Everyone has invested in some particular area or another during their respective lifetime. Whether it be utilizing the steady force of mutual funds, becoming risky with foreign exchange, or investing in the money market, each of these transactions are all in hope of obtaining assets to earn more capital in the long run. Unequivocally, the most popular form of investing can be attributed to the powerful forces of the stock market. Trading from 9:30 every morning to the early hour of 4:00 in the afternoon, millions of trades go through each day with the same goal of making money in the back of every trader s mind. Unfortunately, most of these traders are going to feel defeat after investing

in a few stocks. Possibly, the economy was unfavorable during that session or the respective investor declined to do his or her homework when looking at the fundamentals or technical side of his or her handpicked equity. Nevertheless, I have complied three of the most important factors when deciding to invest in the stock market that all investors, expert or not, must follow when investing (not speculating).

Probably the most important indicator of any stock can be attributed to a company s P/E ratio. Formally known as the Price to Earning indicator, where the current share price of a particular stock is divided by its yearly earning per share (EPS), the P/E ratio can be a magnificent tool when deciding

if a stock is over or undervalued. While the process can be hard to find an exact ratio which fits the perfect formula of an undervalued equity, the procedure does become much easier when using this ratio to compare company s of the same industry. Take for example the jeweler sector where companies such as Zale s and Tiffany s hold some supremacy over the other companies. Currently Tiffany has, according to Yahoo Finance, a P/E ratio of about 22 when Zale s can be calculated to near 30. While the difference may not seem of great margin, to earn the best for your dollar every point does matter. Of course an investor should look at other indicators such as growing margins or technical trends, but looking strictly at the P/E ratio, Tiffany would be winning the first factor to strong capital gains. Expanding on such an issue, I would also advise for long term investors to never buy shares from a company who reports negative earnings which contributes to no P/E ratio. Such companies are for speculators and are too risky for the smart long term investor.

The next indicator to heed would be the economic situation playing out not only in America but throughout the world. For such exercise, you might need to refresh, not only your macroeconomic theories learned years prior, but what exactly the company you are dealing with does. In order to make a decision

based on the economy at the time, understanding what the company produces and how its produces it can be vital to growing your capital. While such analysis and learning of monetary policy, the interest rates, and consumer sentiment may become tiresome, almost all of these indicators will not only have a dramatic affect upon the market, but more specifically your portfolio. Take for example the jeweler I mentioned in reference to Zale s. Looking at its trends over its existence, it can be noted, during times of economic growth, Zale s has preformed fairly well in terms of an increasing share price. However, during times of recession such as experienced during the early part of this century, the share price of Zale s did not continue such optimistic growth and actually declined nearly 25% from 2000 to 2003. Why such a change for this company? Take for example the current economic situation. The unemployment rate, currently at 4.4%, remains at one of the lowest numbers of all time. What that means for shareholders of Zale s can be examined by the consumers who are obtaining these jobs. As the labor force increases, more consumers are going to be granted employment which will result in a higher overall domestic income for America. Since most Americans utilize a process of a negative savings rate, there is a good chance, relative to most years, consumption of luxury goods such as jewelry will increase in large margins especially during this holiday season. What that means is that margins will dramatically increase in the short run for the next few quarters, and if you are to buy shares of this stock now and sell it before the March earning results poor in, you should see a healthy profit in your portfolio. With that in mind, it is imperative to understand the differences of how a stock reacts during certain economic conditions because blindly investing in a company can be a strong calling to want to lose money.

The last resource I utilize to pick out stocks would be looking at the margins a company has. As this type of indicator accompanies the P/E ratio factor,

such analysis of understanding if a company is growing or not should be extremely important if you plan to invest for the long term. If you see that a company is not producing the proper fundamentals in terms of margin growth relative to revenue and operating income, it becomes terribly hard for me to recommend such a company to invest in. Again using the company Zale s as our example, I examined how this company has grown over the past three years. Regarding revenue, while Zale s did grow year to year from 2004 to 2005, the increase was marginal especially when juxtaposed to the loss of revenue growth that this company incurred from 2005 to 2006. A lot of that can be attributed to the disgusting marginal decline of nearly 60% in terms of operating income from that same duration. What that means is that the company has reached its full potential in achieving economics of scale, has lost a fair market share to competitors, such as Tiffany s, or has been taken over by a poor management team running the company. Whatever the case, the numbers for the company, year after year, do not lie, and such evidence provides a less than appealing pursuance of purchasing shares for Zale Corporation.

Thus, using Zale s as my example throughout this process of understanding its P/E ratio, what the company actually does relative to its economic situation, and its growth

year after year, I would label such a stock as a sell for investors. While the process of going through these motions may not sound appealing and scrape off the fun of investing, it is important to remember that you are putting real money into these companies, and by following these steps you absolutely increase your chances of being returned with a nice capital gain.

Dennis Biray presents advice on all kinds of topics ranging from finance and investing to fitness to sports. For more information email him at [mailto:dbiray@gmail.com]dbiray@gmail.com, or to view other articles written by him visit http://www.biraynetworks.co.nr