Taking your money and dropping it into an entirely different investment vehicle is quite easy. But becoming a successful stock investor could be really tough. Many retail investors, especially those who aren’t veterans, tend to lose funds annually. This could be happening for several reasons, but there’s a particular reason that investors with other hustles outside the investment market understand; they don’t conduct adequate research or their research team doesn’t help them with monumental tasks.
So the point here is if you don’t carry out adequate research, you’ll end up taking in huge losses. Well, that’s the bad news. The good news is that you could reduce the amount of losses you incur by conducting adequate research before running the investment. A part of conducting adequate research is understanding that there are some indicators you should put into consideration before buying company stocks.
What Are the Indicators to Consider?
It’s very important that you put all of these indicators into consideration when looking to invest in company stock. Some of these indicators include;
- Price to earnings (P/E) ratio
This ratio measures the relationship between the company’s earnings and the company’s stock price. The price to earning ratio is calculated by simply dividing the current price per share of companies’ stock market by the company’s earnings per share.
For instance, if a company’s stock sells for $50 per share, then for buyers the company’s earnings per share will be around $5. This simply means the company has a price to earning ratio of about $10 (by simply dividing $50 by $5).
The price to earnings ratio tells you the level of a company’s stock price, whether high or low, compared to its earnings.
Some investors consider companies with a high level of price to earnings ratio to be overpriced. But at times, companies with a high price to earning ratio offer huge returns, and a good price to earnings ratio in the future, how do you know? You’ll probably have to check out other indicators before making your decision. Looking to buy stocks from a legit source? Click here.
- Earnings per share (EPS)
The earnings per share, just as the name implies, is the amount of money that each shareholder will get if the company decides to disburse all its profits to its major shareholders. Earnings can be calculated by simply dividing the company’s profit by the number of shares you purchase as a shareholder.
For instance, if a company’s profit is around $200 million and there are about 10 million shares, the earnings per share will be around $20.
The Earnings per Share tells you how companies in industries compare. Companies that show steadiness, consistency in growth, annually, will often outperform the companies that have volatile earnings from time to time.
- Price to book value ratio (P/B)
This relates the value of the market with the value the company stated in its books. It’s simply calculated by dividing the current company price per share by the value of the company’s book per share. Wondering what the book value is? Well, it’s the current equity of a company, as stated in the company’s annual report.
Majority of the time, the lower the price to book value ratio, the better the chance of the stock buyer earning profit. This is basically because you get to pay less for a better book value.
If you’re looking for a good stock with a great growth potential, you might want to utilize the low price to book value ratio as a tool to identify the stock picks available.
- Price to earnings ratio to growth ratio (PEG)
This ratio helps stock buyers understand the P/E ratio much better. This ratio is simply calculated by dividing the price to earnings ratio by the company’s projected growth rate in earnings.
For instance, a stick with a price to earnings ratio of 30 and projected earning growth valued at 25% would have a PEG of 2 (by simply dividing 30 by 15). Company’s stock with a price to earning ratio of about 30 but projected earnings growth of about 39% tend to have a price to earnings ratio to growth ratio of 1 (by simply dividing 30 by 30).
The price to earning ratio to growth ratio can tell you whether a company’s stock has a good value or not. The lower the number, the less buyers have to pay to get a spot on the company’s future earnings.
These are the four major indicators every stock buyer should look out for before making decisions, other indicators include:
- Dividend payout ratio (DPR)
- Dividend Yield
Generally, indicators could help you figure out stock values and the possibilities of rapid growth. But, not only indicators affect stock value, there are also other factors that have effects on stock prices. These factors can’t really be measured, but if you carry out your research well, you should be able to predict stock values.