Here are two methods to interpret and analyze shares before investing in them.
What is the business about
In the book 'Real Money', the author advises investors never to purchase a stock unless they know how the company makes money. One needs to know about its products, services, areas of operations, and position in the industry.
Does the CEO steer the company in the right direction? If so, what are the contributing factors? How will the company perform if the CEO leaves? Before investing, find out the structure of the company's Board of Directors and its governance practices.
A company uses its business model to maximize its profits. Analyze how this business model will work in situations such as a recession or an economic boom.
Competitive advantage is when a firm has an edge over its competitors through better products, patents, brand power, technology, or operating efficiencies.
Company’s track record
There’s a risk if the business is new. Make sure that the company you are investing in has a solid, steady growth.
This aspect deals with investments the company has made, opportunities it had/has to make money, assets, liabilities, and debts.
This deals with the company’s operating statements and cost of running. It also makes a comparison of the sales and costs of the enterprise.
This part deals with the risks the company faces, and the potential to address those risks. These inferences are made through the company's Management Discussion and Analysis Report.
This deals with a company’s track record, dividend history, and growth potential.
One should analyze the company’s revenue to see if they are consistent, if not rising.
This part assesses net income growth from year-to-year.
A company’s profit margin is necessary to assess its steadiness, irrespective of economic conditions. Greater the margins, greater the product domination that a company has.
Debt to equity ratio
The debt-to-equity ratio helps one discover a company's debt holds compared to the number of equity shareholders in the company. The ideal is considered to be 1:1.
Price to earnings (P/E) ratio
One should look for a company with a P/E ratio that is on par or lower than the overall market's P/E ratio and the company's peers in the industry. Lower P/E ratio is a signal that the corporation's stock is trading at a fair price or even at a bargain.
CNBC investors say if an investment's chart begins at the lower left and goes to the upper right, it is a good thing. If the graph is on the downturn, one need not invest their energy to understand why.