I talk about stocks a lot, and one of the most common questions I get is, how do I know which stocks to buy?  Glad you asked, because today I have five things that will help you decide which investments might be right for you. 

• Research, research, research!

One of the most important things you need to do is RESEARCH, RESEARCH, RESEARCH!  For any company you’re interested in, you have to do your homework.  The first and most obvious thing is to find out how the company actually makes money. What type of service do they offer? Or what is it that they actually make or sell?  What are their most popular products? Have you noticed that more people seem to be using it lately?  Why is that?  Does it seem like they’re poised for growth?  Does the company only have local operations? Think about this like you’re getting your dream car. You have to ask the dealer all the important questions to make sure you’re making the right choice.

A lot of this information is easier to find than you might think. As soon as you are done reading this, a simple web search will do.  You can check the Jamaica Stock Exchange’s website, icinsider.com is another great source. So too are the business segments of the newspapers, and of course, we talk about this stuff all the time on Taking Stock.

Now let’s look at some other factors which you should get from your research.

• Price to Earnings Ratio (P/E Ratio)

You might often hear the analysts talk about the PRICE-TO-EARNINGS RATIO (PE ratio).

Simply put, this is the company’s share price divided by their earnings per share. 

P/E = Share Price

Earnings per share

So what does this mean and why do analysts make such a big deal about it? Well, the P/E can sometimes tell you if a stock is overvalued or undervalued.  If a company has a very high PE, it means the price per share is much more than its earnings per share.  In other words, the price you paid is much more than you’ll earn back.  This in turn makes the stock overvalued or overpriced. On the other hand, if the P/E is very low, the stock can be considered undervalued or underpriced.  But this is not an exact science. There’s also something called forward P/E, which looks at future projected earnings.  And there are a lot of other factors to consider as well. A high or low P/E is not a be all, end all. It’s just one piece of information to add to your arsenal.

• Dividends

Another factor we can look at is the dividend yield, so let’s talk about DIVIDENDS.

A dividend is the money that companies pay to its shareholders out of the profits.  Basically, it’s your share of the profits. Some companies pay dividends every three months; some pay twice a year; some pay once a year; some don’t usually pay a dividend at all.  When you are choosing companies to invest in, check to see what their dividend payout looks like. If you like regular and predictable dividends, look for blue chip companies that pay high dividends. Companies that have more predictable profits tend to offer the best dividends. Sectors which can fit this bill include: 

• Banks and financial companies like PROVEN Investments
• Manufacturing companies such as Jamaica Broilers and Seprod  
• Real estate companies usually pay good dividends too; eg. First Rock, PanJam

• Charts

For some persons this may be where their research actually starts and ends, but there are other factors which can affect those dividends and the company’s overall performance.

One factor to consider is the company’s CHARTS. What charts do we speak of? Well for starters there are different types of charts – line charts, candlestick charts and bar charts.  

These charts can give you a LOT of information.  Though a little more on the technical side of things, the fundamental thing to identify here are the trends going up and down. If you see the chart readings starting from the lower left position and moving upward to the right then that’s generally a good thing.  Stock prices are going up. Profits are going up, etc. 

A lot of people get scared when they see a stock they bought, suddenly fall in price one day. But I wouldn’t worry about one-day losses, or even one-week losses.  I prefer to look at the 52-week chart. That tells you how the stock has performed over the past year.  You can look at the high points and the low points.  

If a stock that you’re considering is trading near its fifty-two week low, that could tell you a couple of things. Either it’s undervalued and a good time to snap it up at a low price IF you have good reason to believe it’s going to go back up. But if you notice that the general trend is just down, down, down, there may be good reason for that, and you may want to stay away from it.  There are many stocks to choose from, so choose wisely.

• Market Capitalization

Our fifth factor is what we call MARKET CAP.   Just like the P/E ratio, there’s a formula.

The market cap (short for capitalization) is the number of shares that exist in the company, times the price per share. 

Market cap = number of shares x price per share

Again the market cap value can be found on a company’s quote page. It’s one of the factors that tells you how much a company is worth.

Here we see the quote page for First Rock Capital Holdings. Though you are not seeing the term market cap, the equivalent here is where you see the term Market Value of Shares Outstanding. This tells us the value of all the stock held by the current shareholders in the company. This can be seen as the overall price if you were to buy the entire company. Of course that would likely be negotiated, but that’s still a good starting point.

Now the larger the market cap, the more stable one can expect the company to be, which is generally for mega sized companies and the opposite is true for a smaller cap, which is primarily micro and nano sized businesses. 

However, a point to note is that though larger sized companies may have larger caps, there is less potential for growth but more stability as opposed to smaller companies which will have more room for growth but less stability. So again, you will have to weigh your options depending on your risk preference.

• News

That was factor five, but because you have stuck with us to this point, we have one bonus factor for you! Now this is one many may not pay much attention to, which is that of keeping up to date with NEWS.

Any updates about companies can be very helpful in making your decision for buying stocks. Whether it be via traditional media sources like TV, radio and print or on social media, including of course, my show Taking Stock. When a company announces major decisions or recent performance, it often influences how shareholders perceive the company, and they may use that information to either buy more of that stock because it’s good news that’s likely to have a positive impact, or sell their stocks because they think performance is going to be impacted.

On Taking Stock, for example, we mentioned news about the Johnson and Johnson vaccine and the blood clots associated with it.  We saw where the stock price fell temporarily because of that news.

I trust you followed all that we mentioned here today, whether you’re new to picking stocks or even thinking about adding another stock to your investment portfolio. 

Categories: MoneyMondaysJA