| Guide to Online Investing |
P/E Investing |
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P/E, price to earnings, is a valuation measure. It is the result of dividing the market's current market price (P) by its annual earnings per share (E). A company has to report its earnings to its shareholders every quarter. Usually, companies that are quickly growing their earnings have high P/Es. In today's market, a high P/E ratio is anything above 40. Companies can have low P/Es, below 15, for several reasons. They could be in an industry that does not expect much growth, or the company is expected to have poor earnings in the future. The maket is discounting the price of the stock. When I first started investing, I used this simple P/E idea to buy stocks. Basically, I would look for a company that is going to grow earnings next year. Lets say company X has a market price of 30 dollars, and has an EPS of 2 dollars. Its current P/E is 15. Company X is expected to earn $3 per share next year. Projecting its current ratio of 15 into next year, the market price of the stock should be $45, and you should have a 50 percent profit. If the market thinks the stock is worthy of a higher P/E since its earnings are growing well, the company's P/E could rise to 20, and its market price would be $60. This would be a 100 percent profit after considering some simple math. Ofcourse, this type of investing does come with risk. You must be constantly aware that the company is meeting its expectations. Otherwise, you might be left with a falling stock price. If a company has an extremely low P/E, do not buy it immediately; there is probably a valid reason the market has placed a low valuation on the company. Joseph Sunny |