Dont Fall Into This Trap When Investing Into Stocks
Posted on May 31, 2010
Filed Under Personal Finance | Leave a Comment
Buying and holding stocks over the long term can be a great way to grow your wealth over the long term. This is especially true if the stock pays out a healthy dividend and has great fundamentals. Unfortunately a few investors make a big mistake.
Some people will find a list of dividend paying stocks and then start buying with both hands. While dividend investing can be a great way to make some additional cash flow off of an investment that you are holding, just because a stock does offer it does not mean it is a good investment.
Some dividend stocks are very bad companies and should be avoided even with the extra cash flow. So, what can you do to get around this?
Well basically you should check the fundamentals of the company. Conducting analysis on the Fundamentals consists of looking at different indicators that track to see how strong the company is and if their stock is undervalued or overvalued.
For example the PE ratio looks at two things, the earnings of the company and the price of the stock. If the stock trades at $40 and the company has an earnings per share of $8 that means the PE ratio would be 5. This ratio could then be compared with other companies in the same industry group to see if the stock is overpriced or underpriced.
The PE ratio is of course just one way of telling how strong a company is. Professional investors will look at a few different indicators before they make their final decision.
You can also use common sense here, big companies like Pepsi that actually have something backing them are likely to outlast a small internet business with no real ideas on how they will expand. So, use some common sense here and think about how strong the company is and how likely it is to last.
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