Have you thought of how big companies receive money to help them run businesses? Have you seen the movies with stock market crashes? Well if your answer is yes to both of those questions, then you are on the right track to learn more about stocks.
What are Stocks?
Stocks represent the shares of companies, when you buy stocks from or invest in a company, you gain a small percent of equity in that company, so technically you have somewhat of an ownership over that company. However, your funds are probably too small to have an effect on big companies like Apple and Google. No matter what, you can make money off of these stocks in the forms of capital gains.
Your initial investments will hopefully increase overtime, a gain in your portfolio, and extra money for you. However, there are also risks of losing money if a company is performing badly and people keep selling off their stocks, dropping the prices of the stocks. So doing enough research about a company's potential growth, value, and stability is important before you put in your precious money to invest.
What is Stock Analysis?
When investing in stocks, people want their investments to pay off. Thus, analyzing stocks is a method for investors and traders to use when purchasing stocks. To make a good decision, they use past data to help investors gain an advantage when purchasing stocks.
Two fundamental forms of stock analysis are fundamental analysis and technical analysis. Fundamental analysis focuses on source data, including financial statements, economic reports, assets of the business and market shares. Investors and analysts usually analyze the metrics on the financial statements of a company.
As for technical analysis, in order to forecast the likelihood of potential market changes, they rely on the study of past and current price action. The stock market as a whole is analyzed by technical analysts and is mainly concerned with price, volume, demand and supply factors that influence the market substantially. For these technical analysts, charts are a crucial tool as they show graphical illustration of trends of a stock within a specified time span.
Fundamental and technical analysis can be used together or analysts can choose one or the other. Some analysts use both of these, while others typically only use one. No matter what, using stock analysis is a crucial method of creating the best possible investment strategy for a client's long term investment goals.
How do Stocks Work?
When you purchase stocks, there are certain rights and privileges you can gain. For instance, you may gain voting rights at a company’s annual shareholder meetings. However, this is only if you purchase a large amount of stocks, enough percentage of stocks for you to have a say in the company's operating decisions.
In other cases, you may be able to receive a share of the company’s profits, and this is called dividends. This may depend on the company's own profits every year and how well the company performs overall. The last one, which is the most common way people receive returns on their investments is capital appreciation.
Capital appreciation works in the way that when a certain company’s stock prices rise, your shares or the money you invested in that stock increases in value as well. Similarly, when the price of a stock declines, the value of your shares fall with it as well.
Types of Stocks
Just like with apples there are different kinds and colors, there are different types of stocks as well. Two types of stocks are preferred stocks and common stocks. The preferred stocks usually don't give shareholder voting rights; on the other hand, common stocks usually do depend on the amount of stocks you hold in the company and could potentially have voting rights in the company.
However, with preferred stocks, even if the company loses profit, you are still paid which gives you more certainty. With common stocks, your profit is directly correlated to the loss or growth of the company itself.
Preferred stocks also get paid first when dividends are divided out, while the common stocks get dividends after preferred stockholders have received them, Thus, there are definitely advantages and disadvantages to both of these types of stocks. Depending on what is available and most suitable for your financial situation, you have the option to choose to invest in common or preferred stocks.
Signs to Look For
There are many indications that stock analysts look for when deciding if a stock is worthy to be invested in. Some are usually shown next to the stocks when you are trying to make a trade or invest. You can just look them up on the internet if it doesn’t show. So what are some things you can look at when you’re making a decision whether to invest or not?
Market capitalization, or often displayed as market cap, shows you how much a company is worthy based on the stock market. It is commonly known as the total market value of all outstanding shares. If you want to calculate a company’s market cap, simply multiply the number of outstanding shares by the current market value of one share.
Market caps also divide companies into different categories. For instance, a large-cap is typically $10 billion or more, mid-cap is from $2 billion to $10 billion, while small-cap ranges from $300 million to $2 billion.
Another indication you can look at is Earnings per share, or EPS. EPS is a crucial financial measure that shows how much the company profits. You can calculate the EPS by dividing the company’s net income with its total number of outstanding shares.
Many investors or stock analysts use this to estimate the profitability of a company before purchasing its shares. For those who are more interested in a steady return, the EPS ratio can show you how much a company can increase from its current dividend. This EPS rating considers the growth and stability of a company’s earrings from the past three years, and the EPS is typically assigned a rating of 1 to 99, 99 showing the best ratio.
PE and PB are also ratios used to show whether company’s stocks are worthy or not to invest in. PE measures the valuation of a company’s stocks. It puts price in the numerators and earnings in the denominator.
Typically, the higher the PE ratio is then the more pricey the stock will be. The PB ratio compares the price of stock with its book. Like the PE ratio, the higher the PB ratio, the more expensive the stock is. It basically lets you know the actual assets backing the price of the stocks.
Are you Ready To Invest?
Now that you have learned some basics of investing, and what stock analysts do when making investments and for clients. Don't hesitate to start investing yourself, or do more research on the available stocks of companies before making your decisions. At the end of the day, investments come with risks and even if you don't receive the return that you were expecting, you should be proud you took the first step to put yourself out there as an investor.
