The stock market is at an all-time high at the time of this writing, which has people wondering if now is a good time to be investing in companies that make up both the Dow Jones Industrial Average and the S&P 500. Before making any investment, it is important to understand what you are investing in. Warren Buffet famously said that he doesn’t invest in companies that he does not understand. Some of Warren Buffets biggest holdings include companies such as Coca Cola and Wells Fargo, because companies he believes are going to be around many decades from now.
With any investment, there is a possibility of losing some or all of the money you put in. For example, during the dot com bubble in 1999 – 2000, many internet companies came crashing down after investors had put tons of money into this sector of the market. These internet companies stock prices were being priced higher by investors, and nobody quite knew what they were actually worth. Investors quickly began to realize these companies had no way to sustain themselves and produce quality profits over time which lead to a market sell off.
The Dow Jones Industrial Average (DJIA) is comprised of thirty companies, that include big market capitalization companies such as Apple, Boeing, American Express, Caterpillar and IBM. In order for a company to be admitted into the DJIA, the market capitalization (the market value of a company’s outstanding shares) has to be relatively high, and the company needs to provide value. Investors call companies with high market caps and high value, blue-chip stocks. These blue-chip stocks are widely traded on the New York Stock Exchange because of their ability to rise and fall several percentage points within a few days.
Crypto Currency is becoming a big hit among investors as well. The increase of Bitcoin valuation has given investors a return of 1,100%. The problem with Crypto Currency is the limited amount of regulation that goes into it. The following statement was released by the SEC in December of 2017 “Investors should understand that to date no initial coin offerings have been registered with the SEC. The SEC also has not to date approved for listing and trading any exchange-traded products (such as ETFs) holding cryptocurrencies or other assets related to cryptocurrencies. If any person today tells you otherwise, be especially wary.”
The unregulated nature of crypto currency combined with the volatility makes it a risky investment. The securities and exchange commission are not trading any types of crypto currency or coins on the National Association of Securities Dealers Automated Quotations (NASDAQ) or the New York Stock Exchange (NYSE), and it is not clear if they plan to open the floor up to that kind of trading anytime in the near future.
Investors should be wary of stocks with a high price to earnings ratio (P/E ratio). The P/E ratio is the ratio for valuing a company that measures its current share price relative to its per share earnings. For example, Amazon is trading at a P/E ratio of 353. The P/E ratio shows that consumers have confidence in the company and its future growth prospects. If a company such as Amazon does not meet expectations for their future growth estimates, the stock could take a large price drop. The average P/E ratio among weighted stocks in the S&P 500 and the DJIA is between 20 and 25. Companies that have a 20 to 25 P/E ratio are likely going to be both conservative and value investments for long term profit seekers.