Understanding Stock Data.

Determining whether a stock is a good buy or not has very little little to do with whether its trading at a lower price than it used to.Stock investors need to look at and consider a wide number of elements in determining whether a stock is undervalued or overvalued. This is exactly what creates a market in the first place. Some investors believe a stock is undervalued while some investors believe a particular stock is overvalued at the same time.

Most investors follow one of two different philosophies when it comes to investing: growth or value. Growth investors buy stocks with superior earnings growth. Value investors buy stocks whose prices are down relative to earnings and other information.

Value Investing.

To determine whether a stock is undervlued, you want to look at a stock' price in relation in relation to earnings per share, dividends, and book value which is the company's assets minus its liabilities.

The most commonly used measure is a stock's price/earnigns ratio which is the price of the stock divided by the company's per share earnigns. P/E's have wide ranges for different industries. banking and utility stocks can have very low single digit P/E ratios while the P/E ratios of biotechnology companies can be 50 times or more. The higher the P/E , the more an investor is paying for a company's earnings stream.

Value investors also look at a company's price-to-book ratio which is a stock's price divided by the company's per share book value. This figure tells the investor whether the stock is cheap or not. As with P/E'S , the lower the price-tobook ratio the better for the value investor.

But remember, what is considered cheap in one industry may be an expensive stock in another industry. An internet company typically has a very high price-to-book ratio as its major expertise is non-tangible assets and not machinery. Therefore, it can easily sell for for more than seven times book value. However, a capital-intensive steel company may sell at three times book value and still be expensive.

Value investors also look at the dividend yield which is the annual dividend as a percentage of the stock's price. Value investors risk that a dividentd could be cut. But cash flow must also be monitored which would show if more money is coming int othe company than leaving the company. another measure is the payout ratio which shows how much of a company's profits are going to shareholders.

Growth Investing.

Growth investors typically look for companies that exhibit intensive growth i nsales and earnings. A growth investor will have a tendency to always look for continuing growth. This investment philiophy says the best way to double your money every five years is to invest in fast growing companies. But sales growth must also be translated into earnings which creates growth in earnigns per share as well.