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Selecting Stocks

Selecting Stocks. Personal Finance. How hard is it to pick a stock?. “ Everyone has the brain power to follow the stock market. If you made it through fifth-grade math, you can do it.” -Peter Lynch Fidelity Investments. How can stocks earn money? .

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Selecting Stocks

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  1. Selecting Stocks Personal Finance

  2. How hard is it to pick a stock? “Everyone has the brain power to follow the stock market. If you made it through fifth-grade math, you can do it.” -Peter Lynch Fidelity Investments

  3. How can stocks earn money? • Stocks are ownership stakes in corporations that can earn money in two ways: • Dividends – periodic payout of corporate profits • Dividend yield = dividend per share/current stock price • Capital Gains – the profit realized when a share of stock is sold for more than the purchase price

  4. The goal of stock ownership • Buy low and sell high • Is that really all there is to it?

  5. What moves the market ? • In the short run: • Enthusiasm, fear, rumors and news • In the long term: • Earnings, general economic trends and the business cycle • Remember – individual stocks are not the market, they will behave differently

  6. Things not worth considering • Past performance • Just because a stock has been appreciating doesn’t mean it will continue to do so • Price alone • A $100 stock may be a better bargain than a $25 dollar stock

  7. How to evaluate a stock • No system is perfect, otherwise there would be no risk • Investors compare stock prices to other factors to assess value • The goal is to purchase an undervalued stock based on your assessment criteria

  8. Things to consider - Size • Size refers to market capitalization (number of shares * current share price) • What the company is worth today • Large cap companies are considered stable, but with lower growth potential • Small cap companies are considered riskier • Mid cap stocks are somewhere in between

  9. Things to consider - Style • Growth companies are expanding at an above – average rate • Cannot be sustained • Value stocks are currently underperforming, but might be poised for improvement • Cyclical companies make something that isn’t in constant demand throughout the business cycle

  10. Things to consider - Sector • Sectors represent industry groupings • Finance, health care, technology, energy, etc. • Exposure to industry risk

  11. Things to consider – P/E ratio • Price/earnings ratio is the most frequently used valuation tool • P/E = current market capitalization/earnings • There is debate about what earnings to consider (previous, current or future?) • What is a good P/E ratio? • Compare with competitors • But how do you compare different companies in different sectors

  12. Things to consider – PEG ratio • PEG ratio is P/E ratio divided by the long term growth rate • A company with a PEG ratio close to 1.0 is trading in line with its growth rate • A smaller PEG can indicate an undervalued stock

  13. Things to consider – Other ratios • The price/sales ratio: current stock price/total sales per share for the past 12 months • How much am I paying for revenue? • Price/book value ratio: current stock price/(total assets – total liabilities) • “bird in the hand”, conservative valuation

  14. Advice from “an expert” – Michael Sivy • The core of your portfolio should consist of financially strong companies with above average earnings growth • High growth stocks tend to be overvalued • To calculate earnings growth add dividend yield to projected growth • This should exceed 10%

  15. Where to find the information • Company earnings reports (10Qs and 10Ks) • Analyst reports • Many can be accessed for free online • Ask a full service broker

  16. Diversify and invest for the long term • Buying stocks in several companies and across several industries will lower risk and smooth returns • If you CHURN your portfolio, you will BURN cash in trading fees and someone else will EARN your invested money

  17. In the end …….. • Why not invest your assets in the companies you really like? As Mae West said, "Too much of a good thing can be wonderful". Warren Buffett

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