Fundamental Analysis
This is where you start diving deep into stock research and going beyond “that looks like a good one! Lemme try that! *buy.*” Actually getting into how the companies you’re investing in are doing. It’s not going to ring popular with the meme stock crowd, but again… this is an informative for investors, not speculators.
This is particularly useful in value investing as while you want to look for stocks at a good price, you need to make sure that good price isn’t justifiably low due to the company not doing so well as opposed to one actually doing well, just discounted for whatever exterior reason.
A few key metrics to look for:
- P/E Ratio: The price to earnings ratio. In the most basic sense, this is how much your willing to invest per dollar of earnings. If it’s low, you could be getting a good deal. If it’s high, not likely. However this can be dependent on sector as well. What’s high/low for one sector won’t exactly be the same for another, so you also need to research the averages on that.
- BVP: Book Value Per Share. To calculate this, find the company’s balance sheet (this information should be available on your brokerage’s website) and subtract total liabilities from assets, then divide that by the shares outstanding. If the company is in good shape and the stock price is reasonably close to book value, it could be a good deal and worthy investment.
- Dividends: Most stocks involved with value investing pay dividends, so you’ll want to look up the history of payments. If the dividends payed have consistently increased over a number of years AND the company’s earnings have been high enough to cover them, that’s a sign of a healthy company. Some companies pay dividends into debt to try and make the stock more attractive. Dividends might be nice, but not so much if the stock tanks and you lose capital.
- Beta: The price volatility. Without going too much in depth, you’re basically looking for a beta of 1.0 or under. Higher than one denotes higher volatility than the overall market.
Outside of that, you always want to note if the industry the stock is in is doing well and also, how the company itself is doing in that industry. A fellow investor once told me you always want to go for #1 or #2 in an industry.