The Price Book ratio, P/B ratio, is one of the most sought-after indicators when it comes to value investing. It is calculated as the Price of a stock divided by the Book value per Share. Book value is one of the most conservative measures of a company's value. It is calculated through the balance sheet as the company's assets are tallied minus their depreciation rate (approximated). The next calculation involves dividing the total book value by the total number of shares giving you book value per share. Finally, the price of the stock is divided by the book value per share giving you a ratio. Understanding the ratio is pretty intuitive to understand. If the ratio is greater than 1, the indicator is predicting that the stock is overvalued. Additionally, if it is less than 1, the indicator's prediction is that the stock is overvalued. However, things get more complicated as you compare in between sectors. You can find the stock with the most potential in a certain sector by finding the stock with the lowest P/B ratio. Warning: do not only use this as an indicator when deciding to purchase a stock. 

 

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The SMA (Simple Moving Average) is a very "simple" technical indicator which is used extensively by all traders. SMA is used to predict upward or downward trends. To make a SMA, you must define the number of days prior you want it to track. The larger this number, the less sensitive the SMA is to price movements and the more accurate it will be in predicting long-term price actions. This is because the SMA is an average calculated as the sum of a stock's closing prices for x number of days (which you define) divided by x. Whenever the current day closes, the SMA drops your closing price (x days ago) and adds the contemporary closing price. Therefore, the SMA is constantly changing. Now back to analyzing trends. The general rule is that when a stock is riding above its SMA, it is experiencing an uptrend. Take, for example, Apple on this 5-year chart:

You can see how Apple continues to do well when its stock stays above its 190-day SMA. Many times, a SMA can act a support to a stock. For example, around July 2016 Apple barely fell below the SMA yet rebounded back up. This is why you must wait for a confirmation to sell the stock if you believe it will take a down-trend. Selling too early will cost you gains as it did to those who sold it in July 2016. Normally, this means watching the stock continue to fall below the SMA for a couple more weeks and then sell. The same logic also applies for a downtrend. If a stock is tailing under its SMA, it is experiencing a downtrend. Now, for example, look at this chart of Sears:

Indicators are not the end all be all of investing. No indicator is foolproof and all one does is give you better judgement on a stock. Keeping that in mind, understand that you must use the SMA in conjunction with research of the stock to better predict its movement. A stock can not only be measured by numbers. Take, for example, Elon Musk's tweets. :).  To summarize, the SMA is a handy tool for predicting trends and for acting as support for a stock. 

 

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What are pump and dump schemes?:

Well, for starters, they're illegal. The SEC formally defines them as schemes involving "the touting of a company’s stock (typically small, so-called 'microcap' companies) through false and misleading statements to the marketplace." Realistically, the schemes are done through marketing on social media sites by spreading false information about a stock. For example, you might see multiple messages on various media sites claiming a certain stock is excellent and a great buy (Keep in mind, people are hired to do this). As the SEC mentioned, these stocks are typically low cap stocks since larger companies such as Microsoft or Apple are fact-checkable. This is the "pump" period of the pump and dump. Those promoting this stock buy the stock earlier and see the price jump as many buyers enter the market fooled by their marketing. Cleverly, many scammers use this uptrend to promote the stock even further. Now for the "dump." Once the stock hits record highs, the masterminds behind the sham sell their shares for much higher than they purchased. Soon follows the madness; before everyone realized the stock is artificially pumped, it's too late. The stock immediately plunges which means huge losses for those who bought it for a high. How is this illegal you might be wondering? It might seem as though if you get duped, you deserve too. Well, the only problem is that some people might invest their life savings into the buy (I know this isn't a smart thing to do) and completely lose it all. Not to mention, the scheme when thought about as people manipulating a financial asset's price sounds clearly illegal. That's the basic run-down of a stock pump and pump.

Example of a pump and dump: 

 

A clear case of a pump and dump is LEXG who spent 3.3 million dollars on a marketing plan which boosted its stock price from 10 cents to 9 dollars. Despite the company having no cash and no real profit, the scheme placed to stock's market cap near 500 million dollars. Just a fun fact. 

How to avoid a pump and dump:

Avoiding these is the not the most difficult task yet a task nonetheless. First of all, never listen to incredible stock advice. For example, spammed comments on social media. Always do your research first and never be easily swayed by a pick recommendation. Fake news also included sensationalist news provided by shady stock pickers online. Many read articles along the lines of "How a new company is breaking into this 8 trillion dollar industry." Very misleading and also very fake. Just avoid anything that isn't backed by credible sources.

 

The first thing a teen must come to terms with before getting into the stock market is understanding that the Market is a risky place and serious business. Some lose much of their savings due to a lack of knowledge of the Market. Most youngsters, from my personal experience (and I'm sure statistically) are very oblivious about the stock market. Therefore, I recommend teens first learn the basics about the market. This can be as simple as reading market news regularly, managing simulator portfolios or even investing low capital in the market. Yes, yes, I know - some of your parents won't let you open a custodial account or manage their accounts. Do not get discouraged, you will be 18 years old in no time. Meanwhile, familiarize yourself with the Market by investing paper money on simulators. I also recommend competitions such as the Stock Market Game and the KWHS investment challenge to compete and fully test your trading skills. I have done these competitions personally and although they placed an extra workload during my junior year, it was very exciting to work on these projects. Therefore, I highly recommend them to you too. To summarize, before investing real money, try and get an overall understanding of the Stock Market. If you are wondering where to start, you can begin with learnings market indicators and how they affect a stock price. You can find info about them on Articles >> Market Indicators.

 

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To fundamentally understand Price Earnings Ratio, you must understand Earnings Per Share (First read PES article). The formula for the Price Earnings Ratio, more commonly referred to as P/E ratio is the current price of the stock divided by its Earnings Per Share. It is more intuitive to think of it as a company's profit related to its current price. Therefore, using P/E you can tell if a company is overvalued or undervalued in its sector based on its P/E numbers. For example, If you are interested in the Steel sector and are confused whether to purchase Company A or Company B, you can compare their P/E numbers. The lower the P/E, the better the buy. This is due to the company being undervalued due to its stock price being lower in reference to its profit per share implying it is more probable to grow. Think about it for a while. You'll get it. A more advanced way to use P/E for investing would be to analyze a certain company's P/E trend over a period of time. Many times, companies can fluctuate from undervalued to overvalued so checking their P/E can be an indicator for when to buy the stock. These are the basics of P/E which is generally seen as an overall indicator of stocks potential for growth.  

 

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