Indian stock market investments are made easy with our live NSE and BSE market tips Free. On the other hand, if a stock is trading near its 52 week high, it should probably be avoided because it will likely hit a resistance level and shoot downward. Make sure the average volume of the stock is over 50,000 or so. If the volume is low, then liquidity is low. This means it is hard to buy and sell because there aren’t many buyers and sellers and the stock moves in a very choppy fashion. Dividends are cash paid per share by companies to reward their shareholders for holding their stock.
So if the price of the stock is $2 and the EPS is $1, then the PE would be stated as 2.0x. It is unnecessary to remember this formula since the PE ratio is always listed on the quote page” of a stock. The reason for the formula is to show you the relationship between the numbers and give you an idea of how to tell if a stock is over or undervalued. They are fundamentally controlled by the market – a function of supply and demand.
This means if the PE is very high, then the price per share of the stock must be much more than its earnings per share, which means the stock is overvalued, or overpriced. So basically, it is beneficial to look for companies with low PE ratios between the range of 1.0x and 10.0x. When the market is performing better, the preferable range would be increased to around 10.0x and 20.0x. If the company has a negative earnings per share, then the PE will not be listed. Earnings per share is determined by the above formula: (Net Income – Dividends on Preferred Stock)/Average Number of Shares Outstanding.
If a company fails to meet the earnings expectations of analysts, it instantly decreases the stock price when the actual earnings are announced. A company’s accounting department can easily manipulate it. However, it should still carry some weight in choosing a stock nonetheless. This is a crucial statistic in itself to determine if there is enough cash to pay off debt and engage in future endeavors that contribute to stock price increases. Market cap is determined by the following formula: Number of Shares Outstanding x Price per share.
Basically, when investing, look at the market cap or size classification to find something that matches your risk tolerance. If the beta is 2.0, and the market increases by 3%, then typically the stock will go up 6%. Sounds great until the market drops 3% and the stock falls 6%. If the beta is negative then it moves inversely, or opposite of the market.