What is Cost of Capital – Basic Concept of Cost of Capital

If you are thinking of earning fast, you should be buying low-cost stocks now and selling them tomorrow at a higher price. At least that is how easy it seems, although in the real world, it takes more than that.

In fact, the buying and selling parts are the most critical ones because it is where your money depends.

If you are not able to do your dirty works, which is basically the stock analysis, you might be at the losing end of the game. Make sure then that you have taken into consideration the cost of capital of the company you are putting your money on above everything else.

The cost of capital is simply the sum of the company’s funds, including the debt and equity. This is very important for you to know as this is where the overall cash flow of the company comes from.

This is also where your share may come from in case you are correct in investing your money to this particular company. But more than the capital cost, you are also to look after the other different necessary financial securities a company has. Among these are:

The Current Assets of the Company
This is the additional financial security of a company from amounts receivable or inventory. This is usually converted into cash and other security forms within a year’s time. It is very important to know the current assets of a company as this shows the liquidity of a company.

The Price/Sales Ratio (P/S)
The value of a company in the stock market is usually computed via its P/S. If the PS of a stock is above 10, it is in momentum price and can only be recommended in strong markets. P/S value between 5 and 3 are good for growth market, while P/S value of 2 is value priced stocks.

Cash Flow Per Share
Cash flows represent the standing of a company and thus its viability in the stock market. Companies with positive cash flows are the ones best to invest in because they can offer better prices in the next coming days.

Companies with negative cash flow are the ones you should shun because they are known as the ‘cash burners’ in the industry. You do not want to burn your hard-earned dollars for companies like these ones, do you?

Average Daily Volume (shares)
It is very important to know and learn about average daily volume or shares because this is where making money on your investment depends upon.

Companies with Average Daily Volume of 100,000 and up are the companies you are looking to invest in. If you can even find companies that have more than a million shares, these are the best investments you can bet on.

Financial Health Grade
Companies are also graded in the stock market in an alphabetical order. If you want the best results for you investments, settle for nothing less companies with A, B, and C financial health grades.
Now, you already have idea on what cost capital is.