Techniques for Stock Selection
Today I 'm sharing with you some Techniques for Stock Selection in the market of Pakistan, Here are some methods you follow and make handsome result...
Techniques for Stock Selection
Different Techniques and methods can be used to analysis the stock most important are ratio analysis, Fundamental and Technical analysis. By we can easily Measure the performance of Company and make prediction about future Prices of Stock.
Stock investing requires careful analysis of financial data to find out the company's true worth. This is generally done by examining the company's profit and loss account, balance sheet and cash flow statement. This can be time-consuming and cumbersome. An easier way to find out about a company's performance is to look at its financial ratios, most of which are freely available on the internet.Though this is not a foolproof method, it is a good way to run a fast check on a company's health.
Ratio analysis is crucial for investment decisions. It not only helps in knowing how the company has been performing but also makes it easy for investors to compare companies in the same industry and zero in on the best investment option.
Technical analysis looks at the price movement of a security and uses past data to predict its future price movements.
Fundamental analysis is a method of evaluating securities by attempting to measure the intrinsic value of a stock. Fundamental analysts study every thing from the overall economy and industry conditions to the financial condition and management of companies.
Here is different variables which effect the stock prices and helpful in picking best stock
A measure of profitability is the earnings per share (EPS). Essentially, it is a measure of how much profit a company makes per share of outstanding stock. The EPS refers to the net income, after deducting dividends paid on preferred stocks, divided by the total outstanding shares. If you need to choose between two companies with the same EPS, you can pick the one that can produce the same amount of earnings but with lower amount of investment money or equity as that is the one that is more efficient.A high P/E ratio may indicate that the stock is overpriced. A stock with a low P/E may have greater potential for rising. So when the earning per share is low then investors have to invest because when EPS is low it means that Stocks are undervalued and there is more chances that it will rise.
Price to Book Value
The price-to-book value (P/BV) ratio is used to compare a company's market price to its book value. Book value in simple terms is the amount that will remain if the company liquidates its assets and repays all its liabilities.
P/BV ratio values shares of companies with large tangible assets on their balance sheets. A P/BV ratio of less than one shows the stock is undervalued it means that value of assets on the company's books is more than the value the market is assigning to the company. When the Market value of Asset or stock is low as compare to book value then this is good time to invest in company because at this more chances to rise the value of shares in future.
In choosing stocks, we should pay close attention to financial leverage. Is the company able to undertake its core operation without relying heavily on borrowings? Too much exposure to debt brings a certain degree of uncertainty to earnings that many investors cannot swallow. An important indicator of financial leverage is the debt-to-equity ratio. It refers to the proportion of debt to shareholders equity. A company with a high debt-equity ratio means that it has been bold in using debt to finance its expansions. A high ratio can affect the level of earnings because the company needs to settle interest payments. If the earnings that the company is able to produce out of its investments financed by these borrowings are lower than the cost of the debt financing, this may result to bankruptcy. All those Companies having lower Debt to Equity Ratio are consider safe and have capability to increase its price of shares in future. So Debt to Equity Ratio also Effect the Price of Stocks in Future.
Return on Assets Ratio
There turn on assets (ROA) ratio indicates a company’s profitability in relation to its total assets. It refers to annual earnings divided by total assets. It is also referred to as return on investment or ROI. It shows how efficient the company is in managing its assets to produce earnings.
At the point of view of investors, it provides an idea how effective the company is in turning their investment money into income. Assets consist of equity and debt, which are both used to finance the business operations of the company.
If we compare ROA across companies, it is best to do it for similar ones.Comparing the current ROA with the historical ratios in a company is also recommended. A higher ROA is better; it means the company is generating more money with less investment. Two similar companies may be making the same amount of earnings, but investors would prefer the one who can do it with fewer assets, which would have the larger ROA.
Average Price of Stock
Company’s stocks prices changed time to time which may goes upward and downward and average price can be calculated by past and present Stock Prices. If the Current market Price of the Stock is low as compare to average price then it is a good time to invest in stock. Because now there is much chances that stock price will go up which result profit for investor.
Past Trend of the stock Prices(Charts)
Past trend prices of the any stock also helpful in picking good stocks. We can check different from charts. We can check the different trends of the prices and make prediction about future trend.
Stock Selection Model
Here is the variables which effect the investors in picking the best stocks by using these variables investors can makes prediction about future prices of the stock.
All these variable effect the prices of stocks and play important role in predicting the stock prices in the future. Price to book value consider most important tool for measuring socks prices and can check the books value of the stocks. It consider good when the market price is low as compare to book value.
Debt to Equity ratio show that how much company use debt as compare to its own capital if the debt to equity ratio is low it show that company borrowed less and result company have to pay less interest over its loans. If company paying high interest then it may reduce the company income. Average Stock prices consider most important tool for measuring stocks prices in future as when the current market price is low then the average price then it’s a good time to invest in stocks. All above described variables together consider most important of checking company performance and making perdition about company future stock prices.