Thread by @ballarina_

*THREAD* on some variables and factors to look at when purchasing a stock 📊💸📈💰

1. P/E ratio - this is the price to earnings ratio which is calculated by using the stock price per share/earnings per share(EPS) . P/E ratios can help determine if a stock is overvalued, undervalued or its future sentiment

ex.
two stocks at $12 per share.

stock A has a $2 EPS & P/E of 6
stock B has a $4 EPS & P/E of 3

people are willing to pay more for stock A they are for B based on current numbers.

(no P/E ratio meaning the company has no earnings or is losing money)

from this example the questions to ask are:

-is stock A overpriced compared to B?
- is the market willing to pay more for stock A because it believes the stock will be more successful in the future?
- is stock B better because it’s “cheaper” & can grow value in the future?

2. Large vs. Small vs. Mid Cap stocks

Large Cap- market capitalization of $10 billion or more. these are the biggest traded value companies which are considered safer, operate globally, usually pay dividends and have a lot of historical data to analyze from (apple, google)

Mid Cap- market capitalization of $2-$10 Billion. these are generally in their expansion stage but can provide some stability. usually less transparent as far as financial history compared to large caps, but have more potential for growth overtime (dollar tree, planet fitness)

Small Cap- market capitalization of $200 million- $2 billion. these companies generally offer the most room for growth but also the most risk. these are better for individual investors because institutional investors are limited on how much they can invest in small caps.

these 3 types of stocks have various pros & cons such as trade offs in stability, growth, value, risk and transparency. the general rule is to diversify among all 3

3. D/E Ratio- the debt to equity ratio is the debt/liabilities a company has vs. how much shareholder equity it has, calculated by total debt/shareholder equity.

a ratio of 1 indicates that investors and lenders are equal in terms of the companies assets.

higher ratios mean the company is using more leverage, or borrowing more money to fund its finances. this can be good for a company with high cash flow to expand its business. using debt can also increase the return on equity for shareholders.

on the other side, higher debt ratios can mean riskier investments & higher chances of bankruptcy for a company who is not returning enough to cover its debt.

a good ratio is around 1 to 1.5, but there is no magical number for a debt ratio. there are different benchmarks for different industries, as certain industries require more debt than others such as manufacturing & financial corporations (banks, airlines)

4. 52 week highs/ 52 week lows

The 52 week high and low is the highest and lowest price of the stock in the past year. these two prices can be good indicators to compare where the stock is trading now.

this is a technical indicator, you can use it while conducting technical analysis- analyzing the chart to see historical trends

when a stock hits its 52 week low or high

-trading volume increases
-exit or entry points are created
-can indicate major change in company

5. Initial Public Offering- an IPO is when the company first becomes public. this could be a brand new start up company or one that’s been around for years but never traded on the stock exchange.

when buying at the IPO in its early stages, its important to remember that institutional investors have already invested into this company BEFORE it was available to the public.

because of this, many investors will sell their shares from the investment once they realize their profit when it becomes public.

investors can not sell their shares for 90-180 days from the IPO date. this is called the “lock up period”

once the lock up period expires, many investors will sell their shares, either at a loss or profit. if there is enough selling once the lock up period expires, the market price of the stock may fall. (beyond meat, uber)

6. 10-K Financial Report

every company that’s trades publicly is required to file a yearly 10-K report. This will include their business operations, financial statements, analysis and risk factors.

this is the able of contents for Apple’s 10-K statement as you can see it is broken up in various parts

the financial statements are the most important part in a 10-K when looking to purchase a stock. Analyze their operating income compared to their operating expenses.

Now compare this growth from last years or even the previous year 10-K.

Read the disclosures which explains why the numbers were what they were, and what strategies the company is using to increase profits.

For more detailed break downs, companies also file a 10-Q statement which is released every quarter instead of annually. This lets you analyze financials, operation/ management changes on a shorter time frame.

7. Dividends

this is another way to make money from the stock outside of the direct appreciation of the stock.

I have dedicated a thread on dividends which is linked below.

https://twitter.com/ballarina_/status/1170085690400563201?s=21

Thank you for reading and lastly please remember there is no ONE indicator which alone will give you a solid answer on a stock, but by analyzing various indicators you will have a very well rounded understanding of the company

CC : @BitcoinJay

Also, please note there are no recommendations in this thread, everything is strictly for educational purposes.

*I am not a financial advisor and this is not financial advice*