5 Stock Market FAQ’s Answer For Better Trading

What Is EPS and why it is so important in Stock Trading ?

EPS (Earnings per share) is the portion of the profit or net income of a stock issuing company. EPS is distributed to each outstanding share of a common stock. Now, how can you calculate EPS? EPS=Net Income/Average Outstanding Common Shares. So, higher the EPS means more profitable the company and in the long run more earnings for shareholders. Higher profit is only possible because of upside potential of share price and issuing higher dividends.

Why P/E Ratio is so important for a profitable company? And how big a return you get?

Price-earnings ratio is very popular with seasoned investors or analysts as it gives quick answer to firsthand judgment of whether a company is profitable or not. Suppose that you’re about to buy a fast food stand by     paying a price of $1000 which made a net profit $100 last year.

So calculation of P/E Ratio=Market Price of the Fast-food stand/Net Income=$1000/$100=$10 (which actually is 10/1 ratio) That means for every ten dollars of price of stock should give you one dollar earnings for one year. If  we take it inversely i.e. E/P ratio gives 1/10=10% being the annual yield. If we lower the price of this business to $800 instead & it still produced the same earnings, we have P/E of $800/$100=$8 with return of 1/8=12.5% So a low P/E is preferable for a higher return.

Now if we divide the business into a hundred shares, each share is worth $10 And net income of the same business for that above case is $100 Therefore EPS is $100/100=$1 per share. So P/E ratio for an individual share, just like entire business would be: Market Price per share/Earning per share=P/E=$10/$1=10  which is same as entire business. So what is takeaway of these all? Well, we will want to invest in companies having low P/E ratios. Why pay a higher price for a single $1 of earnings when you do think it is not wise to invest in such companies of higher P/E as long as other important variables are indicating downtrend?

What is the implication low Debt-to-Equity Ratio and when a company issue stock over debt to fund its operations?

D/E ratio explains the proportion of equity and debt, a company is employing to finance its assets for effective    debt solution.A low D/E ratio indicates a lower amount of financing via lenders versus funding through equity via shareholders. A higher ratio indicates that the company is getting more of their financing from borrowing. And that may pose a real risk to the company. If debt levels are too high,it may lead to financial distress or bankruptcy during economic downturn.

There are so many reasons for a company to issue stocks rather than enter into debt. If the company believes its stock price is inflated, it can raise money by issuing stock in the share market. The second is when the venture for which the money is being raised may not generate predictable cash flow. A simple example of this is a startup company. A third reason for a company to raise money by selling equity is when the company wants to change its debt-to-equity ratio.

What kind of stock recommendation would you prefer-a preferred, a common stock or a startup?

A startup is typically more risky than a well established stock picks and not the right kind of stocks to invest. It is the risk taking ability of you to choose the kind of stocks that would give you highest protection.For startup company, though more risky can give enormous upside potential. If you’re more conservative, a combining portfolio of common stocks and preferred stocks may be more preferable.

What is Share Buy Back and why a company initiates it? What is profitable to shareholder-Buy Back or Dividend?

A share buyback refers to repurchase of a company’s own share from marketplace. If a company believes that its stock undervalued, it starts buyback its own shares. And it also believes it can make money by investing in itself. The biggest advantage of share buyback is that it lowers down the number of shares outstanding for a company. This in turn increases the profitability such as EPS, cash flow, return on equity. This improved development can drive the share price higher in future and might be good stocks to invest.

Many a time a company resorted to such buy-backs because of decreased earnings and believes its price is unjustifiably low. Many a time the stock is under panic selling pressure due to certain very negative news prevailing in the  marketplace. And then the company management may think fit to buy back its stocks. By doing so the company is likely to send a signal to the market that it is optimistic & its falling stock price is not justified. However,until you sell your holding shares, the profits you thus earned will not taxable.

Dividend is a predetermined profits share a company pays you at regular intervals. Needless to say that majority of investors like dividend payout. Companies typically pay out dividends from after-tax profits and hopelessly shareholders must also pay taxes on dividends. Repurchase or Share Buy Back is indeed more profitable as share buybacks is better for wealth creation in long run. This is because of reduced share outstanding resulting in improved EPS as well as avoiding defer tax until the shares are sold.

What is your investing strategy?

Different investors follow different strategies. Some look for undervalued stocks, some for growing stock and others may prefer for the good stocks to invest with steady performance. You should focused your strategy on the long-term or medium-term or short-term, and more risky or less risky. Whatever your investing strategy is, you should follow a safer strategy for your better financial career.

Comments 2

Leave a Reply

Your email address will not be published. Required fields are marked *