| An investor buys a share of stock by
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| | (having a justified upper limit): If the
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| resorting to various approaches that
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| | company's stock is trading at $80 and its
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| validate his investment by reaping rich
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| | EPS is $8 per share, it has a multiple,
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| profits. Before investing, however, it is
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| | or P/E of 10. This means that investors
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| necessary for a value investor to study
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| | could expect a 10% cash flow return:
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| the financials of a business, so that the
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| | $8/$80 = 1/10 = 1/(PE) = 0.10 = 10%
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| stock he buys at the company's intrinsic
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| | If it's making $4 per share, it has a
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| value promises a greater return at its
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| | multiple of 20 (20 times $4 equals $80).
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| liquidation value (the value of a company
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| | In this case, an investor might receive a
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| if all its assets were sold). A typical
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| | 5% return (in the same conditions);
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| investor would buy growth stocks that
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| | $4/$80 = 1/20 = 1/(P/E) = 0.05 = 5%
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| have an upward trend, and seem likely to
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| | However, a low P/E is not an untainted
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| keep growing for a long time. Whereas, a
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| | value indicator.
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| technical investor (also known as a
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| | 4. Price/Sales Ratio (PSR): is the same
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| Quant) makes decisions based upon the
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| | as a P/E ratio, except that the stocks
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| psychology of the market and related
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| | are divided by sales per share instead of
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| factors, which involve much higher risk
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| | earnings per share.
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| but may prove to be more profitable, or,
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| | 5. Debt Ratio: percentage of debt a
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| can conversely result in much greater
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| | company has relative to the shareholder
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| losses. The fundamental analysis of any
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| | equity.
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| business can depend on various factors:
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| | 6. Dividend yields above a certain
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| efficient market theory, value and
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| | absolute limit.
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| growth, growth at a reasonable price and
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| | 7. Book value ratio: comparison of the
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| the quality of the business.
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| | market price against the book value of
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| 1. Efficient market theory pertains to
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| | the stock per share.
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| stocks being always correctly priced, as
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| | 8. Market capitalization value: Complete
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| all the requisite information is
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| | total value of a company's outstanding
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| available on the current price.
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| | shares (Market price per share ' Total
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| 2. The stock market sets up the price.
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| | number of shares outstanding).
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| 3. Analysts decide upon the value of a
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| | 9. Equity Returns - ROE: Net income after
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| company based on the potential for its
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| | taxes divided by owner's equity.
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| growth.
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| | 10. Beta: comparison of volatility of the
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| 4. Price and value may not be equal, due
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| | stock to that of the market.
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| to certain irrationalities governing the
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| | 11. Institutional ownership: percentage
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| market.
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| | of a firm's outstanding shares owned by
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| Value investors need to rely on certain
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| | certain institutions: insurance
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| stringent rules governing the nature of
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| | companies, mutual funds etc.
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| the stock which adhere to the following
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| | Learning to analyze one's stocks and thus
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| criteria:
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| | reaping the desirable profit is in fact a
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| 1. Earnings: company earnings are profits
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| | continuous process, as no amount of
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| after taxes and interests.
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| | market efficient theories can ever
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| 2. Earnings per share (EPS): the amount
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| | predict a flawless financial return
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| of recorded income (on per share basis)
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| | system. Even though one invests
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| available to the company to pay dividends
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| | judiciously by studying the market, the
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| to stockholders, or to reinvest in
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| | over-valuation or under-valuation of
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| itself.
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| | stocks can often be determined by market
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| 3. Price/Earnings Ratios (P/E) ratio
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| | emotions.
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