The allure of making substantial profit attracts many individuals to the share market. However, successful investing in the stock market requires an understanding of important investment yardsticks like the earning per share (EPS) and Average True Range (ATR) indicator. In essence, these important metrics provide insight into a company’s profitability and market volatility, in turn, affecting the stock’s potential for return.
Earning per share (EPS) and the ATR indicator are integral financial metrics that can guide investors toward the most profitable stocks. Before we delve into how you can use these tools to earn in the share market, it is essential to comprehend what they are.
EPS, an essential feature of a company’s profitability, represents the portion of a company’s earnings allocated to each outstanding share of common stock. It is calculated by dividing net earnings by the outstanding shares. A public company in India, for example, reported INR 10 million in net income for the year and has 5 million outstanding shares. Consequently, the EPS would be INR 10 million divided by 5 million shares, equating to an EPS of INR 2. The higher the EPS, the more profitable the company is viewed.
On the other hand, the ATR indicator is a technical analysis tool that measures market volatility by decomposing the entire range of an asset price for that period. Developed by J. Welles Wilder, the ATR does not indicate price direction but rather the level of price volatility. High ATR values indicate high volatility and may be an indication of panic selling or buying. Conversely, low ATR values could signify low volatility and suggest a more stable market.
Using EPS and the ATR Indicator to Earn in the Share Market
EPS is a significant factor investors use to choose which stocks to buy. A company with a high EPS is generally considered more profitable, indicating that the company is capable of generating sufficient profits to distribute to its shareholders. This profitability could lead to relatively consistent returns or even appreciate the value of the stock over the long term. Thus, it is often wise to look for companies with an increasing EPS over time as potential investment opportunities.
On the other hand, the role of the ATR indicator is less about stock selection and more about risk management. ATR allows investors to measure the volatility of a share. By understanding the potential range of price movement, investors can set stop loss levels or limit orders that ensure they are not excessively exposed to risk. For instance, if a stock is trading at INR 100 with an ATR of INR 5, it indicates that the stock’s price could potentially fluctuate up or down by INR 5.
Investors can, therefore, use this information to set a suitable stop-loss order, perhaps at INR 95, which automatically sells the stock if the price falls to that level. This risk management strategy guards against significant losses and is a crucial aspect of earning in the share market.
In conclusion, the best way to earn in the share market involves the strategic use of financial metrics such as earning per share and the ATR indicator. Profitable investing goes beyond simply buying and selling shares; it requires a thorough understanding of financial indicators and prudent risk management strategies.
Disclaimer: Before beginning to trade in the stock market, it is crucial for every investor to conduct thorough research to gauge all the pros and cons. The stock market can be a challenging terrain, and it’s important to thoroughly understand it. While metrics like EPS and the ATR Indicator are useful tools for making trading decisions, there is always a level of risk involved in share market investments. Therefore, considering these factors and professional advice is essential.
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