Wealth Management and Your Solutions Now

Investing in stocks is not an exact science. Share prices forecast is more a matter of probability. Because the share price follows the results of the company in the long term, we are therefore concerned with predicting the operating results.

In order to increase our chances of profit, every stock investor has his rules that he follows:

• Buy stocks with a low price or earnings ratio.
• Buy shares of cyclical companies at a high price or earnings ratio.
• Buy shares of Boring companies with predictable earnings evolution
• Buy shares of companies that are simple and understandable.
• Buy shares of companies with a high return on equity.
• Value investing: Tip 1 Buy stocks with a low price or earnings ratio.

To know whether shares are listed cheap or expensive, one usually looks at the price or earnings ratio of the share. If a stock has a low price or earnings ratio, the stock is quoted cheaply. If the stock has an expensive price or earnings ratio, the stock is expensive. Logical if you have a price or earnings ratio of 10 then the company makes 10% earnings per share against the stock price. If you have a price earnings ratio of 20 then the company makes 5% earnings per share against the stock price. Of course 10% profit is better than 5% profit, so good investors buy stocks with a low price or earnings ratio. The use of the fkcconcept is important there now.

Value investing

This may sound a bit strange, but it is. Cyclical companies often make a profit when they are in a profitable trend. As a result, the price or earnings ratio is often low at such a time.

The temptation is therefore great for an investor to buy these shares, the price or earnings ratio is low and the company is making a lot of profit. But the profit of cyclical companies simply goes up and down. After the 7 fat years come the 7 lean years.

Suppose you buy a stock of a cyclical company at a price profit of 7 which seems very attractive. But there is a downward trend for the industry in which the company operates and profits fall by 90%. Then you get a price to earnings ratio of 70. As a result, the share price may drop by 50% to a price earnings ratio of 35.

Conclusion

If you were to buy the stock at a price profit of 35 and the company returns after a while in a profitable period, you have a chance that the share will raise by 100% again. If you come across a stock with a low price or earnings ratio, first check whether it is not a cyclical company, do your homework.