There are four characteristics of stocks that investors may wish to consider when evaluating an opportunity.
Return, dividend yield, volatility, and price-to-earnings ratio are all important considerations when investing. These characteristics may be able to help determine whether an investment is helping the investor achieve their financial goals.
Return
Returns are the gains or losses on an investment over a specific length of time. Looking at a stock’s past performance may help investors determine whether the fund is trending upward or downward. However, understanding that past performance doesn’t guarantee future results is critical.
Dividend Yield
Dividends are attractive for a few reasons. First, some investors might appreciate steady, regular income (although dividends are not guaranteed). Dividends contribute to total returns, which may appeal to other investors. Additionally, dividends may help mitigate losses from a decline in stock price or offset volatility.
Dividends may also be a helpful indicator of a company’s financial health. Companies issue dividends based on their remaining free cash flow after covering all expenses. Companies that generate strong free cash flow may exhibit higher quality and lower valuations, potentially compelling characteristics for an investment.
Volatility
Volatility measures how much and how quickly a stock’s price moves over a specific period of time. Importantly, stocks with higher volatility are considered riskier than stocks with lower volatility. Furthermore, volatility may matter more for short-term investors who plan to sell an investment soon.
Price-to-Earnings Ratio
The price-to-earnings (P/E) ratio measures a stock’s share price relative to its earnings per share (EPS). It may help investors compare a company’s valuation against its historical performance, industry peers, or the overall market.
A high P/E ratio might mean that a company’s stock is overvalued or that high growth rates are already priced into the stock.
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