Greetings fellow newbie investors! RATESDOTCA’s OTGP (Online Trading Guinea Pig) here with the latest in our Online Trading series for the uninitiated.
First, I must digress – it’s been a bit since my last check in, and the reason shows my current inaptitude for the world of online trading: I misjudged the ease of the application process. For those of you looking to get up and running with an online trading brokerage right away, there’s one fail safe way to avoid the hold up: be organized.
According to the Questrade application system, accounts can also be funded through:
The easiest way to validate your bank info through an online application is provide your account and transit numbers displayed on your cheque, and then scan and email (or snail mail) that void cheque to the brokerage. NOTE: Make sure your cheque displays your current address. If you’ve got outdated cheques, a bank statement displaying your current address can be sent instead.
Once you’ve rounded up and sent in this info, you’re sitting pretty in the waiting process for account confirmation. For those of you looking to expedite the experience somewhat, look into the digital signature options – this will save you the time of printing, signing, scanning or mailing.
Alright, let’s say you’ve glided through the application process with considerably more ease than I have. Now the real fun can begin – it’s time to pick some stocks! As I mentioned in my first entry, this is not an area to traipse into lightly – you’re confronted with a LOT of choice – and your money’s on the line should you make an unwise move. For the sake of example, I’ve run Lululemon – my practice stock fave – through the wringer to determine if it’s deserving of my real investment dollars.
The first rule of thumb: understand the industry associated with your pick. While it may be a popular starting point for newbies to go with preferred or frequently-used brands (in my case, the purveyor of the comfiest yoga pants in the land), having insight to how that company turns a profit is vital to you turning one as well.
Here are some points to establish:
Where you may ask, can you find this treasure trove of financial vitals? The best way to get to know a company is by literally starting at the beginning – check out their prospectus. This is the registration statement of a company’s initial public offering and is chock full of information for potential investors. This info needs to be provided by law should a company go public, and can often be found by perusing the investor relations section of their website. It will include:
Chances are, though, that you’re not jumping on board with an initial public offering – so check out how that prospectus held up over time. Check out any update statement filings along with annual and quarterly reports to date to see how that initial price fluctuated, as well as insight to whether any stated goals were fulfilled, and how future growth potential is shaping up.
Now that you’ve done a bit of detective work to see what makes that company tick, it’s time for a bit of number crunching! So while a company’s optimism for expansion might lend you some confidence, the main indicator of stock performance are earnings – and how much investors are willing to shell out for them. One way to go about this is to determine the Price to Earning Ratio of a stock (P/E).
The P/E is basically an indicator of how expensive a stock is in comparison to others from the same industry – essentially, how much investors are willing to pay in exchange for earnings. A high P/E means you’re paying more per share for that company – kind of like shelling out double for those premium yoga pants versus the bargain store variety.
To determine the P/E, take the market cap of the stock, and divide it by the earnings of the shares.
So, in the case of Lululemon:
Market Cap: 4.76 B
Shares: 143.95 M
= P/E of 43.36
So why should you go with a higher P/E? You shouldn’t, necessarily – but it can be an indicator of future growth expected by investors. Just another tool to consider when making your pick.
So hit those books and determine if that potential pick really cuts the mustard - and I'll be back next week with even more tips for analyzing your rate of return.