Do you have the funds to start investing in the stock market, but you’re unsure how to pick good companies to invest in (or even put on your radar)? Well, financially savvy travelers and financially savvy investors, you’re in the right place. With thousands of publicly-traded companies in the stock market, coming up with criteria you can use to analyze companies will help you beat overwhelm, strengthen your investing knowledge and boost your overall confidence. To help you with this, in this episode, we’re chatting about things to look for when picking companies to invest in. While we’ll cover three criteria, there are many others, so do your research.
How To Choose What Stocks To Invest In
In this episode, we chat about:
- Factors to consider when determining if you will invest in a company
- What to look for when picking companies to invest in and how to choose a stock
- Why it’s important to understand a company’s business model
- Metrics to use when analyzing the value of a company
- 52-week range
- P/E ratio
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1. Understand the company’s business model
What companies should I invest in? Here are some questions you can ask yourself to see if you understand how a company makes money.
- What products and services does the company provide?
- Can you explain what they do to a friend?
- Are they making money right now or will they in the future?
- Who are their competitors?
2. 52 Week Range
The 52-week range is the highest and lowest price a stock has closed at within the last year. This stat helps investors determine how a stock is performing and can be used to determine investing entry and exit points.
3. P/E Ratio
Ratios help investors evaluate the performance of a company but also makes it easier to compare companies in the same industry.
Price to earning ratio or P/E ratio is a popular metric that shows if a stock is overvalued or undervalued. Comparing stock price to a company’s earnings, P/E ratio reflects generally how investors feel about the future earnings of a company.
A lower P/E ratio means the stock’s price is low compared to the companies earnings. In these scenarios, a company may be undervalued and investors may have low expectations for future growth.
On the other hand, the higher the P/E ratio, the more overpriced or overvalued a stock. Yet, investors may still be willing to pay more for the stock because there’s an expectation for future growth.
The average P/E ratio is 17 which reflects that of the S&P 500, an index which tracks 500 leading publicly traded companies in the U.S. Anything above 17 is considered high and anything below may be considered low, but always compare P/E ratios between similar companies in the same industry.
Still need help understanding the P/E ratio? Watch this video for an in-depth explanation.
Building Bread (YouTube): Kevin Matthew II helps people figure out what to invest in and where to start.
Trade and Travel (investing course): Learn how to supplement your income by trading in the stock market with Teri Ijeoma.
Broke Millennial Takes On Investing (book): Tackling topics ranging from common investing terminology to how to handle your anxiety to retirement savings and even how to actually buy and sell a stock, this hands-on guide will help any investment newbie become a confident player in the market.
You’re a Wealth Heiress! Now Think and Act Like One (book): Learn how to live your life to the fullest by creating spending priorities, discovering the secret of cycles, and tapping into the power of compounding.
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