It is a long held belief the stock market world that by investing in risky stocks, you will receive a higher pay out when everything clears. This common ideal is known in the business world as stock market volatility. Stock market volatility is considered good investing practice by some, while others view it as a major risk that should be avoided at all cost. However, the question still remains; is stock market volatility good or bad for the average investor?
The answer to this question depends on several factors, but let’s first look at the true meaning of stock market volatility for a better understanding. Stock market volatility is primarily concerned different up and down fluctuations that often occur in the stock market. Volatility is a term used to measure how low or how high the fluctuations are. For example, a sudden rise in the stock market is considered high volatility, whereas a low or normal stock market has reduced volatility.
Other aspects of stock market volatility are option pricing and premiums. An increase in the option pricing will lead to an increase in stock market volatility, which will in turn produce a higher premium. If the stock market volatility is reduced, then so will the premium.
There are also two types of stock market volatility to consider before you start your trading; implied and historical volatility. Implied volatility is calculated by considering what is currently happening to the asset and what may happen to it in the near future. Historical volatility is the average of different volatility measurements over a certain period of time. Historical volatility records is the most common way to check for stock market volatility patterns.
Even the best penny stock alerts often have the highest volatility in the stock market. This can be a good (or bad thing) depending on your investing style and time frame. Day traders usually love this volatility as it allows them to enter/exit trades quickly and easily within a short period. The biggest problem with these trading instruments is knowing what penny stocks to buy. Reliable financial information is extremely limited as most companies are not required to file their financial statements with the SEC and there are no analysts covering stocks priced this low. Technical analysis seems to be the most popular way to trade these low priced plays. Growth Penny Stock Picks is a good example of a website that sends it members some great penny stocks to watch throughout the day to help traders benefit from this volatility.
After a bit of background information on stock market volatility, option pricing, and premiums, you can now start to get a better idea about whether or not stock market volatility is a valuable trading tool or a trap that should be avoided at all costs. Either way, there will be a price to pay for each. If you invest in an stock or asset with a stock market volatility, you will earn more as far as premiums and money if the risky stock does well, but you will also have to take any losses that the stock or asset may return. If the stock trades turn out to be profitable, however, there will be twice as much profit available, if not more.
Investors want methods to value stocks to make wise selections. The price earnings (P/E) ratio is among the fundamental measures of a stock’s cost relative to other firms. Some start (and even seasoned) investors make the mistake of not using P/E ratios. That is mainly because of the fact a P/E ratio is useful only in the context of other info, and can have multiple interpretations. But when used correctly, it’s one of the finest analytic tools available to find ultimate stock alerts.
A price earnings ratio is computed by dividing the cost of a stock by the per-share gains of the firm in question. For instance, if the stock is quoted at $50/share and the firm reported a total of $4.10/share gains for the last four quarters, the P/E ratio is $50/$4.10, or 12.2. Generally, the P/E is rounded off in this example, it’d be recorded only as 12. Basically, the P/E is a gauge of the means by which the market sees the potential for future appreciation of the stock.
A P/E ratio can be either trailing or forwards (estimated). A trailing P/E ratio uses the gains reported by the firm in the preceding four quarters. A forward or estimated P/E ratio uses projections of gains for the coming four quarters to estimate the near term operation of the firm. Other measures that use the P/E ratio may be seen by you. As an example, a relative P/E ratio is computed by dividing a firm’s P/E ratio by the average P/E ratio of the stocks within an index like the Standard & Poor’s 500. A result of 1.0 or higher suggests that the stock has a higher P/E ratio than the typical stock in the index.
A high price earnings ratio suggests the market is expecting growth in the future earnings of the firm, so investors will willingly pay more. A low price earnings ratio may mean even the business is in trouble, or low increase expectations. There are alternative possibilities. Awesome penny stocks with a high P/E may only be overvalued, and one with a low P/E may be undervalued. The P/E ratio is most useful if it is used to compare stocks in a industry. As an example, public utility companies often have low P/E ratios, because investors do not anticipate much increase, and purchase them for their generally high dividends and cost equilibrium. Comparing this type of stock like biotechnology to one in a high-growth sector may be misleading, and does not give very valuable advice. The best penny stocks to watch are those with a high Price-Growth ratio.
Price earnings ratios can be influenced by other variables. P/E ratios will often be lower, because investors can get great yields from other securities when interest rates are high. Since investors will need higher rates of return for the cash they invest, to counter the decreasing value of the dollar a high inflation rate may also result in lower P/E ratios. The investor also needs to remember that gains are computed using accounting methods that are changing, and are subject to exploitation.
It should be clear the price earnings ratio must be used with other advice to be significant. As an investor, you will should look at the present state of an organization by reading its annual report and balance sheet. Analyze the historical growth rate of the business and compare it with other firms in the exact same sector. Be cautious in order to avoid interpretations that are simplistic. As an example, many because the firm was placed for rapid growth a beginner investor has lost cash shorting the best penny stocks to buy and then observe the stock rise and seasoned investors, such as cameron fous, had bid the stock up in expectation.
I'm Aaron Redick, personal finance blogger to the stars (well, not really). I'm just a regular guy (well not really either). Seriously though, I have a lot of experience with investing and finance, and I'm here to teach you what I know. Please follow me in this journey to help ordinary people succeed where others have failed.