Evaluate your stock's downside risk with five measures

September 1, 2004

Q Is there any way to determine the best time to sell a stock if it has not performed as well as expected?

Q Is there any way to determine the best time to sell a stock if it has not performed as well as expected?

A Gauging how far a stock might fall before hitting its bottom price is certainly a difficult, if not impossible, task. While analysts and experts spend much time forecasting how high the price of a stock is "expected" to climb, very little attention is given to determining the ultimate downside risk of the investment.

There are several possible approaches to calculating a stock's downside potential. The five most common valuation measures for stocks are: price-to-book value, price-to-earnings ratio, price-to-sales ratio, price-to-cash flow ratio, and dividend yield.

Also take into account factors such as a company's fundamentals, any positive or negative events that have occurred since the last earnings report, and a stock's long-term growth potential. Valuation models provide insight for comparisons, and the knowledge of what they represent may assist in making decisions based on analytics as opposed to emotions.

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