Do not believe everything free stock myths Trade-It, you could

May 8, 2010 admin Stock Market Articles

Myths Stock Trading – stock price and P / E Ratio

A common misconception among investors and traders is that a party is $ 5 per share “cheaper” than a stock trading at $ 500 per share. This seems common sense, but in reality it is simply not true.

Many investors, particularly newcomers to the world of trading, be tempted by the charm of a “negotiation of economic values” less than $ 10, you can see the lack of the material is not cheap, after all.

For many, this lesson is learned the hard way – by losing the hard earned money. Here are some simple concepts and examples of what really makes an action “cheap.”

Stock Trading Myth No. 1: All actions are created equal

The idea that a stock trading more expensive for a population of three digits is the trade as one of less than $ 10 one of the most persistent of all trading partners, yet unfounded myths.

On the surface this makes perfect sense material trade myth. Finally, a bottle of wine that sells for $ 280 is certainly more expensive than a bottle of the same size, which sold for $ 2. Sure, you can expect the $ 280 bottle of wine, higher quality, but this is a matter of personal taste, not fact.

The fact of the matter is that both a bottle of wine is equal in size, but not in terms of prices – is expensive and cheap.

When it comes to trade, the difference is that not all populations are equal. They are, in fact, not all the same size. If a firm total of 1,000,000 shares of common shares outstanding and 100,000 shares held, you have 10 percent of the company.

If another company has a total of 10 million shares outstanding, and has 100,000 inhabitants, has only 1 percent of the company. In contrast to the two 750 ml bottles of wine, these two populations are not equal in any way.

Stock Trading Myth No. 2: Sirius XM is cheaper than

Take the example of Sirius (SIRI) and XM Satellite Radio (XMSR). Sirius operations for about $ 5 a share and trades XM $ 15. On the surface it looks as if XM were three times more expensive than Sirius, but on closer inspection is Sirius much more expensive of the two.

This is because XM has about 258 million shares, while Sirius has first 4 billion €. If you owned 10 million shares of XM, has about 4 percent of the company, whereas if you owned 10 million shares of Sirius, which has less than 1 percent of total shares.

Neither XM nor Sirius has a positive result (profit) so far made. Sirius had an annual turnover of U.S. $ 325 million in 2005, while XM had revenues of $ 663,000,000.

Per share, representing a turnover of more than $ 0 ª 24 percent of the shares of Sirius. XM sales per share of $ 2 88th As the stock price of Sirius is about one third that of XM, it would be fair to multiply the results of Sirius for three.

In addition to this adjustment, $ 15 of earned income shares of Sirius for only $ 0 in 2005 and won 72 $ 15 XM shares at $ 2. 88th XM is, by all reasonable measures, much cheaper than Sirius.

Do you think the madness that Sirius is cheap because the stock price lower? A stock trading at a low price is not necessarily cheap stock. An action with a high share price is not necessarily expensive.

The above example uses sales data, since neither company has turned a profit so far. Normally, earnings (profit) data were used to determine the actions of P / E (price earnings) ratio.

Conventional wisdom says that action at a lower P / E is cheaper than a stock trading at a high P / E, and in this rare case the conventional wisdom is correct. But who says that working at a lower P / E is a better value than a stock trading at a higher P / E of the conventional wisdom goes too far.

Consider the example of wine: about $ 2 wine could be as good as some $ 10 wine. In this case, the $ 2 bottle of a business. But most of some, if not, the wine is cheap $ 2 for a reason. The same is true for action at a low P / E ratio.

Stock Trading Myth No. 3: Low P / E is good, high P / E is bad

The key to making money in the stock market is finding a stock at a value. Mera-action is not enough information. P / E, income statement and balance sheet data and patterns of sheet are the tools of professional real stock trading.

Before the rookies need to overcome popular myths that inhibit successful trade only stock trading.

Bottle Of Wine, Cheap Stock, Common Misconception, Common Shares, Economic Values,