Three Key Investment Ratios
If you have ever made an investment decision and regretted it shortly after the trade was executed, you are not alone. Consider the following checklist consisting of three, basic pre-trade points. While these three points are not considered exhaustive, following them will easily help eliminate or at least reduce those post-trade doubts.
Without question, the most important consideration when it comes to purchasing a security is to understand the amount of risk it will bring to your portfolio. Since risk is virtually impossible to calculate, the next-best alternative is Beta, which is a measure of a security's volatility relative to the overall market's. Beta can be found at Yahoo! Finance.
As a measure of volatility, Beta is given a value 1.0 for the market. Therefore, a stock with a Beta of 3 will respond three times more than the market. That means if the market has a 3% down day, the stock in question will likely have a 9% down day. The closer a stock's Beta is to 1.0, the more like the market it will behave.
A second valuable figure to know is the Price to Earnings ratio that accompanies a security. While this fact alone will not determine whether or not one should invest in a particular security, it certainly helps the investor understand how that particular security's price compares to others in its sector. A Price to Earnings ratio of 6 for ABC Inc indicates that an investor is paying $6 for every $1 in earnings. If all of the other securities in that sector have P/E ratios of 30, then there is a reason to want to investigate why.
A third valuable statistic is the Earning Per Share (EPS) value of a share. This tells investors how much each share has contributed to the earnings of the company. So, an EPS of $7 tells someone who owns 100 shares that his or her ownership stake entitles him or her to $700 ($7 X 100 shares = $700). Alone, EPS is not really very useful, but when compared to other shares that perform in the same sector, it can provide investors with red flags or prompt them to do more digging (remember, if a company has more shares outstanding, the EPS will be diluted).
While these three statistical measures - Beta, P/E, and EPS - do not make up a comprehensive checklist for investors, they certainly allow investors to know the securities they own better. Since there will invariably be something worth investigating, investors are likely to spend more time digging through the financial statements and accompanying notes. When investors understand the securities they are purchasing, they make better investment decisions, which means less investment-related stress. - 23159
Without question, the most important consideration when it comes to purchasing a security is to understand the amount of risk it will bring to your portfolio. Since risk is virtually impossible to calculate, the next-best alternative is Beta, which is a measure of a security's volatility relative to the overall market's. Beta can be found at Yahoo! Finance.
As a measure of volatility, Beta is given a value 1.0 for the market. Therefore, a stock with a Beta of 3 will respond three times more than the market. That means if the market has a 3% down day, the stock in question will likely have a 9% down day. The closer a stock's Beta is to 1.0, the more like the market it will behave.
A second valuable figure to know is the Price to Earnings ratio that accompanies a security. While this fact alone will not determine whether or not one should invest in a particular security, it certainly helps the investor understand how that particular security's price compares to others in its sector. A Price to Earnings ratio of 6 for ABC Inc indicates that an investor is paying $6 for every $1 in earnings. If all of the other securities in that sector have P/E ratios of 30, then there is a reason to want to investigate why.
A third valuable statistic is the Earning Per Share (EPS) value of a share. This tells investors how much each share has contributed to the earnings of the company. So, an EPS of $7 tells someone who owns 100 shares that his or her ownership stake entitles him or her to $700 ($7 X 100 shares = $700). Alone, EPS is not really very useful, but when compared to other shares that perform in the same sector, it can provide investors with red flags or prompt them to do more digging (remember, if a company has more shares outstanding, the EPS will be diluted).
While these three statistical measures - Beta, P/E, and EPS - do not make up a comprehensive checklist for investors, they certainly allow investors to know the securities they own better. Since there will invariably be something worth investigating, investors are likely to spend more time digging through the financial statements and accompanying notes. When investors understand the securities they are purchasing, they make better investment decisions, which means less investment-related stress. - 23159
About the Author:
Christopher Fitch is the founder of the Mutual Fund Site, a website that has been actively discussing Bond Funds while other sites have avoid the topic.
posted by X - Men @ 4:25 AM
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