Capital markets unite buyers and sellers of securities. Corporations raise capital by selling shares, while investors buy stocks to invest savings. Shares of stock represent ownership stakes over business assets. Prices fluctuate in concert with the prevailing sentiment related to the world economy. Of course, stock price movements also correlate with business performance. Appreciate the relationship between stock price and business value, before putting together a portfolio that matches your objectives.
Buying Stocks to Make Money: Initial Research
You will first make a list of investments of interest, which may include some of your favorite companies. As a lover of fast food, you may think of McDonald's as a prospective investment. From there, you can visit online financial portals, such as Bloomberg and BigCharts.com to pull up stock quotes and charts for these potential investments.
Use the online technology to compare stock charts to relevant performance benchmarks. For example, the Dow Jones Industrial Average and S&P 500 track large U.S. stocks, while highlighting economic cycles. Your analysis should account for the effects of growth and recession upon stocks, profits and business valuations.
Buying Stocks to Make Money: Research Business Valuations
Order annual reports related to the stocks that are being researched. You may contact the investor relations department for paper copies, or access the information online. Annual reports contain news, financial statements, and statistical data that can be compared against share prices for business valuations.
Multiply current share prices times the number of common shares outstanding to calculate market capitalization. You will find the total number of shares outstanding within the balance sheet section of the annual report. Market capitalization defines the value that stock market investors apply to the entire company. Large capitalization stocks are generally ideal for conservative investors. According to Investopedia, large capitalization stocks are worth more than $10 billion.
Next, you will scan stock tables online, or within your daily newspaper for basic financial statistics. The price to earnings (P/E) ratio describes how investors value the corporation's earnings power, as it divides earnings per share into the current share price. For example, stocks that carry P/E ratios over 50 are more "expensive" than stocks featuring P/E ratios of 15. Aggressive growth stocks generally carry high price-to-earnings ratios.
It is important that you develop your own system for calculating business valuations -away from current stock market trading. For example, book value per share relates to subtracting liabilities from assets and dividing by shares outstanding. Further, intrinsic value is calculated by predicting future earnings power, and discounting those profits by prevailing interest rates to arrive at a present value. Stocks are cheap, when they trade at lower prices than the book and intrinsic values of their underlying businesses.
Buying Stocks to Make Money: Trading Stocks for a Profit
You are likely to prefer an online trading account, as a value-conscious investor that prefers to do your own research. As of 2010, Scottrade and E-Trade are two discount brokers that charge brokerage commissions of less than $10 per trade. Be advised that these companies do not offer financial advice, and that no investment can ever be guaranteed.
After opening your brokerage account, you will list stocks that may be described as undervalued when comparing your analysis to their actual share prices in the stock market. These stocks could represent bargains that are ideal for long-term investment. To manage risks, you may dollar-cost-average into these stocks. Dollar-cost-averaging is a process, where you commit to smaller investments over an extended period of time, instead of putting up one lump sum of cash.
You should also identify stocks that are overvalued while reconciling your personal calculations against stock market performance. These shares may be ideal candidates for either short sales, or liquidation if they are already part of your portfolio.
Remember that trading stocks is a dynamic and ongoing process. It is important for you to regularly monitor and compare stock price performance against earnings and asset statistics, regularly. The frequency of these comparisons relates to your trading style and the amount of money that is on the line. As a long-term, buy and hold investor, you should review your portfolio at least semi-annually.
How to Buy Stocks to Make Money, Sources:
Investopedia: Fundamental Analysis
SEC: Beginners' Guide to Financial Statements
Investopedia: Stocks Basics - Introduction
stock promoters
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