Choosing The Right Stocks For Your Investment Portfolio – Factors To Take Into Account
Submitted by Alden Brooks as part of our contributors program.
Although reports suggest that there are 6000 companies that are publicly traded, yet when it comes to your personal investment portfolio, it should only consist of the fiscally strong companies that have earnings that are above the average level. Surprisingly enough, among all the well-built companies, there are only about 250 stocks that fit in the description of powerful companies and according to the stock market analysts, a well-balanced portfolio should consist of maximum 15-20 stocks. The stock market is fraught with risks and a single bad decision might lead to heavy losses for which you might have to rush to debt elimination firms and therefore it is necessary for an investor to pick the right stocks for investment so that he might be able to maintain a steady source of passive income. Whether you’re about to choose the traditional stocks or penny stocks, you have to make sure that you follow the fundamental metrics that are taken into account while choosing the best stocks in the market. Here are some of them.
The EPS of a stock: The earnings-per-share of the EPS is nothing but the ratio between the net income of the company and the total number of outstanding shares that are held by the insiders of the company and the investors. This serves to measure the profitability of the company and the recommended value of EPS that you should look for shouldn’t be less than 80. Remember that if the respective company has demonstrated growth in the last 5-10 years of time, it is indeed going to grow in the next few years too. Check this ratio before taking the plunge.
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The P/E ratio: This is the ratio between the share price of the company and the earning that it generates per share. This ratio will help you measure the amount that the investors will be willing to pay per dollar of the earnings. The recommended value should be high enough as compared to the industry or market average. There are various kinds of Price to Earnings Ratio but the one which is mostly used is the trailing P/E that is usually calculated with the EPS that has been calculated throughout the last few quarters.
The PEG ratio: This is the Price/Earnings to growth ratio and this is calculated as the P/E ratio divided by the anticipated yearly earning rate of the company. This helps you measure how cheap the particular stock can be. When the PEG ratio is below 1, this indicates that the stock is possibly undervalued. When it is equal to 1, it shows that the market is pricing the stock to reflect the EPS growth of the stock and when it is above 1, it means that the stock is overvalued.
Therefore, when you’re about the pick stocks to include in your investment portfolio, you have to take the above mentioned facts into consideration so that you might take an informed and a measured decision.