What Stock Investors Need to Know

What Stock Investors Need to Know

Companies issue stock as a way to raise capital without guaranteeing payments to creditors.  Stock certificates represent a stock investor’s claim on a company’s assets and earnings and assure the investor of voting rights. Owning stock doesn’tmean an investor manages the day to day operations of a company, but it does give the investor a vote for the elected board of directors. In theory, a company’s board of directors should protect the interest of the stock investors. Investors generally use brokers to facilitate transactions and execute trades on the stock exchange.

For many stock investors, utilizing the experience and expertise of a stock broker is the most effective and efficient ways to buy and sell stock.  Your stockbrokers will monitor the market, identify trends, and execute trades on your behalf. Brokerage firms charge fees for their expertise, research, and management on behalf of you and your stock portfolio and your broker is paid by a commission when he or she executes a trade. Stock investors who use a brokerage firm, spend time with an advisor discussing long and short term financial goals and creating a portfolio designed to meet those goals and objectives.

Many stock investors chose to invest without the help of a broker. Online trading platforms, provide stock investors with the technology to manage and execute trades on their own. Sites like Bloomberg News, Google Finance, and Yahoo Finance provide extensive research on companies, their earnings, and their liabilities.  On-line brokerage sites give stock investors the platform, but not the expertise to execute trade. Successful on-line investors have put a significant amount of time into researching the right mix of stocks.

Stock investors and brokers study and analyze a number of factors, including:
•    Earnings: You want to see progressive, if not significant growth from year to year.
•    Sales: These should also steadily increase every year
•    Debt: You would like to see the debt decrease every year. At the very least, the company’s debt should be lower than its assets.
•    Equity: Subsequently, you should growth in the company’s equity every year.

There are other measures to consider before investing in a stock.
•    Price to Earnings Ratio: For large cap stocks, the P/E ratio should be under 20. For all other stocks, it should register below 40.
•    Price to Sales Ration: The Price to Sales Ratio should be close to 1.
•    Return on Equity: The ROE should grow by 10% every year.
•    Earnings Growth: You will want to look for sustained earnings growth over several years. A company with an earnings growth of 10% or higher is a very strong and healthy company.
•    Debt to Asset Ratio: Debt should be half of all assets.

These areas provide stock investors with a solid understanding of the company’s economic outlook. Once an investor has analyzed a company, he or she can determine if the company is compatible with your long and short-term investment plans. Savvy and successful stock investors create a diverse portfolio with a good mix of stocks, bonds, and mutual funds covering a number of different industries and areas.

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