The first myth. The ratio of price to earnings, allows us to see what share - cheap or expensive. This option is easy to find any literature looking for finance. Especially Western, where these ratios are often published. And many people think that this parameter shows us the direction of the correct action choices.
Do not miss : How to earn 3-5% per month in the currency trading
Is it so? Absolutely not. Any investor who is trying to think rationally and adequately (before you make the right decision to purchase shares), requires the maximum available information. A key aspect in the choice is the value of the shares in each company.
The cost, which is based on income, taking into account the different rates of return and other important data (from a financial point of view). But how to understand the real value of the shares? Indeed, ratios of prices (for profit), in reality, we do not show the desired value of the shares.
Therefore, it is not something that is important for the investor. He is essential to possess other data - to know the ratio of the real value and price. With this information, you can easily find out what is the share price (low, high or suitable).
It is important to start the analysis with the actual value of the shares (recognizing her), not paying much attention to the active factors.
Read also: What is fractal forex
Myth number two : to earn good money you need to expose themselves to very high risks. Some potential market participants, a priori, are afraid to work with shares, for fear of losing all earned capital. Of course, there are risks and they need to be taken into account. But not everyone is so critical.
But how does an investor earn substantial capital at the lowest possible risk? It is important to buy a serial action - with well-projected income. That is better to carry out the purchase of such instruments, the income level of growth for some, will be (at least) the sum of the rate of inflation (at the moment), and interest rates.
Investing better in different stocks - you should not invest too much money (10%) of all your money only in shares of the same company. And do not buy shares in several companies in the same field. May best - divide the investment in time. Producing a sale, it is important to use stops. This will minimize potential risks.
Successive shares - shares predictable than revenue growth can easily foresee is one of the safest tools for purchase. (For example, shares of leading US companies). Note the average growth rate of profit share portfolio. His figure should be at least 15%. This gives a good chance to increase the growth of profit (for the next few years several times).
Another important factor is the process of limiting losses on shares. This is easily done using stop orders to sell. Then the portfolio risk is reduced to 10%, and one company equity risk is about 1%.
Myth Three : It is important to buy a stock when the price falls, and sell when he rushed up. There is an opinion that it is best to buy stocks when they are cheap and sell securities carried out in the period of their high cost. Yes, it's true. But for some reason, most market investors, confident that when shares fell - they automatically became cheap, and when grown - expensive?
Therefore, being in full confidence that their rate decreased, then they buy. Similarly, when selling growing. But it's not right.
Buy stocks, betting that the price will rise up. And if the price falls - this is an obvious mistake.
But it is logical to buy the shares at a price that is growing (even more logical when the price goes upper limit). Then there will be the release of cheap shares. Indeed priced securities have good prospects and precise forecasts.
Fourth myth: the purchase of shares - insurance. Salvation from inflation. For a long time, the shares were considered as an object that will insure us against inflation. This point of view is the place to be. But there are some nuances. In reality, a hedge against inflation stands to¸ that grows in value at the same time with the increase on inflation.
This real estate, collectibles, jewelry and so on. But the stock market is another. And for him the process of inflation acts as a threat. Since, with inflation is an increase of interest rates, which had a negative impact on the securities market.
This deprives the sphere of investment shares, and it is likely that the cost of business will increase in price - earnings of firms will decline, and the share price increase. It is because of this, we can not be 100% certain that the shares will insure us against inflation. Yes, they can earn good money.
Earn before inflation will prevail (devouring the profits). But this is only if we invest in stocks that have a consistently high level of income. Only in this case, the stock price will increase faster than inflation grows and we are able to come forward.
Myth Five : everybody can afford the high risks. It is not only cruel, but also extremely illogical myth. Many are simply afraid and do not like to take risks, being careful. After all, the value of the probability of possible earnings under a big question.
Young investors are extremely cautious - they and so many costs and very low incomes. Consequently, they can not so much risk. Much more rational to invest in proven companies, whose income, though not great, but is stable. And while there. Ten years later, it already will be other indicators. So they are patient, putting a reason.
The trader should know : How to choose a trading strategy
Author: Andrew Kemp WELTRADE