How to Value Stocks

The stock market can seem like a scary place. But if you sit on the sidelines for too long, you could end up costing yourself quite a bit in profits you could have used to fund your retirement or your child’s college education. While you might not invest directly in an individual stock for your retirement or college fund, it’s still important to know what your mutual fund or retirement account is holding. Even more, if you do decide to dabble in a little stock investing, you’ll need to know what you’re looking at. What makes a good stock different than a bad stock? What separates a healthy company from a failing company? These are things every investor needs to know. Here is a basic cheat sheet of sorts that you can use when valuing stocks. Basic Stock Information You can find this information basically anywhere on the internet. Any site that provides a stock ticker will let you look up a quick snapshot of the company. It will usually include the following information: • Current stock price: This is the price each share of a specific stock is worth at the moment. It is IMPORTANT that you distinguish between the real-time price and the delayed quote price. Some stocks that don't trade on the major stock exchanges like NASDAQ or New York Stock Exchange will have a 15 to 20 minute delay on their quote. • Range: The two prices here show the range in which the stock has been trading in for the day. It has the lowest and highest price that shares have traded. You can use this to gauge whether the share is pushing up, dipping down or settling in between. • 52-week: This category shows you the range in which shares of the stock have traded in for the past 52 weeks. It is the same principle as the day range, but has more implication on where the stock is heading long-term. • Market cap: The total dollar value of all outstanding shares a company has on the market. Market capitalization gives you an idea of how big a company is. When you hear terms like "Blue Chip Stock" or small-to mid-cap companies, they're usually categorized by the size of market caps. • Shares: The total number of outstanding shares a company has on the market. Multiply the stock price by outstanding shares, and you get the market cap. • Volume: How many shares of the stock that have been traded. A stock with higher trading volume will experience less drastic price swings because it dilutes the impact of each trade. Stocks with low volume are more vulnerable to price manipulation by big traders. • Dividend: If the company pays a dividend to its shareholders, this will tell you the payout per share and yield percentage. • P/E: The price-to-ea ings ratio is how most investors gauge the value of a stock. When you hear people say valuations are low or stocks are cheap/expensive, they aren't talking about the price, they're talking about the P/E ratio. To calculate, you take the price per share of the stock, and divide it by the earnings per share. You can use this to compare with other stocks in the same industry, but it isn't advisable to use it to compare stocks in different ones because sometimes they don't correlate. • EPS: The earnings-per-share of a stock tells you how much each share has earned based on the company's performance. It lets you measure the profitability of the company. • Stock chart: There is also a graph that shows the stock's price performance over a period of time. It is usually shown on just the day's action, but you can expand and collapse to your desired time horizon. What's interesting is it also plots points where news was released, so you can see if it had any effect on whether the stock price went up or down. So there you go. Any questions?