Many investment strategies fail because investors don’t have a blueprint to follow. As a result, they make a last-minute decision about where to invest their money. Many choose investments based on tips from friends. Others might try to time the market based on the daily performance of the stock market indices. Neither is a good strategy for long-term gains, and your finances could suffer because of these knee-jerk reactions to daily news headlines. There are standard rules that apply to every aspect of investing, regardless of your risk tolerance or long-term goals.
Do Your Research
As a potential investor, you must thoroughly research any companies whose stock you are considering purchasing. The first step is to thoroughly study their financials. What do they manufacture? What kind of service do they offer? In what countries are they operating? Are they known as the leader in their field? When you are finished, if you can answer all of the above questions, go buy the stock!
Price-to-Earnings (P/E) Ratio
The most basic and widely used ratio when analyzing a share is the P/E ratio. It compares what you pay for a company, in terms of its share price, with what it generates with its profits, known as earnings per share (EPS). The P/E ratio is calculated by dividing the share price by earnings per share. If the P/E is 10, this means investors are willing to pay $10 for every $1 in earnings per share.
In the stock market, an important indicator of a stock’s volatility is called Beta. Beta compares the company you’re researching to the overall market and gives you a sense of how moody or volatile it has been over the last five years. In short, a high beta value means it tends to be more turbulent, while a low beta means it’s more stable.
When a stock is purchased by you, you own a piece of that company. If the company makes a profit from whatever products or services it sells, it may pay shareholders a dividend. Dividends are paid via the company’s profits and can either be distributed in cash or additional shares of the company’s stock. When evaluating a stock, look for stocks with a history of issuing dividends over time, as this provides a long-term commitment to raising shareholder value.
The most basic rule in stock chart reading is simple. If a stock’s chart goes up, you want to buy it, and if it goes down, you want to sell it. But beyond this, your stock charts can give you information about factors in the marketplace. A stock’s chart says more than just whether it’s going up or down.