There’s a lot of advice out there that will tell you that one or that other thing is the ultimate, end-all key to success. With all that advice out there, it’s hard to determine what the actual key to success is. There’s many ways to be successful in stocks, but focusing only on the stocks that matter is definitely a key step. There’s no right way or wrong way to analyze a stock, but there are specific fundamental elements to pay particular attention to. Before you do anything, know when to cut your losses. You might have heard this repeatedly throughout your stock trading career – the saying “cut your losses short and let your winners run” is frequently repeated. It’s an unfortunate truth of trading that sometimes you will buy stocks that drop. Knowing when to make a move on them and when to sell is important. Remember that stocks don’t always bounce back. Don’t neglect your stocks and let them drop – clean out the losing stocks and make room for winners. Have a strategy, such as a price target when to sell, or if bad news is released about the company. Tap into the most essential elements regarding stocks and start to realize which components matter when paying attention to which stocks to buy.
- The PE ratio isn’t your most dreaded class at school, it’s one of the most important elements to assess when looking into stock value. The price to earnings ratio is the price of the stock’s share, divided by its earnings per that share. The resulting value is the ratio that determines the value of the company, and how much investors are willing to pay for each dollar that a company earns. A high PE ratio likely means that the company is anticipating future growth. A low ratio costs less per share than those with high ratios, so in regards to buying low, this is the way to go.
- Keep a diary – a trading diary. You’ll begin to recognize the trades and patterns that you’re making that are successful, instead of being overwhelmed by what seems like random data. This will allow you to hone in on what works best for you and continue to make these trades in the future.
- Take a look at debt equity ratio, used to measure the leverage of a company. Calculated by dividing all of a company’s liabilities by stockholder’s equity, it determines how much debt a company uses to pay for its assets. This number lets you know how a company finances assets. It can also indicate when a company is getting into debt, so steer clear of high numbers.
- Beta test it – beta gives insight into the volatility of a stock, or in more simpler terms, how unpredictable it’s been. The higher the beta number, the more likely it will be volatile in the market, and vice versa. Most beta numbers can be found next to the PE ratio. Any beta that’s higher than one is considered to be a high beta number, meaning it rises and drops frequently.
- The price to book ratio is also called the book value. This ratio is calculated by dividing the share price of a stock by its net assets. This is similar to the PE ratio, except in the PB ratio, intangible assets are subtracted. This takes out the guesswork of what investors are paying for, because only tangible assets are accounted for. A PB value of 15 or lower tends to indicate steady value of a stock.
- Don’t have too narrow of a focus. All these factors independently are important, but focusing too much on one or the other can shorten insight. Instead, take into account multiple factors when focusing on which stocks to put your energy into.
Undoubtedly, many factors play into which stocks matter, and it’s most important to figure out which stocks matter for you. Over time you’ll recognize the indicators of strong stocks, cut losses quickly, and cash in your gains if you focus on only the stocks that will turn you a profit.