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The bid-ask spread is the difference between the highest price a buyer is willing to pay for an asset (the bid) and the lowest price a seller is willing to accept to sell it (the ask or offer). This spread is a fundamental element of market liquidity and represents the transaction cost that traders need to consider when entering and exiting positions. For example, if there is a spread of 1 pip between buyers and sellers, this represented the cost of trade taken.

It is worth pointing out at this stage the much is made of the “spread” in comparison between the value that one broker may offer versus another. However, there are far more influential factors that determine the success or otherwise of trading such as determining high probability entries, effective risk management and appropriate profit taking exits. This is particularly the case for retail investors who trade smaller contract sizes, as opposed to institutional traders, who often trade much larger sizes of trade ad so small differences in spread will have more impact.

Nevertheless, some understanding of the bid/ask spread, and how this may alter at various points during the trading day is important. Factors influencing bid-ask spread Although there are more, we have focused on the top eight factors we think are of not only most influential but have trader relevance. Asset Liquidity: A highly liquid market usually has a smaller bid-ask spread.

When there are more market participants interested in trading a specific asset, there are more bids and asks available, which narrows the spread. In essence, the abundance of buyers and sellers in a liquid market reduces the difference between the buying and selling prices. Trading Volume: Similar to liquidity, higher trading volume often leads to a narrower spread.

Increased trading activity means more frequent transactions, which can reduce the spread. Active markets tend to have more competitive pricing due to the large number of transactions taking place. Asset Volatility: Increased volatility usually results in a wider spread.

When an asset's price exhibits rapid and unpredictable movements, market makers and traders face higher risk. To compensate for this risk, they set wider spreads. This is often observed when major economic data or news is released, causing abrupt market movements.

Market Hours: Spreads might be wider during market open and close due to uncertainty and reduced liquidity. This phenomenon is often seen toward the end of market hours and the beginning of new trading sessions. Additionally, some assets may have wider spreads when traded outside their primary market hours, such as futures contracts associated with indexes that are closed during specific times.

Asset Popularity: Well-known assets usually have tighter spreads compared to less popular instruments. For example, in the Forex market, currency pairs are categorised by liquidity. Major pairs like EUR/USD tend to have tighter spreads because they are highly popular among traders.

Exotic pairs, on the other hand, have wider spreads due to their lower trading activity e.g., US Dollar/Polish Zloty (USDPLN) Regulatory Environment: The level of regulation in a market can influence the spread. Forex markets, for instance, are less regulated compared to stock markets with centralized exchanges. This can lead to comparatively wider spreads in forex trading, as there is no central authority to standardize pricing.

Transaction Size: Large orders can impact the spread, making it wider, especially in less liquid markets. When a trader places a substantial order, it can temporarily disrupt the supply and demand balance in the market, causing a wider spread until the order is executed. Technological Factors: Faster trading systems and networks can lead to tighter spreads.

Advanced technology allows for more efficient matching of buyers and sellers, reducing the spread. High-frequency trading and electronic communication networks (ECNs) contribute to this efficiency by facilitating quicker trade executions. Other factors to consider with the bid-ask spread Slippage and Spread: A significant aspect to consider in trading is slippage, which refers to the difference between the expected price of a trade and the actual price at which it is executed.

A wider spread, indicating a larger gap between the bid and ask prices, can increase the risk of slippage. This happens because, in volatile markets or with wider spreads, it becomes more challenging to execute trades at the precise desired price. Traders may experience slippage when their orders are filled at a different, often less favourable, price due to market fluctuations.

Therefore, traders should be acutely aware of the potential impact of spread size on the likelihood and extent of slippage, especially when trading in fast-moving markets. Stop Placement and Spread: As spreads widen, it's crucial to consider their influence on stop-loss orders. Stop-loss orders are designed to limit potential losses by automatically triggering a trade closure when the asset's price reaches a specified level.

However, an increasingly wider spread introduces the possibility that the spread alone could trigger the stop-loss order. This is particularly relevant when the stop level is set close to the current market price or price has moved towards the stop. Traders need to strike a balance between setting stop levels that provide adequate protection and avoiding premature triggering due to spread fluctuations.

Having a good understanding of the typical range of spreads for the assets they are trading can help traders make more informed decisions when placing stop orders to manage risk effectively. Alternative accounts and differing spreads Some brokers offer different types of platforms that may offer tighter than the spread associated with a standard account. Often, there is a small brokerage payable for such accounts and the trader must decide which is the best option for them.

If you are interested in looking at different account types with different spread at GO Markets then drop our support team an email at [email protected] and we would be delighted to walk you through the options that are available to you. Summary Understanding the bid-ask spread is important for traders as it has the potential to affect many aspects of trading including costs, strategy, risk management, and perhaps even market interpretation. Although there are significantly more influential factors on your potential trading outcomes than the width of the spread, if treating your trading as a business, which arguably is the right approach to have, then knowing about such factors and their impact would seem prudent.

A rights issue, also known as a “rights offering”, is a method that companies use to raise additional capital from their existing shareholders. It involves offering the right to purchase additional shares of the company's stock at a discounted price while maintaining their proportional ownership in the company. This is how the rights issue process typically works: Announcement: The company announces its intention to conduct a rights issue, often through an exchange announcement.

It may, or may not, involve a temporary trading halt by the exchange prior to the announcement for a specified period of time. The rights issue announcement includes details such as the number of additional shares being offered, the price at which these shares can be purchased (usually at a discount to the current market price), and the ratio of shares offered for each share held. Subscription Period: During a specified subscription period, existing shareholders can decide whether to exercise their rights to purchase the additional shares.

The number of additional shares each shareholder is entitled to purchase is determined based on the ratio specified in the announcement. Discounted Purchase Price: The purchase price for the additional shares is typically lower than the current market price of the company's stock. This discount serves as an incentive for shareholders to participate in the rights issue.

For example, assume you already own 100 shares in Company A. Shares in Company A are currently trading at $25. The company wants to raise money, so it announces a rights issue at $20 a share, with the offer open for 30 days.

It sets a conversion rate of one for five. This means eligible shareholders can buy one additional share for every five shares they currently own. The result is you can buy 20 new equity shares for $400, a discount of $100 on the current market price.

Proportional Ownership: By participating in the rights issue, shareholders can maintain their proportional ownership in the company. If they choose not to participate, their ownership percentage might decrease as the total number of shares outstanding increases. The Rights Issue Discount The discount offered in a rights issue can vary widely depending on various factors, including the company's objectives, current market conditions, and the urgency to raise capital.

There is no standard discount that applies to all rights issues, and the discount offered can vary considerably, ranging potentially from around 10% to 40% below the current market price of the stock. Factors impacting the level of the discount offered include: Company's Financial Situation: If the company urgently needs to raise capital, it may offer a larger discount to incentivize participation. Market Conditions: Prevailing market sentiment and volatility can influence the discount.

In a bearish or uncertain market, a more significant discount might be required to attract investors. Investor Sentiment: If the company is well-regarded and the rights issue is perceived positively, a smaller discount might suffice. Purpose of Raising Capital: The reason behind the capital raise (e.g., funding an exciting growth opportunity versus covering debt) can impact investor interest and, therefore, the required discount.

Size of the Issue: The number of shares being issued can affect the discount. A larger issue might require a bigger discount to ensure full subscription. Regulatory Considerations: In some jurisdictions, regulations might set guidelines or limitations on the discount that can be offered.

Recent examples of ASX rights issues Rights issues are common. Here are a few examples from 2022 including the discount offered and purpose. Atlas Arteria Group (ASX: ALX) conducted a 1 for 1.95 non-renounceable rights offer to raise $3,098 million to fund its acquisition of a 66.67% interest in the Chicago Skyway toll road.

Domain Holdings Australia Ltd (ASX: DHG) conducted a 1-for-12.33 non-renounceable rights offer to raise $180 million needed to acquire Realbase Pty Ltd, a real estate campaign management technology platform. Regal Partners Ltd (ASX: RPL) conducted a 1-for-5 non-renounceable rights issue to increase the free float and shareholder base and fast-track the execution of its diversified growth strategy. Healthia Limited (ASX: HLA) conducted a 1-for-12.5 non-renounceable rights issue to provide additional cash reserves to fund near-term acquisition opportunities and provide financial flexibility.

GUD Holdings Limited (ASX: GUD) conducted a 1 for 3.46 non-renounceable rights issue in conjunction with an institutional placement in late 2021, raising $405 million to acquire AutoPacific Group, a designer and manufacturer of automotive and lifestyle accessories. The Market Response to a Rights Issue: The market's view of a rights issue can be influenced by several factors and can vary widely based on individual investor perspectives, market conditions, and the specific details of the rights issue. As part of the announcement and as previously referenced, it is in the company’s interest to effectively communicate the purpose and potential benefits of the rights issue to address investor and market concerns, so creating positive sentiment in an attempt to both support the current share price and encourage participation.

Positive Views: Opportunity to Increase Ownership: Investors who believe in the company's growth prospects might view a rights issue as an opportunity to increase their ownership at a discounted price. This can be seen as a way to acquire more shares at an attractive valuation level. Capital Injection: A rights issue can provide the company with additional capital that it can use to fund expansion, invest in new projects, or reduce debt.

If the market sees these moves as value-enhancing, it could view the rights issue positively. Strengthened Financial Position: If the company uses the proceeds from the rights issue to improve its balance sheet or address liquidity concerns, the market may see it as a positive step toward financial stability. Neutral Views: Dilution Concerns: Existing shareholders might be concerned about potential dilution of their ownership if they choose not to participate in the rights issue.

However, this concern might be mitigated if the discount offered in the rights issue is attractive enough to compensate for the dilution. Market Conditions: The market's overall sentiment and conditions can impact how a rights issue is perceived. In a bullish market, investors might be more willing to participate, while in a bearish market, they might be more cautious.

Negative Views: Sign of Financial Difficulty: In some cases, a rights issue might be interpreted as a sign that the company is facing financial challenges and needs to raise capital urgently. This could lead to concerns about the company's stability and future prospects. Misallocation of Funds: If investors perceive that the proceeds from the rights issue are being misused or not being deployed in a value-accretive manner, it could lead to scepticism about the company's management decisions.

Stock Price Reaction: The announcement of a rights issue can lead to a significant decline in the company's stock price, especially if investors are concerned about potential dilution or question the company's motives. Summary: Participation in a rights issue is a strategic decision that must take into account multiple factors, and there is no one-size-fits-all answer. Shareholders considering participating in a rights issue should evaluate the discount in the context of their understanding of the company's value and prospects, possibly in consultation with a financial professional.

GO Markets is pleased to announce our partnership with Currencycloud, the experts in simplifying business in a multi-currency world, to streamline and automate client deposits and withdrawals while benefiting from real-time, API-driven competitive FX rates. By integrating Currencycloud’s APIs, GO Markets can now offer a seamless and cost-effective service to its global clients. With access to a virtual multi-currency account, GO Markets can accept wire payments across a host of local and SWIFT payment rails while benefiting from the automated upload of funds that the Currencycloud platform enables, making the reconciliation process faster and more accurate than ever.

Nick Briscoe, Country Manager, Australia, Currencycloud, says of the partnership, “We are delighted to be part of GO Markets’ customer-focused solution, helping clients make the most of global investment opportunities. We look forward to enabling GO Markets’ expansion plans as they add new currencies, jurisdictions, and products to their repertoire.” “We are committed to providing our clients with a best-in-class trading experience. Integrating Currencycloud enables us to do just that.

We can now provide our clients with a complete global trading experience with expanded funding and withdrawal options. What’s more, the real-time FX liquidity, which Currencycloud provides, will enable us to open new markets for our clients,” said Soyeb Rangwala, GO Markets Director.

Just days before Japan’s unexpected negative rate announcements, the country’s central bank chief Haruhiko Kuroda was quoted in an interview where he said he was optimistic about the Japanese economy. In the same interview, he iterated that while he closely monitors the stock markets, he was not overly concerned that the current turmoil in financial markets would have any severe impact on the real economy. He ended by saying that he saw a much improved future for Japan over the course of the next year.

However, only a few days after this interview and in a desperate move to save his country’s worsening economic conditions, the Bank of Japan (BOJ) surprised the world by announcing a negative interest rate policy for the first time in its history. Under this policy, effective from 16 th of Feb 2016, Japanese banks have to pay 0.1% to BOJ for their marginal excess reserves that they kept at the central bank. Why Negative Rates?

The decision to turn to negative rates came after BOJ was unsuccessful in restoring Japan’s economy following many rounds of stimulus packages and easing monetary policies. By bringing the rates down to negative territory, Mr. Kuroda is hoping to put more pressure on banks to increase their lending activities in order to prop up the economy.

Also, BOJ is anxiously hoping to be able to motivate corporate Japan to get their massive cash holdings to work or to even move those funds overseas in search for better yields. Capital outflows will inherently push the yen lower against other currencies; a consequence that BOJ is greatly fond of. Also, BOJ is hoping to motivate corporate Japan to get their massive cash holdings to work or to even move those funds overseas in search for better yields.

Capital outflows will inherently push the yen lower against other currencies; a consequence that BOJ is greatly fond of. [caption id="attachment_12216" align="aligncenter" width="486"] Japan's 5 and 10 year government bond yields[/caption] The FX market’s unexpected reaction Every FX trader knows that interest rates have a direct impact on currencies. So when the interest rate goes up (down), the currency with higher (lower) interest rate will appreciate (depreciate) against those with unchanged or lower (higher) interest rates. According to this theory, now that the BOJ are pursuing negative rates, we should see the yen posting significant declines.

This theory worked, but only very temporarily. The red arrow in the graph below shows the yen reaction after the news broke out. As you can see, the initial reaction was to a lower yen.

However, this didn’t last long and the Japanese currency began to reverse its course soon after the initial reaction (the blue arrow). In a matter of 17 trading days after BOJ’s announcements, the yen appreciated by 5.7% (measure from close to close and as at 17 of Feb 2016) against USD. [caption id="attachment_12217" align="aligncenter" width="984"] JPY and S&PP Daily[/caption] Have we seen this before? Kuroda is not the only central bank governor who has seen his currency fly after introducing negative rates.

European Central Bank’s Mario Draghi saw the euro appreciating by some 5.1% from 2 nd of December 2015 when he cut a key rate further into negative territory. It is interesting to note that, whilst cutting rates has not clearly worked for yen and euro, increasing rates have not worked for the U.S. dollar either. As we discussed previously, increasing rates should push the currency with higher interest rates higher.

However, the graph below shows the USD index has actually lost value since the US Federal Reserve increased the interest rates for the first time since the GFC, on 16 December 2015. [caption id="attachment_12218" align="aligncenter" width="760"] US Dollar index performance since December 15, 2015[/caption] When nothing works Part of the reason why the FX market does not behave, goes back to the point that we are living in a rather unusual era. First there was the GFC, then we had zero interest rates coupled with hundreds of billion dollars in liquidity aids (which arguably created over inflated asset prices) and now, because none of the previous measures have been very effective, we are going into a negative interest rate era. Something the market is not overly accustomed to.

The combination of the above plus the current turmoil in the financial markets have made many worry about the effectiveness of central banks policies in stabilizing the markets and in restoring economic growth. Therefore, the way market prices the asset classes these days is widely different from what policy makers want to see. Ramin Rouzabadi (CFA, CMT) | Trading Analyst Ramin is a broadly skilled investment analyst with over 13 years of domestic and international market experience in equities and derivatives.

With his financial analysis (CFA) and market technician (CMT) background, Ramin is adept at identifying market opportunities and is experienced in developing statistically sound investment strategies. Ramin is a co-founder of exantera.com which is a financial website dedicated to risk analysis and quantitative market updates. Connect with Ramin: Twitter | LinkedIn | Ramin's posts

Backwardation and contango are terms used in the context of futures markets to describe the relationship between the prices of futures contracts with different expiration dates for a specific underlying asset, such as commodities, currencies, or financial instruments. In this article, we aim to explain these terms within the context of futures contracts. Futures Contracts Revised Let's start with a brief overview of futures contracts.

A futures contract is an agreement to buy or sell an asset at a predetermined price at a specified time in the future. These contracts are traded on organized futures exchanges and can relate to a wide variety of underlying assets, including commodities, currencies, stock indices, interest rates, and more. Futures contracts can be settled in two ways: either through physical delivery, where the underlying asset is physically delivered on the specified date, or through cash settlement, where the difference between the contract price and the market price on the settlement date is paid in cash.

Each futures contract expires on the third business day prior to the 25th calendar day of the month preceding the delivery month. There are five key components of a futures contract namely: Underlying Asset: The specific commodity, currency, or financial instrument being bought or sold. Quantity: The amount or size of the underlying asset in the contract.

Price: The price agreed upon today for the asset's delivery at a future date. Delivery Date: The future date on which the asset will be delivered or settled. Delivery Location (if applicable): The place where the physical asset will be delivered if the contract involves physical delivery.

Futures contract participants are generally of three types Hedgers: Futures contracts can be used to mitigate the risk of adverse price movements in an underlying asset. For example, airline companies, which use a lot of fuel and are sensitive to changes in oil prices, can buy oil futures to lock in current prices and protect themselves against future price hikes. If oil prices increase, the gains from the futures contract can offset the increase in fuel costs.

Speculators: These are traders who seek profits by predicting market movements and opening positions accordingly. For example, a forex trader might think that the EUR/USD currency pair is going to rise in the next week based on economic indicators. The trader buys a futures contract on EUR/USD with the expectation of selling it later at a higher price.

Arbitrageurs: These individuals aim to profit from price discrepancies in different markets or times. For instance, if natural gas is trading at $3.00 per million BTU in the U.S. market and at $3.10 in the European market, an arbitrageur could buy natural gas futures in the U.S. market and simultaneously sell in the European market, profiting from the price difference. What are Backwardation and Contango?

Backwardation and contango describe the relationship between the spot price of an asset and the prices of multiple futures contracts for that same underlying asset with different expiration dates. Simply put, these states are determined by more than one price level. Backwardation Backwardation occurs when the futures prices for contracts with near-term expiration dates are higher than the prices for contracts with later expiration dates.

This situation suggests that the market anticipates a shortage of the underlying asset in the near future. Reasons for backwardation include: Supply Concerns: If there are expectations of a supply disruption or scarcity of the underlying asset in the near term, the immediate futures contracts might be bid up in price relative to those further out. Storage Costs: For commodities with carrying costs, such as storage costs for physical delivery, backwardation can occur when the convenience of holding the physical asset immediately outweighs the cost of holding it for delivery in the future.

Immediate Demand: If there is strong demand for the physical asset in the current period, futures contracts that reflect this demand might trade at a premium. Contango Contango refers to a situation in which the futures prices for contracts with later expiration dates are higher than the prices for contracts with nearer expiration dates. Contango suggests that the market expects the supply and demand dynamics of the underlying asset to be more balanced in the near term and potentially oversupplied in the future.

Reasons for contango include: Storage and Carrying Costs: If the cost of storing the physical asset for delivery in the future is higher, it can result in contango, as later contracts would need to compensate for these costs. Interest Rates: In some cases, the yield curve and interest rates might influence contango. If the cost of borrowing to buy the physical asset is lower than the expected gains from holding it, contango can occur.

Market Sentiment: Contango can also emerge from market sentiment indicating that the current supply-demand balance is sufficient, but future uncertainties might lead to a higher price expectation. The Futures Curve Backwardation and contango are often illustrated through the use of a futures curve, which shows how the prices of futures contracts change over different time horizons. This curve begins with the current spot price and includes the prices of futures contracts with various expiration dates.

By connecting these points, the curve's shape—whether in backwardation or contango—reveals market expectations about future supply and demand, the cost of carry, interest rates, and other factors. Oil futures Example The following table below shows a snapshot of oil futures prices from August 2023. Expiry Month Futures Prices by Expiry Month Sep-23 81.4 Oct-23 80.73 Nov-23 80.22 Dec-23 79.81 Jan-24 79.32 Feb-24 78.92 Mar-24 78.57 Apr-24 78.11 May-24 77.75 Jun-24 77.39 Jul-24 76.98 Aug-24 76.56 Sep-24 76.19 Oct-24 75.82 Nov-24 75.5 Dec-24 75.17 Although this is useful, the picture is far clearer when these prices are plotted on a graph (See below) As you can see the slope is downwards and so would be described as in backwardation.

Where Can I Get Information on the Curve? Most major financial exchanges that trade commodity futures, such as CME Group and Intercontinental Exchange (ICE), provide information on current futures curves. Conclusion Contango and backwardation are relevant to a wide spectrum of market participants, from speculative traders to long-term investors and from individual investors to companies and institutional entities.

Understanding these market conditions is valuable for decision-making, risk management, and identifying potential opportunities. GO Markets offers a wide range of CFD futures contracts that you can trade on platforms like MT4 and MT5, and we would be delighted to assist you with any questions you may have.

What is a P/E Ratio? The Price-to-Earnings (P/E) ratio is a indicative valuation metric that measures a company's current share price relative to its earnings per share (EPS). It is relatively simple calculation and is simply worked out through dividing the current share price by the Earnings per share.

There are two common variations of the P/E ratio: Trailing P/E: Based on the past 12 months of earnings. Forward P/E: Based on analysts' forecasts of earnings for the next 12 months. Why is it Potentially Important?

Valuation Insight: The P/E ratio may help investors assess whether a stock is overvalued or undervalued relative to its earnings. In simple terms, a high P/E ratio might indicate that the stock is overvalued, while a low P/E ratio could suggest undervaluation.It is not only the number itself which may be important but also the underlying trend of how PE ratio may be decreasing or increasing which is worth consideration. Comparative Analysis: By comparing the P/E ratios of different companies within the same industry, it is suggested that investors can identify relative bargains or expensive stocks.

This issue of the same industry is an important point. If we look at the PE ratio of the S&P500 as a whole the forward 12-month P/E ratio (August 2023) for the S&P 500 is 19.2 (For context the 10 year average is 17.4).However, to look at this number as a benchmark for valuation judgements on a specific company is flawed as if we look at the trailing and forward PE of individual sectors it tells a very different story. The table below provides this (as of August 2023) to illustrate this point (source: Finviz.com).

PE Forward PE Energy 7.21 9.55 Financial 13.41 12.34 Basic Materials 13.74 17.02 Utilities 18.57 2.97 Industrials 20.56 16.45 Healthcare 20.9 17.51 Consumer Cyclical 22.45 20.93 Consumer Defensive 23.08 20.49 Communication 24.9 16.98 Real Estate 30.72 27.64 Technology 34.33 22.62 As you can see, there is a gross disparity between sectors. Comparing two companies' P/E ratios is like comparing apples with oranges. Therefore, consideration against the sector norm is a far more legitimate comparison than against either the index as a whole, any random stock, or an arbitrary number e.g. above or below 10.

Market Sentiment: The P/E ratio also reflects market expectations to some degree. A high P/E ratio may indicate optimism about a company's growth prospects, while a low P/E ratio might reflect pessimism. However, many would question using P/E ratios alone as a measure of this without the context of other data.

Viewing a P/E ratio without some reference to growth numbers and trends is an approach that is unlikely to yield good outcomes. Factors Contributing to a Rising or Falling P/E Ratio Earnings Growth and Stock Price Movement: Although there are minute-on-minute small fluctuations in price, and thus P/E ratios, clearly the most influential time in terms of moves in P/E ratios is that of earnings releases. At this time, both trailing and expected forward EPS will be recalibrated, and significant changes may be seen in the P/E ratio.If a company's earnings grow and the stock price stays the same, the P/E ratio will fall, reflecting a company at value.

Conversely, if earnings fall and the stock price rises, then the P/E ratio will rise, potentially indicating overvaluation. It would seem logical, if earnings are imminent, to reserve judgment on valuation until after any such news. Market Expectations: If the market becomes more optimistic about a company's growth prospects, investors might be willing to pay more for the stock, increasing its P/E ratio.

For example, with a policy shift to increase renewable energy, it would be reasonable to expect forward growth expectations to rise across the board for all stocks in that sector, rather than perceiving a particular stock as overvalued.However, if growth and P/E ratio are rising because of a specific competitive advantage for that company, then it is not necessarily indicative of overvaluation despite the high P/E. Judging based on a high P/E ratio alone could lead to significant missed opportunities. Once again, this reiterates the need to look beyond just a simple P/E ratio to make judgments.

Interest Rates: Lower interest rates often lead to higher P/E ratios, as investors are more inclined to invest in equities. Conversely, higher interest rates usually lead to lower P/E ratios, as bond yields become more attractive than the dividend yield offered by many stocks, and interest rate hikes potentially impact sales, the cost of servicing debt, and subsequent potential impact on earnings. Traditionally, growth stocks are likely to be more interest-rate-sensitive, and therefore the impact on stock price and P/E ratios may differ from sector to sector, and depending on whether business is conducted locally versus globally.

Economic Conditions: A strong economy might lead to rising earnings expectations and P/E ratios. Conversely, economic uncertainty or recession might cause P/E ratios to fall. Key data trends are likely to be a useful gauge.

This is particularly the case for the “big” data points such as GDP, CPI and jobs data. Other Company-Specific Factors: Changes in management, product launches, legal issues, or other company-specific news can affect both the current stock price and anticipated effect on earnings, thus impacting the P/E ratio.As many of these types of corporate events are unpredictable, when they do occur, it merits not only an evaluation of any prospective investment ideas but also of currently open positions when the P/E ratio may have been part of your decision-making process. In summary, although the P/E ratio is noteworthy for many investors, judging value and entering a stock with a low P/E ratio requires a rigorous and systematic approach, blending both quantitative and qualitative analysis of the issues discussed above.

A simple approach of comparing the P/E ratio of one company against another is unlikely to produce good outcomes. Focusing purely on this may mean that a low P/E ratio may be indicative of a company whose outlook is far from favourable, subjecting you to risk. Conversely, a high P/E ratio alone may not only indicate overvaluation compared to the current price but may also signify a company whose growth prospects are very positive.

Ignoring this based on the P/E ratio alone may result in missing out on opportunity. For those interested in a further exploration of evaluation of stocks with a low PE ratio, we have published an article that may help. “Look before you leap..FIVE reasons why a low PE may be a reason NOT to jump in” and can be accessed HERE