Investing in the stock market can be overwhelming. It doesn’t have to be; the stock market is a just another market. At the supermarket, you consider both price and value. Bananas for .99 per pound?! That’s expensive. The stock market requires that same evaluation. If you understand a stock’s “price tag,” you will be able to properly evaluate if the company is a good buy. You have made decisions on where to bank, your internet search engine, and even which cell phone to buy. If you can successfully make these decisions, you can successfully purchase stock. By following the instructions and examples in this post, you will have successfully picked your first stock.
Like most markets, the Stock Market has operating hours. It is open Monday through Friday, 9:30 am to 4:00 pm EST, excluding federal holidays like Christmas and Labor Day.
Let’s get started.
List the top 10 products you use on a weekly basis.
Warren Buffet advocates investing in companies that you know and trust. If you are a faithful consumer of a product, chances are you know and trust that company.
(1) Who makes the products on your list? This may be obvious or might require a bit of digging.
(2) Is this company publicly traded? In other words, does it have a ticker symbol? A ticker symbol, or stock symbol, is a series of letters, which identifies publicly traded companies.
Below is a sample stock quote for Sunoco (SUN) which is traded on the New York Stock Exchange (NYSE). The following prices and metrics are as of the market’s close on March 29, 2016. Please note that each financial site will look slightly different but have the same information.
|Bid||$32.52||Market Cap.||3.20 B|
|52-week range||$22.86-54.82||Div. Yield||9.84%|
a. How much does the stock cost?
You can enter the stock’s ticker on either Google or Yahoo! Finance to find the relevant information. The current price, $32.56, is the price of SUN’s last trade and is displayed to the right of the ticker and the exchange. The bid price, $32.52, is what you could sell SUN for if you owned it. The ask price, $32.54, is what you could buy it for. As you can see, the current price is the result of buys and sells in the market.
b. Is the stock valuable?
A stock’s price or value is determined by its earning potential, profitability, and price movement. Although P/E ratio (earning potential) and EPS (profitability) are important factors in evaluation, the most straight-forward is the 52-week range. To avoid “paralysis by analysis,” I will focus the on 52-week range. I will discuss P/E ratio and EPS in an another post.
The 52-week range provides the stock’s highest and lowest price over the past 52 weeks. It helps determine if a stock, at its current price, is overvalued. As the commentary of The Intelligent Investor states, “[S]tocks become more risky… as their prices rise- and less risky… as their prices fall.” Therefore, I want you to focus on the stocks on your list that are 75%, or less, of their 52-week high.
(Current price)/(52-week high)= percentage of the 52-week high
Using SUN ($32.56)/($54.82)= .593
SUN is 59% of its 52-week high.
c. Combining price and value.
Being successful in the stock market is directly related to the number of shares you own; it dictates how much can you benefit from price movement. You could buy 1 share of Google (GOOG) for $744.77. Or you could buy 22 shares of Sunoco (SUN) for $744.77. If GOOG goes up $2.00 a share, you make $2.00. If SUN goes up $2.00 a share, you make $44.00.
Purchasing stock is about buying a good company at a great price. When starting out, you want to purchase as many shares of a valuable company as possible. Therefore, you should pick the cheapest, most valuable company on your list and purchase as many shares as you can afford. Here’s my final list.
Pick your own stock. I have provided blank worksheets DIYStockPickingWorksheets.
Disclaimer: Company, or stock tickers, used in this article are for illustrative purposes only and do not constitute a recommendation to engage in any particular securities transactions.
Stock image via CreateHER stock.
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