For the last two or three months we have been talking in some detail about how to analyze the company by its various indicators – multipliers.
And it is really important, but in order to delve into these difficult matters with knowledge, an investor should initially gather as much information about the securities traded in the market as possible.
Today, what you need to know about stocks before you start investing…
in them.
Here are five main parameters to be guided when choosing shares.
- How much is the company
First of all, the interesting question is, how much does the whole company cost?
For example, Amazon and Apple are valued at $1 trillion by the market. This is called market capitalization (Market capitalization).
Market capitalization is calculated as a product of the market price of a share by the number of shares in circulation. By market value criterion, any company can be classified as having a large, medium or small capitalization. In the USA there is even such an index of small capitalization companies as Russell 2000.
Large capitalization companies are regarded by investors as a more reliable investment target than small companies. At the same time, despite the higher investment risk, small companies on average outperform large companies in terms of long-term market value growth.
- How many shares are traded on the stock exchange
The second thing to pay attention to is the number of shares in circulation (Shares outstanding), i.e., the total number of outstanding shares,
except for all shares purchased by the company itself and held in its treasury.
TREASURY – A FINANCIAL OR BANKING INSTITUTION THAT CONTROLS YOUR ASSETS,
INVESTMENTS AND ANY FUNDS RAISED
- How many shares are in free circulation
Number of shares in free float. This is the number of shares held by shareholders, except for the shares of company directors.
and owners of 5% or more. In many small companies where management holds a large share of capital, the number of free float shares is as important as the daily trading volume of that company’s shares. If this number is small, then the trading volume may be small, so those wishing to buy or sell shares may have a strong impact on the market price. - How many trades are made on shares during the daytime
An important indicator of share liquidity is the daily trading volume. It is especially important for institutional investors who need to acquire large blocks of shares. It can also serve as an indicator of price risk. If the trading volume is not high and the investor wants to buy or sell a large block of shares, he or she will either have to deal in small blocks of shares for a certain period of time, or take a significant risk of rising or falling share prices.
As the need to buy or sell the stake in a short period of time may arise quite unexpectedly,
share liquidity, expressed in trading volume, is useful for determining price risk.
- Date and coefficient of the last split
Finally, the last split date and the last split factor, which indicate when and in what proportion the last split of the stock took place. Typically, a company that is interested in attracting private investors will try to keep its shares within the price range available to them. If the company is successful and the share price rises, then the split can make the share price more accessible to private investors.
What else?
It is also useful to know if there are institutional investors and insiders among shareholders…
As the company develops and grows in popularity, the number of institutional investors is constantly growing. It is believed that the optimal share of institutional investors in the share capital should range from 5% to 20%. This indicates confidence in the company on the market.
If the share of such investors is more than 65% and the company faces some troubles, the quotations can be strongly affected by a massive dumping of institutional investors’ shares.
The presence of insiders – persons who have important corporate information and have a significant share in the company’s capital is also a good sign. This means that the objectives of ordinary shareholders and the company’s management are the same. However, when insiders own a significant shareholding, they can ignore the interests of small shareholders. This is most noticeable in companies with different types of shares, when insiders or management are able to make key decisions on various issues of the company’s activities on their own. In this case, other shareholders have little influence on corporate policy development and decision making.