- About Us
- SUBSCRIPTION & PRICING
- Reports & Tracksheet
Investing in a stock isn't like throwing your money into a poker pot and betting for a fortune. But putting money in a target based on systematic research and analysis at a calculated value and expecting a reasonable return on the same based on numerous factors.
When you "buy" a share, you're buying-in an ownership stake in the company.
If you buy, for example, stock of “A Inc.” and profits grow for the next few years, you'll be treated to a rising share price and grow wealthier along with your fellow owners. But if you invest in “A Inc.” and the company does poorly over the next few years, your shares will lose value -- and you'll lose money on your investment. There are several other factors as well that become the key indicators to where the company is moving.
It's surprising that many investors overlook key indicators about a company before they invest. As a result, they become part of lousy companies that lose money year after year.
If you want to invest in a successful company that gives you a return, why wouldn't you take some time to research about it at the first? Don't worry, it's easier than you think. Using just eight key terms and spending 15 minutes to analyze a company can mean the difference between reaping healthy investment gains andlosing your shirt.
Straight from the InvestingAnswers Financial Dictionary -- the industry's most investor-friendly resource used by hundreds of thousands of investors every month -- here are eight key financial terms that will make you a more successful stock investor.
And for a more detailed explanation of each term -- including examples, formulas and more -- just click on it.
Like a ship captain, a company's executive officer steers, rights and can sometimes sink the ship, so it's important to know a company's CEO before you buy.
You don't need the CEO's biography, just a brief overview of their business background. Ask yourself: Do you believe the CEO has the right experience to run a car company for the next 10 years if he ran a retail chain before for the last 10 years? Is the company's success heavily tied to this person like Steve Jobs was to Apple or Warren Buffett is to Berkshire-Hathaway? And if so, do you feel comfortable that the business can do well after that person leaves the company?
A business model is essentially the strategy that a company uses to maximize its profit in its industry. Knowing the business model is a very important task also trying to understand the modus-operandi of the company.
Some companies may work low prices and have high volume of sales resulting them similar amount of profits as to the other company which has low volume of sales but high value items. For example Wal-Mart (NYSE: WMT), offers the lowest possible price so it can sell more products. By contrast, another retailer like Coach (NYSE: COH) sells fewer, higher-quality items but earns a larger profit per product sold. There is no “right” strategy as such, one must insure and agree to himself with the company's business model. Think about how well the company's business model might work in favorable orhostile circumstance such as recessions or economic booms.
Sometimes called an economic moat, a competitive advantage is when a company has a leg up over its competitors through its superior products, patents, brand power, technology or operating efficiency.
Be sure the company you're thinking about buying has a competitive advantage. For example, Wal-Mart offers super-low product prices. Coca-Cola has strong brand name recognition and sells a popular product. A competitive advantage is the wall that keeps competitors from taking market share and keeps that company more profitable -- and makes it a better investment for you -- over the long term.
Revenue or “Top Line” is simply the raw amount of money the company made from sales of its product or service. Depicting the company’s volume of activities and size of operations.
A company with its revenue trending up each year for the past few years. While it's not realistic to expect a company to increase its sales every single year (especially in a struggling economy), a company with a trend of falling annual revenues signals it has trouble selling its products and services or finding other sources of revenue.
More casually called profit, earnings or "the bottom line," net income is simply the amount of money a company earned from sales after expenses and taxes have been paid.
Net income growth from year to year. A company with growing net income each year shows that the company knows how to effectively sell its products, slash or control its business operating costs or a combination of both. Companies like AutoZone and Ross have managed to grow their net incomes for the past three years, and both stocks have returned well over 100% during the same period.
Profit margin (sometimes referred to as net profit margin) is simply the percentage of revenue the company takes in as profit (after expenses, interest and taxes have been paid). Apple, for example, has a profit margin of 26% -- for every $100 iWidget it sells, it makes $26 profit. A company's profit margin is net income divided by total revenue.
A company with steady or growing profit margins every year, even during a recession. Companies with growing profit margins signal that the company can command higher prices because consumers are willing to pay for their product (Apple enjoys healthy profits because it can sell its devices for a much higher price than competitors). Companies that can maintain steady profit margins show the company can effectively control its operating costs, keeping the company efficient (Wal-Mart has been able to keep its product prices low and its profit margins steady even through recessions). Steady or growing profit margins ensure that a company is profitable and can reward shareholders with returns.
With the debt-to-equity ratio, you can find out how much debt a company carries compared to the amount of equity shareholders have in the company. A company with a low amount of debt in relation to its equity (total debt levels that are no higher than the company's total equity levels; a ratio of 1:1 or lower). Used as a safety measure, it tests how well the company can repay its debt obligations in the event that the company runs into serious financial problems. Generally, the lower the debt-to-equity ratio a company has, the less risky it is to you as an investor. The level of Debt will also represent the level of fixed Interest outgo which directly affects the profitability.
Finding a company with strong financials is not enough. Just like you can pay too much for a great car, you can pay too much for a great company -- and that can mean limited upside potential on your gains(and even a loss). With a stock's price-to-earnings ratio (P/E), you can find out if a stock is overpriced. The P/E ratio compares a stock's price to the amount of profit per stock share (earnings per share) the company generated.
A company with a P/E ratio that is on par with or lower than the overall market's P/Eratio (which has historically been between 14 and 17) and the company's peers in the industry. In general, a well-run company with a relatively low P/E ratio signals that the company's stock is trading at a fair price or even a bargain. The Investing Answer: While these terms won't guarantee success with stock investing every time, they will help you avoid the pitfalls that less experienced and even sometimes veteran investors run into. Find companies that a) you understand and agree with from a leadership and business perspective, b) operate with strong management and financial health and c) are trading at a good value. These will be key to your investing success.