Investment involves staking capital in an enterprise, with the expectation of profit. It is nothing but the use of liquid funds to gain income or increase capital. In order for money to grow, investors need to invest judiciously. There are certain guidelines to be followed to avoid major mistakes.
Price of the Company: An investor needs to research on the ‘Market Capitalization’ of the company he is planning to invest in. Market Capitalization or Market Cap is the total cost of acquiring the entire company. It refers to the price of all outstanding shares of a company multiplied by the quoted price per share, at any given point of time. It is important to gauge the relative cost of a stock, before making any investments in the company. This can be done by learning the ‘P/E Ratio’. P/E ratio refers to the Price is to Earnings Ratio. It is the ratio of a company’s current share price to its earnings per share.
P/E Ratio = Market Value per Share
Earnings per Share (EPS)
Example: If a company is trading at $50 per share and earnings per share over the last 1 year were $ 2 per share, then, P/E ratio for this company’s stocks would be $50/$2, that is, $25. High P/E value indicates that the company has high growth prospects in the future.
P/E ratio can be used to make important investment decisions, by comparing P/E values of various companies.
Is The Company Buying Back Shares: It is very important for investors to observe the per-share growth of a company. A company may not show considerable growth in sales, profit and revenue for a few consecutive years, but could generate large returns for investors by dropping the total number of outstanding shares.
Investment Policy of the Investor: An investor needs to have valid reasons for investing in a particular enterprise. Investment decisions should be solely based on the authenticity of a company. Authenticity, here involves the reputation of the company, its management, profits earned, market cap and other such fundamentals, related to economics and finance.
Long Term Goals of the Investor: Investment involves risk but intelligent planning of long-term goals makes investing safe. An investor needs to select a good company that requires him to pay the minimum possible amount initially. He should consider the ‘Dollar-cost Averaging Program’.
Dollar Cost Averaging Program: This involves investing a particular amount in the same investment, periodically. Investors need not invest a lump sum amount in a stock all at once. They can invest a little every month in the same stock. Since an investor puts in the same amount of money, he can purchase more shares when the prices are lower. This basically lowers an investor’s average cost per share in comparison to the average market price per share, in the same time period. Dollar cost averaging builds the habit of setting aside money for investment.
Reinvesting the dividends, to grow over a long period of time, often proves highly profitable. An investor should look for all valid essentials of an investment before investing.