Buying Capital stock shares of ownership of a corporation can be a risky thing to do, even of you pick an old corporation that has a proved history of profits for as long as it has been in business. It is also important to determine what that particular corporation makes and subsequently sells to the consumer. The next consideration is what sector of the economy does the corporation do business within.
Is that corporation in the business to grow and sell food products? Does that corporation build and sell transportation vehicles? Is that corporation in the business of generating and/or selling energy to consumers? Does that corporation mine, process and sell natural resources, like metals or gems or crude oil? Does that corporation sell electric appliances and/or electronics for use within the home, ones mode of transportation or a business? Such a corporation can even be in the entertainment business and produce movies, TV programs and music media for sale to consumers. So too, a corporation can make machines and equipment for other businesses, to be used for the manufacture of finished products that are subsequently sold to final consumers. Last, but not least, does that corporation make medical supplies, drugs or is it in the business of transporting, people, goods and/or services to other places on Earth? Let us not forget about those who are in the business of building homes, factories and other special purpose buildings, roads or bridges.
In regard to the price per share of capital stock, the “price earnings ratio” is an important number. For example, if the price for a share of ownership is ten dollars and the corporation has sold one million shares of stock to the public the corporation now has received invested capital in the amount of ten million dollars. If that corporation earns a net profit after taxes of one million dollars for the reporting year then each share of stock produced a dollar for each ten dollars invested. That works out to a ten percent return on investment. Thus, that stock has a price to earnings ratio of ten to one, which is an excellent ratio and chances are that the price of the particular stock will increase as time passes. Naturally, the higher the “price earnings ratio” the less the stock is worth, in terms of future growth. I would not purchase a stock who “price earnings ratio” exceeds fifteen to one.
That is also an excellent tool to determine if a stock is, in fact, over priced in the marketplace. Within a modern society business conditions change rapidly, due to new product developments and the overall economic health of the country or countries that the corporation does business within. By using the above methods of stock selection you too might earn a whole lot of money just because the corporation whose shares you have purchased is now worth a whole lot more, in terms of its size and the increased net income that it earned in subsequent years.