Explain P/E Ratio of Stocks
Beginners in stock market are often baffled by so many technical terms used in trading and analysis of stock.
Most investors want to become as successful as the great Warren Buffet in the stock market.
To do that, they need to understand the basics of stock market and how it works.
Also, he needs to gain in-depth knowledge about technical terms like P/E ratio, EPS, capitalization etc.
In this article, I will try to explain P/E ratio of stocks which is one of the most commonly used terms in the stock market.
P/E ratio or the price per earning ratio of the stock actually denotes how expensive this stock is.
The higher P/E ratio means that some investors are ready to pay more to acquire this stock.
This also means that there are high expectations for that stock to perform.
In case the company is not able to meet the expectations, then the investors are sure to loose money they invested in this company.
On the other hand, if the P/E ratio of a stock is low, the company is considered to be a low risk company since the earnings and expectations from that company will be relatively lower.
When you go out and start comparing the P/E ratio of different companies, be sure that you are comparing companies within the same sector or industry.
This will give you a better picture since the expectations for different sectors will be different for a given duration.
You can get an idea of the overall industry or economy by looking at the P/E ratio of the broader indices like Dow Jones, S&P 500 or NASDAQ 100.
There are no agencies which provide the P/E ratio of an index but you can get the idea about these if you check out the P/E ratio of the exchange traded fund on that index.
Therefore, you can track the funds based on DJIA or S&P 500 to get a good idea about the P/E ratio of these indices.
On the Dow Jones website also there is the P/E ratio of the Dow Jones Industrial Average.
Some people get confused between the terms P/E ratio and P/B ratio.
While P/E represents the price earning ratio of a stock, the P/B ratio represents the price to book ratio.
It is calculated by dividing the current closing price of the stock by the latest quarter's book value per share.
A lower value will mean that the stocks are undervalued.
But, keep in mind that this ratio differs for each industry.
Most investors want to become as successful as the great Warren Buffet in the stock market.
To do that, they need to understand the basics of stock market and how it works.
Also, he needs to gain in-depth knowledge about technical terms like P/E ratio, EPS, capitalization etc.
In this article, I will try to explain P/E ratio of stocks which is one of the most commonly used terms in the stock market.
P/E ratio or the price per earning ratio of the stock actually denotes how expensive this stock is.
The higher P/E ratio means that some investors are ready to pay more to acquire this stock.
This also means that there are high expectations for that stock to perform.
In case the company is not able to meet the expectations, then the investors are sure to loose money they invested in this company.
On the other hand, if the P/E ratio of a stock is low, the company is considered to be a low risk company since the earnings and expectations from that company will be relatively lower.
When you go out and start comparing the P/E ratio of different companies, be sure that you are comparing companies within the same sector or industry.
This will give you a better picture since the expectations for different sectors will be different for a given duration.
You can get an idea of the overall industry or economy by looking at the P/E ratio of the broader indices like Dow Jones, S&P 500 or NASDAQ 100.
There are no agencies which provide the P/E ratio of an index but you can get the idea about these if you check out the P/E ratio of the exchange traded fund on that index.
Therefore, you can track the funds based on DJIA or S&P 500 to get a good idea about the P/E ratio of these indices.
On the Dow Jones website also there is the P/E ratio of the Dow Jones Industrial Average.
Some people get confused between the terms P/E ratio and P/B ratio.
While P/E represents the price earning ratio of a stock, the P/B ratio represents the price to book ratio.
It is calculated by dividing the current closing price of the stock by the latest quarter's book value per share.
A lower value will mean that the stocks are undervalued.
But, keep in mind that this ratio differs for each industry.
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