How to Choose the Best Stock to Invest

Before you choose the best stocks to invest, there are several terms that you need to know. These are the common terms that you should know to be able to analyze company financial reports properly. There are total of basic 5 terms that you should understand, they are:

1.Earnings Per Share (EPS)
EPS is a ratio that measures the company's profitability. It measures by dividing net income to the amount of stocks held by the company owners, insiders, and also stock investors (the total amount of stocks is called outstanding shares). There are several interpretations on how to count EPS as some people have different perspective over the definition of net income and outstanding shares, therefore, there can be several types of EPS. However, this definition is the basic one.

2.Price/Earnings Ratio (P/E Ratio)
P/E ratio measures how much an investor is willing to pay per dollar of earnings. The basic way to count this is to measure the ratio of the company's share price to its EPS. The best stocks to invest usually have a higher P/E ratio than the average in the market. Like EPS, there are several types of P/E ratio as well, but the common ones are the trailing P/E calculated with the EPS from the last four quarters.

3.Price Earnings to Growth Ratio (PEG Ratio)
This ratio measures how cheap a stock is in the market. You count this ratio by dividing P/E Ratio with the projected year-to-year growth rate. The recommended value is lower than 1.

4.Return on Equity (ROE)
This ratio also measures how profitable a company is. You count this ratio by dividing a 12-months net income to its shareholder equity in book value. High ROE means the company has a lot of debts. However, you can't rely on ROE alone. You might end up burdening your portfolio with high-debts stocks.

5.Return on Assets (ROA)
This ratio is often called as ROI or Return on Investment because it measures how profitable a company is compared to its assets. It's measured by net income divided by the amount of total assets. The assets comprised of equity and debts, so higher ROA means lower debts.

By understanding these terms, you would learn how to analyze financial report pertaining stock investment and choose the best stock to invest. Like they say, it's best to arm yourself before going to war.