A stock is one of the primary ways that investors make money on the market. In the broadest sense, a stock represents an ownership position in a company, or the corporation that issues it. It is possible to invest in a wide range of stocks and there are many reasons that individuals choose to do so. Common reasons include the hope that the value of the shares will rise over time, the opportunity to profit from shorter-term price movements and the chance to earn a dividend from a company.
Whether you’re investing in a mutual fund or individually picking stocks, it’s important to do your homework on the underlying businesses that are generating the stocks’ returns. This includes analyzing the business model, the sector and the competition and looking at financial ratios that can help you predict where a stock’s future performance is headed. The Securities and Exchange Commission requires all publicly traded companies to file quarterly statements, which contain a wealth of information about their operations. You can find these filings by searching on the company’s name or using a tool that provides access to publicly available documents like TD Ameritrade’s Stock Screener.
A key consideration for any investor is how well a company can generate long-term returns on its assets, compared to other prominent asset classes such as bonds, real estate and commodities. The best way to do this is through a combination of growth in the share price, dividends and price appreciation.
When choosing stocks, investors often compare them to a benchmark such as the S&P 500, which gives an indication of how the stock’s performance is performing relative to the overall market. This can be helpful to identify trends, but it’s also useful to consider individual company metrics and how they might differ from the benchmark.
You’ll want to look at a company’s balance sheet, which will give you a snapshot of the company’s financial condition and how much debt it has. You’ll also need to pay attention to the company’s income statement, which will provide you with a breakdown of revenue, any major expenses and bottom-line earnings. You can also look at a stock’s beta, which is the volatility of its stock in comparison to the S&P 500 index. Stocks with lower betas typically have less risk and are more stable.
There are qualitative factors that influence a stock’s valuation, such as the morale of the company and its relationships with consumers, that can be difficult to measure. However, the majority of stock valuation is based on quantitative analysis that can be measured including financial statements, various ratios and valuation metrics.