A key part of the trading game is to know how to value stock before you buy and invest – this is vital.
Equity market investment requires knowledge of the concepts related to stock valuation – when consulting an investment advisor on your holdings, he’d most probably ask you to learn how to value a stock option by yourself.
Research is an integral part of the process, and it’s the only way of looking for reasonably valued stocks. Buying highly expansive stocks, compared to their fundamentals and yearly profits, will never help you make cash in the capital markets – over-priced stocks such as these will come down eventually, and this action can severely reduce your investment. Unearthing cheaply priced stocks isn’t an amateur’s game, and nor is it an easy one – it requires you to understand the methods of how to self-evaluate their worth.
The next few paragraphs will show you methods on how to learn this vital skill.
Methods of Deciding Stock Valuation.
Analyze Financial Results:-
Closely analyzing financial returns is a primary method on deciding a stock’s ultimate value.
A company that posts healthy sale turnovers and a large net profit can get a better value than a struggling rival, whom is struggling to maintain their margins. This technique of stock evaluating will most probably always give you a profit. This technique may fail in times of sudden stock market turbulence or when heavy corrections are made, but it’s usually seen as being a reliable one.
Look at the Earnings Per Share (EPS):-
Another technique is to look at the stock’s earnings per share ratio (the EPS). Companies that post high EPS’s are generally a favourite on the market, meaning that it will give a healthy return in the future. If a company has low earnings per share, it can mean that the company has problems on the execution front, because the net profits are being pressured.
Companies with a good reputation generally have a good EPS, because their stocks are so highly recommended.
Sales and Profit Growth:-
Another technique is to observe the company’s sales and profit growth, whilst also looking at its profits and sales for the past few years. If you can see its sales and profits are growing quickly, more than that of its competitors, then you should consider buying some of the stock – even if current earnings are not all that healthy.
It’s important to consider the net profit, not the gross profit, whilst calculating a company’s potential.
Look for the Company’s Debt Rating:-
An essential thing you should always remember is that all investments should be placed into cash-generating companies – ones that have no debt, rather than those that are deep in debt. The debt to equity ratio should be stable, if you desire to buy stocks of companies that have taken debt in order to expand quickly.
If a debt gets too high for the company, most of the income and profit are going to be spent repaying creditors – this drastically reduces the net profit.
Finally, the last technique is to observe a stock’s market capitalization growth. Stocks with high capitalization should also be strong earners – the two come hand-in-hand. If the earnings are not level with the company’s market capitalization, then it’s likely that the stock price is susceptible to fall.
Experts often suggest buying mid-cap and small-cap stocks; they’re low in price, and have a good potential for growth.
By using these techniques, you’ll be able to self-valuate stocks that have potential, thus earning some sweet, sweet returns through stock price appreciation and dividends.
Keep your cool and think it over.