Saarah Rasheed

People often look for a second source of income to have as a back-up option because who doesn’t mind a few extra bucks? There are many ways to do so but mostly they require putting in extra efforts, for instance freelancing, blogging, etc. Hence a lot of people choose to invest their money and enjoy the returns. There are various financial instruments that can help you achieve your desired returns but one of the most intriguing one among them all is the stock market. A stock is referred to as a unit of ownership. If you own a stock, you own a certain small fraction of that company. And consequently, a stock market is a place where stocks of various listed companies are bought and sold. The prices of stocks are changing all day long based on a number of factors. In reality, it is impossible to quantify all the factors that influence a stock price, let alone be able to predict the exact price the stock will be worth since there is always a factor of uncertainty, therefore it makes it a risky game. Although there are some factors which can help us make an intelligent guess and we will be discussing some of those factors here. The following methods are useful for investing in long term. Company Performance: Knowledge Required: Basic Accounting knowledge, ability to read financial statements of different companies. Company performance is one of the factors that influences the price of its stocks. A good performing company may not necessarily have an upward trend or an increasing price at all times. Sometimes, a company may take on loan for a particular project’s investment and weigh down therefore the scales of liabilities on its financials. Increased debt, or non-performing debts, usually is a sign of declining company performance but not in every case. As in our example, the loan is an investment in a project which can be profitable and have almost twice a return on its investment, hence there is more to financials than a simple increase in debts or assets. Investors use tools for determining company performance. These tools, known as ratios come under the methods of fundamental analysis. By seeking different accounts in the financials, ratios are made which can give a simple output on the basis of which decisions can be taken regarding investment. There are many ratios but two standard ratios used, which are recommended for beginners as well are: Intrinsic Value: Intrinsic value is considered as the true value of a company’s stock that is, how much is it actually worth. If a company’s stock price exceeds its intrinsic value, it means the stock is overvalued and the stock price is likely to come down. Whereas in the opposite case, the stock price is undervalued and likely to go up. It is determined by a combination of ratios and financial statement analysis. Earnings per share: Ratio of company’s profit to number of outstanding shares, EPS is a measure of a company’s profitability. The higher the value, the better option the company is for investment. P/E Ratio: Calculated as market value per share divided by EPS, it is an indication of how much an investor is willing to pay to earn $1. A high P/E ratio usually means that investors are willing to pay more mainly because they are expecting growth in the company. Price to Book Value: This ratio gives an investor an idea whether the stock is rightly priced, i.e. if the stock is overpriced or underpriced. This measure is helpful in the case that if a company went bankrupt, the residual value shareholders get is its book value. So purchasing a stock that is overpriced is likely to incur you a loss in case of bankruptcy. Conclusion: Forces that influence the stock prices are uncountable and there is no way to be able to understand all of them at once. But there are some factors that can be kept in mind while choosing companies to invest in. Remember, it is considered a good practice to keep your investment diversified that is, not invest all your money in a single company or sector. So choose your companies wisely!