Price-Earning Ratio in Stock Market - A Perfect Tool For Stock Analysis?3774981

Investing in stock market is always uncertain. But if you are a smart and experienced investor or trader then you know how to get the ball in your court. However, if you are a novice investor then it is very important that you the right knowledge of the market game, must have right tools, strategies and more importantly, you must be clear with the technical terms that are used in daily routine in market. Before investing in the stocks, it is very important for a beginner to understand the working of stocks and the basics else you may lose your hard earned money.

The most widely used technical term in the market is P/E ratio or price to earning ratio of stocks. In fact, this is one such number that is always followed by the investors.

So, what does P/E ratio denotes? Price to earning ratio of a stock denotes how expensive that stock is. P/E ratio also forms a relationship between the stock price of the company and its earning.

How to calculate P/E To find out P/E ratio of a stock, you need to divide the share price with the EPS of the company. So, P/E = Stock Price / Earning per share (EPS)

How a stock is analyzed using P/E ratio As a common notion, high P/E ratio of a stock means that it is much in demand in the market. Generally, investors run after such stocks that have a higher P/E ratio and they are always ready to pay more for buying that particular stock. Certainly, stocks with higher P/E ratios belong to good companies that are believed to outperform the competition or entire industry and hence does its stock. However, some investors that take higher P/E ratio of a stock as a remark of "overpriced stock" and therefore expects impressive performance from it in the market. But be cautious! Higher expectations or higher P/E comes with higher level of risk i.e. if the "overpriced stock" does not perform according to the expectation of the market then surely the investors that invested in it are going to lose their money.

On the other hand, if a stock has lower P/E ratio then it has complete reverse story that of a stock with higher P/E ratio. A lower P/E stock denotes that the issuing company is a low risk company with lower earnings. Therefore the market has relatively lower expectation from the stock of that company. Sometimes in the market, low P/E ratio of the stock also reflects the notion "vote of no confidence" by the investors. In other words such stocks could also be considered as overlooked by the market.

Conclusion - So the P/E ratio is the perfect tool for stock analysis? Yes, P/E ratio is certainly an important number for analyzing stocks. However, depending completely on this number is undesirable. P/E must be used just to get an idea, what notion does the market has formed for a particular stock, whether the investors like or dislike this stock, to verify that the company's earning are good or not and finally to check the expected performance of the penny stock newsletter. Most investors only consider this number with confidence as a criterion for investing in a stock but it is dangerous. P/E cannot tell you entire story of the performance of the company and its stock, if it did then the other numbers or ratios does not have existed.

As we have already discussed that the investors have much expectation from the stocks with higher P/E, they are ready to buy these "overpriced" stocks but there is a lot of risk involved. If such stocks do not live up to expectations, investors will lose money. On the other hand, some smart investors had made millions from "overlooked"/ low risk / or low P/E but strong stocks. Spotting the potential of such stocks, investors can easily earn handsome without bearing the risk as in case of high P/E stocks. penny stock newsletter

Therefore, P/E ratio is not the only factor that must be considered while stock analysis other ratios must also be focused. PEG ratio could be used to gain a better insight with analyzing stocks. P/E ratio is the most commonly used stock analysis ratio. Many investors solely trade considering P/E of a stock but it is undesirable. Generally, stocks with higher P/E ratio are appreciated but low P/E stocks have even performed really well.