Purchasing stocks at a low price and selling them at a high price is how you make money in the stock market. The aim of each and every one stock traders is to purchase low and sell high, but the major problem is: when prices are enough low to start with and enough high to sell?
How do we know whether share prices are high or low? To answer this, the P/E ratio provides background by comparing the share prices to what the company really earns. To make a decision whether a company has a high or low price-to-earnings (P/E) ratio, we want to compare it with other companies in the similar industry and in the market in universal or against the company’s own historical price-to-earnings (P/E).
Stocks with higher price-to-earnings (P/E) ratios can be expensive, while an unusually low price-to-earnings (P/E) ratio relative to the competitors may point out an under-priced stock. If you purchase the shares when the price is too high, then you will have a small room for the benefit. Therefore the most excellent time to buy stocks is when the price-to-earnings (P/E) ratio is low, and sell them when the price-to-earnings (P/E) ratio is high (when earnings are peaking).
Investor prospect will also have an effect on the company’s share prices. If investors guess a company to do well in the coming years, they will be very probable to invest much more and thus push up the prices.