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How to manage risk
How to analyze investment opportunities
The importance of long-term planning
A single share of a company represents a small, but real, ownership stake in a corporation.
One stock's percentage of ownership is determined by dividing it by the total number of shares outstanding.
Stock ownership generally entitles the owner to corporate voting rights and to any dividends paid.
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It is important to understand that the stock's intrinsic value is not necessarily directly tied to its current market price.
The efficient market hypothesis, a theory that states that all known information is currently priced into a stock. However, this is not always the case.
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The go-to metric for nearly all investors when it comes to valuing a stock has to be the P/E ratio. Standing for price-to-earnings, this formula is calculated by dividing the stock price by the earnings per share (EPS). The lower the P/E ratio, the more earnings power investors are buying with each share.
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Unfortunately, there's no P/E ratio set in stone that makes a stock a buy if it's below, or a sell if it's above.
Often value investors and growth investors will look for different things in a P/E ratio.
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Growth investors often use the P/E ratio as a building block for finding two other metrics: the forward P/E and the PEG ratios.
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While using the P/E ratio as a building block is probably the most popular method to value stocks it is far from the only way. Another common technique to valuing stocks is the price/sales ratio. The P/S ratio is determined by dividing a company's market cap -- the total value of all the companies outstanding shares -- by its annual revenue. Because this ratio is based on revenue, not earnings, it is widely used to evaluate public companies that are not yet profitable and rarely used on stalwarts with consistent earnings such as Walmart
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Another metric useful for evaluating some types of stocks is the price-to-book ratio.
How to calculate?
It is useful when evaluating banks and other financial institutions that carry a number of assets on their balance sheets.
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There's more to valuing a stock than just crunching numbers. Investors have to take into careful consideration qualitative factors also, such as a company's economic moat. Moats encompass companies' competitive advantages, such as a network effect, cost advantages, high switching costs, or intangible assets (e.g. patent, regulations, or brand recognition).
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