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How to Invest in Stocks and Make Money

How to Invest in Stocks and Make Money

There is not magic formula for evaluating share price in stock investment. What we need to use for success is simple business logic. The investors who are interested to buy direct stocks and does not want to pay fees to mutual funds and ETFs shall read this article till the last word. We are going to device a simple investment logic that will help my readers to buy stocks with utmost certainty. This is no magic formula but only investment-logic. Picking stocks intelligently is no rocket science, what you need to look is "a profitable company that is available at sale at bargain price".

I have already discussed in one of my article that how important it is for investors to buy stocks which are trading at high earning yields and has high return on capital (ROC). High earning yield will tell you that if the share is available at bargain price and high return on capital will reflect if the company is a "profitable".

But in order to calculate earning yields and ROC we need a very important information from companies balance sheet and it is called as earning/profits of the company. Normally an investors will refer to the profits of companies of last year and take calculate EY & ROC but this is too risky. With the world economy so dynamic and interrelated, and nature business itself is so volatile that considering only one year results is not fair. Better is to consider averaged results of last 5/7 years in a row. Suppose a company A has EPS of $0.75 in 2010-11, it had $1.25 in 2009-10, $0.65 in 2008-09 and $0.45 in 2007-08. In these year (from 2007 to 2011) the world economy has been most disturbed. In 2007-08 it was US debt crisis and in 2011 we are not facing the threat of Eurozone debt crisis. So taking reference of even the best of companies in these years, their performance had been not encouraging. So for an investors is always important to consider the nations/words economics and political situation into consideration (like Pakistan, Afghanistan, Libya, Iraq, Egypt are politically disturbed) before deciding on the investment option. So evaluating stocks shall be best be done taking example of a "normal year" (when there was not disturbances) or better to take averaged performance of at least last 5/7 years in a row.

By using this method of earning yield and ROC, an investors will get a list of at least 5/10 stocks at time which ranks well in the ranking based on high earning yield and ROC. I will recommend you that if you have good funds for investment then better distribute your investment fund evenly in all of these stocks (that has ranked well as per your analysis). This will allow you to create a well diversified stocks portfolio which has above average growth prospects in long term.

Even safer bet will be to invest among the list of only few selected blue chip stocks. Though it is not easy to find blue chip stocks at bargain price levels still by using the EY and ROC methods you can track the performance of these stocks and as soon as your formula highlights that any stock is undervalued go ahead and grab one. Believe me that finding undervalued stocks cannot get more easier than this. Earning yield method is investors blessings in disguise.

It is important to understand a very important point about stock market investment. I will tell you a story about this, there was a business man who had a general store across a street corner. He very successfully managed that store for fifteen years in a row but in last three years he has seen a steady decline in the popularity of his store. He observed that due to opening of so many retail shops in the locality, most of the customers has been diverted from his shop to the new retail store. He was an intelligent businessman and he judged it early that he will not be able to fight against the might of those big retail chains. He sold off his general store and accumulated some $1 million dollars.

Instead of investing this money again to open a new business he decided to invest this money in equity. For him it was not a easy decision to invest all his hard earned money in equity. But he was firm and he knew that the long term yield that an equity will give him cannot be expected from any other form of asset. But for him the big decision was "in which company he shall invest". He knew about the concept of EY and ROC but still he knew that something is missing in this formula. One day he was analyzing the financial statements of few companies that he realized that he know a lot about retail business and it will be not be bad to buy stocks of only those companies that he can understand well. Warren Buffett calls it - investing within your "circle of competence". So he invested in those stocks for which it was much easier for him to predict future earnings due to his expertise.