Question

Discussion :

The Price Earnings Ratio or PE ratio is an indicator of how expensive a stock is.

Some investors will look to invest in stocks with a high PE ratio.

Some will look to invest in stocks with a low PE Ratio.'

Why do different investors select stocks with such different PE ratios?

Thoughts suggestions and ideas welcome, but please make sure you support your arguments with appropriate referencing.

One of the things that can be very useful is comparing the PE ratio of a stock to the overall PE ratio of the market.

This can provide some context for the stocks and how they compare to the overall market, i.e. are they expensive or cheap relative to the market.

You can also do this to the particular sector they are in, once again providing some context.\

Any thoughts anyone?

Two Referencing

Answer 1

Price earning ratio or P/E ratio is the ratio of market value of company share to its earnings. It is an key tool available with investors and trader for evaluating the profitability of an security. Investment analyses P/E ratio of an company share for finding out whether the company share is worth for investment by them for not. There may be a two cases in a Profit earning ratio, that is a stock have a higher profit earning ratio or a stock have a lower profit earning ratio.

A stock with higher profit earning ratio reveals that a stock is priced higher in comaparison to its earnings. Wheras, a stock with lower profit earning ratio tells that a price of a stock is lower as compared to earnings level. Higher price earning ratio tells that a price is overvalued and a lower price earning ratio tells that an stock is undervalued.

However, it is seen that a stock with higher earning ratio generally belongs to a fastest growing comapnies lke hi-tech companies. Investors are willing to invest in these overvalued stock mainly with the hope better growth in future. A stock with higher profit earning ratio generally grow faster thereby providing better returns in the form of returns to investors.

Stock with lower earning ratio are the one which are in less demand and sold by slow growing or unreputed companies for attracting investors. These companies issue stock at lower prices for attracting investment for aquiring funds. Investors by investing into these securities makes profit via arbitrage oppurtunities.