Three Key Investment Ratios
If you have ever made an investment decision and regretted it shortly after the trade was executed, you are not alone. Consider the following checklist consisting of three, basic pre-trade points. While these three points are not considered exhaustive, following them will easily help eliminate or at least reduce those post-trade doubts.
Probably the most important thing to determine when buying into a position is whether the risk that comes with that security is acceptable to you, the investor. Since risk is a relative term, the easiest way to determine the risk of a security is to know its Beta. Beta is a measure of projected volatility relative to the overall market. You can find a security's Beta at Yahoo! Finance.
As a measure of volatility, Beta is given a value 1.0 for the market. Therefore, a stock with a Beta of 3 will respond three times more than the market. That means if the market has a 3% down day, the stock in question will likely have a 9% down day. The closer a stock's Beta is to 1.0, the more like the market it will behave.
A second valuable statistic is the price to earnings ratio (or PE ratio). This ratio tells investors how much they are paying for each dollar of earnings. So, a PE Ratio of 6 indicates that the shares are priced at $6 for every $1 in earnings. While this alone might not indicate whether one should buy a stock, knowing what competing companies' shares are selling for. For example a PE of 6 for one security when all other competitors' shares are trading at a PE of 30 should set off a red flag, warranting further investigation.
A third valuable statistic is the Earning Per Share (EPS) value of a share. This tells investors how much each share has contributed to the earnings of the company. So, an EPS of $7 tells someone who owns 100 shares that his or her ownership stake entitles him or her to $700 ($7 X 100 shares = $700). Alone, EPS is not really very useful, but when compared to other shares that perform in the same sector, it can provide investors with red flags or prompt them to do more digging (remember, if a company has more shares outstanding, the EPS will be diluted).
Beta, the PE ratio and EPS alone do not tell investors whether or not to buy a share. The point in this exercise is to do some digging and in most cases, one of these will prompt the investor to do exactly that. And by spending more time on the financial statements and accompanying notes, the more the investor will know about the company he or she is considering buying into. And with this, there will be a lot less trading stress and regret. - 23221
Probably the most important thing to determine when buying into a position is whether the risk that comes with that security is acceptable to you, the investor. Since risk is a relative term, the easiest way to determine the risk of a security is to know its Beta. Beta is a measure of projected volatility relative to the overall market. You can find a security's Beta at Yahoo! Finance.
As a measure of volatility, Beta is given a value 1.0 for the market. Therefore, a stock with a Beta of 3 will respond three times more than the market. That means if the market has a 3% down day, the stock in question will likely have a 9% down day. The closer a stock's Beta is to 1.0, the more like the market it will behave.
A second valuable statistic is the price to earnings ratio (or PE ratio). This ratio tells investors how much they are paying for each dollar of earnings. So, a PE Ratio of 6 indicates that the shares are priced at $6 for every $1 in earnings. While this alone might not indicate whether one should buy a stock, knowing what competing companies' shares are selling for. For example a PE of 6 for one security when all other competitors' shares are trading at a PE of 30 should set off a red flag, warranting further investigation.
A third valuable statistic is the Earning Per Share (EPS) value of a share. This tells investors how much each share has contributed to the earnings of the company. So, an EPS of $7 tells someone who owns 100 shares that his or her ownership stake entitles him or her to $700 ($7 X 100 shares = $700). Alone, EPS is not really very useful, but when compared to other shares that perform in the same sector, it can provide investors with red flags or prompt them to do more digging (remember, if a company has more shares outstanding, the EPS will be diluted).
Beta, the PE ratio and EPS alone do not tell investors whether or not to buy a share. The point in this exercise is to do some digging and in most cases, one of these will prompt the investor to do exactly that. And by spending more time on the financial statements and accompanying notes, the more the investor will know about the company he or she is considering buying into. And with this, there will be a lot less trading stress and regret. - 23221
About the Author:
As founder of the Mutual Fund Site, Christopher Fitch's site has been helping people find out Where To Invest. His site has also discussed Bond Funds when all other sites have avoided the topic.
posted by X - Men @ 4:23 AM
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