In the previous article, for Stock Market Investing, I told you about how to make money with the Dividends, today I speak you of How to understand the Stock Market. For the accuracy, The techniques explained in this article are taken from the book of Stock Market Investing for Beginners: Essentials to Start Investing Successfully.
The first thing to ask is what is your goal in financial terms?
For example, get to 65 years with a capital that will allow you to live comfortable. This is an achievable goal, unlike many who believe the opposite. The secret, if we can say so, is in the compound interest.
As you can see in the table above, if you invest a certain capital, depending on which interest you chose, capital doubled over a number of years. This is because of the compound interest.
A brokerage account should give you the ability to access thousands of Stocks, Mutual Funds, ETFs and more at reasonable prices.
The ideal sum to pay would be $ 100,000, but if you do not have the opportunity to invest as much money, it’s fine with 10,000, 5,000 or worse than 1,000. Though the chances of diversifying your investment become more difficult with $ 1,000 but not impossible.
Depending on your age, you must subtract your years to 110. For example, if you are 41, you must invest 69% in Stock and 31% in Bonds (110 – 41 = 69).
Now we come to the selection of equities, how do you select the right ones to buy?
The factors that you will have to look at in selecting the equities to buy are the Value, Growth, Profitability, News and the Comfort levels.
Before buying any equities, you have to keep an eye on the value of the company. Even though the stock price is rapidly dropping, it should not be bought if the price is too high. Before buying, in addition to the price of the equities, consider factors such as price/profit, price/sales, price/book value, and cash flow/operating cash flow. You don’t have to buy too expensive equities, not even buy discounts equities, where there is no chance that the stock will go up and there is no growth on the part of the company.
Any company can grow if there is a continuous investment, well-managed companies can keep their profit margins even if growing. When you buy a stock you should choose an equity stock, which has a viable or rising profitability.
We need to analyze the news of a company, whether good or bad. Because they can influence the equities before it is shown on the balance sheets.
Don’t buy too volatile equities, even if they get a lot, as these equities can go down of much. It’s important to buy equities with which you can be comfortable.
Look for a newsletter service or financial service from an experienced investor. You don’t have to copy exactly what he does, but it will help you get an idea of how to choose the various equities to buy.
Many studies have shown that buying equity stocks with a low price/earning ratio over the rest of the market is a winning choice as these equity stocks tend to outperform.
So the first thing to do is calculate the P/E (price / earning ratio) of the action. How to do? Get the price of the current stock price, for example, Pfizer, at the time I write the price is 33.93. You must calculate your earnings per share by obtaining the net income of the share stock of the last four quarters, subtracting any dividends, and dividing it by the number of remaining shares. Then divide the current stock price for net income.
I explain to you a very simple method to do this calculation alone. Get the price of the current equities, in example 33.93, then search for Google or any other search engine for the title income you are interested in, in this case, Pfizer and add EPS (Earning Per Share). For example, if I enter Pfizer EPS, at the time I write, the net income value is 0.49.
Then 33.93 divided by 0.49 gives me 69.24, the P/E is 69. In this case, the P/E is not the best, as it is not low, but this with this example I showed you how to calculate the P/E Ratio.
When you have calculated the P/E ratio of a share stock, then you have to compare it with all the other major equity stocks in the same industry. For example, if you are analyzing Pfizer, you also need to analyze titles like Merck, Eli Lilly, and Bristol-Myers Squibb. This will help you understand if the stock is below the reference market price.
The second thing to do is calculate the P/S ratio (price/sales ratio), you have to divide the Market Capitalization for the sales per share. The formula is PSR = Market Cap/sales per share, for example, the XYZ company has a 500 M Market Cap and 600 M sales per share. PSR = 500/600 = 0.83 if the average P/S ratio is 1.2. For companies in the same industry, then this title is underestimated.
Finally, you have to calculate the P/B ratio (Price / Book Ratio), you have to split the current closing price for the Book value. P/B = current closing price / Book value if for example the XYZ company the stock price is $ 20 and has a book value of $ 10 . P/B = 20/10 = 2
The P/B Ratio works well with traditional companies such as factories and warehouses.
Many of these data can be found at finance.yahoo.com
There would be much to say about this topic, but for this article, I stop here. For those interested in learning more can read the book of Stock Market Investing for Beginners: Essentials to Start Investing Successfully.