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Do not believe all myths Stock Trading, which could cost
Myths Stock Trading – stock price and P / E Ratio
A common misconception among investors and traders is that an action to $ 5 per share is "cheaper" than a stock trading at $ 500 per share. This seems to be the meaning common, but in reality is simply not true.
Many investors, particularly newcomers to the world of trading, are tempted by the lure an "economic trading" under $ 10, not realizing that the population can not be cheap, after all.
For many, this lesson is learned the hard way – through the loss of hard earned cash. Here are some simple concepts and examples that illustrate what is actually makes an action "cheap."
Trade Values Myth # 1: All actions are created equal
The idea that a negotiation shares at a share price of three digits is more expensive than a business one for under $ 10 is one of the most persistent, yet completely unfounded of all the myths of commerce.
On the surface, this myth of stock trading makes sense. After all, a bottle of wine that sells for $ 280 is certainly more expensive than a bottle of the same size sold for $ 2. Sure, you can expect $ 280 bottle of wine to be of higher quality, but that is a matter of personal preference, not facts.
The fact of the matter is that the bottle of two of the wines are equal in terms of size, but not in terms of price – one is an expensive and cheap.
When it comes to trade, the difference is that not all actions are created equal. They are, in fact, not all the same size. If a company has a total of 1 million shares outstanding and you own 100,000 shares, which owns 10 percent of the company.
If another company has a total of 10 million shares outstanding, and you also own 100,000, you own only 1 percent of the company. Unlike the two bottles of 750 ml of wine, these two populations are not equal in any way.
Stock Trading Myth # 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 as expensive as Sirius, but closer inspection, Sirius is clearly the most expensive of the two.
This is because XM has about 258 million total shares outstanding, while Sirius has 1.4 million. If you owned 10 million shares of XM, you will own about 4 percent of the company, whereas if you owned 10 million shares of Sirius, you have less than 1 percent of the total shares.
XM or Sirius, nor have positive earnings (Earnings) so far. Sirius had annual sales of $ 325 million in 2005, while XM had sales of $ 663 million.
Per share, this equals the sales of about $ 0.24 per share of Sirius. XM had sales of $ 2.88 per share. As the price of the shares of Sirius is about one third of XM, would be fair to multiply the results of Sirius for three.
Even making this adjustment, $ 15 shares of Sirius had sales of only $ 0.72 in 2005, while $ 15 XM shares gained $ 2.88. XM is, by all reasonable measures, much cheaper than Sirius.
Do you see crazy to think that Sirius is cheaper because its stock price is lower? A stock trading at a low stock price is not necessarily cheap. Action rate at a high price is not necessarily expensive.
The above example uses sales data because no company has turned a profit so far. Normally, earnings (profits) of data would be used to determine the stock P / E (price-earnings) ratio.
Conventional wisdom says that a population in a lower P / E is cheaper than a stock trading at a maximum of the P / E, and in this rare case, the conventional wisdom is correct. But anyone who says that working at a lower P / E is a better value of a stock trading at a higher P / E is the conventional wisdom too far.
Think in the example of wine: A little wine, $ 2 could be as good as some $ 10 wine. In this case, the bottle is a bargain $ 2. But most of some, if not, Cheap wine is $ 2 for a reason. The same is true for action at a low P / E ratio.
Stock Trading Myth # 3: Low P / E is good: P High / E is bad
The key to making money in an action is to find a stock at a value. The price action alone is not enough information. P / E ratio, income statement and balance sheet data, and patterns of the sheet are the tools of professional real stock trading.
First, however, beginners must overcome the popular myth that only inhibit trade successfully in the trading of securities.
About the Author
William Smith the author provides additional financial information on many subjects as well as the secret to his success in the market along with 5 Free power stock picks emailed daily so grab your Free subscription on his website at
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