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Strategy
No. 4:
Look for Value Shares
Some shares represent
better value than others do and investing in individual
shares when their shares fall below what are likely to
be sustainable valuations. For newcomers to the market,
it may seem hard to identify these shares. However,
taking a little time to understand how companies are
valued can pay off. Studying the price to earnings ratio
will enable you to judge which shares represent value
and which ones are overpriced. The price to earnings
ratio indicates the number of times the price covers the
earnings of the share. This ratio is listed in the daily
newspapers along side the share's price.
A company with a low
price to earnings ratio can be considered a better value
stock than a company with a high price to earnings
ratio. Over time, companies with low price to earnings
ratios have consistently outperformed those with high
price to earnings ratios.
One thing to remember is
that the price to earnings ratio is calculated on a
company’s current financial situation. One company may
have a higher price to earnings ratio than another but
this could be due to an unusual recent situation.
Similarly, the other company may have had an unexpected
windfall that is unlikely to occur again.
So, before making a
decision based solely on price to earnings ratios, it
would be advisable to check the price to earnings ratios
histories of the relevant companies. Next:
Buy Blue Chip Stocks to Hold in the Long Term
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