Stock investing can be very profitable if you know how to invest. If you are looking for a stock investment that’s a bargain you might want to look at the stock information in front of you twice. What you see might not be an opportunity at all, but a trap. Let me give you an example in this basic money guide.
Stock information is easy to find but not so easy to interpret. For example, you’re looking for a stock investment and JKL Corp. grabs your attention. It’s selling for with a 52-week low of .85 and a 52-week high of . Looks cheap, you say.
JKL has a P-E ratio of 5 when the Dow is selling at 15 times earnings. Once again it looks cheap.
The indicated dividend is .00, which at a price of translates to a dividend yield of 10% (a year).
Bingo! You’ve just found a bargain stock investment. You can buy at , wait for JKL stock to go up, and make a cool 10% in dividends while you wait.
Who says you don’t know how to invest?
You’ve only made two big assumptions: that JKL stock will turn around and go up, rather than continuing its downward trend; and that it will continue to pay .00 a year in dividends.
Well, stock investing is not that easy and a bargain is very difficult to find. The stock information might look good in print, but why is JKL selling so cheap and paying such a high dividend? Odds are there is trouble in paradise.
First, the stock is selling at its low for the year because investors have been (on balance) selling it because they don’t like what they see upon closer inspection. Second, the P-E ratio is low (cheap) because the stock price is low, not necessarily because earnings are so high.
In fact, the P-E suggests that investors are anticipating a bombshell when future earnings are reported.
The indicated dividend of .00 is based on historical (past) data. There is no promise that it will be paid in the future, and investors apparently have no faith that it will. Again, that’s why JKL is selling at such a low price.
Stock investing is largely a matter of avoiding mistakes. This money guide will now offer three basic rules to help get you up to speed on how to invest in stocks.
Rule #1: The stock market knows everything. Millions of people invest in stocks, and thousands of them research stock information and know what’s happening inside a company like JKL. When they see trouble they sell, and that sends the stock price down. In this case people in the know sent JKL from to under within a period of the last year. When and if things start to turn around, informed investors will start to buy JKL and this will send the stock price up. Only when the tide starts to turn does JKL becomes interesting as a stock investment. Not before.
Money guide rule #2: Do not buy a stock when it is near its yearly low and still falling. If in doubt refer to rule #1.
Stock investing rule #3: If you buy a stock and it heads south while the major market indexes are going up … sell and take a small loss. Don’t hold a loser.
Stock information doesn’t lie; you just need to learn how to use it.
A retired financial planner, James Leitz has an MBA (finance) and 35 years of investing experience. For 20 years he advised individual investors, working directly with them helping them to reach their financial goals.
