Friday, November 25, 2005

Sensex - Stock Market Myths

1. You can tell if a Stock(Share) is cheap or expensive by the Price to Earnings Ratio.

False: P/E ratios are vesy easy to calculate, that is why they are listed in newspapers,websites etc. But you cannot compare P/E ratios of companies from different industries, as the forces acting on those companies and industries have are different. Even comparing within an industry, PE ratios do not tell you about various other financial fundamentals and nothing about a stock’s value.

2. To make Money in the Stock Market, you must take High Risks.

False: Tips to Lower your Risk:
· Do not put more than 10% of your money into any one stock.
· Do not own more than 2-3 stocks in any industry.
· Buy your stocks over time, not all at once.
· Buy stocks with consistent and predictable earnings growth by looking at the balace sheet.Also you need to compare the balance of the last five years to be safe.
· Buy stocks with growth rates greater than the total of inflation and interest rates.

3. Buy Stocks on the Way Down and Sell on the Way Up.

False: People believe that a falling stock is cheap and a rising stock is too expensive. But on the way down, you have no idea how much further it may fall. If a stock is rising, especially if it has broken previous highs, there are no unhappy owners who want to dump it. If the stock is fairly valued, it should continue to rise.

4. You can Hedge Inflation with Stocks.

False: When interest rates rise, people start to pull money out of the market and into bonds, so that pushes prices down. Plus the cost of business goes up, so corporate earnings go down, along with the stock prices.

5. Young People can afford to take High Risk's.

False: The only thing true about this is that young people have time on their side if they lose all their money. But young people have little disposable income to risk losing money. If they follow the tips above, they can make money over many years. Young people have the time to be patient.

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