Q: WHAT IS THE DANGER OF BEING INVESTED IN OVERVALUED STOCKS?

A: When a stock is overvalued, it means that its price has outpaced the earnings and growth one can expect from the business. Such stocks put you at risk because, if they tank, you could be waiting a very long time for a rebound.

Q: HOW CAN I TELL IS A STOCK IS OVER-VALUED?

A: Beware of any stocks that have a price-to-earnings (P/E) ratio higher than 50. If the P/E ratio is more than 100, you’re definitely in overvaluation territory. The P/E ratio, by the way, is the price of a stock compared to the amount of earnings one share would generate (earnings per share).

Q: What do I do if one of my stocks is overvalued?

A: If you’re holding a stock that was overvalued and has now declined, look at its financials before deciding whether to cash out.
Ask investor relations the following questions:
• Is there a high probability that the company will recover?
• When will the company be profitable?
• What are earnings and profitability?
• Has the company met analysts’ expectations?
If the company has had two or more quarters of negative surprises, get out of it, even if you have to take a loss. It will take more than six months for the company to figure out what is wrong and turn it around.