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5 Essential Things You Need To Know About Every Stock You Buy
Investing is easy but investing successfully is tough. Statistics show that the majority of retail investors, those who arent investment professionals, lose money every year. There could be a variety of reasons why, but there is one that every investor with a career outside of the investment market understands: they dont have time to research a large amount of stocks and they dont have a research team to help with that monumental task. (For related reading, check out The 4 Basic Elements Of Stock Value.)
For that reason, investments made after little research often result in losses. Thats the bad news. The good news is that, although the ideal way to purchase a stock is after a large amount of research, an investor can cut down on the amount of research by looking at these select items:
What They Do
Jim Cramer, in his book Real Money, advises investors to never purchase a stock unless they have an exhaustive knowledge of how they make money. What do they manufacture? What kind of service do they offer? In what countries do they operate? What is their flagship product and how is it selling? Are they known as the leader in their field? Think of this as a first date. You probably wouldnt go on date with somebody if you had no idea who they were. If you do, youre asking for trouble.
This information is very easy to find. Using the search engine of your choice, go to their company website and read about them. Then, as Cramer advises, go to a family member and educate them on your potential investment. If you can answer all of their questions, you know enough.
Price/Earnings Ratio
Imagine for a moment you were in the market for somebody who could help you with your investments. You interview two people. One person has a long history of making people a lot of money. Your friends have seen a big return from this person and you cant find any reason why you shouldnt hand this guy your investment dollars. He tells you that for every dollar he makes for you, hes going to keep 40 cents leaving you with 60 cents.
The other guy is just getting started in the business. He has very little experience and, although he seems promising, he doesnt have much of a track record of success. The advantage to this guy is that hes cheaper. He only wants to keep 20 cents for every dollar he makes you - but what if he doesnt make you as many dollars as the first guy?
If you understand this example, you understand the P/E or price/earnings ratio. If you notice that a company has a P/E of 20, this means that investors are willing to pay $20 for every $1 per earnings. That might seem expensive but not if the company is growing fast.
The P/E can be found by comparing the current market price to the cumulative earnings of the last 4 quarters. Compare this number to other companies similar to the one youre researching. If your company has a higher P/E than other similar companies, there had better be a reason. If it has a lower P/E but is growing fast, thats an investment worth watching. (If these numbers have you in the dark, these easy calculations should help light the way, seeHow To Find P/E And PEG Ratios.)
Beta
Beta seems like something difficult to understand, but its not. In fact, and can be found on the same page as the P/E Ratio on a major stock data provider such as Yahoo or Google. Beta measures volatility or how moody your companys stock has acted over the last 5 years. Think of the S
