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Lesson 12. Evaluating Stocks - Pg. 66

66 Chapter 12. Evaluating Stocks In this lesson you will learn the mathematical formulas necessary to effectively evaluate and re- search your stock's performance and what they measure and mean. The Dreaded Math Part Made Easy Stocks are financial instruments, and financial instruments are measured numerically. At some point, then, your stock selection is going to have to include math if it is to be a sound investment choice. Most financial documents regarding stock are packed with ratios and equations. This, in addition to all the fine print with such comments as "These securities have not been approved by the SEC" is enough to frighten the most stout-hearted investors into running back to their mattresses to hide their money. Here's the catch: You don't need to understand most of those figures in order to get a good idea of how good a stock is. Highly technical statistical information is available should you need or want to see it, but getting quite so much information on a stock is probably overkill for the average investor. Tip Analyze the past performance and project the future performance of stocks that interest you by using statistics and formulas. Think of analyzing a stock as betting on a baseball game. You could just pick your favorite team, but it would probably be a better bet if you knew how your team (stock) had done in its last game against the same team. It would be an even better bet if you knew how your team had played the whole season leading up to that game. You could learn who is playing on the team (the fund man- agers), what the weather's going to be like (market conditions), and who has the home field ad- vantage (how the stock performed in this type of market before). At some point, however, the sheer amount of numerical information, from comparative batting averages of individual team members to the laws of probability, would become unmanageable for anyone save maybe a statistician or bookie. Stock is no different. You will need to at least become familiar with the following indicators of stock health, but information above and beyond this probably isn't necessary to an individual investor: · · · · · · Price/earnings ratio Earnings per share Current/dividend yield Current and debt ratios Book value Credit ratings