How to Analyze Stocks (For Beginners)
4 tips for analyzing stocks
If you are ready to invest in individual stocks, you must know how to analyze stocks. Thinking that a company will turn out well is not a reason to blindly invest in that company's stock. Once you have decided that you want to invest in a company, you should analyze how the company is doing, how it has done in the past and, more importantly, what you plan to do in the future. . Next, you must decide if the stock is a good buy based on the current price. Even if the company is going to grow 25% per year in the foreseeable future, the stock price will not be a good purchase if it is valued as growing 50% a year.
The four steps to analyze an action are:
- Determine how the company makes its money
- Find out the company's finances
- Analyze the future growth of the company
- Determine if the current price does not it's good
Actually, before you start analyzing a stock, what you have to do is find out what stock you want to investigate! Let's say I'm interested in the (imaginary) company Bill & # 39; s Brews (BBREWS) after testing his signature Bill & # 39; s Acorn Ale. I go to a finance website, like Yahoo! Finance or CNN Money, and enter your ticker symbol (in this case, BBREWS) in your stock price widget, and start investigating.
The first thing I want to know is what the whole company is about. Many companies are diversified and do more than you can know. For example, people know that General Electric produces light bulbs, but they may not know that they also make airplane engines and have a powerful financial arm. In this case, BBREWS makes not only beer, but also a wide range of soft drinks. In fact, 60% of the income comes from soft drinks, but only 10% of the income comes from soft drinks. In other words, 60% of the total sales money comes from soft drink sales, but only 10% of the profits. BBREWS makes a lot more money for every beer it sells than for every bottle of soda. This can make you more likely to invest in BBREWS, because you see that the product you like, the beer, is the one that is making money.
Second, now that you have a reliable idea of how the company makes money, you need to get a more quantitative idea. You must find out the price / earnings ratio (the ratio between the price of the shares and the annual earnings of one share), the price and sales (the ratio between the price of the shares and the annual sales), the profit ratio of The company and Comparison numbers for other companies in this industry. You will also want to obtain any other financial data of this company that you can obtain, but these are the most important numbers for the proper analysis of an action. The average values for these numbers will vary enormously from one industry to another and depending on which sectors of stocks are hot, therefore, to know if the number is low or high, you really need to consult related companies in the same industry. For example, you should compare the numbers of Bill & # 39; s Brews with Budweiser, Boston Brewing and Molson Coors.
Third, you must find out what analysts think about this stock and read their opinions. You should also find out what the recent growth rates have been in profits and sales. Check if the members of the company or institutional investors, who may have a better idea of how the actions will perform, are buying shares of the stock. If a CEO believes that his company's stock is undervalued, he will be more likely to buy it, and if he thinks he is overvalued, sell it. Since the CEO probably knows more about stocks than most people, this is a good indicator that he may be undervalued. Analysts also spend long periods of time studying individual firms and finding out if they are overvalued or undervalued. You should also read the news reports about the company to see if there are catalysts for higher than expected growth. For example, let's say that Bill & # 39; s Brews has just won an award for "Best American Ale" this year. This can make the sales of Bill & # 39; s Brews increase in the next year.
Finally, now that you have determined all this, you must synthesize all the data to decide whether the action is a good purchase or not. This is definitely more than an art than a science, but you must determine that the numbers you have found are a good investment. A general rule is that the PEG index (price / earnings for growth) must be less than 1. In other words, the P / E index (found in step 2) must be equal to or lower than the percentage annual growth rate of earnings. For example, if the P / E ratio is 10 (the share price is 10 times the annual earnings) and the expected growth rate is 15% per year, the stock can be a good buy. If the P / E ratio is 25 and the expected growth rate is 10% per year, it may not be a good purchase. However, this is just a golden rule and there are many exceptions to the rule.
You are now ready to analyze the actions on your own. There is nothing like knowing that your investment future is in your hands and that you can determine when an action is a good buy and when it is not. Good luck to find the right investment for you!