The Bull Hunters Guide

Hello fellow Bullhunters

Okay… so we have discussed how a corporation works.  We have taken a look at how to determine the value of a stock and if a stock is just a piece of paper.  We have even considered the components of the DJIA and how they cycle.  Now it is time to look at HOW we are going to make money on the stock market by weighing up growth as opposed to value of stocks.  More of The Bullhunters Guide to the US Stock Market.

The name of the game in investing is maximizing your returns.  Simply put, you want to buy stocks that are going to make you money.  There are two ways that this can be done - capital gains and dividends. 

We’ve already discussed dividends.  They are distributors of company earnings to shareholders on a per share basis.  But most of the 13,000 publicly traded stocks don’t pay any dividends at all - does this mean that they are worthless… of course not.

You realize capital gains when you sell a stock for more than you paid for it.  Gains in a stock that you have not yet sold are said to be unrealized capital gains.

Stocks go up because people want to buy them - it’s all about supply and demand.  People decide they want to buy a given stock because they think that it offers them a good chance of maximizing their future.  Institutional investors (banks, pension funds, etc.) who purchase the bulk of shares are looking further ahead - 5, 10 or even 20 years (or longer).  The question they ask themselves is At what rate will this stock grow its earnings into the future.  Once they answer that question they ask How much am I willing to pay today for those future earnings.

One way to evaluate a stock is by looking at its price-to-earnings ratio  (P/E ratio or just P/E).  A stock’s P/E ratio compares its current selling price to its earnings share (EPS)  If Wal-Mart’s most recent selling price were $48.32 and its most recent EPS number were $2.56, then its trailing P/E ratio would be $18.88 (48.32/2.56 = 18.88).  If Wal-Mart expected EPS of $2.80 next year, then its forward P/E ratio would be $17.26 (48.32/2.80 = 17.26).  Some people like to look at the trailing P/E because it is a historical fact and not a projection.  Others like to look at the forward P/E because what happened in the past is irrelevant - it’s the future that’s important.

Who’s good at maths because that was a lesson and a half.  Well Sean really worked on this and all the links go to his Stock Market Glossary of course so you can follow those in to see what they all mean just in case you are not quite clear on all the terminology.

It’s all a science that must be studied to know the ins and outs of the stock market and know what you are trading and how much you could potentially make.  So whether you think the trailing P/E ratio is the marker or the forward P/E ratio is the marker is entirely up to you.  As long as it follows your trading system is what is important.

To Your Success

Angela Recchia
Graduate Support
Universal Wealth Creation © 2004 - 2007

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This entry was posted on Friday, July 20th, 2007 at 3:54 pm and is filed under Bullhunter, Make Money, Stock Market, Trading System, Wealth, Wealth Creation. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.