There are about 3,041 Stocks & Shares traded in the United Kingdom and about 262 in Nigeria, talk less of other places such as Europe and the United States of America. This shows you that there are an enormous number of stocks to pick from.
Assessing which Stocks & Shares to invest in involves fundamental analysis, which is the examination of the financial data, management, business concept and competition of the company you are interested in. Technical Analysis is also very important.
Fundamental Analysis of Stocks;
Earnings Per Share (EPS): This is defined as the portion of a company’s profit allocated to each outstanding share of common stock. EPS serves as an indicator of a company’s profitability.
EPS calculation = (Net income – Dividends on Preferred Stock) / Average outstanding shares
EPS is considered to be the single most important variable in determining a share’s price. It is also a major component used to calculate the P/E valuation ratio.
Price to Earnings (P/E) Ratio: This looks at the relationship between the stock price and the company’s earnings.
P/E calculation = Stock price / EPS
In general, a high P/E suggests that investors are expecting higher earnings’ growth in the future compared to companies with a lower P/E.
The following is a guide on how to interpret the P/E ratio figures quoted for the stock.
• N/A (No P/E available) – no earnings or negative earnings
• 0-10 – under-valued stock or in decline
• 10-17 – fair value stock price
• 17-25 – over-valued stock or increased earnings
• 25+ – high future growth or bubble
Investment Strategies in Stocks & Shares
Value Investing: This was started by Benjamin Graham and David Dodd, professors at Columbia Business School in 1928. It involves fundamental analysis of stocks, looking for under-valued stocks (low P/E ratios of 0-10) of companies which are performing very well (increasing EPS over the quarters or annually). They used the concept of ‘margin of safety’ which is the discount of market stock price to its intrinsic value.
Warren Buffet is a famous student of Benjamin Graham.
Growth Investing – This is the investment in companies that show above average growth even if their share price is expensive (high P/E ratios). These are the dangers of buying when market has peaked.
Studies have shown that value-investing has consistently outperformed growth stocks and the market as a whole. There is a case for having both in your diversified portfolio.
