Buy Low Sell High Strategy

Buying stocks at a low price and selling them at a high price is how you make money in the stock market. The goal of all stock traders is to buy low and sell high, but the problem is: when prices are low enough to begin with and high enough to sell?

How do we know whether share prices are low or high? To answer this, the price-to-earnings (P/E) ratio provides context by comparing the share prices to what the company actually earns. To decide whether a company has a low or high P/E ratio, we need to compare it with other companies in the same industry and to the market in general or against the company's own historical P/E.

Stocks with higher P/E ratios can be overpriced, while an unusually low P/E ratio relative to the competitors may indicate an under-priced stock. If you buy the shares when the price is too high, then you will have little room for profit. Therefore the best time to purchase stocks is when the P/E ratio is low, and sell them when the P/E ratio is high (when earnings are peaking).

Investor expectations will also affect the company's share prices. If investors expect a company to do well in the coming years, they will be very likely to invest more and thus push up the prices.