Investing Feeds

In a break from the tutorials, as I am trying to put a lot of material into an order which suits the development of the series, I felt that it was a good time to introduce a list of wider reading sources from the internet to help with the assimilation of all of the theory. One of the most important aspects of learning to Invest is to strike a balance between theory and practice, and the only way to do that is to develop a personal understanding of how the markets work. [Read more]

Finance has a language and life all of its own, and potential investors, especially if they are new to the market, are often at a loss to understand all of the different terminology and analysis which goes on, both in the Financial Press, and in technical books on the subject. In this article, and in subsequent ones to follow, an attempt will be made to take one concept at a time and dispel some of the myths and jargon surrounding it.
The P/E Ratio appears in all share listings in any financial press, it is a good idea that you look at a website whilst reading this article, which contains listings (www.ft.com is always a good one). Essentially it is a mathematical representation of the earnings (total post tax profit of a company that is attributable to shareholders i.e. that could be paid as a dividend) and the Price of that share. Essentially to reach the P/E Ratio an analyst takes the Earnings per Share (Total profit attributable to shareholders divided by total number of shares in circulation) and the current share price and represents them as a ratio thus

P/E = Price (P)/Earnings per Share (EPS)

The resulting figure is a measure of, amongst other things, the amount paid for a certain level of potential profit. Following a simple example you have the choice of investing in two companies A&B; A has a PE Ratio of 10. B has 8; both have EPS of $0.5. What the difference in the PE Ratio is telling us that there is a lower investment needed (and therefore less risk involved) in investing in company B, to achieve the same level of reward. By rearranging the formulae to its reciprocal, analysts arrive at the earnings yield, which, expressed as a percentage is useful to compare your stock against other stocks. If a stock has a higher Earnings Yield that yours, or you’re potential, it may make for a better investment, especially when that stock is in a broadly similar line of business.

As with all investing advice, take care and definitely only invest what you can afford to lose in the worst case scenario, PE Ratios cannot predict an Enron, or Northern Rock for example and what looks good on paper, or in Theory, can be fundamentally flawed.