Any trader or investor worth his salt knows that analyzing the value of a stock is essential to making good stock purchases. However, if you’re a beginner, an overload of information out there can make this process extremely complicated, and this complication can increase the fear of wanting to learn how to trade.

Thankfully, TradeHero is here to help! No matter which approach one chooses to use in analysis, all stocks possess certain inherent qualities and characteristics that give good indications of a company’s worth and value. The TradeHero app includes, in one stock page, some of these essential indicators to give you a quick and comprehensive overview of a stock.

In this tutorial, we explore these indicators, although the terminology and concepts used are, of course, universal. If you have downloaded TradeHero on your smartphone, use the application side by side with this tutorial to optimize your learning!

Market Cap

Market cap simply refers to the total value of a company’s outstanding shares, also known as a company’s ‘price tag’, or how much the market values the company.

It is calculated by multiplying the number of a company’s shares outstanding by the current market price per share.
Companies can be considered big or small cap, with small cap firms implying more risk and big cap firms implying more safety. However, this is not a hard and fast rule. History has shown that big cap firms (also called blue chip stocks) are not any less immune to economic turmoil than small cap firms!

In general,
Mega Cap — $200 billion and more
Big Cap — $10 billion and more
Mid Cap — $2 billion to $10 billion
Small Cap — $300 million to $2 billion
Micro Cap — $50 million to $300 million
Nano Cap – Under $50 million

These are approximate definitions and are not agreed upon everywhere, but are generally safe to follow.

Bid/Ask Price & Spread

Located underneath the stock price, you’ll find the bid/ask price and spread.
The bid price is the maximum price that buyers are willing to pay for a particular security. The ask price is the minimum price that sellers are willing to sell at for that same security. The bid/ask spread refers to the difference between these two prices. The spread can be considered big or small based on how much of your current stock the spread is a percentage of.

For example, security ABC trading at $10 with a bid/ask spread of $0.20 doesn’t have a smaller spread than security XYZ trading at $100 with a bid/ask spread of $0.40. This is because ABC’s spread is equivalent to 0.02%, while XYZ’s spread is 0.004% of their respective share prices.

What do the bid/ask price and spread tell us about a stock?

In general, a smaller spread indicates more liquidity of the stock, which just means that your stock is more easily converted to cash, and thus, is safer. Companies that are less liquid are more likely to be unable to pay you back in the case of sudden market turmoil.

Typically, big cap firms will have smaller spreads because they are traded more and are thus, more liquid, while small cap firms will have bigger spreads because of their relative size and relatively illiquidity.

Earnings per Share

Essentially, comparing the price of two different shares can be quite useless in trying to determine if a stock is a good buy or not. So many factors go into determining price that it becomes almost meaningless as an indicator. The same goes for total earnings, because the number of shares can also differ from company to company. A better option would be to look at earnings per share which calculates just how much profit trickles down to each outstanding share. It is calculated like this:

Net Income ÷ Outstanding shares

(There’s actually a little bit more to this, such as subtracting preferred shareholders dividends, but for now this will do.)

EPS tells you something about the profitability of the company, or how much earnings you would earn per share. However, you should always keep in mind that a high EPS doesn’t automatically mean it’s a great company.

A company that invested $100 equity to generate an EPS of 5 is much “better” than a company that invested $500 equity for the same EPS of 5. Their percentage returns are much greater. Still, EPS is rarely used in isolation. Its value can be determined as good or bad by corroborating it with operating cash flow per share data. It is also most importantly used to calculate P/E ratio.

P/E Ratio

P/E ratio stands for Price/Earnings ratio. It is calculated as the current share price divided by the latest reported earnings per share (EPS), usually for the past fiscal year. You can also view it as how much investors are willing to pay per dollar of earnings.

Thus, a security with a P/E ratio of, say, 17, indicates that investors are willing to pay $17 per dollar of that security’s earnings.

A reasonable range of P/E ratio usually changes with each industry. For example, 17 would be generally acceptable for the tech industry. The general sentiment stands that a higher P/E ratio indicates that investors are expecting higher earnings growth, while a lower P/E ratio suggests investors expect lower earnings. However, sometimes high P/E ratios also prompt some analysts to consider a stock overvalued or overpriced, while low P/E ratios are undervalued.

For example, at the moment, Apple’s P/E ratio is around 12.4, Microsoft at 13, while Google’s P/E ratio is at 30.9. Being from the same industry, some analysts have called Google out for being overpriced and overvalued, while others have simply continued with their optimistic outlook with regards to Google’s future.

Of course, P/E ratios shouldn’t be used alone if possible. Always try to compare it to the P/E ratios of other companies in the same industry, or even with the P/E ratio history of the same company.

Charts

On the stock page, you will see immediately a graph provided.

This graph charts the price levels over several different durations: 1 day, 5 days, 3 months, 6 months, 1 year, 2 years and 5 years. This caters to traders and investors of all types. Generally, if you see that price has on the whole been increasing incrementally over a longer duration (e.g. 1 year, 2 years, 5 years), it’s a good thing. It means that a company has been able to stably perform well financially, and provides some assurance that it’s likely to continue this trend.

Looking at charts for shorter durations (e.g. 1 day, 5 days) is more helpful for those of you looking to hold positions for shorter periods of time. Usually these traders (known as day or swing traders) are tracking price movements, trends and patterns in the short term to make profits off these trends. Because price is relatively more volatile on a day-to-day basis than over a longer term, day or swing trading will make you profit quickly, but also risk losses equally fast.

The 50-day MA (green) and 200-day MA (red) charts also provide useful information on price trends and movement. In general, whenever a shorter-duration MA converges with a longer-duration MA, it signals a change in the direction of price movement.

Other information we can look at is the trading range and the breadth to indicate the volatility of price. Trading range refers to the distance between the high and low prices, while breadth refers to the span of price movements representing the number of points of movement over time. Breadth must be considered relative to the price of the security that day, i.e. as a percentage.

For example, if the high and low price of security ABC in one session is $35 to $33, that is its trading range, while its breadth is 2 points. The greater the breadth, the more volatile the price, and thus, more risk but also more returns.

News

Lastly, TradeHero has included an RSS Feed of any current news regarding the stock you are viewing. Remember that news is as important as any technical analysis you do. Look out for announcements of any earning reports, or new product releases and so on. These could all indicate a rise or fall in price shares and whether or not you profit or lose.

Making Sense Of It All

There you have it! Some essential indicators to help you evaluate a stock. Remember that no single platform will be able to provide you with all the information you need to make a perfectly informed choice. For that, you have to continue to research from different kinds of sources. Nasdaq, for example, gives you a lot more figures and details from which you could learn more about a stock.

However, using TradeHero will help you get into the swing of things quickly, learning as you go, and on the move as well! Remember you can also add stocks to your Watchlist to keep an eye on them if you’re not yet ready to buy.

Happy trading!