We are faced with a wide range of options when thinking about saving our money. That’s why our primary concern should be making the most informed decision to meet our financial goals. But how do you save up your money? For most of us, just cutting off on the monthly expenses or increasing our income will result in a surplus of money. So what is the best thing we can do with this money to aim for a better financial future?
One of the initial steps we should all consider is to set aside a sum of money that can serve as an emergency fund or a buffer for unforeseen circumstances. Once we have accumulated enough savings that can sustain us for at least six months or more without any income, we may consider taking our financial planning to the next level by setting aside funds for investing in the stock market or stock exchange. Investing in stocks or using the stock exchange can be an effective means of building wealth for the future.
But how do we choose the right stocks to buy? The answer is stock analysis. To put it briefly, stock analysis is a set of practices that an investor uses to get an idea about the profitability of a certain stock.
By now, many of us are likely acquainted with the concept of stocks. However, for those who are new to this field, it's worth noting that stocks contain all the shares that a company has divided into. Moreover, shares represent units of equity ownership of a corporation
If we hear terms like P/E ratio, EPS ratio, or return on equity, we should instantly think about the fundamental analysis of stocks. And if you don’t know what P/E stands for, is ratio is to indicate the company’s profitability, by showing the price of each share of its stock. In case you're not familiar with the term P/E ratio, it actually refers to the price-earnings ratio. This ratio signifies the connection between a company's stock price and its earnings per share and is primarily employed for determining the company's value.
Additionally, the EPS ratio (earnings per share) is another important metric that indicates a company's profitability. It represents the price of each share of its stock.
There is also the technical analysis of stocks, in which case we would see a lot of charts and trend studies. People that use technical analysis tools are strong believers that past prices can dictate future prices and that patterns do arise in the behavior of the market. However, we might need both technical and fundamental analysis if we want to make the best decisions for our goals.
One of the best steps we can take before investing in a stock is to get as much information as we possibly can.
Information is power, whenever and wherever. So starting our journey as investors means that we need to get as much information as possible. But do not hurry! Take your time, choose an industry and a company, and look for its financial statements, news, and articles related to it and its industry. Also, diving in on data from that company’s competitors is very insightful in most cases. We want to be able to make an assessment - is the company underperforming in its sector of activity, or is it thriving?
Understanding the chosen industry is essential here as we are facing a lot of factors that can influence a stock's future value. Think about it, regulations can impact the way a company operates. Also, if the industry is highly competitive, like the tech industry, how is the chosen company differentiating itself to gain its market share? Even more so, we need to understand some indicators if we want to analyze stocks independently.
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Pay close attention to financial KPIs and evaluate them correctly.
Common key performance indicators (KPIs) for analyzing stocks should not be overlooked. We are entering the realm of fundamental analysis, and we want to make sure there are no such things as “red flags” on our radar. The P/E ratio, or the price/earnings ratio, is used by investors to compare the performance of a company concerning its competitors. The lower the P/E ratio, the more attractive the stock is. We can always calculate this formula by dividing the value per share (the price of the stock at a certain moment) by the earnings per share(EPS).
We should also be looking into the level of debt of the company. What if the company’s debt is so big it looks like it’s going to have issues paying it back in the future? And that’s not all! The financial health status of a company can be dictated by a lot of other factors. We might spot a decline in profitability and revenues or a negative cash flow. Negative flows of money can signal that the company is using more money than it is making. That doesn’t sound good, right?
Keep your eyes open for any potential trigger that might come your way. It’s not always the case that you’ll spot a red flag, and the company will perform poorly, but you’ll make better-informed decisions if you take them into account.
The real value of a stock is a subjective matter.
Investors can’t speak for everyone when deciding if a stock is underpriced or overpriced. However, based on the price that we consider fair to pay, we get valuable insights for us and can make further decisions. It’s a matter of what type of investor category we are in.
One example is the scenario where we consider a stock overpriced, yet we do believe that the company is going to grow further, based on our prior analysis and beliefs. We will still want to invest and gain later returns on the long-term investment. On the other hand, if we are not interested in the long-term game, an overpriced stock would act as a deal-breaker.
The leadership team plays a big role in the success of the company.
Don’t overlook this aspect. Get your stalker gloves on and start looking into the CEO or the board members' backgrounds. See if you can find any reason to worry. Maybe you’ll find a team that seems able to inspire and impose a vision in the company. After all, management is crucial in a lot of aspects.
Check if the leaders in the company are known to be great communicators. It is also useful if we could find some information about the company’s top management view on the development of its employees. That could give us a hint into how is the work environment inside the company, the levels of satisfaction, the situation with harvesting talent, and employee retention. All of this can influence the success of a company if we look at the big picture.
It is time to acknowledge why we want to own a piece of a company’s stock.
According to Warren Buffet, the American business magnate, we should aim to invest in companies that we can understand. We should have a clear view of the way a company operates and how it makes its profits. It’s common sense that investing in something we have no idea about can become a real problem when assessing the right decisions along the way, like when to hold your share and when it’s better to just cash in. Also, we need to understand the potential growth and different aspect of the industry and the company.
No, you don’t need to be an electrician engineer to invest in electric companies' stock, but it does help to understand how these companies are making their revenues or where the energy is coming from, as an example. On top of that, looking into the competitive advantage that the company has is a defining factor that can tell why we might prefer a company over another and believe in its long-term success or not.
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