Try answering this question: How do I know if I should invest in the stock of a specific company? Regardless of whether you are a novice or seasoned investor, this question is probably one of the most frequently asked questions in stock market investing history. Contrary to popular belief, the answer to question is relatively simple. It is the same thing that you do when you decide to purchase a house, car, cloths, or anything else. Do you know what it is yet? The answer is find value.
That was easy, wasn’t it? All you have to do is find value! Well, that’s actually the hard part. What is value? How do I know if buying shares of stock at the current price makes sense? These questions are the harder questions to answer and are typically the questions that scare investors. However, In order to become a successful investor you must get comfortable with the concept of finding value.
So, how do you find value? There are several tools available that can help you answer that question. One of my favorite tools is the P/E Ratio. Remember that share price alone does not tell us much about the value of stock. However, when taken together with a company’s earnings you have a metric that can tell you whether or not a stock actually has value. A good way to look at it is if the P/E Ratio for the company is significantly higher than that of the S&P 500, then the stock is probably overvalued. If the P/E Ratio for the company is significantly less than that of the S&P 500, then the stock is probably undervalued. If the stock is undervalued then that is a good stock pick. It’s as good as gold!
I know that this is oversimplifying it, but for the most part the P/E Ratio one of my favorite ways to quickly and easily find good stock investments. Stay tuned for more!