How to Find Good Stock Investments
Finding a good stock to invest in involves lots of information, analysis and a little bit of luck. Here are some tips as well as tools that are used to determine if a particular stock is a good investment.
One of the reasons that stock prices rise is due to supply and demand of the market. If a company is growing rapidly and earning more money each year or quarter, the stock price should increase due to the overall value of the company increasing. As the company increases, the stock price increases as well. When a company does poorly and does not grow or make a profit, the value of the company lessens and the stocks worth starts to decrease because it is not in demand. The value of the companies stocks is always up to the market forces. There is no set rules on why stock increase or decrease.
One of the many tools that investors use when analyzing whether a stock is worth its price is the P/E. P/E stands for price to earnings ratio. P/E ratio can easily be determined by dividing the market value of a stock over the last year by the earnings per share of the last year. For instance, if a stock averages a price of $100 over the course of a year and its earnings over the last 12 months for each share was $2, the P/E ratio would equal 50. It is important to note that investors should not base their entire analysis on a P/E. The reason that P/E isn’t the best indicator is that earnings per share are the result of accounting. The P/E is only as good as its accounting methods.
P/B or Price book is also a good method to determine if a stock is a good buy. P/B stands for price to book ratio. The price book ratio is a way to see if the book value of a company is worth the market value at its current price. This can be a very helpful tool for many investors. Another way to determine if a stock is a good choice is the amount that it pays out in dividends. Not every stock pays dividends, but a dividend is profits from a stock that a company gives back to its shareholders. It can be 1% of the profit or all of the profit per share that a dividend may encompass. If you are looking to invest in stocks, keep in mind the above ways to determine if a stock is worth investing in.
Dear Investing Blog,
long time reader, first time poster, I work at Stillwater Capital, and thought I would take the time to tell you what was on my mind. I was thinking about hedge funds and some of these funds blowing up, and thought that I would add my two cents and see if you had anything to add too – I hope I’m not being too off topic from your post here, but I just wanted to say a few things after reading your last thought here… many investors were hurt by Amaranth and other funds, and I was thinking about the ways some of those affected are going to sort through the damage, here are some principles they may want to have in mind:
1. Sophisticated hedge funds apparently have no clue about should have basic concepts like money management, position sizing and ‘risk of ruin‘ knowledge, and should use stops or have a point where they know to exit.
2. Bennett McDowell once said that, “Money management in trading involves specialized techniques combined with your own personal judgment. Failure to adhere to a sound money management program can leave you subject to a deadly “Risk-Of-Ruin” exposure and most probable equity bust.”
3. The smaller the amount you risk for any one trade relative to your capital base the lower the risk of ruin.”
4. And of course it goes without saying that a good hedge fund investor has to pick good funds to invest in. The key, though, to success in this business, is not to choose the best performing managers, but actually to evade the frauds and blowups.
5. With both frauds and blowups, contrary to public opinion (and myth), size does NOT matter: Beacon Hill was $2 Billion, Lipper was $5 Billon, Amaranth was $9 Billion).
Suffice it to say that these should be some of the main points investors should think about as they interview and select hedge funds to entrust their dollars to.
Do you agree with this?
Jack Doueck
Stillwater Asset Backed Strategies
Stillwater Capital
Has anyone heard what was going on with AC Energy Inc. it trades now over the counter as ACEN. I found out about it early last year on the Motley Fool website as a great upcoming company. They manufacture self charging batteries for cell phones, computers, Ipods things like that. I thought it was a great idea at the time, but didn’t buy any stock. I recently heard some very positive rumors regarding this company, but I can’t find out anything about it. I can’t find their website but they are trading. Has anyone else heard anything about this company?