Does the price of a stock really matter? Many people look at the price of a share before deciding whether to buy that particular stock. Should you follow your instinct and consider the price of a stock before deciding whether to buy it or not?
When buying a stock one of the factors that one needs to take into consideration is the PE ratio, the price per-earnings ratio of the company. The PE ratio is the calculation of how much a company earns divided by the price of the company. Listen to today’s episode to learn how to calculate a company’s PE.
Once we understand why people are willing to pay 10, 30, or even 400 times earnings, ask why should someone do that? If I can pay a cheaper price for a similar stock, why should I buy the more expensive one?
The answer is different people look at stocks differently. Beauty is in the eyes of the beholder; what is important to one person may not be as important to someone else. The most important thing to keep in mind is that if the PE ratio is very different, probably the stocks aren’t exactly the same.
When investors are willing to buy stocks at higher PE ratios, it’s often because they believe that the company will increase its earnings, and, once that happens, the initial price of the stock will rise, and they can walk away with a profit.
Let us know if you look at the PE ration before you buy a stock.
Efraim is a business student, former IDF officer, and an entrepreneur, head of “A Day with an Officer.” Contact him at: firstname.lastname@example.org
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