Stock Trading Tips And Advice That Can Help You Make Money
There are countless books that have been written about buying and selling stocks, and as a beginner, it's definitely worth reading at least a few of them. Be careful, though, because jargon is rife through the world of stocks, and it can be a bit overwhelming when you first stumble across terms like P/E, RSI and EPS, to name a few. It's very easy to get the impression that once you know all the jargon, you'll find it really easy to buy and sell stocks. Well, that certainly helps, but the reality is that a lot of your success will be due to something a lot closer to home - yourself. Your starting point, when working out your strategy, should be to take a good, long look at yourself. What sort of investor are you? That's probably the most important question you can ever ask. Are you young, with only a small amount of capital but plenty of time left in the workplace with good earnings potential? Or are you retired, or close to retirement, with a reasonable level of savings but low income. Add to this your tolerance for risk, and your enthusiasm for research and detail. Do you like calculating and interpreting statistics? Are you a 'big picture' type of person, or someone who likes to delve into all the little details. All of these things are important when you're working out what sort of strategy and plan you want to follow in the stock market. If you think that you can start buying and selling stocks without a plan, and with no understanding of yourself or your situation, you might as well just throw your money in the bin. Once you've decided how to proceed, you will need to know at least some of the basics of the stock market in order to make a decision about whether to buy or sell a stock. If you get carried away, there are hundreds of different indicators and ratios you can look at to make a decision, but there are a few that are generally considered to be the most important. PEG - Projected Earnings Growth In the past, many people considered the Price to Earnings ratio (P/E) of a stock to be an important indicator of value. If the stock had a low price, relative to large earnings per share, then chances were the share price would rise in the near future. Nowadays there are thousands more companies in the public markets, and with so many choices, it's not always that simple. Even now, though, P/E is a good indicator, but it's better if you supplement it with a little more information. That's where the PEG comes into play. To calculate the PEG of a stock, you take the P/E and divide it by the projected growth in earnings. So if you have a stock with a P/E of 20 and the projected earnings growth for the next year is 5%, you'd have a PEG of 4 (20/5). What you're looking for here is a low number - the lower the better. A low number means that you're buying future expected growth at a cheaper price. So in this situation a company may have a high P/E, but still be a good buy if the projected earnings are also high. Getting accurate projections is important, and with many internet brokers providing a lot of information on their sites, generally it's possible to find accurate and trustworthy projections for any company you're interested in buying. On the flipside, if you see the PEG becoming less favorable, it may be time to sell any shares you have in that company. Tracking the PEG of a company can be very helpful in managing your portfolio. ROE - Return On Equity Return on Equity is a different sort of indicator, because to some extent it assesses the ability of a company to make money. If you give one company $100, they may be capable of turning it into $1000. Another company, with the same $100, might only be able to make $150. This makes a big different to the potential profitability of a company. To calculate ROE, you divide the Net Income of the company by its Book Value (which simply assets minus liabilities). This sort of information is widely available online. You can then compare the percentage return with other companies in the same economic sector, and see how they compare. For example, 15% return in one sector might be considered outstanding, whereas in another it might only be average. If you're tracking ROE over time, you want to buy when the projected ROE is high (relative to history) and sell when the ROE is trending steadily downward. Look also for major changes, which could be mergers, impending lawsuits, management changes, other economic factors specific to that industry, and so on. Any of these could be causing a downward trend, and if they're impacting negatively on the company, are reasons to sell your shares. Over time, it's a good idea to continue reading and learning about the stock market. Things change, and you need to monitor your portfolio to see if those changes are having a negative impact on the stocks you own. As your knowledge grows, you may want to add a couple of other indicators to your research, so that you can watch for changes over time. Things like Moving Averages (MA) and a Relative Strength Indicator (RSI) are common technical indicators, and can be useful once you understand how they're calculated and what they represent. In the end, though, technical analysis and indicators are useless if you don't have a strategy or plan to follow. So make sure you have your plan in place before you begin, and your chances of success will be greatly improved. Timothy Gorman is a successful Webmaster and publisher of OnlineStockTradingSecrets.com. He provides more stock advice, information and money making stock trading tips that you can research in your pajamas on his website. |
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