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We all know about P/E Ratio, but what is this PEG Ratio and what does it mean?

The PEG ratio or Price/Earnings to Growth ratio is one of the most popular valuation ratio calculated for determining the relative trade-off between the price of a stock, the earnings per share (EPS), and the company's expected growth rate. This was popularized by Peter Lynch, who wrote "The P/E ratio of any company that's fairly priced will equal its growth rate", i.e., a fairly valued company will have its PEG equal to 1.

Basic formula:

PEG = (P/E) / (projected growth in earnings).
For example, a stock with a P/E of 30 and projected earnings growth next year of 15% would have a PEG of 30 / 15 = 2. A lower ratio is 'better' (cheaper) and a higher ratio is 'worse' (expensive).

What does PEG tell us?

PEG, which is derived from P/E ratio, is generally higher for a company with a higher growth rate. Using just the P/E ratio would make high-growth companies overvalued relative to others. PEG is a popular indicator of a stock's correct value. Similar to PE ratios, a lower PEG means that the stock is undervalued more.

It is preferred than P/E ratio because it also accounts for growth. If a company is growing at 30% a year, then the stock's P/E could be 30 to have a PEG of 1. The PEG ratio of 1 is sometimes said to represent a fair trade-off between the values of cost and the values of growth, indicating that a stock is reasonably valued given the expected growth.

Investors may prefer the PEG ratio because it explicitly puts a value on the expected growth in earnings of a company. The PEG ratio can offer a suggestion of whether a company's high P/E ratio reflects an excessively high stock price or is a reflection of promising growth prospects for the company.

On the flip-side, the PEG ratio is less reliable for measuring companies with low growth rates. Large, well-established companies for instance may offer dependable dividend income but little opportunity for growth.A company's growth rate is an estimate. It is subject to the limitations of projecting future events. Future growth of a company can change due to number of factors like market conditions, expansion setbacks and hype of investors.

To conclude, we can say that though there are certain advantages of using the PEG ratio like, it accounts for growth and easy to calculate. But,it has certain disadvantages, like it can be an misleading indicator at times. Thus it should be used with utmost care and only in those situations, along with other parameters, where it shows the right picture. Well, Investing is not that easy ! Right ?

Deciding to invest in a small business can be a wise financial decision if your research is done carefully and thoroughly. Smart and savvy financial advice for any investment is to never invest more than you can afford to lose. Use discretionary funds in order to minimize your risk and maximize your potential for return. Any investment is a risk, but there are ways to ensure that you are making a wise investment.

If you do intend on investing larger sums of money, it can be more profitable to invest small amounts with several companies. If a few of the investments do turn out to be losses, they can be offset by a few highly successful investments. No matter what investment strategy you end up taking, it is important to remember not to invest more than you can afford to lose.

Professional venture capitalists will tell you there are no magic formulas for deciding where or how to invest your money, but there are basic elements that are important to consider first. Investigate how long a potential business venture has been established, whether it is a new company or if it has recently expanded and how deep in debt they are. You should also take a close look at the management of the company. You should also determine if the company has enough business working capital to maintain a positive cash flow. If the management deals unfairly with investors, has a high employee turn around or if the management receives bonuses out of proportion to the stage of the business's development, these can all be signs of a high-risk investment and can signal problems in the future. It is always wise to investigate a company thoroughly before investing.

Once you decide you are ready to invest in a particular company, the next step is to decide how to invest. There are many ways in which an individual can invest in a small business. One way is to offer bad credit business loans to a company you believe can be successful if they have enough business working capital available, but do not qualify for a traditional bank loan. Part of the terms of the loan can be a percentage of ownership or a certain number of shares. Bad credit business loans can be high risk, but even the best venture offerings pose some risk. Bad credit loans can also demand a higher interest rate.

Investing in a small business can be a wise financial decision if you exercise caution, investigate before you invest and do not be pressured into making a fast decision. Take your time, there are plenty of opportunities available and plenty of small businesses that will welcome your money.

Byline: This is a guest post by Sara Mackey.

Many people are hesitant to invest, even when the market would be in their favor, because they see investment as a dangerous, “high risk” gamble, rather than as an opportunity to grow their wealth.Granted, there is some inherent risk in investing, but it isn’t as wild as some think it is, and more importantly it is a risk that can be managed, if handled correctly.

Diversify Your Holdings

To the lay investor, diversification is an earful, and probably sounds technically intimidating, but diversification is actually one of the simpler, and most effective, ways to minimize investment risk. Simply put, diversification is not putting all your eggs in one basket. That is to say that you shouldn’t over-invest in one stock or fund, because, while it may be exciting when it is performing well, if the value drops, it will be devastating.

Conversely, if you divide your risk across several stocks, you will get multiplied benefits when they are all performing well, and won’t be crushed if one of them plummets.

Average Your Dollar Costs

Part of what makes investing difficult is the dimension of time. Timing, as they, is everything. But as it turns out, timing isn’t necessarily everything, and there is a smart way to invest that takes much of the guesswork out, and leaves you with more predictable gains, no matter how the market is performing. This strategy is called dollar cost averaging.

Essentially, dollar cost averaging means that you are consistently adding to your investment, regardless of what is happening with your stocks. By investing a fixed amount on a regular schedule, you are able to capitalize on the fact that the market fluctuates. Instead of buying a lot when the prices are low and not buying at all when prices are high, you have a set amount that you use to buy shares every month – $100 for example and you just distribute that and buy as many shares as you can with it each month. In the end, your average cost will be much lower than it would be when you try to outsmart the market.

Consider your goals when investing, and ask yourself if dollar cost averaging and diversification are good strategies for you.

Byline:

This is a guest post from Jacelyn Thomas. Jacelyn writes about identity theft protection and she can be reached at jacelyn.thomas@gmail.com.

We all know mutual funds, but what are inverse mutual funds all about?

They are a special type of funds in which the value goes up when the stock market comes down. They are nothing but "short funds" or funds having short positions of the index or stocks. By investing in this fund investors/traders can take advantage of fall in the markets.

The main objective of the inverse mutual fund is to provide investors with an alternative during market-decline and in the case where they cannot short sell the index. This type of fund is generally linked to the market index such as the S&P 500 or any other benchmark index. The value of such funds change similar to the traditional funds, on a daily basis, say if the index declines by 1 percent in a day, the fund value increases by 1 percent for that day.

In what other ways these funds differ from the traditional funds?

While a traditional mutual fund purchases shares of index or stocks, which is income generating in the form dividends, the inverse mutual funds do not purchase the stocks themselves. Instead, they may short sell the index or stocks or even buy put options on the index or the stocks. Hence, these funds make money only if the particular index or stock falls.

How does these funds benefit retail investors or traders?

Many investors,rather traders, can make use of this type of fund as a hedge against market conditions.Hedging is method that can be used to protect your investments in case of a market fall. During market corrections, investors/traders could buy some shares of an inverse fund in order to protect their long positions in other funds or stocks. This way, even if the market does go down, they will be able to recoup some of their losses on their long positions with the inverse fund.

Disadvantages:

Unlike the traditional funds, there are no dividends in these type of funds. The costs involves are also high since frequent churning of positions required on a day to day basis. They also involve high risks and needs constant monitoring of the fund value and the market direction.

Conclusion:

Firstly, investors should only purchase an Inverse Mutual Fund if they completely understand the risks associated with shorting and the returns associated with it. These funds can work as a hedge only and investors will not benefit from investing a large amount of money into it, since stock markets have performed well in the long-term. This can be used as short-term strategy only and not as a long-term one. Hence, Inverse Mutual Funds are complicated instruments than traditional mutual funds and it should only be used by sophisticated investors and traders.

There are many such funds in developed markets and there aren't any such funds in emerging markets like India. Hope some fund house would take some cue from this and launch an inverse fund soon.