Isabella* was in her early thirties and had built up an emergency pot and a good amount in savings. With her excess cash she wanted to learn about stocks, how they work and how she might be able to make her capital work harder. She set aside an amount that she could afford to lose without compromising any future plans or her lifestyle and began to educate herself on stocks.
Isabella started to read the Financial Times and listened to their daily podcast to learn how financial markets were performing. She also watched CNBC occasionally.
Isabella followed the news feed of companies that she was interested in and asked herself the same questions:
-Is the company doing anything new?
-Are there any deals, mergers or acquisitions going on?
-Do they have good earnings?
Isabella chose companies across different sectors that she was excited by. She followed each of them on social media along with their peers and competitors to learn more about their overall sectors.
To access more information about each of the stocks she used Yahoo Finance. On Yahoo Finance she looked up the:
Historical price performance of the stock to work out if the company performs well during a recession and when might be best to execute the trade.
The Price-to-Earnings (PE) ratio which is calculated by dividing the current price per share by the earnings per share for the past 12 months. This metric is the amount that investors are paying for a dollar of a company’s earnings.
Dividend yield which indicates how much income investors can collect from holding a share.
By looking at the historical price performance, Isabella worked out that the stock she was interested in was currently trading at a mid-point range and it was a suitable time to buy.
She also looked up the company’s peers and competitors to gauge which companies in the same sector have performed better or worse. Yahoo Finance also gave her a list of buy or sell recommendations from different analysts. The recommendations told Isabella if the stock was expected to outperform or underperform compared to the wider market.
In this case, the stock was performing better than the wider market and it looked like a good investment, Isabella was careful to also look at when the stock was not performing well and found out what the factors involved were. She also looked at when the company’s stock had experienced volatility and how fast they recovered but kept in mind that past performance isn’t necessarily indicative of future performance.
Isabella was researching a technology sector stock which had a high PE ratio due to investors expecting high growth rates in the future. She compared the company’s current PE ratio to its peers, to get an overall idea of the sector’s expected growth. Some of the company’s peers had a low PE ratio, which could mean that their stock was undervalued or perhaps the company had a cash flow problem, or they had stopped innovating. Isabella did more research on the low PE ratio companies in the same sector to find out if they were good value stocks.
Isabella then looked at dividend yield on the stock, this is the income that investors are receiving from the stock on a quarterly basis and varies by sector. Companies in an early growth phrase may opt to re-invest capital back into a business and have a low dividend yield. A yield above 3 or 4% is high and could be an indication of not having a solid growth strategy or no commitment towards putting capital into research and development. This might raise questions about the source of their future growth and innovation. If the dividend yield is cut, the company might be facing a cash flow issue or a drop in sales.
Before she made any decisions in relation to buying a stock, Isabella looked at the financial statements of the company. By doing this she was able to spot trends happening in the company and assess its financial health in terms of the assets and liabilities. She looked at the balance sheet which told her what the company owned and what they owe. She also paid close attention to the profit and loss account and assessed what was coming in, what was going out, how fast the company is growing and what the profitability is like.
Isabella looked at the financial reports of the company’s peers in order to get a real sense of the company’s success in their sector. After looking at the company’s rivals, she decided to buy the original stock that she was researching and their closest rival to maintain diversification in her portfolio.
*Names have been changed.