Buy Australia Shares
Consider these tip if you are planning to buy Australia shares.
If you want to buy Australia shares. Let's begin with 'E', or earnings - a share in a company is a share in its earnings as long as the company exists. The company dividend, or what the it pays you, is only a fraction of this earning since most companies retain more of their profit to finance further development, but then that growth leads to best earnings, in which you still hold a share. 'P', or price, is what the finance market is asking you to pay for this stream of earnings.
Clearly then, if you are planning to buy Australia shares, Our professionals should calculate whether its value is justified by what the company will earn in the future. This raises two issues, one is estimating this future stream. The second question is, what will you pay today for returns in the future? For example, what is the current value of Re 1 every year from now until the end of the century? We know that the actual value of this sum is Rs 93, but clearly no one will pay this amount.
For two reasons - firstly, most of us would rather have Re 1 today than Re 1 tomorrow (and Re 1 to be received in 2100 seems practically worthless today); secondly, if the interest rate is 8 percent per annum, I can 'buy' Re 1 per year by putting Rs 12.50 in the bank. Now, if interest rates rise overnight to 10 percent, that same annual income of Re 1 per year will cost only Rs 10. Since fixed income streams suddenly became affordable, shares should also become affordable. The inverse relationship between interest rates and share value generally holds true, but in finance markets, stock prices have not reacted to the recent increase in interest rates. This is because development in earnings has been so strong.
This means that the price we are willing to pay for a share basically depends on its current earnings (the P/E ratio); but more importantly, it depends on our expectation that earnings will grow over time. As the Australian economy has gathered steam, companies across sectors have shown earnings growth year on year.
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