How do you compare companies in the stock market? How do you know which one you should buy?
I asked a stock trader friend to write about it and here’s what he has to say.
Because there are so many different stocks that you will have to choose from, it is important that you know how to determine which investments are good ones and which are not.
You will find that the ability to put two stocks side by side and compare them is a very useful skill that can be quite lucrative.
Those who know how to tell the difference between the stocks of two companies that are similar but sell different products have a natural edge when it comes to making money.
The very first thing that you will want to do when going about comparing two different stocks is comparing their respective P/E or price-earnings ratio. This number is essentially the market value per share divided by earnings per share.
The higher a company’s P/E, the better investors usually feel about the stock as a whole. Companies that have a higher P/E usually have a very healthy stock that is doing well because there is so much confidence from their investors. Make sure that you focus on this number when comparing two stocks.
The market capitalization of a stock is a very important thing to consider and, simply put, is the size of a company as a whole. This number is a company’s total shares of stock multiplied by the price of the share.
When you are looking at two different stocks and trying to decide which one you want to invest in, it’s usually a good idea to go with the larger company because statistically it is the safer decision.
But just because you make a safe decision when investing in a stock, it doesn’t mean you will see a big return. Typically when it comes to investing, the safer the investment, the less potential for profit.
The volume of the two stocks will be yet another important thing to look at before making a final decision of any kind. By comparing the volume of the stocks you will be looking at the total number of shares bought and sold on any given day for each company, and that can really tell you something important.
You can usually see certain patterns by looking at these numbers and statistics and they can help to give you a better idea as to how the companies will perform in the near future.
When you are looking at stock volume and the movements that a stock makes, it is important to know certain things. If a high volume stock is on a severe downward trend and suddenly comes back up, this doesn’t necessarily mean that it is rebounding but rather is most likely being influenced by a single investor looking to make some short-term gains.
Stock charts can be very valuable when you are comparing two or more stocks because they will provide you with a way to visualize their performance by providing you with the trends of the stock prices.
There are also certain online charting services that provide you with a way to compare two separate charts over certain periods of time. If you are interested in two different stocks but need to see the difference between them, these charts can be of great value.
Of course the prices of the stocks you are considering will be another factor which you will need to take into account before deciding which one to invest in.
It is important that you remember that lower priced stocks usually fluctuate in price more so than higher-priced stocks. While it is true that the price of a stock won’t be able to definitively tell you whether or not either one is a good investment, this information can definitely help.
Investing in stocks can be a very risky thing and it is important for you to be careful when it comes to the decisions you make, because one wrong move can mean huge losses.
Those who are new to the stock market will definitely want to take it slow and not overwhelm themselves by jumping into the deep end too early. The more information you get on the stocks you are looking at for investment, the better your chances will be of great results.
This article is written by John Conor of Independent Investor, a website where you can compare financial spreads of different US brokers.
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