Making money is the name of the game, but exactly how does someone go about doing that? You clearly have to buy stocks when the price is low and sell them when the price goes up. That's the most obvious way to make money investing on the stock market. Every investor tries to figure out when to go into and out of stocks, but timing the market never works. So there has to be a better way to assess the value of stocks.
Some investors will tell you to look at the Price Earnings ratio and if the PE is low then you would deduce that the stock is cheap because the company has high earnings relative to its price. Other investors will focus on the Return on Equity metric and tell you that the ROE needs to be over 10%. Low levels of debt and a high rate of sales are also good qualities for companies to have. The question to answer is really what should the actual price that a stock is trading at actually be?
If you want to be an effective value investor you should screen stocks as the first and most important step to make the research part manageable. This should include eliminating companies that don't have earnings, that have high debt-to-equity, low return-on-equity, and companies that don't have consistent positive free cash flow.
DCF models require that you asses the free cash flow for a company. The FCF comes from the calculation of the difference between capital expenses and total cash from operations that is derived from the statement of cash flows for the company. You can find such information on websites like Yahoo! Finance and Google finance.
There have been many studies that have shown that value investing works, but many investors are mezmorized by the promise of stocks that grow by 100% overnight. There is nothing more exciting that having your money double in no time at all, but the reality is that sound investing is often slow, consistent, and for lack of a better word, boring. It is those investors with discipline to stick to proven strategies over the long term that will be rewarded in the end.
Some investors will tell you to look at the Price Earnings ratio and if the PE is low then you would deduce that the stock is cheap because the company has high earnings relative to its price. Other investors will focus on the Return on Equity metric and tell you that the ROE needs to be over 10%. Low levels of debt and a high rate of sales are also good qualities for companies to have. The question to answer is really what should the actual price that a stock is trading at actually be?
If you want to be an effective value investor you should screen stocks as the first and most important step to make the research part manageable. This should include eliminating companies that don't have earnings, that have high debt-to-equity, low return-on-equity, and companies that don't have consistent positive free cash flow.
DCF models require that you asses the free cash flow for a company. The FCF comes from the calculation of the difference between capital expenses and total cash from operations that is derived from the statement of cash flows for the company. You can find such information on websites like Yahoo! Finance and Google finance.
There have been many studies that have shown that value investing works, but many investors are mezmorized by the promise of stocks that grow by 100% overnight. There is nothing more exciting that having your money double in no time at all, but the reality is that sound investing is often slow, consistent, and for lack of a better word, boring. It is those investors with discipline to stick to proven strategies over the long term that will be rewarded in the end.
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