The greatest myths in the securities market

Ratio of price to earnings shows whether the stock cheap or expensive.

Ratio of price to earnings is easy to find. Virtually every financial publication, at least in the West, published by the ratio of price to earnings. It seems that the discussion of the shares of the figures tell all. So that this ratio is an excellent indicator for selecting stocks.

Right? Wrong!

If you have been told that the ratio of price to profit "Corporation Pyramids" is 7, and the "bubble companies", he was 14, would you buy "Pyramid Corporation" instead of "Companies bubbles"? Maybe yes, but you would not feel confident taking such a decision. Why? Because you need more information. Before you decide to purchase shares of any company, any self-respecting investor to gather as much information to make correct decisions. One of the most important things that you would like to know is the value of the shares of each company brought on the basis of their profits, profitability and other key financial data. In other words, you would like to understand what the real value of these shares. Ratio of price to earnings will not affect the value of the shares!

What investors need is the ratio of real value and price. Sign of the ratio of the real cost and prices, investors will be able to immediately determine whether the share price to a low, high or real. But it does mean that we need some way to calculate the cost. Of course, there are theories and formulas to calculate the actual value. But they are complex, and some even experienced investors say they are incomprehensible. Consequently, most investors, even professionals, do not start with the actual value of the shares! They resort to such trivial means of comparing the ratio of price to earnings.

Myth number 2

To earn good money in the securities market, it is necessary to assume the existence of a high degree of risk.

Recently, one woman said to me: "I'm just afraid of the shares before his death. I can not afford to lose their hard-earned money." We can not say that the understanding of the high degree of risk when investing in the securities does not have some merit. Many investors lost substantial sums of money market. The spectacle away from the windows of investors in 1929, vividly recalls the risk that is part and parcel of investing in securities.

The collapse of 29 th and 87 th years, software failures opinions exchange deals, the sale of shares by persons and institutions that have insider (confidential) information, the acquisition through borrowings, etc. also contributed to investment in securities of the image, usually associated casino. To a large extent, the investment community - worst enemy himself on deterrence of private investors. And this is very bad, because the investment in securities is one of the best ways to save a considerable state of the average person, and in fact should not necessarily be a very risky business. To do this, just a few simple techniques and some discipline. In fact, it can be much safer than investing in real estate, collectibles, or your own business.

As a minimal risk to earn good money on campaigns?

Buy stocks with consistent, predictable levels of income growth on them: to buy shares, the level of income growth which is a minimum amount of current inflation and interest rates.

Invest in different stocks: do not invest more than 10% of your money into shares of any one company do not buy shares for more than two companies of the same industry.

Do not throw with his head in the market. Spread investment over time.

Use a stop order to sell in order to reduce the risk to a minimum.

Stocks with consistent, predictable rate of growth of income are the most secure of all the shares, which You can buy it. They usually represent the best of America.

Equity portfolio with average earnings growth of at least 14% a year, has a high probability of doubles in five years. After twenty years it would increase to 1500%.

If you purchased shares of the ten companies, and limit your losses on the shares of each company to 10% using a stop-order for the sale, the overall risk of your portfolio is only 10%. Your risk of shares of each company is only 1% of the total portfolio. How can you call kinds of investments that have potential for growth stocks, with such limited exposure to risk?

Myth number 3

It should buy shares when the rate decreases, and sell when it grows

There is widespread belief that, if the buy securities when they are cheap, and sell them when they are expensive, it certainly will bring a profit. The truth is non-rebuttable. However, many investors think that if the shares fall in price, they are cheap, but if the rise in price, then my dear. In this they are buying shares when their rate is reduced, and sold when it is growing. This is a big mistake. Shares purchased in the expectation that they will grow in value. If the stock price declines, the put-to miscalculation. That is, in principle, it is logical to buy the shares, the price of which is increasing. Moreover, it is best to buy shares when the price exceeds the previous top mark. When not a disgruntled shareholders, ready at any moment to throw their shares into the market at a bargain. If the action actually assessed, then they should be ahead of the brilliant prospects.

Myth number 4

Shares are insured against inflation

For many years, traders felt the action by insurance against inflation. You can agree with it, you can not accept. It all depends on perspective. It ensures that the present inflation that expensive at the same time as inflation - real estate, jewelry, collectibles, etc. With respect to the securities market, the inflation rate represents a real threat to him. In the face of rising inflation to raise interest rates, causing a number of adverse effects. On the one hand, investors who favor bonds with high interest rates, depriving the market of securities infusions of capital. On the other hand, can jump the cost of business, revenues will fall and share prices rise.

Therefore categorically assert that the shares are used by insurance against inflation, at least misleading. At events, you can earn money faster than inflation eat invested money. To do so, invest in stocks with a high level of growth in income for him. When the price of the shares will rise faster than inflation. You like to whip inflation, moving ahead of it.

Myth number 5

You can afford a high degree of risk

Apparently, this is the most cruel and stupid myth of all myths about the stock market. Everyone knows that older people do not like risk. They have to be very careful, because the value of future profits is very limited. They, you see, can not afford to lose their money. But this is about young people.

Young people, most of them are forced to take every penny. Creating a family, buying houses, capital accumulation, etc. require fixed costs. It is young, with the exception of, perhaps, the yuppie obsessed with career, is at the bottom of the income scale. Their net income is very low. They never can afford to take risks. In addition, young people have one important advantage - time. Is there any sense to take risks when you can invest in proven and reliable company, profitable from year to year? With the growth of 10% in the year of investment will double every seven years. By the time the younger offspring is time to go to school, this original, reliable investment increased eight times.

When there is time, you can afford patience. Patience on the market paid it.