Sunday, August 14, 2011

How to find the "most valuable" stock?

How to find the "most valuable" stock?

To answer this question, we must know the nature of stock, find out what stock is?

Stock are shares of the company. When we buying a stock, we bought the shares of the company & share of the company to do business. In other words, we would like be one of the owner, so we become shareholder.

That being the case, we must ask: What is the purpose of doing business?

The answer is: making money.

The more money the company made, the higher value of its shares.

So, if the number of similar stock price, then, obviously, the most worthy of the highest net profit per share to buy.

Usually we are depends on the price-earnings ratio (PE Ratio) as a standard.

Assuming the price of three stocks are RM2, their net income per share were 15 cents, 20 cents and 30 cents, the price-earnings ratio would be 13,10 and 6 times respectively. If other conditions are the same, then you should purchase the stock which having price to earning ratio 6 times.

As doing business, all of us want to get an annual bonus, which is the dividend.

If three of the stock price is RM2, they distribute dividends of 5 cents, 10 and 20 cents respectively, then the dividend yield (Dividend Yield) were 2.5%, 5% and 7.5%.

It definitely better than fixed deposit

So, you should buy dividend yield of 7.5% of the shares.

Because the 7.5% dividend returns are 2X higher compare bank deposit interest rates.
You can put your investment as time deposits, so that you can be assured long-term investment.

We invest in a company, hoping the company a solid foundation to stand the test of economic turmoil.

Therefore, it is best to buy tangible assets value higher than the price of the stock.

Usually we are price and net tangible assets per share ratio of the standard, if the ratio is less than twice, we may said the stock is undervalued, you can buy.

For example, price of RM2 per share, net tangible assets of RM2.80, the price / asset ratio of 2 ÷ 2.8 = 0.71, less than 1, which means you buy RM2 to RM2.8 assets, worth the investment.

In addition to compare price-earnings ratio, dividend yield and net tangible asset value per share, the best even compared with other factors, such as the financial situation of the three companies over the years of track record, business stability, and select the most advantages company (leader), then buying its shares.

Able to do this, you will be repeated win in the stock market & create wealth.

Source: 台湾著名经济学家高希均教授,著作《经济学的世界》


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