The stock market is one traditional way that people raise their overall net worth over time. Over time, the stock market has increased in value at a higher rate than inflation and that is another reason so many people wishing to invest their money choose stocks.
One way to earn money in the stock market is to invest in undervalued companies. These are simply corporations who have stock prices that are lower than the true value of their company. When the market realizes this, it will correct the error and the price of the stock should increase. When the market corrects the error, the price of the stock will go up and that will earn the investors more money.
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So, how do investors find undervalued stocks? Here are some tips to help you recognize them and to know when to add them to your portfolio:
1. Examine The Price / Earnings Ratios
The price/earnings ratio is determined by dividing the company’s total profit for the previous fiscal year by the total number of outstanding shares. The higher the number, the stronger the company is considered by most investors.
If a company has a high P/E ratio, it should have a higher stock price. If the price of the stock is not reflected in the ratio, this is one way to determine that the stock may be undervalued.
A thorough examination of the P/E ratio over time is a good way to find undervalued stocks to consider investing in.
2. Analyze The Dividends
Many companies pay their shareholders dividends at the end of each fiscal year. The amount of the dividend per share is determined by the board of directors and is usually based on the profit and general health of the company.
Dividends can be paid annually in cash or they can sometimes be paid in additional stock in the company.
Once you find out the dividend that a company is paying, you should look at how it relates to the corporation’s overall debts and cash flow.
Some companies pay a large dividend to attempt to lure additional investors to purchase their stocks. If the company is overpaying their dividends, stay away, it is not as healthy as the numbers first appear. If the dividends are legitimate however, this is an indication that the company likely has an undervalued stock and is worth investing in.
3. Compare The Company To Its Direct Competition
Whenever you invest in a company, understanding how healthy it is compared to its direct competitors in the same industry is always an important factor to consider.
If you want to invest in a fast food hamburger restaurant, for example, knowing what the company’s market share and profit margin are compared to the other top companies who sell burgers is always important to know. It is also wise to know how that type of restaurant is doing in relation to the entire fast food market.
Don’t just look at the current year, either. It is best to examine the overall trends in the industry over a few years as well as the predictions many experts have for its future. Is the company innovative and offering its customers new and exciting products or are the new products coming from their competitors?
Stock Up On Undervalued Stocks
These are all important questions to ask before deciding whether a company is undervalued and can help you find smart stocks that will increase in value for you over both the short term and the long haul.
