The Optimality Of A Competitive Stock Market

Author : Harrison Sachs
Publisher :
ISBN 13 :
Total Pages : 58 pages
Book Rating : 4.6/5 (182 download)

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Download or read book The Optimal Criteria for How to Determine If a Stock Is Worth Buying, How to Strategically Invest As an Equity Investor, and How to Make Money So That You Can Afford to Invest in the Stock Market written by Harrison Sachs and published by . This book was released on 2020-02-26 with total page 58 pages. Available in PDF, EPUB and Kindle. Book excerpt: This essay sheds light on the utmost optimal criterion for how to determine if a stock is worth buying and elucidates how to strategically invest as an equity investor by following a dividend investment strategy. Moreover, how to make money so that you can afford to invest in the stock market is delineated in this essay. Even though the criterion to determine if a stock warrants purchasing is often eminently complex, it ultimately does not have to be and can be streamlined so that is parred down into asking some six basic questions. While investors may be inclined to turn to reading financial statements, ascertaining dividend percentage yields, computing financial ratios, such as the price to earnings ratio and the price to earnings growth ratio, there is far more that should be taken into account before making a purchasing decision of an equity. The six basic questions that an investor should ask before purchasing a stock in order to determine if it merits owning encompass the following: 1. Does the stock pay a dividend? 2. Does the company consistently report positive net income? 3. Is the company competing in a market with high barriers to entry and/or minimal competition? 4. Does the company dominate the market as one of the leading competitors? 5. Does the company have a significantly lower stock price than similar market competitor? 6. Can the company maintain profitability in the coming years if it does not innovate? If you can answer yes to all six of these aforementioned criterion questions then it is highly likely that the stock is eminently undervalued. If you answered yes to five out of six of the criterion questions it is still likely that the stock is undervalued. However, if you answered yes to at most four out of six of the questions then the stock is far more likely to be overvalued and therefore would not warrant a purchase for the more conservative investor. As per the first criterion question, it is critical for companies to offer a dividend to their investors. The dividend not only renders the share of equity an income generating asset, but also vindicates to investors that the company has confidence in their business model to warrant doling out dividends. In other words, it not only renders the stock more valuable as an income generating asset that is not procured procured based purely off speculation for the prospect of earning a capital gain, but also allows companies to win over the trust of investors and raise capital more easily. In other words, the merits of a company's business model are dubious if the board of directors does not have the confidence to offer a dividend to their company's shareholders. Some investors completely abstain from ever buy non-dividend paying equities. As per the second criterion question, it is important for companies to consistently report earning positive net income annually. Companies should be able to efficaciously manage their resources and streamline and refine their business model to remain profitable in the digital. When companies report earning negative net income, it is a clear tell-tale sign of under-performance and underlying financial issues. In the digital era, it can be a hardship to recover from insolvency, operational inefficiencies, mismanagement of resources, and the continual usage of an unprofitable business model. It is incumbent that companies are managed effectively and are not encumbered by debt and lack of positive cash flow. As per the third criterion question, it is often less risky to buy shares of equities from companies that compete in lucrative markets characterized by minimal competition and high barriers to entry. Companies that have a monopoly on the market are not prone to competitive threats. Moreover, markets with high barriers to entry indicate that a profitable company will be far more likely to financially thrive in the long haul since competitive threats are virtually non-existent when a market is absent of competition.