Understand Fundamentals of Stocks – Investment Strategy and Analysis of Shares

Share market or stock market is one of the hot chicks for many of us. People use to be very excited when they trade in market and get profits. But few are there who go with some rumors and suffer losses. There are few terminologies being described which will help investors out in understanding the fundamentals of a company and its stocks. Only thing anybody needs to have the Balance Sheet, P&L Account of last 2-3 years.

Two major factors to understand are:

1. EPS – Earning Per Share: It is nothing but termed as earning per share which means how much a company is earning on per share with the total shares outstanding (share capital). It can be calculated by net earnings per financial year or per quarter of the company and dividing it by the total outstanding shares (share capital).

EPS = Net Earnings / Outstanding Shares

There are three types of EPS which can be looked upon:

Trailing EPS – Last 12 months EPS.
Current EPS – Current EPS means EPS came from current financial result.
Forward EPS – Forward EPS which is going to reflect by next financial year end.

2. PE ratio – Price to Earnings Ratio:It is one of the most important thing to calculate and take into consideration. Every trader or investor should keep watch on this ratio.It tells investor whether the stock’s valuation is high or low compared to its estimated earnings.

Low P/E ratio is a good sign for a investor to invest in that stock, however P/E ratio doesn’t tell the whole in and out of the company.

P/E ratios should always be compared of one company to other companies in the same sector/industry, it will give basic idea of valuation of the share.