Look at the company’s history and estimate its future
When valuing shares, you need to estimate the company’s future prospects by looking at various factors in and around the company. For example, future profit development is important to look a little more closely at. To be able to make an easier assessment of the company’s future profit development, you can check in which branch the company is located and if the industry is facing a change. How large the market share the company has and whether it is constantly taking market share from its competitors can also be important factors. One should also look at the share’s history in profitability. If the company has enjoyed steady profit growth and revenue growth, it is likely that it will continue to have high profitability. If the company has a high and stable return on equity, it may be a sign that it is a well-managed company. You can find this information easily accessible in the company’s annual report, which you can find most often directly on the company’s own website.
There are a number of stock strategies
There are many different strategies for selecting stocks for their savings. The strategies that are most popular vary from year to year and depending on the business cycle as different companies perform differently at different times. If you want to evaluate a share in depth, the result may differ depending on which method you use or who you ask. There are a number of methods for stock valuation and we intend to go through a few in brief.
The simple strategy: Companies you understand and believe in
One of the most common, and simplest, methods for finding worthwhile shares is to ask yourself whether you believe in the company or not. This can be done by, among other things, answering these questions:
- Do you think the company has a clear and good strategy?
- Does corporate management seem competent?
- Do you think that the business concept and management can lead the company forward and continue to take market share from its competitors and increase profitability every year?
- Does the company’s products seem to be popular?
If the answers are yes to these questions, it seems to be a company that you believe in and understand.
A popular strategy is to look at companies that have high or strong dividend payouts. It is difficult to predict future dividends, but it is easy to see how the company has distributed historically. If you use the dividend strategy, then you try to get as much dividend as you can. The dividends you receive can either be reinvested in different companies or used elsewhere. The underlying idea of stock dividends is that the profits that the companies make, and which do not need to be reinvested in the company’s operations, can be distributed to the shareholders. Generally speaking, it is mature and stable companies that distribute a lot of money and therefore the dividend strategy is often considered a defensive and cautious strategy because larger, stable companies are not associated with such great risk.
Another popular strategy is to buy companies that are growing rapidly, so-called growth companies. This strategy can be a little trickier as you try to predict a company’s future growth rate. On the other hand, it helps if you have some guidelines along the way. A growth company does not have to be small, but what characterizes a growth company is the opportunity to grow a lot for a long time to come. If a company is to grow a lot, it either has to act in a market that is growing strongly or be a small player with plenty of room to grow.
One strategy that has become very popular in recent years is the so-called value strategy. Value investing is based on the theory that if the price and value of a share are different things and they can therefore differ. The strategy is to buy shares that are traded at a low price in relation to the company’s actual value. Estimating the value of a company is difficult because it is about predicting the company’s future profit, and getting an exact value is in principle impossible. Instead, you make cautious assumptions and try to buy at a price that is slightly below what you believe the company is worth. This is called a safety margin and is used as a protection against errors in their assumptions about the company’s future development.