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Unit 6: Investment Strategies-I

Some important ratios: Notes
a. EPS
b. P/E Ratio
c. Projected Earnings Growth (PEG)

d. P/S (Price to Sales)
No single number from this list is a magic bullet that will give you a buy or sell recommendation
by itself, however as you begin developing a picture of what you want in a stock, these numbers
will become benchmarks to measure the worth of potential investments.

Task Select any three stocks from a similar industry and calculate their important financial
ratios. Note the reasons behind the differences in their stock prices and market performance
for the last 1 year. Also find out how their financial ratios play a vital role in stock
performance.

Step 3: Try to Figure out Earnings

Earnings are profits. It may be complicated to calculate, but that’s what buying a company is
about. Increasing earnings generally leads to a higher stock price and, in some cases, a regular
dividend.

When earnings fall short, the market may hammer the stock. Every quarter, companies report
earnings. Analysts follow major companies closely and if they fall short of projected earnings,
sound the alarm. For more information on earnings, see my article: It’s the Earnings.

While earnings are important, by themselves they don’t tell you anything about how the market
values the stock. To begin building a picture of how the stock is valued you need to use some
fundamental analysis tools. These ratios are easy to calculate, but you can find most of them
already done on sites like cnn.money.com or MSN MoneyCentral.com.

Step 4: What to Look for in Stocks?

There are many factors to consider when analysing a company. Here are some of the factors you
should consider along with others such as financial ratios and the economy.
1. Look for stocks with earnings growth
2. Size matters in investing

3. Three main influences on stock prices
Step 5: Figuring your Return

If you can’t measure your return, how will you know if you’re making money? Here are some
tips on tallying up your profits.

Step 6: Stocks and the Economy

The economy can have a dramatic affect on stock prices. Factors such as interest rates and retail
sales play an important role in what happens in the stock market.

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