Are stocks a good value? The beginners guide to finding out
How do you know if a stock is a good deal? Or the stock market?
The industry bombards us with complicated analysis and unreadable, unnecessarily intimidating jargon. How can you simplify it to what matters?
The easiest way to fathom a stock’s (or the market’s) value is to think like you’re buying the whole business. What’s the price, and what will you get back in the long run?
The price part is easy. Stock prices and broad indexes like the Standard & Poor’s 500 are quoted widely.
For the “get back” part, many use a figure called the price-to-earnings ratio, or P/E. It’s a stock or index price divided by its earnings per share. Some use the past 12 months’ earnings. Others use estimates for the next year (which I prefer, called forward P/Es). If a P/E is 12, you’re paying $12 for every dollar of earnings. Most pundits presume stocks are expensive when P/Es are high and cheap when they’re low. They think high P/E implies low return potential (and vice versa). But there is a better two-step way.
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