Is this a good Stock?

How do you know if you should invest in a stock? There are some standard ways that you can use to evaluate a stock. Start with the ticker symbol or the letters that identify a stock on a stock exchange. You can usually find out the following:

last traded value - most recent per share prince that it was purchased at
net change - how much it has gone up or down
bid price - most recent amount offered for it
ask price - most recent amount someone has offered to see the stock for
day high and low - highest and lowest price for the day
volume traded - number of shares trade in the last day
52 week high and low - highest and lowest price for the year
price

Plus the really important stuff:
P/E- Price to earnings ratio. The lower the number is usually the better.
EPS - amount of earnings the company generates per each share of stock that exists. The more generated the better.
Dividend & % - shows the current dividend and the percent of earnings that the dividend represents. Not all companies issue dividends.
Capitalization - the total number of outstanding shares times the price per share. There are large and small cap companies. Generally the smaller the market cap of a stock the riskier it is.

When you examine this information along with company listings of financial information you see if the company is financially sound and if its revenues and earnings have been increasing on a regular basis.

You'll need to look at how much debt or loans the company has. In general, less debt is better than a lot of debt. Also look at how well the company is doing in comparison to its competitors and the industry too.


There are print and online resources that provide financial information on individual stocks and industries.

Investing - Sectors

Experts divide stock into categories based on industries. These industrial categories are called sectors. Most financial advisors recommend that a diversified portfolio should include from five to teen stock in different industries. Familiar examples of industrial categories are retail, health care, technology and energy.

Sectors are important because many factors effect the economy in different ways. Some industries do well while others do poorly. For example, when the economy is doing well and wages are up, retail stores do well. When the economy is doing poorly, companies that provide necessities like health care or food do well, but retail stores do poorly. People have less money to spend on non-essentials. In this way, diversification helps protect your against large overall losses.

How Stocks Earn Money

Stocks earn money in two ways: increasing in value and dividends. When a company's revenues (money earned) and profit are increasing, the value of a share of its stock increases. As a result, buyers are willing to pay more for it. Capital gain is the difference between what you originially paid for a share of stock and its present value. If its value decrease, that's a capital loss.

Stocks also may pay dividends. The key to growing investments is reinvesting your captial gains and dividends. When you reinvest the money you make from investments, you buy more share with it instead of spending it. Over time, you own more and more shares and have more and more gains and dividends.

Investing - Exchanges, Brokers & Stocks

A share of stock represents a tiny share of a company. Stocks are sold in different stock markets or exchanges. The two major exchanges are the New York Stock Exchange (NYSE) and NASDAQ or the National Association of Securities Dealers Automated Qutation system.

To buy stock, you place an order with a broker. A broker is someone who completes transactions between buyers and sellers. There are different types of brokers:

full service- provide investment advice and recommendations
discount- place orders at a low price but limited advice
electronic- place orders over the Internet

In addition, some mutual fund companies offer brokerage services.

There are two types of stocks: common and preferred. There are two difference between the two types of stocks. A company will decide whether or not to pay a dividend or a percentage of it's earnings to stockholders. Preferred stock pays a guaranteed dividend. If a company goes out of business, their assets are used to pay off bond and stockholders. Preferred stockholders are paid before common stockholders. If there is no money left then common stock holders will not be paid.

Investing - Stocks Ups and Downs

There's a lot to learn when you invest in shares of stock. First, you need to expect the prices of those stock shares to go up and down. They will --- often every day! Here are some of the many reasons why a stock price will increase or decrease:

• increase or decrease in sales or profits


• change in corporation's management


• change in products or services


• a famous investor buys or sells shares of stock


• a well-known analyst upgrades or downgrades their evaluation of the company


• research reveals something good or bad about the corporation's products


• the corporation wins or losses a lawsuit


• a lot of people are either buying or selling their shares


• the stock market is either up or down


• positive or negative media coverage toward the corporation


• rumors

Volatility refers to how much a stock's price tends to jump up and down from day to day. Some stock have more volatility than others. Sensible investing takes time to see results. Investing in stock takes long-term thinking.

Investing - Growth Rate

The growth rate or how fast your money grows from year to year is really important. In our compounding example, we used a growth rate of 10%. That's how fast your money grew over the time that you had it invested.

Your money will earn more or less depending on where and how you've invested it. A typical bank account will earn about 5% each year. Shop around to find the best rate. Read the Smart Banking post to get some ideas on how. There are other ways for you to invest your money and get a different growth rate.

A certificate of deposit (CD) is an investment option available at a bank or a credit union. It's kind of like a saving account but different. Here's how it works. You deposit a sum with bank, wait a specified period of time, and then withdraw the sum plus interest. It' s kind of like you are loaning the bank your money to use for a specified time period and they are paying you for the right to use your money. The time period is anywhere from three months to six years.

Another way for you to invest your money is by purchasing stock. What is stock? Basically it means that you own a piece of the company or in other words you have a claim on the company's assets and profits. Ownership is determined by the number of shares that a person owns divided by the total number of shares outstanding.

So, if you own 50 of the 1000 share of stock that a company has outstanding then you own 5% of the company. Only a specific type of company, a corporation, can issue stock. While stock often provide a higher growth rate, there is more risk involved with investing your money in them.

In the next post, we'll talk about risk.