Market Indicators

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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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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Earnings Per Share or EPS is one of the most important indicators when it comes to measuring a company's profitability. Earnings per Share is calculated simply as a company's profit divided by their total outstanding shares. Thus, you can think of EPS as profit per share. You might be confused on how to use EPS when judging to buy a stock. Similar to any other indicator, you must use reference when evaluating a stock with an indicator. To analyze a stock using EPS, you must check whether its EPS is growing quarterly to see if the company is making more money. Different sectors of the market have different average EPS numbers. For example, if I was interested in purchasing Company A shares, I would need to weigh Company A's EPS against Company B and C's EPS which are in the same sector to figure out which company is making more money. If Company A has a higher EPS than Companies B and C and an EPS which is growing quarterly, it would be a good buy ONLY from looking at EPS. However, investing is not so one dimensional or simple as there are many other factors which affect a stock's performance. Conclusively, the higher the EPS, the better. 

 

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