Little Black Book

Here’s three things to review when choosing to invest in a stock.

First of all, what is a share? What are you paying for, and what are you getting in return when purchasing a “stock”? How does one determine which stocks to invest in?

When one buys a company’s stock, they actually become a part owner of the company. The “share” or “stock” is called such because all share-holders are investing their money to buy a piece of ownership in the company; and in return believe that the company will use the invested money effectively to perform well in it’s particular industry. Depending on how a company allocates the money brought in by investors, and many other variables, the company’s value will either increase or decrease. As a company’s value increases or decreases, so will the value of its shares. As a stock appreciates in value, one can choose to sell their stock for a profit (known as stock appreciation). A second way to profit from investing in a stock is the issuance of dividends. Dividends are simply the sharing of profits by a company to its investors.

With that being said, there are a few key things to look at when choosing a stock to invest in.

1. Performance history of the stock

With today’s technology, information on every publicly traded company is readily available. There are years of information on stocks traded today which will help in deciding which are good investments and those which are not. Looking at a stocks trading price over time can be indicative of its future performance, especially when compared to the market overall.

2. Stock volatility

For example, if a particular stock has consistently outperformed the market by decreasing less than, or even increasing, when the market average price is decreasing, odds are that the stock will continue to outperform the market in the future. The measure of how drastically a stock’s price changes up or down, especially when compared to the market as a whole, is known as volatility. A safer investment is in a stock with less volatility.

3. P/E ratios

The standard measurement of a stocks value is the P/E ratio, which stands for price to earnings. To calculate this ratio, one must take the price of the stock and divide it by the company’s annual net income. For example, a company with a stock price of $100 and net income per share of $5 will have a P/E ratio of $20; which is the recent average market P/E of United States stocks and slightly higher than the long-term average of Australian stocks.

Typically, stocks with a higher P/E ratio than the market average are considered expensive, while the stocks with a lower ratio are considered cheap. Either type can be considered a “good investment”, depending on how a person prefers to invest. The stocks considered expensive could be a company with a high stock price and low earnings, but may be growing very rapidly and will be increasing in value in the future. Conversely, a stock that may appear cheap because of a lower price or higher earnings per share could appear as such because many believe that a company’s future earnings will be less than they presently are; making what appears to be a good investment what is known as a value trap.

The cardinal rule for investing is to make the best decision with the information one has at the time. Through stock information now available online and the use of financial ratios, especially the P/E ratio, everyone is capable of investing intelligently in today’s markets.

 10thousandgirl would like to thank Aaron Cunningham, for writing this article.

10thousandgirl Planner_Neelan Sornalingam

Name: Neelan Sornalingam
Organisation: Sense to Dollars
Service: Financial Planner
Specialties: financial planning, life planning
Area serviced: Sydney, NSW

Phone: 0420 940 805
Address: Level 4 / 175 Macquarie Street, Sydney NSW 2000

A personal note: Sense To Dollars is a Financial Life Planning practice designed to help individuals or couples achieve their life and financial goals while building wealth to ensure financial security in your later years. I act as a financial educator, coach; accountability coach and adviser to ensure you are living out your ideal life. A life that is richly and completely yours.

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Claire Carton

Name: Claire Carton, Partner

Organisation: Griffin Legal

Area serviced: Canberra, ACT

Service: Conveyancing, estate planning


Name: Megan Hodge, Associate Financial Strategist

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Area serviced: Canberra, ACT, Melbourne, VIC

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Organisation: Fife Financial Services

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Service: Financial planning, Mortgage broking


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Biography: Karen Tromp is a Chartered Accountant and Partner at Roberts & Morrow who enjoys proactive engagement with clients to help them to achieve their wealth and business goals. Karen joined Roberts & Morrow (as a mother of 2) in the position of Admin Assistant, attained her CA qualification 11 years later, and partnership in 2004. Being an accountant is all about people-helping them to achieve their goals and solve problems. As a member of Zonta for 8 years, she s passionate about advancing the status of women worldwide through service and advocacy.

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Personal Note: What are the best financial words of wisdom you’ve been given?

“If you pay peanuts, you get monkeys”

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Organisation: Forsyths

Service: Accountants and Financial Advisers

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Area Serviced: Armidale, NSW

Biography: Kylie Alcorn is an economist and a licensed financial adviser with Forsyths. With over 23 years experience in the investment, superannuation and financial services industry, Kylie has a passion for informed decision-making via education.

Phone: (02) 6773 8400

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Biography: Fiona Miron is a solicitor with over 15 years experience in property and insurance law in the ACT and NSW. Fiona graduated with Honours from the ANU in 1996 and also holds a post-graduate qualification in arbitration. Fiona has extensive experience in property, leasing and estate matters, and insurance law. She is actively involved in the New England community and enjoys netball and gardening outside of work.

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Organisation: Roan Financial Group Pty Ltd

Service: Financial Planning

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Area Serviced: Orange, NSW

Biography: Joanne Stephens as an authorised representative with Roan Financial Group specialising in the major facets of financial planning and in particular the protection and well being of women in the workforce as they develop their career, their families and their wealth.

Joanne has completed her Diploma of Financial Services and is completing a Graduate Certificate of Commerce (Financial Planning) at UWS leading to a Masters Degree. Once completed this will allow her to embark on the pathway to holding the Certified Financial Planner® designation.

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Physical Address: Level 1 Suite 2, 179a Anson Street, Orange, 2800

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Area Serviced: Newcastle and the Hunter, NSW

Biography: Leah Jay has been a leader in Property Management since 1994. During this time they have not only maximised their owners investments but provided career paths to the many female employees over the past 17 years. Since commencing operations Leah Jay has received the REI NSW Award for Excellence in Property Management on four occasions, making them the most awarded Property Managers in NSW. The success stems from real passion, dedication and knowledge to the industry and continually striving to find innovative ways to deliver the highest level of service.

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Physical Address: Suite 1, 74-84 Tudor St, Hamilton, 2303

Personal Note: Leah Jay has recently launched a new website which provides useful information about leasing, owning and buying an investment property. It also features another industry first with a search by map facility for tenants, as well as latest news items. All of which keep you update to with Leah Jay, legislative changes/requirements and the industry in general.


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