An investor buys a share of stock by resorting to various approaches that validate his investment by reaping rich profits learn to analyze your stocks and double your profit. Before investing, however, a value investor must study the financials of a business so that the stock they buy at the company’s intrinsic value promises a greater return at its liquidation value (the value of a company if all its assets were sold). A typical investor would buy growth stocks with an upward trend and seem likely to keep growing for a long time. Whereas, a technical investor (also known as a Quant) makes decisions based upon the psychology of the market and related factors, which involve much higher risk but may prove to be more profitable or, conversely, result in much greater losses. The fundamental analysis of any business can depend on various factors: efficient market theory, value and growth, moderate price growth, and business quality.
- Efficient market theory pertains to stocks being always correctly priced, as all the requisite information is available on the current price.
- The stock market sets up the price.
- Analysts decide upon the value of a company based on the potential for its growth.
- Price and value may not be equal due to certain irrationalities governing the market.
Value investors need to rely on certain stringent rules governing the nature of the stock, which adhere to the following criteria:
- Earnings: company earnings are profits after taxes and interests.
- Earnings per share (EPS): the amount of recorded income (on a per-share basis) available to the company to pay dividends to stockholders or to reinvest in itself.
- Price/Earnings Ratios (P/E) ratio (having a justified upper limit): If the company’s stock is trading at $80 and its EPS is $8 per share, it has a multiple or P/E of 10. This means that investors could expect a 10% cash flow return:
$8/$80 = 1/10 = 1/(PE) = 0.10 = 10%
If it’s making $4 per share, it has a multiple of 20 (20 times $4 equals $80). In this case, an investor might receive a 5% return (in the same conditions);
$4/$80 = 1/20 = 1/(P/E) = 0.05 = 5%
However, a low P/E is not an untainted value indicator.
- Price/Sales Ratio (PSR): is the same as a P/E ratio, except that the stocks are divided by sales per share instead of earnings per share.
- Debt Ratio: percentage of debt a company has relative to the shareholder equity.
- Dividend yields above a certain absolute limit.
- Book value ratio: comparing the market price against the stock’s book value per share.
- Market capitalization value: Complete total value of a company’s outstanding shares (Market price per share’ Total number of shares outstanding).
- Equity Returns – ROE: Net income after taxes divided by owner’s equity.
- Beta: comparison of the volatility of the stock to that of the market.
- Institutional ownership: percentage of a firm’s outstanding shares owned by certain institutions: insurance companies, mutual funds, etc.
Suppose you need to learn more on the basics behind these ratios; visit https://www.investopedia.com/financial-term-dictionary-4769738. Suppose you want to obtain some of these ratios and other financials on a particular company visit, https://finance.yahoo.com/ or https://www.morningstar.com/.
Learning to analyze one’s stocks and thus reaping the desirable profit is a continuous process, as no amount of market-efficient theories can ever predict a flawless financial return system. Even though one invests judiciously by studying the market, the over-valuation or under-valuation of stocks can often be determined by market emotions.
If you are located in or near Nashville, Tennessee, feel free to make an appointment to learn more about the services offered at KG Meyer, P.C. If we cannot help you, seek out a fee-only Registered Financial Consultant (RFC) who acts as a fiduciary.
