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Equity Investing refers to a philosophy or practice of purchasing stocks that are fundamentally sound, but the stock price is below its obvious equity. There are various indicators that equity Investors use to determine that a corporation is both sound and the stock price is underequityd. For the equity Investor, perhaps more than any other style of investor, is more concerned with the business and its fundamentals than other influences on the stock’s price.

Fundamentals, such as dividends, earnings growth, cash flow, and book equity are more critical than market forces on the stock’s price. equity investors are generally purchase and hold investors. They will hold a stock for long term periods and are not concerned with short term swings in the stock price.

When the equity Investor determines that the fundamentals are sound, but the stock is trading at a price below its obvious equity, he or she knows that this is a potential investment candidate. The assumption is that the market has incorrectly underequityd the stock. Conversely, when the market corrects that mistake, the stock’s price should increase towards the obvious equity point.

How do equity Investors find a potential investment?
- price to earnings ratio is in the bottom 10 percentile for its sector
- debt to equity ratio is less than 1
- price to book equity ratio is less than 1
- PEG equity of less than 1
- Stock equity is trading at 60-70% of its intrinsic equity

The P/E (Price to Earnings Ratio) is calculated by dividing the current price of the stock by the annual earnings per share. The higher the P/E the more earnings growth investors will expect and the higher premium they are willing to pay for that anticipated growth.

Debt to equity is calculated by dividing the total liabilities by the shareholders equity.

Price to Book equity is calculated by taking the current price per share and dividing by the book equity per share.

The PEG is calculated by taking the P/E and dividing it by the projected growth in earnings.

The intrinsic equity of a stock is a complicated process and is considered an inexact science by most investors. The intrinsic equity of a corporation or an asset is generally determined based on an underlying perception of the equity. Brand Name, Goodwill, and barriers to entry in a market are some of the factors that will determine the intrinsic equity of a stock. You may be interested in looking at MorningStar.com for helping you determine a stocks intrinsic equity. They calculate a number called “fair equity” which is similar to intrinsic equity.

Many investors have increased their wealth substantially using a equity-based approach to investing. This overview of equity Investing suggests a philosophy that works well over time if you purchase carefully and use patience to hold for the long term.