There are tons of different approaches when it comes to the stock market. There are as many investment philosophies out there as investors and money managers. But one of the main approaches is value investing. Here’s how to invest using this strategy.
There are several methods even within this strategy that different investors employ. It is broken up into various sections. One of those categories is the low P/E ratio method. Learning how to invest in the stock market using this approach is fairly simple to begin with.
Money managers often use this strategy as well. They pick a bunch of stocks with a low P/E ratio. That means their price is relatively low or close compared to its earnings. In essence, this means that it’s an unpopular stock. The market is saying that they don’t think the earnings will grow that much and that it is priced correctly relative to its future potential.
They don’t just stop here. They look further to see if the low P/E ratio is actually warranted. They will do a fundamental analysis on the company to make sure it is solid. They will look at the financial statements, do a valuation, evaluate the management and analyze the competition. Once they are done with all of this, they will see if their valuation matches what the market is saying.
They start with low P/E stocks because you will have a better chance of finding an undervalued stock this way. If you start with high P/E ratio stocks, you will have less to choose from. It will also be more difficult to find one that is actually trading below its intrinsic value.
Again, this is just one method of investing that many people use. It’s good to get a broad view of how people engage the stock market. This is just one of them.