"The best investment in the world is a lousy investment if you pay too much for it".
One of the most important things an investor must consider before he makes an investment decision is the price of the company.It is not the company that matters most,but the price at which you buy.This is because the price of the stock may not reflect the underlying realities of the company That is, a company may be underpriced or overpriced.
A stock is said to be overpriced when the price of the shares is higher than the underlying realities of the company.While a stock is said to be underpriced when the price of the company is lower than the potentials of the company.
This could be as a result of so many factors.It could be as a result of inadequate information about the company ,and a host of other factors.
The smartest way to make money from shares is to buy shares when prices are low and to sell when prices are high.For instance,an investor who bought a stock when it was selling at the lowest price will be better than an investor ,who bought the same stock at the all time highest.
HOW ARE PRICES DETERMINED
Price of stocks on the floor of the exchange are determined through the interplay of demand and supply forces.Price of stocks changes daily on the floor of the exchange.A stock that apreciates today may depreciates tommorow.A stock is said to appreciate when the price of the stock increases, while a stock is said to depreciates when the price of the stock falls.
It is, however,important to note that the fact that the price of a stock is depreciating does not mean the company is in trouble.It might be your own golden opportunity to reap huge and superb returns in the form of capital appreciation.Also, the fact that the price of a company is appreciating rapidly does not mean that the appreciation in price will continue forever.It might be your unique opportunity to exit the stock and move to an underpriced one.This is because the price of the stock might still come down,especially if the underlying realities of the comany does not support the increase in price.
Be wise!
Friday, June 15, 2007
Tuesday, June 5, 2007
TIPS FOR PICKING PROFITABLE STOCKS 2
THE HISTORY OF THE COMPANY AND PAST PERFORMANCE
A prospective investor in a company will do well by checking the dividend and bonus history of the company He wants to invest in.This is because the future of a company can be predicted from its past.All this can be found in Annual reports of companies.Past performance is however, not a guarantee for future performance.
THE TYPE OF MARKET THE COMPANY OPERATES IN
Is the company the market leader?How often do people purchase the company's product? Does the company have too many competitors?Is the product of the company a necessity or does it have a close substitutes?These are some of the questions you must ask yourself before you take your investment decision.For instance,companies whose products are necessities will be a good buy any day.Products like Sugar, Salt,Cement and some other essential goods are few examples.
I will now move over to the Quantitative tips of picking profitable stocks.Enjoy your reading.
QUANTITATIVE TIPS FOR PICKING PROFITABLE STOCKS
These are Mathematical/Accounting ratios.We have so many of them.But I will dwell on a few that are frequently used in financial journals and Newspapers.These ratios are very simple to understand.They are:
A.Earnings per share EPS
Earnings per share is calculated by dividing the profit after tax of a company by the number of shares in issue.The rule here is this:The higher the EPS the better the stock.A company with EPS OF N6 is better than another company with an EPS of N3 .This information can be found in Financial Newspapers like Stockswatch,Financial Standard, Money wise,e.t.c.
BPrice per Earnings P/E
The price per earnings ratio is derived by dividing the price of the stock by the earnings per share of the company.This is a very important ratio, because it indicates the number of years it will take before you recoup your investment.The lower the p/e ratio,the better the stock.That is, the lower the number of years it will take to recoup your investment.A stock with a p/e ratio of 5 is better than another stock with a p/e of 10.I will discuss this in greater detail later under 'pricing of securities'.
DIVIDEND PER SHARE/DIVIDEND YIELD
The dividend paid by a company is very important.This is because ,a stock of N50 per share may pay a dividend of N1 per share while another stock of N25 may pay 80kobo per share.I need not tell you which of the two companies is the most profitable.
Dividend yield is calculated by dividing the amount of dividend paid by the price of the stock.The higher the dividend yield the better the stock.Stockbrokers and Investment analyst recommend stocks whose dividends yield is 5% or more.Any stock below this is not advisable.However,you will learn later on this blog under "when to buy and when to sell' that you can still buy when the dividend yield is below 5%
A Combination of these tips will help you to make the best investment decision from time to time.
Good luck!
A prospective investor in a company will do well by checking the dividend and bonus history of the company He wants to invest in.This is because the future of a company can be predicted from its past.All this can be found in Annual reports of companies.Past performance is however, not a guarantee for future performance.
THE TYPE OF MARKET THE COMPANY OPERATES IN
Is the company the market leader?How often do people purchase the company's product? Does the company have too many competitors?Is the product of the company a necessity or does it have a close substitutes?These are some of the questions you must ask yourself before you take your investment decision.For instance,companies whose products are necessities will be a good buy any day.Products like Sugar, Salt,Cement and some other essential goods are few examples.
I will now move over to the Quantitative tips of picking profitable stocks.Enjoy your reading.
QUANTITATIVE TIPS FOR PICKING PROFITABLE STOCKS
These are Mathematical/Accounting ratios.We have so many of them.But I will dwell on a few that are frequently used in financial journals and Newspapers.These ratios are very simple to understand.They are:
A.Earnings per share EPS
Earnings per share is calculated by dividing the profit after tax of a company by the number of shares in issue.The rule here is this:The higher the EPS the better the stock.A company with EPS OF N6 is better than another company with an EPS of N3 .This information can be found in Financial Newspapers like Stockswatch,Financial Standard, Money wise,e.t.c.
BPrice per Earnings P/E
The price per earnings ratio is derived by dividing the price of the stock by the earnings per share of the company.This is a very important ratio, because it indicates the number of years it will take before you recoup your investment.The lower the p/e ratio,the better the stock.That is, the lower the number of years it will take to recoup your investment.A stock with a p/e ratio of 5 is better than another stock with a p/e of 10.I will discuss this in greater detail later under 'pricing of securities'.
DIVIDEND PER SHARE/DIVIDEND YIELD
The dividend paid by a company is very important.This is because ,a stock of N50 per share may pay a dividend of N1 per share while another stock of N25 may pay 80kobo per share.I need not tell you which of the two companies is the most profitable.
Dividend yield is calculated by dividing the amount of dividend paid by the price of the stock.The higher the dividend yield the better the stock.Stockbrokers and Investment analyst recommend stocks whose dividends yield is 5% or more.Any stock below this is not advisable.However,you will learn later on this blog under "when to buy and when to sell' that you can still buy when the dividend yield is below 5%
A Combination of these tips will help you to make the best investment decision from time to time.
Good luck!
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