Picking stocks like Warren Buffet should be a major desire of any trading investor who wants to become a guru in trading stocks and making billions from the stock market.
First, I need to clearly state that trading is different from investing.
Someone said if you want to be rich you must ask the millionaires how they did it and that is exactly what I would be doing now.
In 2004, a research was carried out and it was discovered that we have 483 billionaires in the world.
Forty two of these billionaires made their money from stocks and shares.
The person leading then was Warren Buffet who is now the richest man in the world.
My conclusion, if the richest man in the world made his money from stocks and shares and 42 out of 483 billionaires in the world made the billions through stocks and shares, and then I am talking about something that can make sure you join the richest people in the world.
Therefore, how did Warren Buffet do it? Before I go on to how he did it, I need to say that he was not a stockbroker, he was not as well born into a rich family, and he has most thing in common with you.
He was even rejected in the Harvard University.
Trading in stocks refer to short term investment and long term investment.
Picking stocks successfully like him involves being able to value stocks at their actual value.
To get the actual value of a stock you have to carry out serious research, I will state step- by -step.
A ratio is a relationship between two or more items.
In stock selection, a ratio is used as a benchmark for evaluating the financial position and performance of a company.
A single ratio itself does not indicate good or bad condition.
It should be compared with some standards.
Standards of comparison may consist of: 1.
Past ratios.
2.
Competitor's ratio.
3.
Industry ratios.
CURRENT PRICE: The price at which you buy a stock is the greatest determinant of profitability and not the company being bought.
Price determines everything.
The ratio is provided by the market it is not derived.
Always see it as a duty to ask why a stock is selling at a given price? For how long will it sell at this? For how much was it selling in the past? EARNINGS PER SHARE {ESP}: It is got by dividing profit after tax by the outstanding shares in issues of a company.
Since PAT is released 4 times in a year, then it is possible to derive ESP 4 times in a year that is: profit after tax/outstanding shares in issues = ESP Notes on ESP: a Dividend is paid out of ESP.
b The balance which is retained after is transferred to reserve or used for expansion purposes.
PRICE /EARNING RATIO {P/E}: Earning per shares alone means absolutely nothing.
In order to get a sense of how expensive or cheap a stock is, you have to look at those earnings relative to the stock price and divide it by the last four quarter worth of earnings.
Notes on P/E Ratio: 1.
The P/E ratio measures the value of a stock by considering it s E.
P.
S.
2.
It is the most important ratio used in trading short term.
3.
Stocks with low P/E ratio cheaper.
4.
Stocks with high P/E ratio expensive.
5.
Stocks with high P/E ratio don't usually pay high dividends.
6.
Stocks with low P/E ratio can afford to pay higher dividends.
IMPLIED PRICE: This is calculated using the average P/E ratio in an industry and the E.
P.
S of a particular company.
This can also be used in determining the potential price of a stock.
RETURN ON EQUITY {ROE}: A return on shareholders' equity is calculated to see the profitability of owner's investment.
The return on equity is derived by dividing profit after tax by shareholders fund.
This is calculated as follows: Profit after tax/shareholders fund =ROE Notes on ROE: 1.
ROE computed over 5 years shows the strength of a company.
2.
Never make any long term investment without considering the trend in the ROE of a company.
3.
This can be used as a last bench mark in trading stocks.