The stock market is a huge globally entity, and one that boasted a total market capitalization value in excess of $70 trillion as of December 31st, 2019.
With this in mind, it can be hard to grapple with the fundamentals of stock market trading, whether you look to target shares in individual firms or invest in indexes that focus on specific industries and marketplaces.
In this post, we’ll ask how you can determine the viability of a potential stock option and what factors should ultimately inform your decision.
Price-to-book (P/B) Ratio
We’ll start with the P/B metric, which has been largely designed for investors with a decidedly glass-half-empty mindset.
In simple terms, this represents the value of a company if it were to be disbanded and sold today, which is an often overlooked metric in a market where investors are often short and mid-cap options that boast tangible growth potential.
The price-to-book ratio, or P/B ratio, is a financial ratio used to compare a company’s current market price to the book value. It is also sometimes known as a market-to-book ratio. This is highly recommended metric for value investors. P/B ratio can be impacted by accounting standards is real life and P/B ratios can be less useful for services and information technology companies with few tangible assets on their balance sheets.
It’s also insightful to know the value of a company and its core assets in real-time, particularly as companies in mature industries can easily falter in terms of their growth and future expansion. This has been used as one of the various value investing technique by Warren Buffet and his mentor Benjamin Graham
When analyzing the P/B ratio, you can accurately estimate the risk associated with your subsequent stock market investment, regardless of whether you’re looking to secure a short or long-term gain.
Price-to-earnings (P/E) Ratio
Next up is another ratio, and arguably one that remains the single most scrutinized of all similar metrics in the marketplace.
It’s also arguably the most important for long-term investment options, as it measures the real-time price of a particular stock against the relevant company earnings.
This is crucial; especially when you consider that a stock can rise significantly in value without a proportionate increase in earnings. So, by analyzing a stock’s P/E ration, you can determine whether or not it has the fundamentals to sustain growth and further increases over a predetermined period of time.
An earnings report tells you how the company is performing. A P/E ratio tells you how investors perceive how the company is performing. In other words, how much they are willing to pay for a dollar’s worth of earnings.
This trend has been evident amongst big tech stocks over the course of the last 18 months, with share prices rising at a disproportionate rate to earnings. This is why some investors have changed their approach in 2020, with many predicting that some big tech shares will be primed for a steep decline in the near-term.
The P/E ratio is the price an investor is paying for $1 of a company’s earnings or profit. By that it means, if a company is reporting basic or diluted earnings per share of $10 and the stock is selling for $200 per share, the P/E ratio is 20 ($200 per share divided by $10 earnings per share = 20 P/E).
Dividend Yield
If you’ve heard of dividend-paying stocks, you’ll understand why these are heavily favored by risk-averse investors with a desire to safeguard their capital.
Dividend yield is shown as a percentage and calculated by dividing the dollar value of dividends paid per share in a particular year by the dollar value of one share of stock.
After all, these entities pay out regular (albeit relatively modest) dividends even if their share price declines, creating a guaranteed source of investment income that helps to hedge against more risk-laden and volatile positions.
Dividend yield equals the annual dividend per share divided by the stock’s price per share. For example, if a company’s annual dividend is $2.50 and the stock trades at $35, the dividend yield is 7.14% ($2.50 ÷ $35).
With this in mind, the dividend yield is a popular and widely used metric amongst investors, as it highlights precisely how much of a return you’ll earn on your investment over time.
More specifically, by dividing the stock’s annual dividend by its real-time price, you’ll understand the percentage return you can expect. This will represent interest on your initial investment, while you can simultaneously benefit from any appreciation in stock value that occurs each year.
Private Stock Needs A Different Skillset
Private stock is an increasingly viable and great investment for those wanted to diversify their portfolio but still ensure their investments remain in stock. The trick is in finding a good private stock. You have to evaluate the business in a different way than if you were buying the stock on the open stock market. Let’s look at an example with upside food stock and you can see how to find a good private stock. Upside food stock is interesting because they grow chicken in a different way using a master bank of cell lines. A stock like this is future forward because it’s better for the environment, and also appeals to those fighting for animal rights. It’s about picking a private stock that sits well with a future audience, especially if you’re holding long-term. Also, there’s a chance private stock company could go public with an IPO where you’d probably make good on your investment.
People also read