Free stock market tips! How to invest on the stock market by analyzing company stocks. Learn simple formulas for deciding when to BUY and SELL.
Ever thought about using stock market tips? When it comes to making money, bank accounts offer dismal interest rates (less than 4%) which is barely ahead of inflation. So in making money work harder, many people consider investing on the stock market. The gains do not even compare to what the banks brag about – and investing in the right stock at the right time can reap huge rewards.
It’s no secret that investing in the stock market is a risky business. But it’s not the same as going to a casino and putting it all on red. Profits made from stock market tips are the result of carefully calculated risks made by analyzing company stocks. Here are some free stock market tips to consider:
A Simple Business Model
Choose a company stock that operates in familiar area - put personal expertise to good use. Don’t chase companies with confusing business models and lots of unexplained subsidiaries. Learn to see beyond the public relations hype that makes the company sound flashy and high tech.
A Credible Management
Many company directors move on sooner or later, so find out where the current Board come from. Do they have a track record of failed businesses? Those people are potentially back out there. On the other hand, the management may have a history of success.
Robust Financial Accounts
Public companies are required by law to publish their financial accounts at the end of each period. These can be found on the company website or on the stock exchange website. A quick scan through the summary will reveal how the company's revenues and profits have grown year-on-year.
Look for at least three years of steady growth. If the company is loss-making, why? When will it be profitable? Does it have fixed costs or will these rocket in line with revenues? Does the company have sufficient cash in the bank or will it need to refinance soon (through a stock issue, or a new bank loan)?
The Difference Between Price and Value
Investment analysts work on financial ratios which reveal the difference between price and value of a stock and its projected growth. For instance:
Price Earnings Ratio = Market Capitalization / Post-Tax Profits
So, begin by calculating a PE Ratio. Take the market capitalisation (say, $200m) and divide it by the post-tax profits figure in the latest annual financial accounts (say, $18m). This gives a historic PE Ratio of 11.
A low PE Ratio (say, below 12) suggests the stock is geared for growth. It offers higher risks but also higher rewards. A high PE Ratio (say, over 20) suggests a well-established stock, which offers lower risks and capital growth - but may offer regular dividends. However, a high PE Ratio can also mean a stock is overvalued - this is likely if the company is small or overhyped.
Most blue-chips have high PE Ratio as they have exhausted most of their growth potential. A PE Ratio cannot be calculated on a loss making company.
A similar measurement of value is the PEG Ratio:
Price Earnings Growth = PE Ratio / Annual Growth in Earnings Per Share (%)
Simply divide the calculated PE Ratio (say, 11) by the annual percentage growth in Earnings Per Share. For instance if the company returned 8c per share in 2007, and 10c per share in 2008, the growth rate is 20%. So the PEG Ratio is 0.55.
The famous fund manager Jim Slater believed that a PEG Ratio of less than 0.66 was a winner. It showed that a stock with a fast growth rate, but a low overall rating, was too cheap. A PEG Ratio of between 0.66 – 0.75 it is still attractive. But anything over 1 is poor value given the growth in prospect.
Beware Of The Competition
Assess the merits of the competition and then make a comparative financial valuation. Is it a real threat to trading? Can the two companies happily co-exist? Would it make a good acquisition one day?
Stock Market Tips
Read stock tip sheets based on growth company stocks, but do not take their advice as spot on all the time. Use it as a source of ideas and build up a unique portfolio that won’t take a dive every time a broker says “sell” and a thousand investors take their lead.
Having picked some attractive looking stocks, leave the investment alone for at least a year. A growth stock needs time to grow.
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Interpreting Financial Accounts
