There as many ways of investment strategies as investors. Some investors give greater weights to professionalism of management, composition of capital, promoters' stake and overall performance of a company on the financial front reflected in its growth of profit , robust reserve and surplus account and consistent dividend payment record. Obviously this strategy is very sensible and can be almost thought to be infallible guides to sound investment. The stock market while reacting to any particular stock or share ( though these two terms vary in their meanings) both factor in the sectoral prospects, current developments and long-term financial health of companies as well as the position of that particular company in the sector which it belongs to. Therefore, what we witness in the form of price behavior of a particular share is nothing but the outcome of its demand and supply situation at any given point of time. The logical question that should follow is why the price of a share of a company which fundamentally looks so strong and is up today goes for a tailspin in the very next day. The answer lies in the fact that short-term price behavior of any share is heavily influenced by the current developments involving the company as well as the sectoral space in which it operates. And a medium or long term investor is averse to taking a short-sighted view of things and goes for cherry-picking when the chips are down! How Price Earning Ratio helps a smart investor in identifying the hidden gems which are out of favor of the market for some inscrutable reasons is the focus of this article. As you have noted the meaning of Price Earning Ratio is unmistakably clear in these very terms Price and Earnings. Here price refers to the market price of a share of any company at a given point of time and earning refers to what you earn by holding it. And it is ratio of price to its earning. To illustrate it with an example let us take the price of a share of X Company Limited has current market price of Rs 50 and its earning is Rs 5. To get it Price Earning Ratio we have to divide 50 by 5 and it is 10. Now coming to the central theme how it helps in identifying a potential winner which is being ignored by the market for reasons and logic best known to it. If we study the Price Earning Ratios of similar companies we may find a few which have very solid financial performance behind them but prominently figure with lower Price Earning Ratios. Here is our chance to spot them and buy! My experience has been rewarding and the only thing that success of this strategy calls for is patience and faith in it. Even if initial results prove not so satisfying it's always advisable to accumulate them at dips and hold it till time comes to strike it big. Talking about shares of companies with lower Price Earning Ratios, one of my very wise and witty friends likened them to persons of caliber and merit being compelled to serve in small companies with low compensation to be spotted by any big companies with fabulous pay!!! Happy investing!
Price Earning Ratio Could be A Smart Tool for A Smart Investor
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