As a beginner investor, it can be tricky to know what stocks to buy.
Do you go with the herd? Do you buy whatever stock seems popular on television at the time? Do you ask your buddy who just got started himself?
For the record, we don’t advise you to do any of those things.
Instead, as a beginner investor, it’s important to understand key metrics that help you understand how a stock performs or will perform in the future. Although, this requires research.
Stick around to discover the key metrics you should know as a newbie investor.
What the Heck Is a “Stock” Anyway?
Before you can start investing in stocks, it’s important to know what a stock actually is and how it can help you. So, what is a stock anyway?
A stock is basically a piece or a “share” of a company. Each share is given a price based on what the company is worth.
A company will issue shares to investors to raise money. The stock market allows you to buy publicly traded companies like Apple, Disney, Google, or Walmart.
Whenever you purchase stock in a company like the ones mentioned above, you become part-owner of that company. For example, let’s say a stock had only 100 shares. If you bought one share, you would own 1% of the company.
Now, that’s not realistic, but it gives you a sense of what stocks are and why they are important investments for your future. To learn more about investment tips, we suggest checking out kjtradingsystems.com.
Key Metrics That Every Newbie Investor Should Know Before Buying Stock
When you consider buying stocks, it’s better to understand how to identify a wonderful business rather than identifying cheap stocks. After all, if you’re thinking about investing, you should be considering a long-term approach.
A wonderful business will usually have good long-term performance — even if it’s at a higher valuation. Conversely, buying cheap stocks from companies that haven’t established long-term success usually doesn’t work out for most investors.
To identify if a business is wonderful or not, you’ll have to understand three key metrics:
The price-to-earnings ratio is a valuable metric for evaluating a wonderful business. To calculate, divide the company’s current share price by its past 12 months of earnings. Additionally, you can use the projected earnings for the next 12 months to calculate a company’s future P/E ratio.
The PEG ratio or price-to-earnings-growth ratio sort of levels the playing field for wonderful businesses that fall short in their P/E ratio. To calculate the PEG ratio, divide the P/E ratio by the company’s growth rate.
For instance, a company may have a P/E ratio of 24 and a growth rate of 12%. Therefore, the PEG ratio would be 2.0.
The payout ratio provides the annual dividend rate that gets expressed as a percentage of its earnings. That can help you determine the company’s dividend stability. For example, let’s say a company paid out dividends of $2 per share last year, but they earned $4, the payout ratio would be 50%.
Knowing What Stocks to Buy Takes Time
Understanding what stocks to buy takes time and practice. It’s just like anything else. However, if you dedicate yourself to understanding the three metrics from above to evaluate stocks, you’ll be on your way to owning pieces of some wonderful businesses.
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