3 Numbers You Must Understand To Build Wealth With Stocks, According to Jaspreet Singh

Most people want to get rich , and many know investing is the best way to build wealth. However, many people don’t know how to pick out the right assets and investments to get them where they want to be financially.

Jaspreet Singh, the creator of the Minority Mindset channel on YouTube, has some advice for anyone who aspires to get rich. In one of his recent videos , he broke down three numbers you should know to make wealth-building easier.

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What To Look at When Buying Stocks

When considering which stocks to buy, many amateur investors don’t know how to determine if a company is making money or if a stock is a good investment. Singh explained how you can use three specific numbers to start researching stocks and improving your investment portfolio.

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Market Capitalization

Market capitalization, also called market cap, is a way of measuring the value of a company. The formula used to determine market capitalization is multiplying one share’s current public market price by the amount of total outstanding shares. If a company has one million shares outstanding and each share is worth $50, this company’s market capitalization would be $50,000,000.

Knowing a company’s market capitalization can give investors insights into its scale, stability and risk.

Number of Shares Outstanding

The number of shares outstanding is the amount of total shares that a company is selling. Shares outstanding represent the stocks it offers to executives inside the company and outside investors.

If the stock share supply increases, the share price will drop. Conversely, if the company decreases the amount of shares available, demand for the stock and its price will rise.

Profit

A company’s profit is the amount of money left after paying off all business expenses. Profits are important to investors, because they allow you to determine which profit multiple you buy the stock at. Company profit, like market capitalization and shares outstanding, is information that companies must release when they are publicly traded.

How To Analyze Stocks

Singh demonstrated how the average investor can use these numbers to determine the real value of a stock before investing in it. He used McDonald’s stock (MCD) as an example, rounding the numbers to:

• Market capitalization: $185 billion
• Shares outstanding: 720 million shares
• Profits: $14.3 billion

These three numbers can help you better understand several things about stocks.

Stock Price

Stock prices aren’t random numbers that a company chooses. To determine stock prices, divide the market capitalization by the shares outstanding.

For example, if a company is worth one million dollars and splits into 5,000 shares, each share is worth $200. If that same company divides into 1 million shares, each share is worth $1. In McDonald’s case, the stock price equals about $257 per share.

Profit Multiples

The first thing that Singh suggested you do with these numbers is to find the profit multiple. You can find the multiple by dividing the company’s market capitalization by the profits. In this example, the answer comes out to 12.5, meaning McDonald’s is selling for 12.5x earnings.

With this number, you can determine if you’re over or underpaying for the stock by comparing its profit multiple to competitors’ multiples in the same industry. If McDonald’s has a much lower multiple compared to others, it may be cheaper and worth buying.

Profit multiples are only a starting point for a good stock analysis, as they begin to show a company’s value. However, established companies tend to have lower profit multiples, because investors can base their analysis on past growth. In contrast, investors don’t have as much to go on with startups, which makes them more of a bet on future growth and drives up their multiples.

Other Considerations

Knowing a company’s stock price and profit multiple is only one thing to consider when researching your investment portfolio. Singh encouraged investors to dig deeper into each company and think about what they are buying into. In the case of McDonald’s, it’s more than just a burger restaurant. Buying shares of McDonald’s also means investing in the thousands of square miles of real estate it owns worldwide.

Diving even deeper will produce better results. Learning about the executives can provide more insights into the company’s trajectory regarding profits, innovation and direction. Another angle is researching the company’s intellectual property to determine how it differentiates itself from the competition.

Finally, using income statements, balance sheets and cash flow statements to study cash usage can also help you make better investment decisions.

This article originally appeared on GOBankingRates.com : 3 Numbers You Must Understand To Build Wealth With Stocks, According to Jaspreet Singh