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Analyze your Stocks and Double your Profit

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




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