Stock Trading Myths – quotes and P / E ratio

Investors and traders A common misconception is that an action to $ 5 per share, being a "cheap stock trading" 500 per share. This seems to be common sense, but in fact it is not correct.

Many investors, especially the new business world is the temptation to "low-cost transactions Charm" is less than 10 dollars in stock, but did not realize the population can not be cheap.

For many people, this lesson is painful lessons the way – through hard-earned money losses. Here are some simple concepts and examples to illustrate what really makes action "cheap."

Stock Trading Myth # 1: all people are equal

The idea that stock prices in a three-digit transaction fees more expensive than 1 below 10 U.S. dollars, is one of the most enduring, but not on a commercial basis, complete with all myths.

On the surface, the myth of such transactions, it is of great significance. After all, 280 yuan, selling a bottle, of course, the price of 2 dollars more than a sale of the same size bottle. Of course, you can expect $ 280 bottle of wine quality are better, but this is a personal preference issue, not a fact.

Fact of the matter is that the two bottles of wine is equal in size, rather than on price – an expensive and cheap.

When it comes to trade issues, difference is that not all actions are the same. They are really, not all the same size. If a company has 1 million the total number of outstanding shares, with 10 million shares, which owns 10 percent of the company.

If the other company has 10 million the total number of outstanding shares, they also have 10 million, only a restructuring. Unlike the two 750 ml wine bottles, these two groups are not equal in any form.

Stock Trading Mistakes 2: Sirius XM's cost ratio

Take the cases of companies Sirius (SIRI) and XM Satellite Radio (XMSR). Sirius and XM is about 5 U.S. dollars of trade, industry, 15 U.S. dollars. On the surface, XM Sirius 3 times more expensive, but careful observation, Sirius is clearly the most expensive of the two.

This is because XM has total of about 258 million shares outstanding, while Sirius has one. 4 billion U.S. dollars. If you have 10 million of XM, shares of the company will have about 4 per cent of the company, and if it has 10 million Sirius shares, you must be less than a total of shares.

Sirius and XM, or have a positive income (profit) so far. Sirius has 325 million in 2005 sales, while XM has 663 million U.S. dollars in sales.

Per share, which equates to about $ 0 sales. 24 Sirius part of it. XM's two U.S. dollars per share of sales. 88. As the Sirius stock price is about 1 / 3 is the XM, which will be fair to the spread of three Sirius results.

To make this adjustment, Sirius shares of 15 yuan achieved sales of just $ 0. 72 In 2005, while the $ 15 XM's shares rose 2 U.S. dollars. 88. XM is that all reasonable measures cheaper than Sirius.

You see Sirius cheaper way of thinking, because its stock price less stupid? A low stock price stock trading is not necessarily cheap. A higher proportion of stock price is not necessarily expensive.

The above example uses the sales data, because no company has started making money. Under normal circumstances, income (profit) data used to determine the stock P / E (under the price-earnings ratio), the ratio.

The traditional view that a lower stock P / E is a cheap stock trading high P / E and in this particular case, the conventional wisdom is correct. However, for anyone to say who stock the low P / E than the trading in the stock, and better at a higher P value of / E is the traditional wisdom too far.

Think of wine example: a little wine, 2-element and up to about 10 U.S. dollars a good wine. In this case, the bottle is a bargain $ 2. However, some, if not the most expensive wine is 2 billion, is the reason. The same is true for a low-phosphorus action / E. coli

Stock Trading Myth # 3: Low P / E is good, P Alta / E is a bad

The key to making money in the operation to find a value of the population. Share price information is not enough. A / E's profit and loss account and balance sheet data, charts and technical models of the real values of professional tools.

First, however, beginners must overcome the myth of non-governmental trade, only barriers to trade success.

Tags: Believe, Cost, Could, Don't, MythsIt, P Alta, Per, SIRI, Sirius, sirius 3, stock, Trading, U.S., xm satellite radio