Of course, investment criteria will vary from investor to investor. What's important to one stock investor isn't necessarily key to another. There are, however, a few things that all stock investors ought to monitor.
When most people buy a stock, price is a consideration. Maybe you're a bargain-hunter whose eyes light up at the sight of a low price/earnings ratio. Or maybe you're a go-go growth investor who's willing to pay a steep price for a company with terrific growth prospects. Either way, you have a price you're willing to pay for an investment. Anything above that makes the stock too expensive for your taste.
Once you've bought a stock, valuations still matter. If a stock's price/earnings, price/sales, or price/fair value ratio jumps significantly from where you bought it, that increases your price risk, because more of the company's value is in the unknowable future. (Price/earnings and price/sales ratios are widely available; price/fair value ratios are available to Morningstar.com Premium subscribers, and are calculated by dividing the the company’s share price by what Morningstar’s equity analyst thinks that company is worth, based on discounted cash-flow analysis.) If the expectations underlying that higher valuation don't pan out, the stock's price can plunge back to earth.
Conversely, if a stock's P/E or price/fair value shrinks significantly, take notice. You may still like the company, and you now have the opportunity to buy more of it at the cheaper price. But if a shrinking share price signifies deteriorating fundamentals at the company, you may no longer want to own the stock. Only you can determine what falling prices means for you.
Investigate Rapid Price Moves >>