When it comes to trying to assess the potential profitability of a stock, there is no shortage of indicators to look at. However, deciding which indicators make the most sense for you will usually depend on your philosophy as an investor.
For example, some investors choose to look at higher-level economic factors for direction on where to invest. Others will examine financial statistics behind the business such as their revenue or balance sheet. And still, others will examine the trades that other people are placing and use this to fuel their own decisions.
This article is going to take a look at a blend of different indicators that can help you decide what to invest in.
One of the best (and easiest) ways to identify potential investments is to look at things that are going on in the economy and buy stock in companies that are set to profit from these trends. For example, during the COVID-19 pandemic people were forced to stay at home. However, they still needed to buy essential products like food and supplies. This ultimately ended up being very good for eCommerce sites like Amazon. Consequently, the price of Amazon stock was up about 70% during 2020.
Some other economic data to keep in mind when making investment decisions is data on employment, unemployment, inflation, foreign policy, and consumer spending.
Earnings Per Share
A company’s earnings per share (EPS) is their net profit divided by the total number of shares that they have outstanding. This is an indication of how much money a company is bringing in compared to how many shares of stock exist. Many investors will use this to estimate the value of a company’s stock. A high EPS indicates a more valuable stock because it means that a company is making a lot of money compared to its share price.
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Price To Earnings Ratio
A company’s price-to-earnings ratio (P/E Ratio) is a ratio that’s widely used to determine how over or under-valued a stock is. The P/E ratio is determined by dividing the price of the stock by the company’s earnings per share.
A higher P/E ratio is usually a sign that a company is overvalued because it means that the stock is expensive compared to how much money the company makes. In these instances, investors have usually factored in a high growth rate for the company. High P/E ratios are generally seen in younger startups with lots of room to expand.
A low P/E ratio is usually a sign that a stock is valued more accurately. Low P/E ratios are generally seen in more established companies.
Moving averages are technical analysis tools that give you a sense of how a stock’s price is moving over an extended period of time. They are found by determining a stock’s average price over the past few weeks or months and then updating it as time goes on. This metric gives traders a sense of whether a stock’s price has been trending up or down and whether or not they should buy it.
We hope that you’ve found this article valuable when it comes to learning what indicators help you decide what to invest in. If you are interested in reading more, please subscribe below to get alerted of new articles as we write them!