Do you want to make money in the stock market? Of course you do.
The best way to make money in the stock market is simple: buy low and sell high. Finding those low stocks to sell high is not quite as simple. Finding undervalued stocks takes time and research, and we’re here to show you how to do it.
Price To Earnings Ratio
This is one of the most fundamental numbers in stock research and for good reason. Identifying stocks with a low price to earnings ratio is essential for finding undervalued stocks, and in turn, making money.
Price to earnings ratio is the price of a stock relative to the profit it’s making. This ratio applies across the board, from small under the radar stocks, to major companies like Apple.
Once you find the price to earnings ratio, it’s important to compare it with the industry average. The S&P 500’s price to earnings ratio currently sits around 23-25, so stocks with a price to earnings ratio below 20 should be considered good stocks to look into.
This should be your first tool in finding undervalued stocks, but it’s important to continue research on stocks before investing. Some stocks with appealing price to earnings ratios can be misleading.
Cheap Stocks vs Undervalued Stocks
Just because a stock has a low price and high earning potential doesn’t necessarily make it an undervalued stock. Numbers can be misleading, and it’s important to identify the difference between and cheap stock and a good stock that will actually earn you money.
Sometimes, you can find cheap stocks that are also good stocks, and that’s when it’s a good time to jump on it.
For example, Banco Santander (NYSE:SAN) is a cheap stock, currently priced at under $7. When you look further into the stock, you’ll see that it’s actually a good stock as well. With a price to earnings ratio of only 13.5, this stock has huge earning potential.
Understand the Company
Investing in companies that you understand can greatly increase your earning potential. It’s easy to look at numbers and make blind decisions, but what do you really know about what the company does?
Warren Buffet employs this strategy, and recommend investing in industries that you’ve either worked in or have a significant knowledge of.
Research Different Types of Investments
While buying and selling stocks instantaneously (day trading) is exciting and can be very profitable, it’s also very dangerous. Undervalued stocks can be utilized profitably through several different methods.
In this trading futures article, they go through all the benefits of an often overlooked method of trading that can prove to be incredibly profitable.
What Does This Mean For Me?
There are plenty of resources for making money. Investing in stocks is just one of them. However, with the right knowledge and research, investing in undervalued stocks can be one of the best ways to make money on the side.
Looking for other ways to make money? We have plenty of resources for both business and consumers, right at your fingertips.