While stock investment has arguably been made easier than ever due to the varied investment options available today, understanding which stocks are worth investing in still requires a lot of diligence and skill.
Investors will either take investment suggestions from stock experts or friends and colleagues who have experienced success within the market. Some will also take ratings from research providers to guide their investment decisions.
However, when evaluating stocks and determining whether they are worth buying, there are various financial and market conditions that investors should first assess. There are also reliable metrics that you can use to improve your stock evaluation capabilities and choose the best type of stocks that will successfully diversify and strengthen your investment portfolio.
Evaluating Investment Stocks
Here are five easy ways to evaluate stocks:
1. Think Broad When Evaluating
When selecting and evaluating shares, it’s important to do so as part of a broader investment strategy. That broader strategy should include a desire to create a highly diverse portfolio set to achieve specific investment objectives.
While evaluating stocks, assess risks as much as possible and weigh those risks depending on the sectors and companies they invest in. Moreover, investors should know whether or not they plan to chase long-term capital growth or earn consistent income from dividends. Many investors choose to combine the two to maximize their returns.
Investors should take as much time as possible to research the business and the sector it’s a part of, assessing the management and track records of the companies they’re investing in.
Additionally, investors must consider macroeconomic factors that may affect businesses, including exchange rates, government regulations, and competition.
2. Source Reports and Research
Sourcing information is a key aspect of evaluating stocks. The less information or track record about a company, the more risk there is regarding potential investments.
Typically, companies provide yearly financial reports detailing their activities. By reviewing a company’s finances, income sources, and how it manages cash, plus expenses and revenues, investors will have a better idea of whether stocks issued by the company in question are worth pursuing.
Investors should also look at broker reports. These reports provide a complete narrative about a company, helping with historical data and giving intrinsic insight into the company’s decision-making. By evaluating broker reports, investors have a better understanding of the company’s resilience, how it handles adverse market conditions, and the kind of improved value it provides shareholders over time.
Always stay current and up-to-date with market trends and consistently reassess investment to determine the true value of the stock.
3. Use Metrics to Evaluate Stocks
Investors will commonly use valuation ratios to gauge the true valuation of a stock they’re considering investing in. Investors will use these metrics to determine company value, compare companies/sectors, and determine the investment potential.
Some of the metrics that investors will use to evaluate a stock include:
i. Earnings Per Share (EPS)
The earnings per share centers around a company’s net profit, dividing that profit by the number of common shares outstanding. It’s a key aspect of share price analysis, showing a company’s profit-making capabilities. The higher the earnings per share is for a company, the more profitable it is.
Earnings per share are essentially the share amount paid out of a company’s profits to shareholders. EPS tells shareholders how companies in a particular industry compare. The companies that show consistent earnings growth will present more attractive stock options for investors.
ii. Price-to-Earnings Ratio
This ratio measures the correlation between company earnings and stock prices. To do this, investors must divide the current price per share of the stock by the company’s earnings per share.
By using the price-to-earning ratio, investors can tell whether the company’s stock price is high or low compared to its earnings. However, it’s not considered a reliable standalone metric.
Some investors believe that companies with a high price-to-earnings ratio have overpriced stocks. However, those companies could net higher returns.
iii. Net Tangible Assets
Net tangible assets are used to assess the future profit-making capabilities of a company, particularly in industries that rely heavily on capital.
Investors will take the total company assets, including the equipment, property, and plant, before subtracting total liabilities, patents, and trademarks.
The net tangible assets are divided by the number of shares of common stock outstanding to calculate a company’s net tangible asset per share of common stock.
iv. Price-to-book Ratio
Also called the P/B ratio, this metric evaluates how fairly priced a share is, taking the current price-per-share and dividing it by the book value per share, indicating how much investors are willing to pay for each dollar of the net value of a company.
The ratio matters most to investors who want to invest in companies with a market value lower than its book value.
4. Make Use of Online Financial Tools
Another easy way to analyze a stock is to use online financial tools. Investors can use stock screeners to filter stocks according to different parameters regardless of the types of stock being evaluated.
Whether the stocks are blue-chip stocks or issued by lesser-known companies, stock screeners provide detailed information that lets investors thoroughly assess the viability and potential volatility of a stock.
Various free stock screeners are available online, though some charge subscriptions fees if investors want more information.
5. Leverage Online Information Resources
Investors can use the information provided by online resources and websites like The Stock Dork to do more precise stock evaluations, where you can get regular stock reports and updates, as well as detailed information about companies and the value of their stock shares.
Investors can also get key investor education via the internet on such resource platforms to develop and/or fine-tune their investment strategies so that they can maximize the value of their stocks. Investor ideas are also provided to give investors important tips to evaluate their stock and consistently re-assess their stock options.
Each of those stock evaluation options will ensure investors have good starting points to build on when becoming full-fledged stock investors.