the Basics of Researching Stocks.
research on stocks can be a very gratifying process once you learn the basics.
Investing on one's own can be risky but very rewarding. There are several principles
that every investor needs in order to make a competent investment decision that
takes into account risk and return. First time investors need to plan for the
future by setting an investment objective. Secondly, an investor needs to understand
the basics of investing. Third, investors need to understand risk versus return.
As an investor, you can do some initial screening
to determine whether a stock is right for you. You can do this by looking at some
basic financial and investment ratios. The most popular ratio mentioned is called
the P/E ratio. The P/E ratio (Price/Earnings
ratio) measures how expensive a stock is to own. The P/E ratio is a stock's current
price divided by the company's past year earnings per share (EPS). The higher
the P/E ratio the more expensive the stock and the more risk an individual investor
will take. Generally, if the P/E is greater
than 30, investors expect earnings to grow much fasterthan the average company.
If its under 30, investors may have lost interest or the company is expected to
have slower earnings growth into the future. A P/E under 30 may also be an indication
that the market has not properly valued the stock.
investment measure is a stock's beta. The beta measuress how volatile a stock
is when compared to an index. The higher a stock's beta, the more risky and volatile
the stock is to own. Generally, high technology
stocks such as computers, software, and biotech stocks will have higher betas.
Companies in more mundane industries such as food, tobacco, and utilities will
often have much lower betas. A beta greater
than 1.00 will move much more than the market when it goes up and down. Investors
who want to assume the least amount of risk should choose stocks with betas below
Dividend yield is another measure
of how well a stock could perform in the future. Value investors usually look
at a stock's dividend yield which is the annual dividend as a percentage of the
stock price. Dividend yield varies greatly with by industry because of industry
growth, competition, and market forces. Companies sometimes cut dividends. But
investors can look at cash flow which shows if more money is coming into a company
than leaving. Cash Flow is generally measured by adding earnings plus all noncash
charges such as depreciation. Investors can also measure a firms payout ratio
which shows how much of a compay's profits are going to shareholders.
look for our continuing series on Performing Stock Research.