Make Money through Stock Trading by the Price to Book Ratio Way

Investing in stocks to make a quick buck is not for the long-term traders but for the day traders. The day traders are the ones who have borne the brunt of highly erratic market movements even in otherwise blue chip stocks. Of course, hot tips to invest in a stock due for a jump in value should not be overlooked. However, stock tips, loosely given by stock trading firms should be taken with a pinch of salt but those from your portfolio manager should be carefully considered. A few stock tips, particularly from a reputed expert in the field, could prove to be highly useful.

Stock Trading

These are volatile times for the markets what with the global slowdown, inflationary pressures, hikes in interest rates, currency depreciation, the Iran nuclear standoff, world oil supply hitches and the EU financial crisis. It is certainly not a surprise to find market meltdowns in such circumstances. Only a long-term trader with deep pockets, with proper research for stock picking and the right attitude can make a fair amount of money in these trying situations.

There are no clear signs of an economic revival in the immediate future. Taking this into account, it is expected that corporate profits would be on the low side for the next few quarters. Traders can no longer depend on upcoming bonus or dividend relief.

What is the way forward to make money from trading in depressed market conditions? Traders should reinvent their strategies when picking stocks. They should move from ratios based on earnings to price to earnings ratio. In relation to dividends determining stock selection, they should shift from ratios based on earnings to ratios based on assets.

Price to earnings ratio and ratios based on assets will bring into consideration the price to book ratio. Why is it required to look at the price to book ratio? In the present uncertain scenario, it is the best way to hedge your bets as it is the most reliable ratio. It is certainly less unreliable than profits and dividends as it the total value of the company’s assets, when in a hypothetical situation it is liquidated, compared to its market capitalization.

Let’s look at it in another way. As a trader, you purchase X number of shares of a certain company. You will buy those shares only when convinced that even in a worst case scenario of the said company folding up, you would still receive its book value which is higher than the prevailing stock price. So, the price to book value ratio can indicate accurately whether equity held has a value below the current market price or above it.

It is not yet time to be complacent and think that you have hit the jackpot with the book value ratio method. Things can still go wrong as when book values are unrealistic for they could be hiked by managements. It is essential to have grapevine support so that you choose managements that are clean.

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