How to Invest in the Stock Market
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“How to invest in the stock market?” Let’s admit it. This question has been asked too many times by would-be investors and traders in the stock market. The answer can’t be encapsulated in a single sentence or paragraph. Gosh, a book can’t contain it all. New questions will surely be born every time you throw an answer to the person who’s asking that question. It’s like asking how to survive here on planet earth. It can be answered in many ways. But instead of focusing in one general question, let’s settle to a more specific one: what are the qualities of stocks that are good to buy or even for long-term investing? Personally, I look at many factors when I evaluate a stock but I picked four of the most important factors I’d recommend you to check when deciding if you’ll invest long-term to a particular stock or not. 1. Regular and increasing dividends. As I mentioned in my article “ Which Is Better: a Cash Dividend or a Stock Dividend? “, a dividend, whether in cash or stock, is one of the two ways of earning in the stock market. If a stock regularly issues dividend to its stockholders, it’s an indicator that that company grows. The keyword is “ regular “. Did that stock issue dividends every year for the past five years? If that stock regularly issues dividends on a yearly basis for at least 5 years, that stock is not just a good stock to buy but it’s also a potential candidate for a long-term investment. If you’re using COL Financial as your online stockbroker , you may check a stock’s dividend records as shown below.
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How to invest in Stocks
Transcript of How to Invest in the Stock Market
How to invest in the stock market?Lets admit it. This question has been asked too many times by would-be investors and traders in the stock market. The answer cant be encapsulated in a single sentence or paragraph. Gosh, a book cant contain it all. New questions will surely be born every time you throw an answer to the person whos asking that question. Its like asking how to survive here on planet earth. It can be answered in many ways.But instead of focusing in one general question, lets settle to a more specific one: what are the qualities of stocks that are goodto buy or even forlong-term investing?Personally, I look at many factors when I evaluate a stock but I picked four of the most important factors Id recommend you to check when deciding if youll invest long-term to a particular stock or not.1. Regular and increasing dividends.As I mentioned in my article Which Is Better: a Cash Dividend or a Stock Dividend?, a dividend, whether in cash or stock, is one of the two ways of earning in the stock market. If a stock regularly issues dividend to its stockholders, its an indicator that that company grows.The keyword is regular.Did that stock issue dividends every year for the past five years? If that stock regularly issues dividends on a yearly basis for at least 5 years, that stock is not just a good stock to buy but its also a potential candidate for a long-term investment.If youre using COL Financial as youronline stockbroker, you may check a stocks dividend records as shown below.
2. Increasing earnings and sales.I think its self-explanatory why its a good indication of growth if a stocks earnings and sales are on an upward trend.If, for the last five years, a companys earnings and sales are consistently on an upward trend, mark that stock as a potential candidate for your long-term investment plan.If youre using COL Financial as your online stockbroker, you may check a stocks records of earnings and sales as shown below.
3. Increasing free cash flow (FCF).In short, how much cash does that stock still have after paying its debt (if any) and other bills?If a stock has a big free cash flow, it means it has the ability to pay current and future debts, pay our dividends and finance its horizontal growth (branch expansion, for example).Keep in mind that when you buy shares from that stock, you become a business partner of that company. Would you like to partner with someone whos a potential candidate for bankruptcy because it has zero to negative cash to pay its business debts? No way!If youre using COL Financial as your online stockbroker, you may check a stocks free cash flow records as shown below.
4. A Price-over-Earning (P/E) ratio of below 20.The Price-over-Earning or P/E is a metric we use to determine the ratio between a stocks price per share and earnings per share (EPS). In other words, how much are investors willing to pay per PHP1.00 earning?If Ill invite you to be my business partner in my online business, would you investPHP25.00 orPHP50.00 per PHP1.00 earning?Formula:P/E = Share Price/Earnings Per Share (or EPS for short)In general, if a stock has a P/E of less than20, it can be considered as a good stock to buy.When there are more sellers than buyers for that stock, its P/E goes down. As a result, the share price goes down, too.The opposite of it happens when there are more buyers than sellers the P/E goes up. When that happens, the share price goes up.Therefore, when the P/E of a stock is low (below 20), that stock is often treated as a good stock to buy because of its inexpensive share price. When the P/E is high (20 and above), some traders dont buy that stock anymore because its already considered as an expensive stock.However, it doesnt necessarily mean that its no longer a good stock to buy if its P/E is 20 and above. You cant just base your buy or no-buy decision based on the P/E of that particular stock.As a matter-of-factly, I have made it a practice compare that stock to the other companies that belong to the exact same industry.For example, I compare Ayala Corporations (AC) P/E to SM Investments Corps (SM) P/E because these two belong to the same conglomerates industry. I do this because Id like to know if its the only stock in the same industry that monopolizes a good P/E or there are other stocks in the same industry that exhibit a promising P/E also.
I alsocompare that stocks P/E with the markets (meaning, the entire Philippine stock market) P/E.
Check COL Financials latest Technical Guide if youd like to know the industry where each stock belongs.
These four qualities of a good stock are not a panacea to the general question onhow to invest in the stock market. Theres more to learn. But if you know these four qualities, you canuse them as your stepping stones in learning the fundamentals of the stock market.
