How to Understand Stock Data

Check the company profile and learn what the company does. In some economy's or political administrations, some types of companies don't do well. Today, housing would be a bad choice, whereas at the height of the Bush administration, companies who dealt with stem cell research wouldn't go far. Pull up the company's financial data. Here are some important terms to remember:
DTI or Debt To Income: This is a percentage that tells you how much debt a company has compared to how much money it makes. A high DTI could mean that the company is overextended in credit, and cash on hand is low. In a pinch, this company would be hard pressed to pay back a debt, and if it had to file Chapter 11, the debtors get paid back first. As a stock holder (an equity instrument, not a debt) you might get lucky and get some money back, but don't hold your breath.

P/E or Price to Earnings: This tells you how much the company is valued at. You take all the shares of stock outstanding (issued) and multiply it by the current stock price. Then you divide the annual earnings by this number and you are given a percentage. So for arguments sake we'll say the stock has a P/E of 9. This means that it's fiscally worth 9 times the amount of money it earns. A P/E that's really high (typically too much more than 10) might mean that the company is over valued, and the price could drop suddenly. A low P/E might make it undervalued, and a "bargain", but only if the other financial data support that. If it has a low P/E and has twice as much debt as income, well that's no bargain I want.

Beta: This is a good one, it's not the fish you get in the little glass bowls at the pet store. In the most basic of terms, it is a measure of risk / return compared to the entire market. I say risk / return because in investing the two go hand in hand. If the beta is a 0 that means the stock does whatever it wants on a whim. If the beta is a positive number, that means it tends to move the same way the market does, if its negative, it goes the opposite way the market goes.

Look at the experts. One of the major reasons I like MSN Money is because they show you not only what analyst think (and they get paid to think about this stuff and nothing else, consequently they are probably a gas at a party), but also what "insiders" have done recently. Whenever a person of authority in a publicly traded company makes a significant trade of their own company's stock, they have to report it. They are not supposed to make any trades using knowledge that isn't available to the general investing public, but seriously, if I see half the officers of a company dump tons of shares of their own stock, I'm going to think they know something I don't.

Lastly, I like to look at their financial reports, another summarized tab in MSN Money, and see if they've had a positive and consistent growth of revenue and earnings per share. If the revenue spikes on year or one quarter way above what it usually is, then they probably sold an asset or had a good quarter and that's ok, but if it goes up and down like a see saw then I begin to wonder what they are doing with their sales or their assets. I begin to question the ability of their management to be consistent. Same thing with going down. A spike (or dip, call it what you want accounting professors) could just mean they paid off a large debt (an in depth look at their financial statements would show this as a debit to cash on hand or revenue and a credit to their debt, which is backwards I know but that's GAAP for you). I also love me some dividend paying stocks. You can reinvest them or take them as income and pay an amazing amount of taxes on them.

Buy it! Or sell it if you already own it and don't like what you saw. There are tons of good sites out there to invest with, but my favorite is Sharebuilder. They only charge $4.00 to set up an automatic trade and they have some great tools for gains and loss tracking. Plus they are now owned by ING and that's a well known name in banking.