Knowing the Basics of Stock Market Investing

Why the basics of stock market investing?

You may be aware that stock market is a complex game. If you want to succeed in this risky business, it is vital to learn the basics of stock trading. But before risking your real money in the stock market, you must recognize the factors in choosing the right  stock to invest in. Here are some basics of stock market investing.

Sales Revenue:

This refers to the amount of money the company makes annually. Although some companies that are still in the early development stage have no revenues to offer.Many of the companies that have been in the market for years make use of the revenues to cover some losses and other costs.But companies that continually lose money eventually go out of business.

Earnings:

This also refers to the net income that reveals if company is making money or losing it. Aside from revenues, the earnings are the money that would not be used in covering expenses. These are the extra money    or free cash the company makes.However strong and consistent return on equity (RoE=Net Income/Shareholders Equity) of above 8% for a longer period (say last 10 yrs) is also the key deciding factor. And likewise a savvy investor will never invest money in a company that is not earning money.

Debt:

This refers to the money the company owes in many ways. If a company is in debt, the money they have     is for paying up for the debit alone. Sometimes a company raise money by issuing stocks or borrowing and issuing debt. Whenever a company issue debt,it has to repay its bondholders. That’s why an intelligent investor prefer companies that have low debt level. So low Debt-to-Equity ratio(D/E ratio) should be 0.5 or lower the better.

High Current Ratio:

C.R. i.e. Current Assets/Current Liabilities should be above 1.5 right up to 2.5 need to be looked for any aspiring value investor to make it a profitable investment.

Liquidity:

This refers to the cash position of a company. With a stronger liquidity position, its more likely the company to be in business going forward. Cash rich companies are in better position to offer benefits to their  share-holders,in respect of all the assets. These assets could give you an understanding of the company’s position in the industry. If the companies have significant properties in their hands, you could safely trust their background and buy stocks.

Valuation:

This refers to worthiness of good company. Most popular and widely followed simple method of valuation of stocks where you could easily work out its P/E or price/earnings ratio.

You just take a current price of a stock and divide it by the company’s latest yearly earnings. A general rule is that you always should be careful of Co hat have P/E ratios of above 50 and below 5. P/E ratio of around 15 is desirable for a fundamentally good stock. Its difficult for a company sustain going forward whose P/E is over 50. Again at P/E ratio below 5 means that investors are abandoning the stock, signaling serious problems in this company.

P/E can be negative for a company that did not make money in latest year. Another important tool that could effectively be implemented is the Price/Sales ratio that’s derived by getting price of the stock and dividing it sales per share. For this ratio, the lower the value (if positive), the more attractive the valuation. If Price/Sales ratio of a company is in between zero and 1.0, it is a worth value investing.

Quality Management:

It is the vigilant leaders of management who are the actual custodian of any highly successful companies for attractive return on your investment.

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