Investing in the stock market is as cliché a piece of investment advice as it gets. Many have attempted and missed the mark, many too, have raked in the bucks by knowing how to manoeuvre this space.
Stock market trading is the activity of buying and selling of publicly traded company shares through a legal platform called an exchange. The assumption of activities around stock trading is that an investor purchases shares in a company at a certain price with the expectation of later offloading them for a higher price. The margin hence becomes the profit.
However, the catch and determinant on whether the investor makes a profit is heavily hinged on their ability to predictively analyze a company and how it’s future performance will impact trade.
1. Finding the intrinsic value
The purpose of analyzing a company before making an investment is to identify its true value, not the perceived value being traded at the stock exchange. This analysis is the cornerstone of investing.
For starters, a publicly traded company is compelled by law to publish its financial statements, hence it should be easy to find one especially in the local dailies. Not everybody is financially literate enough to analyze a financial statement in its entirety however, there are key parameters that should provide clarity on where a company stands. On a financial statement, the key numbers to look out for are; net income, profit margin, debt-to-equity ratio, debt-to-earnings ratio.
The debt to equity ratio is the sum total of a company’s liabilities (debt) divided by its total equity (value of shares issued by a company). It is an important health check valuation metric because it reveals the extent of the company’s dependence on borrowed money against its ability to repay its debts.
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