How to Evaluate Stocks in the Stock Market
If you are looking to invest in the stock market, you will need to learn the basic skill of evaluating a stock before deciding on investing in it. Indeed, there are many ways through which one can determine the value of a stock. Participating in the financial markets is not merely an act of gambling, picking a stock that looks cool is a great way to guarantee that you never make any income on your investment. Stock investing only works when you take the time to do your homework and evaluate a company stock as well as research all of the positives and negatives before making a decision.
For the sake of brevity and simplicity, we are going to show you the most commonly used ways to evaluate stocks in the stock market. These will give you a good head-start until you run into other variables that need to be considered.
Industry: Before you start crunching the numbers, look at the big picture. What is the industry that your company stock belongs to? What are the projected trends for growth within this industry? As a brief example, take a look at the healthcare industry. With many baby boomers about to reach retirement age, you can expect to see a lot of demand for healthcare companies to take care of our aging population while doing research and development of medicines that will cure chronic ailments.
Price-o-Earnings Ratio (P/E): This is the number that is most commonly seen in stock evaluations. This number can be loosely defined as the ratio between the price of a company’s stock and the earnings per share. If there is a high P/E ratio on a stock, it means that there is expected growth potential within that stock over a longer period of time. Therefore, it means that investors expect higher earnings growth in the near future. Be careful with this number, as it is not a tell-all crystal ball. A stock with a low P/E could be undervalued due to unprecedented growth that exceeds its past trends of performance.
Compound Annual Growth Rate: This is a statistic that requires further calculations in order to obtain the number, but it is the annual growth rate of a stock investment. Obviously, a higher number indicates greater growth. A common piece of advice is to view this number as an average over a longer period of time instead of an annual basis due to fluctuations that occur because of years of growth and years of loss.
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