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Frequently Asked Questions (FAQs) on Stocks

  1. What is a P/E ratio?

  2. How would I use the P/E ratio?

  3. What does the beta of a stock mean?

  4. What is contrarian investing and how do they pick their stocks?

  5. What is book value?

  1. What is a P/E ratio?
    Price to Earnings ratio (P/E ratio) is one of the most important fundamental measures of a company's stock's growth potential. The P/E ratio is the current price of a stock divided by its earnings per share for a 12 month period. Here's an example: A stock selling for $100 a share has earnings for $20 for a 12 month period. Its P/E ratio is 5.
     

    $100 divided by $20 = 5

     
  2. How would I use the P/E ratio?
    In the above example, you are paying five times what a share of stock earns. The more the P/E varies from the industry average, the more speculative the stock is. For example, if the industry average for financial stocks is 10 and your stock has a P/E ratio of 30, unless you like to gamble, you might consider selling. Your stock is overpriced for its group. The P/E ratio, also called a stock's multiple, is one easy and effective way to compare stocks of varying prices.
     
  3. What does the beta of a stock mean?
    Beta is the measurement of a stock's volatility in relationship to the rest of the stock market. Volatility is the degree of price fluctuation of a share of stock. The Standard & Poor's 500 tock index has a beta of 1.0. Any stock with a higher beta is more volatile than the market, while a stock with a lower beta can be expected to rise and fall in price more slowly than the overall market. For conservative investing, you should be looking at stocks with a beta lower than 1.0 and vice versa.
     
  4. What is contrarian investing and how do they pick their stocks?
    There is an old maxim on Wall Street that says, "When everyone's buying, sell; and when everyone's selling, buy." It's easier said than done but a contrarian will evaluate a situation many different ways. They believe that the little guy is usually wrong in picking the direction of stock prices. Here are a few ways they find those stocks:
     
    • Find out what stock groups are depressed and why. Some may be depressed only for emotional reasons. If this is the case, find a stock or stocks in a group with steady to growing earnings and dividends and a growth rate higher than the Standard & Poor's 500.
       
    • When the price/earnings ratio and the price/book value are below the Standard & Poor's 500 average, there may be a buying opportunity.
       
    • When debt is no more than 35 to 40 percent of a company's equity, a contrarian will consider buying.
       
    • Contrarians don't chase trends. They're are more interested in dull, mundane stocks that are profitable and they're patient investors.
  5. What is book value?
    Book value is calculated every year and is arrived at by deducting a company's liabilities from its assets and dividing by the number of shares of stock outstanding. Book value will usually be a different amount each year.

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   Always keep in mind to:
  1. Spend less than you earn! People who spend every penny they make usually end up going broke.......
  2. Take enough risk on the money you save! Playing safe by putting your money under the mattress or in a savings account will not make you wealthy..

Remember that..... Fully one-fifth of humanity, some 1.3 billion people, struggles to survive on less than $1 per day. About 40% of humanity survives on less than $2 per day. More than a billion people around the world will go to bed hungry tonight. Life expectancy in some 32 countries is less than 40 years. If you have a few extra dollars in your pocket (you don't have to be a millionaire to make a difference), please share some of your financial good fortune with others who are in great need.


Think About It...  Being in the 'now' brings a freedom, unlike living in the past or in the future, which is a kind of imprisonment. This isn't a kind of a denial where you pretend life doesn't have problems. Life is full of problems, but most of those stresses and failures are reliving old hurts or worrying about future concerns. -- Carl Honore

When you 're diagnosed with cancer, you start to bargain with God: "Let me get through this, and I'll take better care of myself. I'll get my priorities in order. I'll learn to live every day to the fullest." Isn't it sad that you have to get sick before giving yourself permission to live life to the fullest? -- Robert Schimmel Look at Life in different & Positive ways