Today the playing field in the stock market is as level as it’s ever been.

Taming the Stock Market with Stock Software

Anyone with an internet connection has access to an unprecedented amount of accurate financial data and the ability to learn how to interpret these data simply by searching with Google or Bing.

What’s more, investors have computers capable of running powerful stock software that automatically does the error-prone, tedious, grunt-work for them.

At no other time in history has this convergence of access, knowledge and computing power been available to the average investor.

Just a few decades ago, the ability to obtain and analyze stock market data was the indisputable domain of large financial companies with their huge research staffs and multi-million dollar budgets. And analysis was a much more manual task.

So the retail investor had little hope of competing with the big guys because they just didn’t have the same access to accurate data and they didn’t have the time, knowledge or capability to perform the required analysis.

However that’s all changed.

With an internet-connected computer, investors now have the tools necessary to make good investment decisions.

Unfortunately that’s not enough.

Just because someone has the tools, it doesn’t mean they will use these tools correctly or even learn how to use them correctly.

As an example, suppose you had a big pile of unordered papers and a spool of wire. What could you do to bring order to the chaos?

Think about it for a minute. Okay, what did you decide to do?

Hold that thought.

Obviously there are a number of different solutions, but two that spring to mind right off the bat are, first, to use the wire to bind the papers together to create a spiral notebook  and, second, to make paper clips from the wire and clip together a small number of individual pages with each paper clip.

Permanent and Temporary Solutions

The first solution is better if you need a permanent solution while the second will do just fine if you’re only interested in a temporary solution.

A third solution would be to simply use the wire to wrap the papers in one big ordered bundle – of course you would not be able to easily access the papers if you needed to read them, but it is a potential solution nonetheless.

So what’s the point? Well, the point is, given a problem and some tools, the solution often depends on how much knowledge you have, how much time you have available, how much effort you’re willing to apply and your ultimate goal.

For the papers and wire example, I left the requirements vague. However if I’d specified the papers needed to be quickly accessed over the next 10 years, then two of the three solutions would no longer apply – we’d be left with making a notebook (or some other creative solution that you might have come up with when I asked you to think about what you’d do).

So let’s switch to the investing realm and capture some specific requirements. There are only two general ones.

First, and most obvious, people invest so they can grow their wealth. At the end of the day, that’s usually the ultimate goal. As you’re aware, there are myriad methods and strategies that purport to help you achieve this goal. I’m only going to talk about one of these: Value Investing.

If you’re reading this on my blog, then you know I don’t believe in market timing, technical analysis or any of the various short-term trading strategies. None of these work consistently over long periods of time. If you disagree, then this site isn’t for you.

On the other hand, if you’ve bought into the fact investing is a long-term endeavor and you believe in following people like Warren Buffett, Peter Lynch, Charlie Munger and Benjamin Graham, then read on, because what I’m about to discuss could make you quite a bit of money in the stock market.

As I mentioned earlier, today’s investors now have the basic tools necessary to succeed spectacularly in the stock market. But it’s essential they correctly use these tools.

Which brings me to the second requirement: investing is a long-term pursuit. We’re not looking for a temporary, paper clip, solution, but a permanent, or mostly permanent, one.

Unfortunately, back in the good old days when your grandfather had to walk 10 miles to school in the driving snow, uphill, both ways, the basic data weren’t available and, what’s more, even if a small subset were somehow accessible, the time and effort required to properly analyze these data was impossibly large.

The average investor couldn’t do it.

The good news is, that’s no longer the case.

Today, just about anyone sitting in front of his or her computer can download financial data and use investment software to analyze these data and make sound decisions.

Stock Software

Of course this begs the question of which stock software to use. Software isn’t a panacea for the stock market. Software packages use different algorithms and have different user interfaces. Some user interfaces are easy to learn and some aren’t.

And obviously the algorithms I’ll be talking about are value investing-based ones, but even so, there are various definitions of what value investing is. It can be as simplistic as looking for low price-to-earnings (P/E) ratios, price/earnings-to-growth (PEG) ratios, price-to-book-value (P/B) ratios and high dividend yields.

Or it can be more complicated, such as utilizing the methods of Warren Buffett to incorporate strong fundamentals and wide economic moats (if you’re interested in understanding how Warren Buffett invests, check out the free report, Stock Market Investing for Maximum Profits).

Stock Market Ratios

For those that don’t know, the P/E ratio measures how much a share costs compared with how much the company makes in profit for each share. So if a company’s stock is trading for $20 per share and it earns $2 per share in profit, it has a P/E of 10.

The P/E ratio tries to eliminate absolute figures so it is easier to compare companies. Lower P/E ratios are considered better. An important side note, however, is because the P/E ratio can vary between industries, you should only use P/E ratios to compare companies in similar industries.

The PEG ratio takes earnings growth into account.  It’s simply the P/E ratio divided by the average growth rate of the company’s earnings. So a company with a P/E of 10 that is growing its profits at 20% a year has a PEG ratio of 0.5 whereas another company with the same P/E of 10 but only growing profits at 10% per year has a PEG ratio of 1. Lower PEG ratios are generally thought to indicate better value. Keep in mind, however, that profit growth may not pan out and therefore the future might not mimic the past.

The P/B ratio attempts to reveal how cheap a company is relative to its assets. A company’s book value is generally defined as how much you could raise in the open market if you sold off all of the company’s assets and paid off its debts.

A P/B ratio of 1 indicates the sale would return all the money you invested while anything above 1 indicates you’re paying more than the company’s basic assets are worth.

However since good companies utilize their assets to add significant value, most profitable companies have P/B ratios well in excess of 1, nevertheless the P/B ratio provides a good sanity check.

Another way to decrease risk is to look at a stock’s dividend yield. This is the amount the company pays each year in dividends divided by its stock price. So if a company pays $2 a year and is selling for $100 per share, its dividend yield is 2%. Dividends add cash to your pocket each year, however they are not guaranteed and can be eliminated at any time. Therefore it’s important to look for a long, uninterrupted history of dividends payments as well as dividends growth.

But That’s Not All…

As you can see, there are quite a few steps to consider when investing. But it doesn’t end there. There’s still the matter of diversifying, allocating your money between your chosen stocks, rebalancing and putting a good money management strategy into place.

All of these things were difficult to do in the past but can now be handled by the right stock software package with just a few clicks

Investing in the stock market can be one of the most important things you do. And the sooner you get started, the better off you and your family can be in the future, so it makes sense to learn what you need to know right now and then implement a solid strategy as soon as you can.

Stock software can help you reach your investment goals, but you still have to take responsibility for your investments and ensure you’re using software that’s compatible with your investment style and is based on effective and proven methods.

There’s no excuse to wait a moment longer. If you’re serious about your financial future, start learning today.

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