Basics on how to pick a stock
Partly based on the following article: Best Practices for New Investors:
Basic thigs to check in a stock:
- P/E Ratio (Price/Earnings Ratio): Low is better than high. Benchmark is around 20 (Price to Earnings Ratio) P/E Ratio = MarketValuePerShare/EarningsPerShare & EPS = CompanyProfitPerYear/NumberOfShares. Therfore
- StockPrice CompanyProfitPerYear
- P/E Ratio = --------------------; EPS = --------------------------------------
- EPS NumberOfShares
- PEG Ratio (Price/Earnings-to-Growth Ratio): Determines a stock's value while also factoring in the company's expecte earnings growth providing a more complete picture than the P/E ratio.
- P/E Ratio
- PEG Ratio = -------------------
- EPS Growth
- E.g. PEG > 1 is overvalued; PEG < 1 is undervalued. e.g. PEG < 1 hast a lot of potention for growth
- EarningsGrowthRate = (EPS this year/EPS last year -1)*100. e.g. -> ($2.09/$1.74 - 1)*100 = 20%
- If P/E Ration = 22, then PEG Ratio = 22/20 = 1.1
- If possible: Cash in its balance sheet; Income statement; Favorable net debt; Improving net margints
- Tenbagger: Investment that appreciates to 10 times its initial purchase price.
- Blue chip: Nationally recognized, well-established and financially sound company. Operate profitably in the face of adverse economic conditions.
- Three types of goals:
- Income-Oriented: Focus on low-growth firms in indusutries and sectors such as the utilities.
- Capital perservation: Low-Risk tolerance, focus on stable blue-chip corporations.
- Capital appreciation: Rise in the value of an asset based on a rise in market price.
- Diversification
- Keep your eyes open for emerging markets and new acquisitions etc.
- Finding Companies:
- 1) Read market events and opinions
- 2) Use a stock screener: https://de.investing.com/stock-screener
- 3) Chec out the industry's ETF page
- 4) Review investor presentations
- Beta: A stock that swings more than the market over time has a beta above 1.0. If a stock moves less than the market, the stock's beta is less than 1.0. High-beta stocks are supposed to be riskier but provide a potential for higher returns; low-beta stocks pose less risk but also lower returns.