Valuation Of Stocks

Stock Investments yield very good returns when played correctly. If you are starting to trade stocks you will make good money. When you begin trading, you will have list of stocks that you can buy. Most investors who make money in stock market turn to value investing. Value Investing is when you buy stock for the value it has and not the cheap price point.

In this article you will get to learn about various techniques to measure value of a stock. There are two kinds of Valuation Techniques. We will begin our study with Fundamental Valuation. This technique is used to understand a stock price. You can either work with these techniques or just look at supply and demand to derive the value. The second way is a short term way and will not work if you want to work long term in the stock market.

Some valuation techniques:

* Earning per share: Simply put, EPS is total net income of a company divided by the total outstanding shares. You should look at EPS number derived using both GAAP principles and Pro Forma also. When companies report EPS using GAAP they may take earnings multiple times while in other number, each earning is taken just one time. You can compare EPS numbers from past to see growth and then see which companies deliver better returns and are good enough to buy.

* Price to earning ratio: To calculate P/E ratio, just divide the per share price by the EPS figure calculated above. You should compute both historical as well as forward ratios for this number. To calculate past P/E numbers, you can use the EPS number for last four quarters or last 4 years. Forward pr future earning numbers are calculated to measure future earnings. Remember one thing that stock price measures future earning not the past earning. Past earning is merely an estimate as to what could be the future earning.

* Rate of growth of a company: Rate of growth of a company impacts valuation a lot. You can begin by looking at he growth in sales , top line and bottom line of a company over span of last four or five years. Companies regularly give growth guidance, you can listen or read that press release and get ideas as to what is the comp0any looking at.

* Earnings Before interest, taxes, depreciation and amortization or EBITDA: This is a good measure of cash flow of the company. It will tell you how is the cash utilized and cash position. It works well with public as well private companies. You can get hold of income statement of a company and then calculate the EBITDA. This ratio can be used to compare various companies also.

There are more ratios that can be used to study a stock further. These ratios discussed should be a good starting point when you start looking for a company to invest your money. If you want to make quick money in stocks, you need to pick very carefully. Working with financial ratios will help you make good picks and make money by trading these stocks.