Investing in the stock market can be very daunting because the risk of losing money is very real. Even though, good investors are still making above average returns in stocks sometime beating other asset classes. So what are they doing differently?
Picking a winning stock is an art that anybody can develop. You don’t need to go to a business school to understand some of the confusing jargon used in the stock market. All you need is some interest and the rest will fall in place. To be able to choose a stock with a high winning probability, I would put a sum total of all the below.
Know your investment goals.
This is sounding so repetitive and boring. Right? You better get bored but let it sink somewhere in your mind. The cardinal rule in any investment-know your goals. What exactly do you want to achieve?
In the stock market knowing your goals will help you determine whether you’re in for income or growth. This will go a long way in determining the stocks that you pick. For example, an investor whose objective is income will look for stocks that have been consistent with their dividends. The main concern would be the dividend yields and the ability of the company to sustain or increase its dividend payments in future. On the other hand, a growth-focused investor would look for discounted stocks with growth prospects.
Learn some stock basics
Learning some stock basics will go a long way in helping you choose the wining stocks. Some of the basics that you should learn include:
P/E Ratio: The price to earnings ratio is the best indicator of how expensive a stock is. The actual price might not tell much. P/E ratio is important in evaluating a stock against its past performance, or for comparing a stock against its peers in the industry. To get the P/E ratio, divided the current price of the stock with earning per share. To get the earning per share, divided the year’s/ period’s earnings by the number of outstanding shares. All this information is available online. The P/E simply tells how much one is willing to pay for every 1 shilling in earning. A high P/E ratio could be an indication of an overvalued company while a low P/E ratio could indicate an undervalued company. This measure should always be used together with other metrics.
Dividend Yields: This simply means the percentage of return the company pays back as dividends. For example, Safaricom announced a dividend of Ksh. 1.40 per share. The current price of Safaricom is 28. The dividend yield is 1.40 divided by 28, multiplied by 100. This will give you a dividend yield of 5%
Revenue growth: Revenue is simply the total sales of a company in a given period of time. While most investors lay a lot of emphasis on profit growth alone this may be misleading. A company may announce growth in profit due to a one-off business activity such as sale in property. Thus this may not always reflect growth. It is always good to keep track of how revenue is growing over the years.
Select a sector that you clearly understand
Stocks are divided into different sectors according to the industry the company operates in such as agriculture, banking, investment, etc. Selecting a stock in a sector that you clearly understand the industry dynamics will give you a competitive edge. It will also make it easier for you to follow up on market trends and news dynamics that affect the price of the stocks.
If investing in the stock market were easy, everybody would do it. Analyze yourself accordingly and if you clearly fit for this market take the necessary steps to get started.
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