Learning the Basics of Stock Market Investing
Mar 28th, 2008 by Kaushik Adhikary
Image via WikipediaStock market is a complex game. In order for you to succeed in this risky business, learning the basics of the stock trading would be an important factor for your financial growth.
Before risking your money with the stock market, you should be able to recognize the factors vital in choosing which company to invest in. Here are the basics in learning some facts about your investing company:
Sales Revenue: This refers to the amount of money the company makes annually. Although some companies that are still in the early development stage have no revenues to offer.Many of the companies that have been in the market for years make use of the revenues to cover some losses and other costs.But companies that continually lose money eventually go out of business.
Earnings: This also refers to the net income that reveals if company is making money or loosing it. Aside from revenues, the earnings are the money that would not be used in covering expenses. These are the extra money the company makes.
Companies with large earning have an advantage in the stock market because investors examine the earnings made by the company they are about to buy stocks on. And likewise a savvy investor will never invest money in a company that is not earning money. Unfortunately, there’s no universal system that can detect accounting manipulation of a company.
Debt: This refers to the money the company owes in many ways. If a company is in debt, the money they have is for paying up for the debit alone. Sometimes companies raise money by issuing stocks or borrowing and issuing debt.Whenever a company issue debt,it has to repay its bondholders.That’s why an inteligent investor prefer companies that have low debt level.
Liquidity: This refers to the cash position of a company.With a stronger liquidity position, its more likely the company to be in business going forward. Cash rich comapnies are in better position to offer benefits to their share-holders, in respect of all the assets(money, stocks, and all businesses they own) of the company.
Knowing these assets could give you an understanding of the company’s position in the industry. If the companies have significant properties in their hands, you could safely trust their background and immediately buy some of their stocks.
Valuation: This refers to worthiness of good company.Most popular and widely followed simple method of evoluting valuation of stocks,that you could easily work out is the P/E or price/earnings ratio.
You just take a current price of a stock and divide it by the company’s latest yearly earnings or its future projected earnings.A general rule is that you always should be careful of companies that have P/E ratios of above 50 and below 5.o.
Its very difficult for a company sustain going forward whose P/E is over 50.Again P/E ratio below 5 means that investors are abandoning the stock,signaling that there likely to be serious problems with this company.
P/E can be negative for a company that did not make money in latest year or projected to in the coming year.Another important tool that could effectively be implemented is the Price/Sales ratio that’s derived by getting the price of the stock and dividing it sales per share.For this ratio,the lower the value(if positive),the more attractive the valuation. If Price/Sales ratio of a company is inbetween zero and 1.0, it is a worth value investing.
It’s never safe to gamble your money away on some company you don’t even know. The basics of the stock market lie on the companies’ background. Make sure you research to ensure your money is in the right hands.
