| For many people, finding undervalued stocks is the | | | | complete opposite effect. So many would buy the |
| holy grail of stock picking. I have to admit that I'm | | | | shares based on the price to earning ratio that an |
| one of these people as there's nothing more | | | | undervalued stock would suddenly become an over |
| satisfying than finding a bargain in the stock market. I | | | | inflated stock. That is of course the road to ruin! |
| find that it is more of a rush to find an undervalued | | | | Another item I look at is if the company has a long |
| stock than it is to watch my current holdings go in | | | | history of paying dividends to it's investors. If the |
| value. That's purely because I know the price will | | | | initial price to earning ratio is low and the company |
| always fluctuate whereas if I've made a good | | | | does pay dividends it can be seen as confirmation |
| investment I can keep it long-term safe in the | | | | that the accounts are in a healthy state. If they can |
| knowledge that if it doesn't go up in price | | | | afford to pay out dividends each year then the |
| immediately over the long-term it will rise. | | | | company must be making a profit. On the other hand |
| So how would you go about finding an undervalued | | | | sometimes companies don't pay dividends because |
| stock? Well that's a topic which is always up for | | | | they reinvest all the profits back into the company. |
| debate. I have my way of doing things that I've | | | | So in some cases this can be misleading. It's always |
| learned from my peers and through painful | | | | worthwhile getting a copy of the annual reports to |
| experience! I've gotten a few wrong, believe me. I | | | | find out if this is the case. I always make sure to |
| usually start with the price to earnings ration which is | | | | notify my broker that I want to reinvest any |
| often listed as P/E. So if you've always wondered | | | | dividends in much the same way. That way I end up |
| what that term meant its nothing more than the | | | | owning more and more of the company as it silently |
| companies earnings divided by the share price. I use it | | | | works away in the background. |
| as a quick indicator of stocks that might justify | | | | In conclusion, start with the price to earning ratio to |
| further investigation. It's not the only thing I look at | | | | filter out potential investments. From there, look into |
| because lets face it if it was that easy there would | | | | the companies annual reports to find out if they are |
| be a few more stock market millionaires than we | | | | in a healthy state as the last thing anyone wants to |
| have at the moment. Perhaps it would have the | | | | do is risk their money. |