Lots of people think of investing profit a significant global economy just like the US. This can be carried out with the S&P 500 stock index of over 500 first-class US companies. That doesn't seem such as for instance a lot compared to the roughly 5,000 stocks traded on the US market. However, these 500 companies take into account around 80% of the sum total capitalization of the US stock market. 

The Standard & Poor's 500 is the primary US stock indicator. Its performance influences the GDP of exporting countries and wage growth as well as many derivatives. The entire world tracks the index daily.

As for the companies (components of the S&P 500 index), everyone knows and uses the services or products of those companies, those types of are Microsoft, Mastercard, Google, McDonald's, Apple, Delta Airlines, Amazon and others. If you invest in securities of such major US companies, it may be the best investment you can make. 

Can it be difficult to construct a profitable stock portfolio by yourself?

Indeed, it'll seem something unattainable for a non-professional.  Anyone desiring to start investing needs to have more money, understand and read company reports, regularly make appropriate changes in their portfolio, monitor market share prices, and most of all, decide which 500 companies to purchase at the beginning of their journey being an investor. Yes, there are some issues, but they're all solvable.

Share price. That is the price tag on a company's share at a point in time. It can be a minute, an hour, a day, per week, a month, etc. Stocks can be an energetic instrument. The market is unstoppable, and price will soon be higher or lower tomorrow than it is today. But how do guess what happens price is good enough to purchase, whether it is expensive or not or possibly you ought to come tomorrow? The answer is simple, you will find financial models for determining what's called fair value. Each investor, investment company and fund has a unique, but in the middle of those complex mathematical calculations is generally a DCF model. There are lots of articles explaining DCF models and we won't enter the calculations and examples. The main goal is to find a currently undervalued company by determining its fair value, that will be later converted to a price per share. We make daily calculations and find out the fair prices of all aspects of the S&P 500 Index centered on annual reports, track changes in the index and update the data.

Investment algorithm. 

For the forecasting model to work well, we want financial data from companies' annual reports. We process this data manually, without using robots or automated systems. That way, we dive into the companies' financials completely, read and discuss the report, then feed that data into our forecasting model, which determines the fair price. It is vital to possess at the least 5-year data and look closely at the dynamics of revenue, net income, operating and free cash flow. The very decision to possibly choose company comes only after determining the company's current fair value and value per share. We consider companies with a potential in excess of 10% of fair value, but first things first.

Beginning. So, the company's annual report comes out today. The report must certanly be audited and published by the SEC (Securities and Exchange Commission). Predicated on section 8 of the report, we make calculations within our model, substitute values, calculate multipliers, and finally determine the fair value. By all criteria, the business is undervalued and right now the share value is much lower than the calculated values, let's go deeper into the report.

Revenue. Let's look at revenue dynamics (it is a significant factor). Revenue has been growing going back 3-5 years, it could be ideal if it's been increasing year after year for a decade, however the proportion of such companies is negligible. We give priority to revenue within our calculations—no revenue - you should not include the business within our portfolio. We focus on possible fluctuations. As an example, throughout the pandemics (COVID-19), many companies from different sectors have suffered financial losses and the revenue decreased. That is an individual approach, with regards to the industry. The best option: revenue growth + 5-10% during the last 5 years.

Net profit. We look at the net profit figure, and it is good if additionally, it grows, in practice the web profit is more volatile. In this instance the important factor is that company has q profit, rather than loss, that will be 10-15% of revenue. Obviously, a strong decline in profit is a negative aspect in the calculations. The best option: a gain of 10-15% of revenue during the last 5 years.

Assets and liabilities. We visit the balance sheet and observe that the company's assets increase year after year, liabilities decrease, and capital increases as well. Cash and cash equivalents are increasing.  We focus on the company's overall debt, it should not exceed 45% of assets. On another hand, for companies from the financial sector, it is not critical, and some feel more comfortable with 60-70% debt. It is all about an individual approach. We consider only short-term and long-term liabilities, credits and loans, leasing liabilities. The best option: growth of company assets, total debt < 45% of assets, company capital a lot more than 30%.

Cash flow. We're immediately thinking about the operating cash flow (OCF), growing year by year at a rate of 10-15%. We look at capital expenditures (CAPEX), it could slightly increase or remain the same. The primary indicator for us will soon be free cash flow (FCF) calculated as OCF - CAPEX = FCF. The best option: growth of cash flow from operations, a small escalation in capital expenditures, and most of all, annual growth of free cash flow + 10-15%, which the business can devote to its further development, or for example, on repurchasing of its shares.

Dividend. Besides everything else, we have to focus on the dividend policy of the company. All things considered, we want it when profits are shared, even just a bit, for our investments in the company. If the dividend grows from year to year, it only pleases the investor. Additionally, the entire return on investment in companies with a dividend should increase. Many investors prefer a "dividend portfolio," purchasing 15-20 dividend companies with yields of 4-6%, as well as the growth in the worthiness of the shares themselves. The best option: annual dividend and dividend yield growth, dividend yield above the typical yield of S&P 500 companies.

Multipliers. Moving on to the multiples of the business, they're all calculated using different formulas. When calculating the same multiplier, you need to use 2 or 3 formulas with an alternative approach. We have a tendency to lean toward the average. The critical indicators will be the 3, 5 and 10-year values. The index for a decade has the cheapest influence in the calculations as well as the annual. In today's economy, we consider 3 and 5-year indicators to be the main ones.

How many multiples is enormous and it creates no sense to calculate every one of them. We should give consideration only to the major ones. One of them are Price/Earnings ratio (P/E), Price/Cash Flow ratio (P/CF), ROA and ROE, Price/Book (P/B), Price/Sales, Enterprise Value/Revenue (EV/R), Tangible Book Value, Return on Invested Capital (ROIC). It is necessary to consider these indicators in dynamics over 5-10 years. The best option: price/profit and cash flow ratios are declining or are at the same level (these ratios ought to be significantly less than 15), efficiency ratios are increasing year by year and moving towards 30, other ratios are above average in this sector. invest in the stock market

This is a small set for investors. Obviously, there are many indicators in a company's annual report, the important ones include operating profit, depreciation, earnings before taxes, taxes, goodwill and many others. We prepare the important thing and most significant financial indicators, you can save lots of time and research all companies in the S&P 500 Index.

We have now a general idea in regards to the financial health of the company. We made some calculations within our financial model, where we determined the percentage of undervaluation right now and made a decision whether to purchase shares of this provider or not. You can find no impediments. Allocate 5-8% of one's available budget and purchase the stock. Make sure to diversify your portfolio. Buy undervalued companies, 1-2 in each sector. You can find 11 sectors in the S&P 500. Choose only those companies whose business you understand, whose services you utilize or whose products you buy. Don't rush the calculations in your model, if you're uncertain, do not invest in this company.

Surprisingly, an undervalued company might not reach its value for a long time. The dividend paid will improve the situation. Beware of companies with information noise. Generally, they talk a whole lot but do not do much.
The S&P 500 index of companies has been yielding a typical annual return of 8-10% for several years. Obviously, there has been bad years for companies, but they're recovering considerably faster than their "junior colleagues" in the S&P 400 or 600. Have an excellent and profitable investment.