The Most Used Ratio for Stock Valuation

One of the most common stock valuation methods is the Price Earnings Ratio or often referred to as PE ratio. The definition of the PE ratio is quite simple just as the name indicates: Take the current stock price and divide it over the earnings per stock.

So, as an example suppose stock A is currently at 15$ and its earnings mount up to 0.56$. The calculation of the PE then is: 15$/0.56$ = ca. 27.

It’s now important how to interpret this number. What does it tell me? What you will almost never read anywhere is what kind of unit this PE has. Most of the authors simply present us the bare number of the PE calculation. In order to know which unit you get at the end it’s important to know what you use in the beginning of the calculation.

And that is:

The price of the stock:
unit: $/stock

Earnings per stock and year:
unit: $/stock/year

If you divide $/stock over $/stock/year you will only get “year” as the unit of the calculated number. So 27 means 27 years. In other words: If company A continues to earn 0.56$ per stock each and every year it will need 27 years to reach the current stock price. That’s why it’s better to choose those stocks with a lower PE as they don’t need so much time to reach their current stock price.

Thus, the decision to make is: Buy those stocks with a low PE ratio.

That is ok, but what does “low” mean? Low, compared to the average PE of the same branch.

Therefore, the only thing you have to pay attention to is that you can only compare stocks of the same or similar branch when deciding to buy a stock based on the PE ratio alone.

The problem with the PE ratio is that the company must already earn something in order to use this PE figure. When it only generates losses (mostly the case with start-up firms) you can switch to the Price/Sales ratio because every company has at least a certain amount of turnover.

A stock is also known as a share. They refer to one's own investment in a company. Stocks are tagged by the prices on them. The better the company the higher the price of the stock. Owning a stock does not mean you own a whole company, but rather that you own a small piece of it. It's the amount one is investing in the company to share their profits or losses. Of course stock investors are provided with some privileges of sharing profits and voting for management.

Stock influences the economy and also the currency value of a country. The better the stock prices are the better the stock market is. The better the stock market is the better the economy of a country is. Usually stock values are most fluctuating. No one can exactly say when a stock incurs profit. Many invest in stocks, some become multi millionaires overnight, and some will be bankrupted overnight. That's the power of a stock. Now the question that comes into every ones mind is how this powerful and most fluctuating stock looks like. It's just a piece of paper that has proof of ones owner ship on it. Now days it is being stored as an electronic image rather than as a paper.

Stocks are of different types, there is Common stock and preferred stock. Common stocks are considered as the most risky type of stocks. If the company is in profits they common stock holders entail greater benefits but if the company is in losses then common stock holders will loose the most. On the other hand preferred stocks are less risky. Preferred stock holders have some degree of ownership on the company and under any circumstances they are assured of certain amount of payback. If the company is in losses after the debt holders it is the preferred stock holders that will be paid.

But how these stocks are traded? It's quiet confusing. They are usually traded in a stock market where buyers and sellers sit together and decide what should be the price of a stock. Sometimes this kind of trading is also done online. They are the ones who are responsible for change in the value of stock. If there are many who want to buy a stock than those who wants to sell it then the price of the stock goes up.

On the other hand if there are few people to buy a stock and more to sell a stock then obviously the price of the stock go down. What makes people to buy a stock? It is just the hope to incur profits on them. If the company is in profits then others want to buy that stock because they can incur profits on it. So they stock value increases. But if company is in losses then no one wants to keep those stocks and they try to sell them but very less people attempts to buy them hence price of a stock goes down.

The price of a stock is always fluctuating. The secret of successful investment is choosing the right reliable company for ones own budget.

Buy Stock Without a Broker - 5 Tips That Will Save You a Fortune in Commissions

The main advantage to using a stock broker is for the benefit of his or her investment advice - and you pay dearly in sales commissions for that advice too. If you make your own investment decisions and feel comfortable managing your own portfolio, you should know that you don't need a stock broker's or financial advisor's help or "connections" to buy stock.

While it is true that you need to purchase stock through a brokerage account (or directly from a fund or from the company for which the stock was issued), the purchase options I'll show you here don't involve a stock broker or financial advisor in the process at all.

In fact, most of these tips allow you to buy stock without a broker and with no commissions, no fees, and will put 100% of your money to work for you from day one!

1. Open an account with a discount brokerage
There are dozens of discount brokerages both online and offline that will allow you to set up and manage your investment portfolio yourself. I'll leave researching them to you, but realize that you can typically make trades for around $10 a trade through a discount online brokerage as opposed to the significant 1 to 2% sales commission that you would be paying to a financial advisor for the same transaction.

2. Buy mutual funds directly from the fund company
You can buy mutual funds directly from the mutual fund company without going through a stock broker or using a brokerage at all. After researching which funds from which mutual fund company you want to buy, call the mutual fund company or visit their website to buy directly from them. In most cases, you won't pay any sales commission at all when you buy funds like this (sales commissions that you would pay had you gone through a broker or brokerage).

3. Buy single shares of stock
There are several specialty companies that allow you to buy single shares of stock. These shares typically come framed and are meant to be used as conversation pieces or as novelty gifts. But, buying that one share qualifies you for the dividend reinvestment plan (DRIP) for that stock which is another little known but very powerful way to buy stock without a broker and pay no commissions at all.