When evaluating a stock investment option you need to make several considerations; stock’s valuation, strategy, plans for diversification and appetite for risk.
The most basic measure for evaluating a stock is the company’s earnings. When you purchase a stock the direct reward is the dividends paid from the profits the company made. However, the directors may choose not to pay dividends and reinvest the money back to the company which increases the value of your stocks.
The most common measure of stock is Price Earnings ratio given by share price divided by earnings per share P/E. As a general rule of thumb, stocks with P/Es higher than the broader market P/E are considered expensive, while stocks with a below-market P/E are considered cheaper.
Other popular measures include the dividend yield, price-to-book and, sometimes, price-to-sales. These are simple ratios that examine the stock price against the second figure, and these measures can also be easily found by studying stock tables.
Investors seeking better value seek out stocks paying higher yields than the overall market, but that’s just one consideration for an investor when deciding whether or not to purchase a stock.
Picking stocks is much like evaluating any business or company you might consider buying. After all, when you buy a stock, you’re essentially purchasing a stake in a business.
Stock investment is a great asset since it has a very high liquity incase you want to dispose it.