Chapter 13
Evaluating Stocks’ Prospects
IN THIS CHAPTER
Measuring the potential risk and return of a stock
Valuing a stock by using a discounted cash flow analysis
Determining the valuation of a stock, including price-to-earnings ratios
Using online stock selection tools to study investments
Comparing a company to its peers and industry
When investors say they bought a stock because “it’s a good company,” you should automatically become skeptical. As you find out in this chapter, one of the biggest mistakes investors make is confusing a company and its stock. They’re not the same thing.
A company is a business that sells things to customers and tries to make a profit. A company’s success is measured by its revenue and earnings growth, which I discuss in Chapter 11. But a stock is a different animal. Stocks are essentially pieces of ownership in a company. Stock prices are determined by how much investors are willing to pay to own a piece of a company. If too many people think a company ...
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