This is all you need to understand while picking up stocks

When you buy a share of a given company, you don’t actually own a fraction of that company as an entity or a least not directly. Instead, each share represents a claim on the company’s assets.

By owning a share of a particular company, I became a shareholder of that particular company.

So what benefits I get by owing a particular share of the company?

Why Valuation Matters

When should you buy the stocks, Is this is the right time to buy the stock. — All of this depends upon the Valuation of the stocks this we can decide at this particular time should you buy the stocks or it is right to bargain the price

In the next following topics, we gonna discuss how to value a company

Market Capitalization

when you try to value a company, what you really want to see is whether is the price you think a stock should be at corresponds to the current market price.

Simple Calculations

• Current Market Price * Number of shares that the company issued = Market Capitalization

For example

• $1 Share price * $1,000,000,000 = $1,000,000,0000 Market Cap

Market cap is the most basic indicator of size, and it’s one of the easiest ways to categorize companies.

Large Cap = 10 Billion +

Mid Cap = 2–10 Billion

Small Cap = Below 2 Billion

P/E Ratio: Price-To-Earnings Ratio

It’s a very quick and convenient way of getting a rough idea of how expensive or cheap a given stock is. The P/E ratio tells you how much money you’re gonna pay now for $1 of earnings from that particular company.

P/E Ratio= Earnings per share / Market value per share

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For Example

As a historical example, let’s calculate the P/E ratio for Walmart Stores Inc. (WMT) as of November 14, 2017, when the company’s stock price closed at $91.09.2 The company’s profit for the fiscal year ending January 31, 2017, was US$13.64 billion, and its number of shares outstanding was 3.1 billion. Its EPS can be calculated as $13.64 billion / 3.1 billion = $4.40.3

Walmart’s P/E ratio is, therefore, $91.09 / $4.40 = 20.70x.

P/FCF Ratio: Price to Free Cash Flow Ratio

In the investing world with its cash is king, and that’s a popular phrase for a good reason. Accounting with all its complexity can be manipulated for whatever reason. But faking actual cash is much harder, which is why a lot of investors use the company’s cash flow as one of their main valuation metrics. So what exactly is cash flow? Quite literally. Is the flow of cash coming into a business minus the amount of cash flowing out of it? It’s like a river.

Revenues from sales and investments flow into the company. But then the company has to pay wages by inventory, pay, rent or interest on its debts, and 1,000,000 other expenses. If there’s any cash left after covering all these expenses, well, then the remainder is called free cash flow, because the company can do with it whatever it likes.

What’s most important to you is that when a company has free cash flow, the river can now flow from the company to you in the form of dividends.

In contrast, a company without free cash flow is in danger of going bankrupt even if its businesses otherwise viable.

Calculations

= Companies free Cash flow / Number of shares outstanding

P/B Ratio: Price to Book Ratio

Asset — Liabilities = Value (Book Value)

D/E Ratio: Debt to Equity Ratio

Let’s say the U. S Treasury offers 2% on its bonds. A company like Netflix is big enough to be able to borrow money at a pretty good rate, let’s say 3%. So for Netflix, it makes sense to borrow billions of dollars each year at 3% and two investment back into the business by making more shows at 10% Netflix is effectively being paid to borrow money, and the same principle applies to virtually every company

It must borrow enough money to invest in itself and not miss out on opportunities to expand, but not so much that it will drown an interest.

This balance is measured by the debt to equity ratio, our final evaluation metric.

= Liabilities of the company / Companies Book value

The result tells you how many dollars of debt the company has for every $1 it actually owns. This is what is known as leverage.

Dividends

One of the biggest reasons most people buy stocks is to watch that steady stream of dividends flow into their account.

Investors love dividends because they’re consistent. If the company you’ve bought is doing good, it will keep on paying its dividends like clockwork. If the company is growing, it might also try to increase its dividends every year.

The most basic way to compare the dividends of different companies is just to calculate how much dividends each company pays for every dollar you own. This is known as the dividend yield. If Microsoft shares cost $100 payout a total of $2 worth of dividends in a year. Well, then, dividing one by the other gives Microsoft a dividend yield, which in this case would be 2%. Most big companies you can think of have dividend yields of roughly around 2%.

Buybacks

Buying back their own stocks by the companies. But now there are 10% fewer shares of Facebook and existence. In other words, the same amount of value is spread around a lower amount of shares,

making each share more valuable. And, of course, because buying stocks isn’t a taxable event, Facebook doesn’t get hit by taxes, and neither do you because you didn’t actually receive any cash.

Stock Classes

With a single class of shares, they need to hold at least 50% to maintain a majority voting power. But what they can do instead is to create a second class of shares that carries more votes. They can create Class B stock, which carries 10 times higher voting power, for example, so they can sell off 90% of the company and still maintain a voting majority.

There is one additional catch with these super shares. They convert to regular stock when they get sold, which ensures that voting power can’t end up in the wrong hands.

All of these Terms are required to understand while picking up the stocks if you don’t understand it Probably you should stick to the safer option that is ETF — Exchanged Traded Funds