How to Invest in Stocks

When you set about investing in the stock market you will have to decide which stocks to invest in. This means you will have to evaluate which stocks are going to give you the returns that you want...

Establish the Type of Return

When you buy into a company that is listed, you are buying a part of the business. You are putting money in and in return you share in the profits of that company. Your outlook may be a long term outlook and therefore you will be doing fundamental analysis of that stocks performance, along with the return that that stock is expected to give you. So you are looking and past performance and expected future performance. The past performance will not always reflect the future performance of a stock.

Past Performance

The past performance of a stock is based on the price to earnings ratio or commonly known as the PE ratio of a stock. The price of the stock is varied throughout the years and hence the PE ratio is calculated at the time of the dividend release date. This can be as much as every quarter and as little as once a year. Some companies have no dividend and hence only rely on capitol growth for their investors. The dividend is the money per stock held that is released as profit to the owners of the stock. The dividend is the share of profits that the company made in the time frame allocated to the financial year. For example, if the company has made an $8.00 profit per share in one financial year, it may release $2.00 of that profit each quarter. Different companies will release profits in different ways. Examine each company for the methods of profit share.

What Effects Future Performance

Factors that affect the future outcomes can be economic influences and internal management influences. Economic issues can affect a company's performance because they influence the returns through monitory exchange rates, borrowing power, labor and capitol input considerations. These influences do not have an immediate impact on the company's performance, but should be evaluated over the longer term, for future performance expectations.

Internal factors such as leadership issues, policy direction and financial planning for future growth will all indicate to the investor the likely future performance of a company. If leadership or management has changed hands then the past performance of managers should be evaluated to determine the likely outcome for the company that has taken on this new management.. "Once a bad manager, always a bad manager"; is a common expression within the business world. There are no second chances in management.

Changes in policy direction can have a major influence on future performance in a company. For example if a company were to adopt a environmental policy that forces them to upgrade all their plant and equipment over the next five years, then profit and dividends are not going to be as much as their past performance would indicate.

Poor financial planning in one year can lead to a heavy penalty for investors. Write downs on the value of plant and equipment, mean that net worth of the company has decreased and as such their borrowing power or debt exposure can increase. With higher debt levels come reduced returns.

When investing for the longer term a lot of information can be found on the companies website, and from financial press releases. Another good source of information is the company itself. As an investor in this company, you are entitled to call them and discuss any concerns you may have as to their future direction. You can also query their future plans and ask for any relevant information on financial matters.