Factors Affecting or Influencing Share Prices

Share prices are dependent on many factors. So, it is quite hard to point out just one or two factors that affect or influence the shares prices. As you know, shares prices are extremely vulnerable to market volatility, coming off badly when the stock market dips.

There are so many factors that affect the prices of stocks like market news / rumours, company failed to repay hugh debts (usually in billions of US$ dollars as a guideline) when deadline is dued, broker's recommendations, market analyst's reports, listed companies / firms added or removed from MSCI Index, dual-listing, economy reports (GDP, Jobs data ...), company announcements (e.g. price-sensitive information), inflations (CPI), interest rates, election results, domestic political turmoils, riots, revolts, military coups, anti-government street protests, strikes, war, tensions and confrontation between countries, terrorism, crude oil or energy prices...Just too many to named it here.

Obviously, foreign investors or institution fund managers with big funds will dump their portfolios if negative news continues. Their action impact quite a lot to shares prices fall or rise.

Regardless of these factors, the price of stocks is quite liquid and it's determined by how much buyers are willing to buy and how much sellers are willing to sell for their shares.

Take note that an in-depth study into this subject is beyond the scope of this blog. Nevertheless, allow me to share with you although most of it are common sense.

Here are some factors (not in the order of importance) are my personal views.

- Market Sentiment
Many investors are taking one day at a time depends on current situation, they will make their investment decisions based on current market sentiment about the global economies, regional crisis, interest rate, recession, soaring inflation, crude oil prices, supply and demand...depends on what they hear, watch and read. Our feelings change frequently whenever latest news surfaced. So, investors are normally watch and see and try to sort things out daily. This impacts shares prices daily.

- Investors' Confidence of the Health of the Economy
Confidence here does not refers to blind faith about any data accuracy or completeness. I'm referring to the confidence in an economy. The stronger the economy, the stronger or more stable its currency. The higher the shares prices.

Strength about any economy can be estimated or projected from the leading economic indicators such as GDP(Gross Domestic Product) growth, Consumer Price Index (CPI), employment data, government policies changes, trade balance, current account balance, productivity...

Companies have good balance sheet, favorable financial ratios(assuming not window-dressed) like P/E, P/B, earning per share, impressive profit after tax..., budget surplus, consistently making profits despite bad economy...

Investors will likely to invest their money for listed-companies with histories of strong earnings track records like blue-chips and push up these companies shares prices.

However bear in mind that a company has made profits in the past not necessary mean it will continue to do so. Sometimes, the company may defending an upcoming big legal lawsuit, employees may threaten to go on strike or quit, profit margin has shrunken but generally the percentage of such things from happening are quite low. 5 per cents?

Judging from uncertainties ahead, risk-averse investors will most likely to put their investments to listed-companies with a steady cash flow and long history of earning track records.

- Local and World Economic Trends
An uptrend like anticipated business growth or economy recovery whilst a downtrend like a world recession. Generally, when US is in recession, this will impact global countries and push the shares prices down. Likewise, when US announced a better-than-expected growth or confirmation of out-of-recession, the global shares prices will likely follow-up with good news.

Therefore, investors will take their cue form key US economic data and acted on it.

- Regional Crisis
We have learned from sub-prime debacle, it started out just a domestic US mortgage problem but the effect spread so fast across the global like tsunami, this crisis triggered sell-offs in Asian equity market. Regional currency crisis back in July 1997 also caused similar problem in Asian equity markets.

- Inflation
Investors generally are concerns or worry about soaring inflation spurred by rising crude oil or high energy prices, combined with continues slowdown in the US economy will have a significant impact on regional economies and in turns the shares prices.

If government announced a harsher-than-expected tightening of monetary policy to fight inflation, this will further impact the shares market.

- Human Psychology
Human greed generally pushes up the shares price and fear of uncertainties and panic selling will generally pushes it down. Take note, greed can turns into grief if one do not take the opportunities to take profits when market is overheating. Bull run never last. Take the profits if the prices of the stocks are reasonably high within a short period. Likewise, reconsider accumulate good fundamentals stocks like blue-chips if prices fall unreasonable low within a short period. Consult your consultants when necessary.

- Market Rumours/Speculation
Generally it will drive the shares up or down depends on whether it is positive or negative news, novice investors or beginners should stay out of market rumours or speculations simply it is usually involves with a lot of uncertainties or risks.

Most of the time, rumour-mongers are up to something to achieve their motives, unfortunately this are true. When market rumours become too hot, these stocks become hot-stocks and people get burnt especially it has already passes down to many levels and it finally becomes distorted. Beware, blindly chasing the last passed-out rumours is as risky as playing with Russian's roulette. Amateur investor should minimize the market risks by not following the crowds.

Do your own research and understand companies fundamentals. Better relies on reliable information than rumours.

- Dividends Payout/Dividend Policy
When combined with low fixed/saving interest rate and inflation, shrinking dollars will likely to cause investors to park their money on high-paying dividends stocks or bonds to enjoy better return of their investments. Although the yield may not be high enough to shout about but it does provides a credible return under the current quiet market conditions. So, as long as the dividend return or yield is much higher than current bank interest or inflation rate, investor looking for regular returns will likely to invest these companies' shares and in turn pushes up these shares prices.

- Crude Oil Pricing.
By now, we probably heard enough of this, soaring crude oil prices had already pushed up inflation higher and cause essential household items to rise. When inflation level reaches to a critical stage, this will trigger trickle-down effect on goods and services, the opposition and ordinary people will vent their frustrations to their government, anti-government street protests will cause country to go chaotic and affect the sentiment of investors and affect shares prices.

Skyrocketing fuel prices will hurt almost all companies especially so to transport-related companies like airlines businesses because of higher operating costs, fuel accounts for more than 30 per cent of an airline's operating costs, which means most low-cost budget carriers already operating without much fat, so there is little left for them to trim. They will likely announce a significant drop of bottom-line figures, may even turn into big loses. Without doubt, this will affect their shares prices. Not surprisingly, most investors already dump these listed-companies' shares.

- Syndicates
Although it's pretty hard to pin-point who are they. They generally push penny stocks to astronomic heights and make it a 'hot-stock' with 'news' like company receiving big contracts, bonus issue, stock split, take-over or acquisition news but only to sell down later to make profits from unwary investors and finally the shares prices collapsed when the fact is out and small investors get caught with holding this high P/E penny stocks they purchased.

Beware of stocks suddenly traded record high volumes of activities without valid and satisfactory explanation. Don't follow the crowds.

- Interest Rates
Interest rates changes generally will impact sectors that are price-sensitive to their kind of business like banks and real estates, this in turn will affect their shares prices.

A big rise in interest rate will generally cause a sell-off/plunge of shares prices if all things are equal. The reverse is also true.

- Substantial Shareholders Transaction
When you see heavy 'insiders' buying/selling through price-sensitive announcements or 'intelligence' information, this is a strong buy/sell signal. Likely, the shares prices will go up/down even if the information is not acted on for a couple of months. Success investment is about how 'intelligence' is put to use. Some people are privileged to know what is about to happen. They make use of this 'intelligence' legally or illegally to their advantage. This is what happen in the stock market when the market 'insiders' get to know ahead of the public that certain company ‘will soon come to the primary market’ to raise money. In a bid to take full advantage of the discounts of the public offers, they will push the market price appreciably before technical suspension is imposed on the shares price.

- Buying/Selling Patterns of Institutional Investors
Institutional investors backed by big investment companies generally have big funds to change the course of action on a particular shares. Be it foreign funds, pension funds, mutual funds, unit trusts... Their buying/selling patterns in particular stocks are generally make stock prices rise or fall. Therefore, the amount of stocks they owned or dumped are generally a key factor investors should never overlook.

- Cutting-Edge Technology
One example is Apple's iPhone, Apple's shares price has gone up quite a bit when they announced this latest technological products last year.

- Holiday Sentiment
People do needs money to celebrate special festive seasons like Christmas, New Year celebration, long vacation holiday... So, in order to raise money to celebrate with this occasions, investors may sell some of their stocks into the market for sale. If majority of holiday makers do the same things, this may cause the shares prices to drop a bit, simply there are more sellers than buyers. This might explain why market tends to drop when long holiday is near.

Whatever the outcomes, be psychological prepared, a big rise in shares prices during the bull run may be a good time to unload especially penny stocks and turn paper gains to real profits, a dip in shares prices during bear run may be a good opportunity to pick-up bargains stocks like blue-chips left by those who have panicked.

Do analyze the market when investing. The market is your best teacher for shares investment, it is an instant feedback mechanism. If you make a mistake in shares investment and lose money, ask yourself "Where did my analysis go wrong? If each time you use 1 per cent of your investment money, you can afford to make 100 mistakes, instead of being wiped out by the first mistake. You should nibble in small amounts instead of committing large reserves.

Remember higher returns are accompanied by higher risks. Be prudence about your investments!

By the way, stock markets up/down are cyclical. No one can accurately 'predict' the market. If anyone who claims to is either a charlatan or naive. Although the market is quite cautious at the moment, I think one still can make money in the stock market during this periods, but one may have to climb a wall of worries and uncertainties to do so. Be a contrarian but cautiously beware the risks involved.

All the best with your investments!

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Signs of market overheating and impending stock market crash

When you hear the following signs in stock market, you know the market is overheating and the major correction or market crash is not far away.

1. Stock market soars to record high levels. Most stock analysts are very positive to forecast another record high level in the headline news. You hear every other days analysts forecast another new record high level. Rarely the warning of risk of investment are mentioned in their articles. They are overly-optimistic.

2. Majority of investors even common folks are very optimistic about stock market.

3. Media covers with many positive news about stock market. Stock market becomes the headline news. You see most stock market news are interpreted as positive, even occasionally negative news do not seem to affect the stock prices at all because the market is really 'hot'.

4. A lot of people talk about making 'fast and hugh' profit within a few days or even a single day. They are generally very optimistic about stock market than anything else. Stock market seem to be their first priority now.

5. Almost all stocks are over-valued and set another new record high, majority of investors are very positive even for high P/E penny stocks and expect a further rise in the stock prices. They are afraid of missing the 'bull ride'.

6. Many companies went IPO, almost all newly-listed IPO over-subscribed unprecedented.

7. Almost all newly listed IPOs stock surge in first day of trading. Some IPOs stocks even surge more than 50% within a day. Unbelievable but true.

8. Extreme high volumes traded almost on all stocks, historical low-volume stocks also see significant rise in volume traded.

9. Even ordinary folks who have very little knowledge about stock market suddenly just queue and buy stocks. They just buy stocks blindly based on rumors. They 'tasted' quick gain and most of the times they just have strong hope their stocks are likely to hit another record high, they will usually hold it instead of taking profit because greed already set in.

10. Suddenly a lot of new accounts are open with stockbroking companies so as to trade in the stock market. You hear, read and watch news about family took their life savings and put almost all in stocks investment and suddenly they give 'advices' to ordinary folks about getting rich with their money.

11. Most market experts will think market crash will falls to others but not them. They will say the bull market now is different from last time. The markets never change but they do. Despite their knowledge, they are still 'blinded' by the fact of risk of investment.

12. Maniacs and excessive irrational in stock market. People spends more times talking about making quick money from stock market than making decent living from their jobs.

13. When a lot of stock investors suddenly become 'rich' overnight. Making money appears to be so easy in stock market.

14. ....

When the above warning signs exist, you know the end of a bull market is very near and the start of a bear market will begin soon. Hopefully by learning these common warning signs, you can liquidate your stocks investment fast and take your profits early before the market heading for major correction or crash. Although you may not get out the best/peak time but you will be rest assured the money already cashed out to your banks. You don't want to get caught of still holding the over-valued stocks. When market crash, blue-chips stocks are not spared either.

There are always some warning/tell-tale signs before bull stock market heading to major correction or crashes. If you are astute enough to recognize these signs, likely you are already cashed out your profits and out for good.

When dealing with human psychology, greed pushes up the stock prices but fears pushed it down. Be cautious with your hard-earned money or life saving. Bull markets are not long-lasting. The reverse is also true.

All the best!


Attached video shows one of the investors invest all of her life saving in stock market. She voiced how she felt the pain of the markets recent tumble. Look like another painful lesson of not knowing the risks of investment when market is overheating. Unfortunately, this kind of thing happens every times when market is overly-optimistic. Someones will always get caught. Be cautious!

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Stocks Versus Commodities

Based on chart (click to enlarge), oil and gold seem to be rising unstoppable (oil hit a record high of around US$110 per barrel currently, was traded about US66 per barrel same time last year) while stocks are continuing heading southward.
From past history record, whenever a new record high is reached, it will hit another record high. How high will it go is anybody guess? But what goes up must come down, the reverse is also true.

Look like as fears over US recession continues, investors are shifting their investments to commodities besides oil and gold, especially for gold is always consider as a safe haven for investors in times of uncertainties. Gold was traded almost about US$1,000 per ounce currently, was traded around US$680 per ounce same time last year. Clearly, commodities seem to be a better investments now. How long will it last is anybody guess?

As global stock market uncertainties continues, investors are likely to continues to invest their monies into commodities, prices of gold are likely to rise even further. At the moment, seem like the demands not only for gold but also silver, platinum, aluminium, copper and other soft commodities like soybean, wheat, corn, cocoa...

Interesting clips to share, click to enlarge.

Bubble in the Chinese stockmarket has to be burst soon

The bubble in the Chinese stockmarket has to be 'burst' soon. When 'Tom, Dick and Harry' just jumped headlong onto the stock bandwagon and unfortunately a lot of them actually does not have a clue of how stockmarkets work at all, they just listen to market "tips", market "rumours", market "gossips"... (attached video explained it all).When these people rushes in blindly to put in their hard-earned monies or savings into the stock market, it sounds danger. I even heard in China some even took their children's saving and headlong to the stock market, hoping to find "gold mine". You know when the market reach into such a situation, it is definitely a sign of over-heating market, of course there are many others 'illogical' signs to show it. My personal view is get out as soon as you can before the stock market crash and 'blow you apart'. When market is over-optimistic, my personal view is get out before you regret about it. The reverse is also true.

As China Digital Times also reports, the recent stock market crash caused a Beijing investor to attempt suicide in the Wangfujing shopping district. Isn't this remind us of the past? Do we need to learn this 'painful' lesson again? Are we not learning from the past? Are we not try to minimize such 'bad' experience from occurring again? Well, what can we say? To errs is human.

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Are we pending a big market crash?

Are we in the beginning of the market crash in 2008?

Well, personally, I think so. I know I am not a guru in this area but personally, I would like to share what I think. Just look at the simple chart (see below, click to enlarge), most regional stock markets are plunging almost 20% by now, some already passed that points. January 2008 is the worst month as you can see from this simple chart.

Just barely few months ago, although US has taken the lead to come out with some 'rescue' packages but it seem like all these measures are 'sealing up' the leaking pipes and allow the inherent problems to shift to another 'leaking' areas and may be worst to transfer to a 'bigger' leaking hole somewhere before it got too much 'pressure' and 'burst' the pipe and cause a bigger market crash.

Sound pessimistic? I do agree but unless the whole world beside the IMF works together and 'seal' all this 'leaking' or inherent problems otherwise we cannot depend on FED rate cut alone forever. I don't doubt FED rate cut will 'ease' the situation but for how long? Another FED rate cut announcement to 'ease' it when next stock market problems arises and ignore the inherent problems like crude oil crisis, US currency depreciation, global inflations ... and eventually from US recession to global recession. Hopefully not.

We can see the recent heavy sell-down on the stock markets must have caught a lot of retail and institutional investors by surprise despite FED rate cut and US$140/150 billion rescue plan. What appeared to be a haven in investment like the stock market was still subject to panic selling from institutional investors/funds Managers.

I personally believed that the market heading south in the stock market was mainly due to the withdrawal of some foreign funds. As a result of tight liquidity, unwinding of yen carry trade and potential high losses in some hedge funds, some foreign funds might have been forced to withdraw their investments from the Asia-Pacific market too.

I think the plummet in global stock market was mainly due to the fear of sharp drops in the US.

Although our banking institutions were not really affected by the US sub prime issues, the international contagion and fear of more crashes, fear of uncertainties ahead, margin calls and panic selling from retailers caused heavy losses on regional stock markets.

Let recap what have happened in the last market crash 10 and 20 years ago.

Scenario of market crash in 1987/8

The market crash in October 1987 was partly attributed to strong market performance of most markets during the first nine months of the year. For example, the US market experienced more than 30% increase during the nine-month period.

However, from Oct 12 to 16, the Dow Index tumbled by 9.5%. On Black Monday of Oct 19, it plunged 22.6%, or 508 points, within a day. It was the largest single fall since 1929, in both absolute and percentage terms.

Scenario of market crash in 1997/8

The Asian stock market crash of 1997/98 began with a currency crisis in July in Thailand and quickly spread to neighbouring nations. One by one, overheated markets crashed in Thailand, Indonesia, Malaysia, the Philippines, Hong Kong, Singapore, Taiwan and South Korea. This was mostly due to the rapid industrialisation in these countries.

The US market was affected by the turmoil in Asia. Its share prices began to collapse at the beginning of October 1997. On Oct 27, the Dow Index tumbled by 554 points, or 7.2%, within a day. However, it recovered by recording a rise of 337 points the next day.

I am not very sure whether we have seen the worst of the crash in 2008. However, the sell-down has definitely caused a big disruption in our uptrend momentum. It appears to be quite unlikely for the regional stocks to reach their recent height just about one month ago.

Any market rebounds may prompt fund managers to continue offloading their equity exposure.

Personally, as for now, I am expecting some market volatility in the coming month if US just keep on playing with FED cut. Let hope the whole world works together to resolve this problems.

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Some Important Lessons to Know For Shares Investment

1. Don't let emotions mess you up. Market is not for the temperamental, sentimental and emotional one.

2. Understand the high risks involved in stock market investment. When market is in the bull run or over-heating, take the profits if one shares are shooting high without good reasons, don't let greed rules your mind. Otherwise, greed may turn into grief because one will never know of a sudden bad news may come unexpectedly from nowhere even during the good times and this can wipe off your 'paper gains' overnight.

When your gut feeling tells you the signs of beginning of bear run, be prepared to cut losses early if necessary. Whatever rules you may applied to suit your 'comfort' level, be it 5%, 8% or10%. If a stock falls below your purchase price level, be prepared to 'stomach the pains' and cut-loss. Better to cut small losses than to risk a possible larger losses later on. Market has no mercy to stocks falling even to blue-chips when bad news surfaced.

3. Pay attention to fundamental analysis of company earnings and future growth potential or direction. Understand the market trends related to their business. What is favorable business model yesterday may not be today. The reverse is also true.

4. Look for 'Relative Strength' of a company. Who are their competitors? Their strengths ,weaknesses and growth opportunities. Their consistently good track records...

5. Understand top management leadership capabilities from their past track records. Are their performance consistent or erratics?

6. Never invest shares consistently traded in low volume. You may find it difficult to unload your shares holding when market is heading downward or worst, market crashed.

7. Analyze different technical chart patterns so as to minimize risks involved when making decision to buy or sell shares. Look for patterns like "double top", “double bottom”, “flat base”, “cup with the handle”... If in doubt, consult your 'reliable' brokers.

8. Growth vs.Value Investing. Look for listed-companies consistently reporting good earnings and sales growth from their track records, or consider buy stocks with a low P/E ratio and strong fundamentals. Stay out of penny stocks if possible.

9. Don’t try to short-sell the market. Don't try to time the market. Even experts made mistakes sometimes. Don't get caught with your own pant down. Be cautious not careless.

10. Stay right mix for your shares portfolio. Don't over diversified and lose your focus. Don't try to put too many eggs in your baskets, focus only a few good potential growing and strong fundamental stocks like blue-chips.

All the best!

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Stock Market Investing Tips

Since stock investment can be risky like any other investments; one should evaluate the risks associated before putting your hard earned money.

Most investors lost money in the stock market because of lack of information to wrong investment decision/strategy and they are usually over-confidence about the up swings in the market without realizing the risks involved and uncertainties ahead.

Below are some common tips hopefully may minimize your investment risks and get you the right tracks of stock investments.

1. Know your investment objectives in terms of short and long term goals. What kind of investors are you?

2. Invest within your mean, know where you can stand in terms of needs when market is turning against you. Be certain about your own risk appetite.

3. Make sure you have time to follow up with your share investment. Be well-informed.

4. Never put all eggs in one basket, diversify but not over-diversified your investment.

5. Read related market investment information from reliable sources.

6. Never buy or sell shares based on hot rumors or under pressure, this usually turn out to be a bad decision and get your fingers 'burned'. Never, never feel pressurized at any time by circumstances. Be cool!

7. Try to minimize your risks, as far and fast as possible. Don't take risk what you cannot afford to take.

8. Follow some guidelines, like the 5% rule, i.e. never risk more that 5% of your investment you cannot stomach to lose.

9. Always use cut or stop loss orders to protect your capital investment whenever possible.
Better lose minimum than a lot. Instruct your broker on cut or stop loss order when you are on long holiday vacation.

10. Lock-in your profit as soon as the deal gets profitable, this is especially when the shares went up significantly in a short period, like +30% within one week. Don't let greed overrule you. Likewise, don't sell in panic because of fear. Don't let fear overrule you also!

11. When you are unsure where the market is heading, it is better to stay put until situation get clearer.

12. Avoid speculative stocks, it's meant for the speculators.

13. Stay out with high P/E stocks and consistently 'in-the-black' stocks.

14. Always be well informed through reliable updated financial sources.

15. Watch updated financial market news to stay ahead with the trends of financial market.

16. When come to stock picks or recommended tips, know the fact and don't listen to market rumors. Any tips that come to you may be already too late even it's true.

17. Stock investment is not short-term like gambling, invest stocks in long-term, as there are likely greater chances of getting better returns (ROI) in long term if you focus on strong fundamental stocks like blue-chips.

18. Do your research. A well-researched and well-done valuation is timeless.

19. Change your broker if he/she consistently seem to be not able to provide you reliable information or good advice to help you make 'intelligent' decision.

20. Always do your home work before putting your hard-earned money into the investment world.

21. Learned from past mistakes and avoid repetition of same mistakes again.

22. When internet traffic get heavy or slow down heavily when doing internet trading, call your broker to place your bet as market data may change significantly.

23. Always set your price limits on fast-moving stocks when trading in share market .

24. Don't assumed that your order has been placed correctly. Double check and make sure you did it correctly. Correct it if need to.

25. Understand your margin agreement if you trade on margin, beware that your broker can sell your equities without giving a margin call.

26. Bernard Baruch once said that “If you want to make money, big money, buy that which is being thrown away.”

27. Be a contrarian. Sell or reduce your shares holding when market is over-optimistic about that stocks. Likewise, Buy or increase your shares holding when market is over-pessimistic about the stocks.

28. Beware of scams and internet stock fraud. Don't believe in get-rich-quick scheme.

29. Remember 'paper' gain is not a gain until it is in your wallet or pocket.

All the best!

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Common Mistake Of Taking Losses

Psychologically, most novice investors made a common mistake after losing heavily on shares investment by falling into the temptation of 'averaging mentality' to buy back more of the same high-risk, high P/E shares or worthless stocks which they losses. This mentality of taking back all their losses are not much different from gambling mentality to make bigger bets. Stock investment is not about gambling. Gambling is short term whereas shares investment is long term.

Nothing is further from the fact, history has told us that even several experience traders took a plunge with getting further into bigger losses and getting into bigger troubles. Have we not heard of that? How much more can it happens to novice or inexperience investors?

Don't lose your 'cool' or discipline by allowing a small loss to turn into a big loser. It's better to minimize losses than compound the problem by making decision based on emotional feelings in an attempt to recover from the original mistake. Novice investors should take the losses as a learning curve to sharpen his/her knowledge and skill and wait when next opportunity arises.

Always remember this tip when taking a loss:

Small losses allow you to remain investing and learning, whereas larger losses can seriously hamper your investment when next opportunity arises.

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Investment Quotes from Jim Cramer

- Picking the right stocks is one of the hardest parts of investing, and every night on Mad Money, I try to take some of that burden off your shoulders.

- Every once in a while, the market does something so stupid it takes your breath away.

- As long as you enjoy investing, you'll be willing to do the homework and stay in the game. That's why I try to make the show so entertaining, because if you aren't interested, you'll either miss the opportunity to make money in the market or not pay enough attention and end up losing your shirt.

Risk of Buying/Holding Stocks with High P/E Ratios

P/E ratio is one of the financial ratio used to evaluate of a company's current share price compared to its per share earnings.

The calculation is formulated as:




For example, if a company is currently trading at market value of $10 a share and earnings over the last one year were $0.20 per share, the P/E ratio for the stock would be 50 ($10/$0.20).

So, what does it means to the novice investors? Briefly, if a company were currently trading at a multiple (P/E) of 50, the basic interpretation is that an investor is willing to pay $10 for $0.20 of current company earnings. So, it appears the investors are buying/holding stocks at a high premium.

So, why there are still many investors willing to go for high P/E stocks knowing there are an upside risk? Mainly, Stocks with "high" P/E ratios share a common trait: their performance shows there's plenty of bullishness about the company's future sales growth prospects and outstanding earnings. This usually further 'boost' the company's share especially when market is in the bull run since most investors are optimistic about the market at that time. Nothing wrong for being optimistic but one have to be realistic to the stock market world, stock markets are full of uncertainties ahead. How many of us foreseen the sub-prime problems when market 'seems to be doing fine'?

Past experience has shown us that those who held high P/E stocks usually got their fingers 'burnt' badly when the unexpected got them. The situation get even worse when investors bought high P/E penny stocks or stocks without strong fundamental.

Unless investors can stomach the pains of these 'sudden turn', otherwise, I think it is important to focus on stocks with low P/E ratio with good fundamental. Although P/E ratio is only one of the factors that investors should consider when buying shares, it usually has also less downside risk when market is heading south or running against you. So generally speaking, it's better to be safe than sorry.

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Buying Cheap or Penny Stocks?

Cheap doesn't mean good. The old saying "Paying a peanut, you got a monkey". Cheap stocks are cheap for a reason. Stocks sell for what they’re worth.

So, which one is better? Buying 1 million shares of a $0.01 share or buying 1000 shares of a $10 stock? I think most people would agree the former because it seems like a good bargain, with more opportunity for big increases from owning more shares. Although this might be true when market is in the bull run but the money you make in a stock isn't based on how many shares you own. It's based on the amount of money invested. The more money you invested, the more you make or loss depends on the market situation.

Many novice investors have a love affair with cheap or penny stocks, but low-priced stocks are generally missing a key ingredient of past stock market winners: institutional sponsorship.

A stock can't make big gains without the buying power of mutual funds, banks, insurance companies and other deep-pocketed investors fueling their price moves. It's not this cheap shares that cause a stock to surge higher in price, it's big institutional block share trades of 100,000, 200,000 or more that cause these great jumps in price when they buy -- as well as great price drops when they sell.

Fund Managers or Institutional Investors account easily for majority of the trading volume each day on the stock exchanges, so it's a good idea to fish in the same pond as they do. Stocks priced at below $1 a share are probably not on the radar screens of fund managers or institutional investors, not to mention shares are less than 10 cents a share. Many of these stocks are thinly traded so it's hard for mutual funds to buy and sell big volume shares.

Beware: Cheap doesn't mean good. Cheap stocks are cheap for a reason. Stocks sell for what they’re worth.

In many cases, investors that try to grab stocks on the cheap don’t realize that they're buying a company mired in problems with no institutional sponsorship, slowing earnings and sales growth and shrinking market share. These are bad traits for a stock to have. Institutions have market research teams that seek out great opportunities, and because they buy in huge quantities over time, consider piggybacking their choices if you find these fund managers have better-than-average performance.

The reality is that your prospect of doubling your money in a cheap or penny stock sure sounds good especially during the bull run, but bear in mind that penny shares are usually suffer the most when market crashes. Unfortunately, novice investor are usually the one get caught when market crashes or situation turn against them because penny stocks usually fall the hardest when market crashes.

So, since this is your hard earned money, please do your home work. Invest wisely. Focus on institutional blue chips or quality stocks. Buying penny shares without looking into the fundamental is just like buying lottery or lotto and hope for the best. Buying share is not like buying lottery, it's about future investment of your money. Don't regret for not knowing the danger or pitfall of buying cheap or penny shares. Beware!

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