Novice investors often entire the stock market when a high-profile company, such as Facebook (FB) goes public and captures the popular imagination. Venturing into the stock market can be frightening, but every seasoned investor was once a beginner. With this straightforward guide, the newcomer can make decisions with confidence.
Before buying any stock, investors should perform due diligence to ensure that the company and stock will perform. Due diligence can include different forms of analysis, the most basic being fundamental analysis and technical analysis. In fundamental analysis, the investor evaluates the intrinsic value of the stock by considering the overall economy, industry conditions, and the finance and management of the company. Technical analysis uses statistics including past prices and volume. Rather than be concerned with intrinsic value, technical analysis focuses on identifying patterns and trends in the stock’s current and future movements. (See Technical vs. Fundamental Trading)
Investors should research the company’s SEC filings. Other good sources of information include the company’s website, which will typically have an investor relations page. Financial websites like finance.yahoo.com or thestreet.com also offer information. (See Top Edgar Tools)
To make a case for buying Facebook stock. the investor should analyze ad revenue growth, including mobile growth, user trends, risks to operations, and outlook. Also look at trends for profit margins, revenues, and mobile.
After doing due diligence and feeling comfortable with the decision to buy the stock, the investor should determine if the current price is an appropriate entry point. Fundamental analysts calculate valuation metrics to determine if the stock is undervalued (the point the entry price is most attractive) or overvalued (investors may want to wait for the price to come down before buying the stock). P/E is the most common valuation metric but there are many others.
Source: Yahoo! Finance
The forward price-to-earnings (P/E NTM) for Facebook is 39.8x; in isolation that does not tell the investor too much. However, if it is compared to historical or industry P/E (NTM), it will determine how the stock is valued relative to its trends.
Another way to see if the stock is a good entry point is to look at its historical stock chart trend. Technical analysis looks at various aspects to see if the chart is at a good level.
Source: Yahoo! Finance
Once the investor determines the stock is a good value at the current price, the next step is to calculate the number of shares to buy. If using an online brokerage account as the intermediary for the sale, there is usually a share calculator available. Otherwise, the calculation is:
Total Amount Desired to Invest /Price per Share=Number of Shares to Purchase
The current price per share can be found on any financial website, such as Yahoo!Finance as seen below:
For Facebook, if the total purchase amount is $10,000 at a price per share of $76.26, the investor can buy:
$10,000/$76.26=131 shares can be purchased
The Bottom Line
Investing in any stock, including Facebook, requires research and analysis. Investors should consider both the potential rewards and risks before buying stock.
DIsclosure: At the time of writing this article, the author owned shares of Facebook.