Entry from LiveJournal blog - 25 Aug 2008
In stock market, when someone makes profit only when some else loses.
X buys a share at Rs. 100
Y buys it at 105 - Say he gets share what X sells. X makes profit of Rs.5
Z buys it at 110 - Say he gets share what Y sells. Y makes profit of Rs.5
Now Z tries to sell but since there are now buyers for price >= Rs.110, he decides to sell at lower price to lower the loss.
So he decides to sell at say Rs.105. Lets say, Y thinks stock price went to Rs.110 and it can go up again to that extent. So he buys it at 105 and waits for it increase.
When it doesn't increase, he decides to sell at say Rs.100. Now X sees it opportunity and buys it.
In the above process,
X made profit of Rs.10
Y made no profit no loss
Z made a loss of Rs.10
Broker got his commission by recommding stock...
==> Rumours, News, Broker recommendations all drive up or down the value of stocks. Right?
==> Valuation is process of creating perception that a certain stock is attractive at certain value. Right?
==> P/E of 10 is good for one company, P/E of 25 is good assumption. Who knows what is right one? P/E of 10 means getting back investment in 10 years. But as investor, do I get EPS as dividend? No. Dividend could be 0 also. In that case, valuation of stock goes up. Am I running behind something which I will never get?
Isn't this cheating? Isn't it gambling? Isn't exploiting people who are ignorant, who do not have access to information that to at right time?
Hi,
ReplyDeleteTo choose a company for investment, what should be the ideal P/E ratio? Since that indicates the term for the return on investment, should it be smaller value to be a better company? While choosing companies to invest I do check this factor but I think it is just the ratio of price to the equity capital of that company. Do share your thoughts.
Ravikiran
Hi Ravi,
ReplyDeleteI have not used it extensively. I know very little about it. Here is some info.
The ideal P/E is differs from sector to sector. For sector, average P/E of companies is caluclated and taken as reference to evaluate a company. If a company is P/E is below avg P/E then it has potential to grow.
For more more info, follow below links:
P/E – What is it all about?
http://www.equitymaster.com/detail.asp?date=9/2/2004&story=2
P/E ratio simplified
http://www.equitymaster.com/detail.asp?date=7/10/2008&story=2