Fortunately, there are some key numbers that may help you decide if an investment is right for you. Read on to learn how to research stocks, and then flex your analytical muscles.

The theory: How to research stocks

When you buy shares of a company’s stock, you’re probably hoping their value will increase. Unfortunately, there are no crystal balls, but understanding the company better can help you make a more informed prediction about how its shares might perform. Here are some important terms you may want to look into when you research a stock:

• Revenue or sales: Revenue is the income a business creates, usually from the sale of goods and services. It’s the lifeblood of a company; without revenue, an enterprise can’t function for long. If revenue is increasing over time, that may show that the company is growing.
  
• Net income: This is how much profit a company made, or what’s left over after subtracting expenses, debt payments, and taxes from revenue. Net income is similar to the cash you have left after paying all your bills.
• Price-earnings (P/E) ratio: The P/E ratio is a mathematical formula that compares a company’s stock price to its earnings per share. Investors use it to make educated guesses about whether a stock’s price is high or low. This article can give you more details on how to research stocks based on their P/E ratios.
  
• 52-week range: This is the highest and lowest price of the stock in the previous year. It can help you suss out whether you’re purchasing a stock near the top or bottom of its price range.
  
• Earnings reports: Public companies must file a 10-Q every quarter with the Securities and Exchange Commission (SEC); this document provides a view of the company’s financial position. You can look up a company’s reports online using the SEC’s EDGAR database. Earnings reports can be complicated, but they’re a rich source of information.

These key indicators that can help you research stocks are generally available in stock charts, earnings reports, or both. In addition, it’s a good idea to consider non-numerical information, like news reports, company press releases, and publicly available reports from management, like annual or quarterly letters. And you can get weekly market updates and other financial news right here on Stash.

If that seems like a lot of information to digest, remember that you’ll likely get more comfortable understanding the numbers as you go. There’s no magic how-to: research investments that interest you. You may be surprised at how much you can learn by simply sitting down and digging in.

Jargon Hack.

What is 52-Week Range?

52-Week Range

The highest and lowest price at which a stock has traded over the course of the previous year.

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The practice: How to analyze a stock before investing

Now that you know the kind of information you might want to look at, let’s dig into a hypothetical example of how to analyze a stock. Before investing in XYZ Capitol (an imaginary company)*, let’s say your research gives you the following information:

• In the last quarter, XYZ Capitol had $10 million in revenue.
  
• In the same period, its net income was -$9 million, a loss.
• Its P/E ratio is 5, and the industry average is 20.
  
• The stock price is $8 per share, and the 52-week range is between $8 and $50.
  
• A quarterly letter from the company’s CEO mentions ongoing litigation related to a faulty product and a management shakeup that includes the departure of the company’s CFO.

As a general rule, it’s best not to judge a company based on a single quarter, but there are exceptions. In this case, XYZ Capitol has:

• A large loss (net income)
  
• A low share price (52-week range)
  
• Major litigation and C-level turnover (CEO letter)

Something is clearly going on with XYZ Capitol. It might be a good bet to avoid purchasing the company’s stock for now. 

(Example is hypothetical, and is not a prediction or projection of performance of an investment or investment strategy)

Put your knowledge to work with Stash

Knowing how to research stocks is an important part of being a savvy investor. And understanding how to analyze a stock before investing may help you make more informed decisions, even without a crystal ball. Stash offers opportunities for every investor.

The post Here’s How to Research Stocks appeared first on Stash Learn.

Jargon Hack.

What is P/E ratio?

P/E Ratio

The price-earnings ratio is a mathematical formula that measures a company’s stock price compared to its earnings per share.

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Tactics and considerations:

• Look at the P/E ratios of other companies in the same industry or sector as the company whose stock you’re considering.
• If the P/E ratio is higher than the average, that could mean the company is overvalued. If it’s lower, that could mean it’s undervalued.
• Generally speaking,  a high P/E ratio reflects an expectation of higher growth in the future. But a high P/E could also mean that a stock’s price is high relative to its earnings, and possibly overvalued.
• By contrast, a low P/E ratio may suggest an investment opportunity as the stock price is low relative to its earnings. But this could also suggest that the company has a problem, such as a bankruptcy or threat of a lawsuit.
• Similarly, it’s important to pay attention when the P/E ratio of an entire industry or sector climbs above, or falls below, its historic average.
• Remember, the P/E ratio is just one of many metrics to consider when purchasing a stock. Other things to consider could include profit, revenue, and debt.

Example:

Here’s what the price to earnings ratio formula looks like, as a mathematical equation:

If the stock for Acme Company (not a real company) is trading at $20 a share, and its earnings per share is $5, then its PE ratio is 4*.

Let’s say that Acme  is in the aerospace and defense industry, which has a P/E ratio of 43, according to industry research. The P/E ratio is low for the industry, and the P/E ratio suggests the stock might be good value–in other words, it could increase closer to the industry average over time as its price is relatively low compared to its earnings.

Now let’s say that Acme’s stock is $500 a share, and it’s EPS is still 5. That would give Acme a P/E ratio of 100*, more than twice as high as its industry average. That could suggest the stock may be overvalued.

Other things to keep in mind: Some industries, like technology,  can have very high P/E ratios. That’s because there is often a lot of hype and expectation about how certain stocks will grow over time. (Think about the FAANG stocks, for example, which have some of the most talked about products and services in the market.) More subdued industries, such as financial services, can have lower P/E ratios.

Jargon Hack.

What is earnings per share (EPS)?

Earnings per Share (EPS)

It’s a mathematical formula that divides profits among each share of common stock outstanding.

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The post How to Value a Stock Using a P/E Ratio appeared first on Stash Learn.