Trading: Price to Earnings Ratio

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Price to Earnings Ratio

Measures how much you are paying for the company’s earning.

The higher the price-to-earnings ratio the more expensive is the stock price.

Higher price-to-earnings ratio indicates that the company is very popular and it attracts more buyers in the market.

Average P/E Ratio = 17

High P/E Ration > 25

High P/E companies are very optimistic about future and stock price are overvalued and when bubble happens investors are more likely to lose quite a lot.

Low P/E

  • Company is undervalued, trading at low price
  • Company most likely have high earnings

It is best to find the correlation between low P/E ratio and above average returns.

Trading: Dollar Cost Averaging

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Dollar Cost Averaging

DCA (Dollar Cost Averaging) vs LSI (Lump Sump Investing)

In stock market past performance cannot guarantee the future performance because every bear market decline, crash and panic.

DCA is simply where you invest same amount of money at regular intervals: every month, year or week regardless of market trend.

It will force the invester to buy more when the price is low and less vise versa.

Benefits related to DCA is that the invester will not be devasted by the losses that come along.

DCA encourages you to be patient and stick to the market for a long term during ups and down.

Example:
Month 1 : Stock Price $10 Bought 50 shares 
Month 2 : Stock Price $5 Bought 100 shares 
Month 3 : Stock Price $5 Bought 100 shares
Month 4 : Stock Price $15 Total 250 shares