Everyone has invested in some particular area or another during their respective lifetime. Whether it be utilizing the steady force of mutual funds, becoming risky with foreign exchange, or investing in the money market, each of these transactions are all in hope of obtaining assets to earn more capital in the long run. Unequivocally, the most popular form of investing can be attributed to the powerful forces of the stock market. Trading from 9:30 every morning to the early hour of 4:00 in the afternoon, millions of trades go through each day with the same goal of making money in the back of every trader’s mind. Unfortunately, most of these traders are going to feel defeat after investing in a few stocks. Possibly, the economy was unfavorable during that session or the respective investor declined to do his or her homework when looking at the fundamentals or technical side of his or her handpicked equity. Nevertheless, I have complied three of the most important factors when deciding to invest in the stock market that all investors, expert or not, must follow when investing (not speculating).
Probably the most important indicator of any stock can be attributed to a company’s P/E ratio. Formally known as the Price to Earning indicator, where the current share price of a particular stock is divided by its yearly earning per share (EPS), the P/E ratio can be a magnificent tool when deciding if a stock is over or undervalued. While the process can be hard to find an exact ratio which fits the perfect formula of an undervalued equity, the procedure does become much easier when using this ratio to compare company’s of the same industry. Take for example the jeweler sector where companies such as Zale’s and Tiffany’s hold some supremacy over the other companies. Currently Tiffany has, according to Yahoo Finance, a P/E ratio of about 22 when Zale’s can be calculated to near 30. While the difference may not seem of great margin, to earn the best for your dollar every point does matter. Of course an investor should look at other indicators such as growing margins or technical trends, but looking strictly at the P/E ratio, Tiffany would be winning the first factor to strong capital gains. Expanding on such an issue, I would also advise for long term investors to never buy shares from a company who reports negative earnings which contributes to no P/E ratio. Such companies are for speculators and are too risky for the smart long term investor.
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