Investing is a game best played after doing hard research on the entities involved. For a lot of people, the easiest way to get into this game is through the stock market. Online brokerage accounts, community forums, and a variety of business e-zines make it easy to start. Here are some stock market tips to ensure you can stay active and make money.
Before Buying
Researching companies and understanding a few important formulas clarifies which stocks are good investments and which to avoid. A market novice should know how to calculate the P/E ratio and what the numbers mean, understand dividends, know the ROI over an extended time period, and understand the significance of cash reserves.
P/E stands for price-to-earnings, and it represents a ratio of the cost of each share divided by the earnings on each share; in other words, how much are shareholders getting for their money? There are other ways of looking at this same question, such as the ROI. ‘Return on investment’ can be looked at by assessing the balance sheet of a company. The investor wants to discover how well management used shareholders capital (money paid for stocks,) to increase their earnings and those of their stockholders.
Dividends are one indicator of business profitability for someone owning their stock. This is a percentage of the earnings of the company paid out quarterly to shareholders. Dividends do not necessarily reflect high or low earnings; in fact, a corporation may increase their payouts to appease stockholders, such as BP has done recently.
Instead, investors looking to create steady income from the stock market can look at the dividend percentages to make their choices. While profitable companies do not always pay higher percentages, unprofitable ones are unlikely to pay out at all.
Cash Reserves
Can a company have too much cash on hand, and should this worry a potential investor? It is rare, too much debt is a more common and more problematic concern. However, some speculate that Berkshire Hathaway is a perfect example of excess cash reserves. This is a holding company with unmatched historical success, who analysts believe has too much cash to be able to invest and grow at their current and past highs. This is not a common occurrence, though, and too much debt on the company’s balance sheet should be a red flag.
Debt will be present to some degree in every business. To find a number to compare different securities by, the ‘debt-to-equity’ ratio is used. This formula calculates the amount of debt or liability a business carries in relation to the amount of shareholder equity. It can be used to compare different companies, and if it is out of proportion to similar businesses, to avoid investing.
Advanced analysts will give tips for the stock market based on advanced formulas. However, using the fundamental considerations listed above, strong businesses will emerge and investors can then choose from the cream of the crop. Once a stock is purchased, be sure to monitor the market and your shares diligently. To stay abreast of important news, set up email and mobile alerts, and you can avoid being taken by surprise.
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