Secure Investments
Why is a low P/E Ratio in a stock supposedly a more secure investment ???
I recently read in a book….that the the P/E Ratio really doesn´t assure you of anything…though i do wish to udertand it better….. doesn´t a low P/E Ratio been that the stock is ovarvalued….For it means that its earnings are too low?? I dont know im confused…please help me understand it….
Price to earnings is the relationship between the stock’s price and their annual earnings per share (EPS).
So a stock that earns $2/share and sells for $60 has a P/E of 30.
The theory is if a stock has a low P/E, then it might be undervalued and eventually the stock market will realize this and the stock’s price will increase.
However, you must be careful. Some industries have low P/Es in general and some (like some internet companies used to) have very high P/E ratios. So not only would you want to consider the P/E of the stock itself, but also the companies within the sector too.
FYI, using P/E ratio is an “old” way to pick stocks used for generations since other data on companies were not as easily accessible. Nowadays, selecting stocks is a much more refined process where you might consider earnings, earnings growth, sales, sales growth, insider trading, as well as a number of other attributes.
You might consider picking up How To Make Money in Stocks in good times and bad by William O’Neill whose CANSLIM method is very well known.
That’ll help you get a good basic understanding of what makes a successful stock successful!
Hope that helps!
Secure Investments with Gold