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“My name is ken wallace roy and welcome to this video how to figure out out if a stock is worth buying or in other words. How to determine if stock is undervalued. Everyone says to buy low and sell high now stock prices go up and down all the time and in this example you can see why it s important to buy low. You d want to buy the stock at around 14.
As opposed to closer to 51 and in this video. I m going to show you exactly how to know when a stock is priced low. And when it s priced high. But first we need to quickly go over three definitions.
So a share or a stock represents ownership of a company. So. If you were to buy even. A single share in a company.
You would be part owner of that company. And as an owner of the company you re entitled to share in the profits of the company and those profits are paid out as dividends so for. Example if a company is paying out a dividend of 100 per share and you own a thousand shares you will receive 1000. Every year for as long as you own those shares and as long as the company continues to pay a dividend of 1 per share.
And that money goes directly into your trading account you can spend it as you wish or you can reinvest. It it s all up to you the dividend yield. Is simply the dividend divided by the share price. So in this example.
We ll take the same dividend of 1 per. Share. And let s assume..
The share price today is 20 a share the dividend yield is going to be 5. So the 5 percent represents here is the return on your investment while you re holding on to those shares so let s say you have 5000. To invest so 5 of that is 250 dollars in dividends each year for as long as you own the shares and as long as the company continues to pay a divot another way to look at it is if you have the same 5000. To invest at 20 a share you re going to be able to buy 250 shares.
And again. The dividend is 1 per share and you end up with 250 dollars in dividends each year so the 5 dividend yield is a very quick way to figure out okay what s the return on my investment while holding on to these shares. Now what happens. If the share price starts to drop.
So let s say we go from 20 a share to 15 a share or let s say we go even further down to 10 a share or if the share price drops to 5. So you can see that as the share price continues to go down the dividend yield continues to go up so. Again let s go back to our example of 5000. To invest so if you were to buy these shares at 20 each your return on investment would be 5.
Which is the 250 in dividends that we looked at before however if you waited till. The shares dropped to 5 the same five thousand invested now would earn you 20 which would mean 1000. In dividends each year for as long as you own the shares in this company. And as long as the company continues to pay dividends.
So you can see that as the share price drops. You re going to earn more in dividends. So it pays to buy low. So.
Let s just go over this very quickly so. As we ve seen as the share price goes down the dividend yield. Goes up and the reverse is true..
If the share price starts to go up again. The divin deal is going to go down. So this is what i call law of dividends and this is very very important because we need to know this in order to help us determine to figure out when a stock is price low. When it s priced high.
So i m going to repeat this one last time here as the share price starts to go down the dividend yield will go up as. I said. Before stock prices go up and down all the time so in this example what if i was to tell you that the average dividend yield for this doc over the last five or 10 years has been 45. And the current event deal today is 8.
Now remember as the stock price starts to go down the dividend yield is going to go up. So. The area below the dotted line. This is your buying area that s where the stock price is going to be low.
So anywhere below the line that s when you want to go out. And perhaps think about buying stocks in this company. Because that s where. The stock is going to be undervalued.
And if the current dividend yield. Today. Was two and a half percent. Then you know that the stock is overvalued and you may want to consider it for sale.
So now let s take a look at a real life. Example with two companies. So we re going to look at ibm and waste management..
These are two american corporations and we re going to go figure out which one of these is undervalued and which one of them is overvalued. So what we re going to do is look at the current dividend yield and the average dividend yield for both so let s start with ibm first to get the dividend yield. We re going to go to the yahoo finance website. You can take a look at the url at the very top left hand corner.
So here. I m going to enter the stock symbol for. Ibm you can see that the dividend yield for. Ibm.
Today is 39. 1. To get the average. We re going to click on key stats scroll down and you can see that the 5 year average.
Dividend yield for ibm is two point zero eight percent let s go ahead and put both of those numbers into our table. So is ibm undervalued or overvalued. Today well remember when the current dividend yield is greater than the average dividend yield. The stock is undervalued so ibm is undervalued now let s go take a look at waste management back to yahoo finance.
I m going to put in the stock ticker symbol for waste management wm. You can see that the dividend yield. Today for waste management is two point seven seven percent. We re going to click on key stats.
The five year average dividend yield for waste management is three point five one percent so let s go ahead and put both of those values back into our table is waste management. Undervalued or overvalued. Well..
We can see that the current dividend yield at two point seven seven percent is less than its average dividend yield. So the stock is overvalued so this is a really quick way to figure out if a company is priced low or if it s priced high now you don t want to go out and buy ibm right away as you know the current dividend yield changes. Whenever the share price changes so these numbers are valid as of today. But whenever you re ready to invest you d want to go and look at the current dividend yield again and compare it to its average dividend yield now in addition to this there s a couple of other things you want to check before you make any investment decisions.
And i call that my twelve rules of simply investing so the twelve rules are listed here on the screen. So what we looked at today was rule 11 b. Was to look at the dividend yield. Now.
This is the most important rule on the screen. This is the one you want to check first if a company does not meet this rule. So if a company is overvalued. Then don t waste your time with any of the other rules.
If a company is undervalued. Then you want to go ahead and evaluate everything else and then make a decision. Whether or not you want to invest in this company or move on to something else to learn more about these twelve rules and to understand them and where to get the values for the rest of the rules head on over to my website where i ve got lots of other information on dividend. Investing i have a very easy online self paced course that you can look at takes you through everything step by step goes through the twelve rules teaches you everything you need to know on how to invest for yourself by yourself.
If you want to go even faster than that you can subscribe to the simply investing report. Where i track one hundred and ten stocks every month and show you exactly which ones are undervalued. Which ones are overvalued and all the numbers that you would eight four twelve rules are also in that report every month. I ve got lots of other information and articles and resources about.
Investing so head on over to my website simply investingcom. And i hope to see you there thank you ” ..
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