When to Invest in Stock Market?

 

When to Invest in Stock Market? – TRACK PE RATIO OF THE INDEX

If you want to Invest in Stock Market for Long Term to earn higher returns.

Here is the formulae to decide what is the right time to invest in Stock Market either through Mutual Funds (Indirectly) or in Directly in Shares.

Whether a Stock is Under Valued or Over Valued? – TRACK PE RATIO OF THE SHARE

 

PRICE EARNING RATIO (PE RATIO) = Market Price of a Share/Earning per Share

It tells us that how much Capital we need to invest to earn Re 1.

PE Ratio 5 means Rs. 5 to be invested to earn Re 1 (Dividend plus Capital Appreciation)

PE Ratio 15 means Rs. 15 to be invested to earn Re 1

PE Ratio 25 means Rs. 25 to be invested to earn Re 1

Now you decide that to earn Re 1 we should invest Rs. 5 or Rs. 25.

We should Invest when Market PE is at lowest.

1.       PE Ration of Index for eg. NIFTY. Average PE of Top 50 Companies

-          Generally it ranges between 10 – 30.

-          If NIFTY PE is around 10 to 15, then it is right time to Invest. Since Stocks are undervalued.

-          And If NIFTY PE is around 25 to 30, and then it is right time to Divest (encash the profits). Since Stocks are overvalued or we can say Share Values are at their Peak.

Year	P/E Ratio	Return (Per Year)
1999	12	105%
2003	11	116%
2008	10	130%
Feb 2000	28	-53%
Jan 2008	28	-64%

 

Do not follow the tip. Follow the trend.

2.       Individual PE of Particular Share

-          We cannot decide on individual PE of a particular company.

-          So we need to compare it with the Industry Average PE Ratio.

-          For eg. If Average PE of Particular Industry is 20. Then Shares having PE ratio below 20 are undervalued and shares having PE Ratio above 20 are overvalued.

-          Old Companies which are successful since long and are giving regular returns must be having higher PE because they are less risky and public can pay higher amount for same return.

-          New Companies which are trying to establish themselves in the market must be having lower PE because they are more risky and lesser people want to invest in them. Stock price is cheap.

IMPORTANT NOTE: HIGHER AND LOWER PE IS NOT THE SOLE CRITERIA BUT IT IS ONE OF THE IMPORTANT FACTOR IN SELECTING STOCKS

 

-          Share Price of a Company is mostly dependent on the future earnings which we can expect on various factors like

o   Past trend for earning, Growth Rate.

o   Latest News for particular company or industry affecting profits.

Higher PE is justified when Growth rate in earnings is high and consistency in earnings. We can consider to buy the stock even if it is having PE Ratio.

Lower PE should not be considered where Growth in earning is negligible and no consistency in profits in past years. We should not be considering purchasing on the basis of PE.