There is a lot of jargon to be learned when you start investing in stocks. How do you learn it all? In this article, I will attempt to make some of this jargon easier for you to comprehend.
The first term I shall discuss is the P/E(Price-Earnings) ratio. P/E ratios vary from stock to stock. However, I've found that it's usually good for a stock to have a P/E ratio of twenty or less. Be wary of a stock if it has a P/E ratio of around one hundred and thirty or something to that effect. In some industries the P/E ratio is higher than other industries so keep that in mind as well.
What about the yield? The yield is basically what the stock will pay out in dividends. If you're investing for the long term then you may want to pick stocks that have a high yield because of compound interest. Companies such as banks, REITS(Real Estate Investment Trusts), energy companies; etc are all examples of stocks that usually have a good yield.
How about ROA and ROE? ROA stands for Return on Assets and ROE stands for Return on Equity. Basically, you want both of these numbers to be going up or to be stable over the course of a decade. It's not the end of the world if they slip for a year, but if it's a constant problem then pick another stock.
What sort of cap size should you pick? There are nano caps, micro caps, small caps, medium caps, and large cap stocks. Nano caps refer to stocks that have a market cap of less than fifty million dollars. Micro caps have a market cap of under a hundred million dollars, small caps have a market cap of under one billion dollars, medium caps have a market cap between one and five billion dollars, and large caps(also know as blue chips) have a market cap that exceeds five billion dollars.
Out of all of these different market caps which should you pick? Medium cap stocks and large cap stocks are usually more stable than their counterparts(they also usually pay a dividend). Of course, some people believe that smaller cap stocks have more potential for growth than the larger cap stocks. I prefer to have the majority of my stocks in medium and large cap stocks. I will have some smaller cap stocks, but the majority are medium to large cap stocks.
What about the amount of sales a company has? The stocks that you pick should have at least a hundred million dollars in sales each year. This is not a guarantee of success, but it does show that the company is making decent money. Stocks that have less than a hundred million in sales may skyrocket in growth, but they are more risky. The choice is yours.
One thing to avoid in stocks is companies with a large amount of debt. Debt is also known as financial leverage in the investing world. Companies that are highly leveraged are more likely to go bankrupt, which means you will lose all of the money you have invested in their stock. Banks are the exception to this rule. It's quite common for banks to have large amounts of debt.
Learning the jargon involved with stocks takes albeit of learning, but it is well worth the effort. In the grand scheme of things, you'll be better off financially if you can learn some of it.
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