| Market Capitalization | | | | However, the P/E ratio doesn't tell us the whole |
| A company's market capitalization (or "market | | | | story itself. It's usually more useful to compare |
| cap") is calculated by taking the number of | | | | the P/E ratios of one company to other |
| outstanding shares of stock multiplied by the | | | | companies in the same industry, or to the market |
| current price-per-share. It is the amount of | | | | in general, or against the company's own historical |
| money you would have to pay if you bought | | | | P/E. |
| every share of stock in a company. | | | | It would not be useful for investors using the P/E |
| The price that an investor pays for a security. | | | | ratio as a basis for their investment to compare |
| This price is important, as it is the main | | | | the P/E of a technology company (high P/E) to a |
| component in calculating the returns achieved by | | | | utility company (low P/E) as each industry has |
| the investor. | | | | much different growth prospects. |
| For example, if an investor buys XYZ at $35, | | | | Price / Earnings To Growth - PEG Ratio |
| then this would be the purchase price. When | | | | A ratio used to determine a stock's value while |
| looking at the return on the investment, the | | | | taking into account earnings growth. The |
| investor would compare the purchase price of | | | | calculation is as follows: |
| $35 to the price the investment was sold at or | | | | PEG Ratio = Price to Earnings ratio / Annual EPS |
| the current market price for XYZ. | | | | Growth |
| Share | | | | PEG is a widely used indicator of a stock's |
| Certificates representing ownership in a | | | | potential value. It is favored by many over the |
| corporation. Shares are also known as stocks or | | | | price/earnings ratio because it also accounts for |
| equities. | | | | growth. Similar to the P/E ratio, a lower PEG |
| P/E Ratio | | | | means that the stock is more undervalued. |
| The P/E ratio is how much money you are paying | | | | Keep in mind that the numbers used are |
| for $1 of the company's earnings. If a company | | | | projected and, therefore, can be less accurate. |
| were currently trading at a P/E of 20, an investor | | | | Also, there are many variations using earnings |
| would be paying $20 for $1 of earnings | | | | from different time periods (i.e. 1 year vs. 5 year). |
| The P/E looks at the relationship between the | | | | Be sure to know the exact definition your source |
| stock price and the company's earnings. You | | | | is using. |
| calculate the P/E by taking the share price and | | | | Short Selling |
| dividing it by the company's EPS. | | | | The selling of a security that the seller does not |
| In other words, if a company is reporting a profit | | | | own, or any sale that is completed by the |
| of $2 per share, and the stock is selling for $20 | | | | delivery of a security borrowed by the seller. |
| per share, the P/E ratio is 10 because you are | | | | Short sellers assume that they will be able to buy |
| paying ten-times earnings | | | | the stock at a lower amount than the price at |
| [$20 per share dividend by $2 per share earnings | | | | which they sold short. |
| = 10] | | | | Selling short is the opposite of going long. That is, |
| In general, a high P/E suggests that investors are | | | | short sellers make money if the stock goes down |
| expecting higher earnings growth in the future | | | | in price. |
| compared to companies with a lower P/E. | | | | |