Investing in the stock market is a great way to make a sizable return on your investment, but of course you must also accept the risk that goes along with the possibility of earning a decent reward. That being said, investing in stocks is not exactly like saddling up to the poker table. While it is possible to speculate in the stock market, smart investors take calculated risks and reap the rewards.

The following are some great tips on how to invest in the stock market.

Invest in a Company Not a Stock

Shares should be bought on the basis of value and not simply because the price is right. When investors buy into a company they take the time to analyze the operations or lines of business and even look at the management team's capabilities. It is important to remember that a stock is only as good as the underlying company, so it pays to evaluate the company you are thinking of investing in before making decisions solely based on price.

Take a Look at the Company Financials

A good stock investment has a strong balance sheet and a healthy profit and loss statement. All listed companies are required by law to publish their financials in their annual report. Most companies have their annual report available for download on their website so it is easy to get hold of the information without even buying the share. The financial statements should show year on year increases or decreases in profit and will also give their balance sheet for the past two years for the purpose of comparison.

Do Read Stock Tips, But Don't Follow Them to the Letter

Investment analysts often prepare crib sheets for use by investors. These crib sheets provide technical and fundamental analysis for each stock along with a buy or sell recommendation. While it is useful to be aware of what the analysts are saying, following their advice to the letter makes your portfolio vulnerable to the tides. Every time they change their recommendation to a sell you will find yourself racing to get rid of a stock whose price is plummeting simply off of the recommendation of the analysts.

Learn How to Calculate P/E Ratios

The Price/Earnings Ratio is a powerful formula. It is calculated as follows;

Price / Earnings Ratio = Market Capitalization Post Tax Profits

The market cap is simply a measure used by the investing community to determine a company's size. It is calculated by multiplying the total number of shares outstanding by the current market price of one share.

A company with a high P/E relative to the market means that its earnings are expected to increase sometime in the future. If the company does not perform, the price of the stock will fall to match the revised market opinion.

You don't have to have a huge amount of money to start investing in the stock market and you don't need to be a financial wizard either. Sticking to basic valuation methods and using a common sense approach to investing can bring much success.

Learn more about this author, Natalia Jones.
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