What is a P/E Ratio?
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P/E, or price-to-earnings ratio, is probably the most popular analytical tool provided in the stock quote. At a glimpse, it lets you know how the market values a company in relation to its earnings. A higher P/E ratio tends to mean that a company’s stock price is relatively expensive. A lower P/E ratio means the price is relatively inexpensive.
The key word here is relatively. P/E ratio is useless on its own; it always needs to be compared, either to other companies of similar size, the company's industry, or to past performances of the same company.
What you really need to know about this is that low P/E ratios suggest the stock may be under-valued, but also may have no growth prospects. Always compare a company’s P/E ratio with companies in the same industry and of the same size – A higher P/E ratio compared to the industry suggests either that the stock is overvalued or people expect bigger things from this particular company than all the others in that industry.
Learn more about the P/E ratio with Wall Street Survivor's Getting Started In The Stock Market course pack:http://courses.wallstreetsurvivor.com/is/10-getting-started-in-the-stock-market/
thank you so much for the very kind and very useful explanation. The concept is quite clear to me now. What is not clear to me is why a stock with a P/E ratio of let's say 100 is preferred to one that has a P/E ratio of say 5. Moreover ... why invest in a high-P/E ratio sector ? it makes no sense to me. I would go immediately for stocks with a P/E ratio as low as possible. Thanks again gino
+Jan Norris Hey Jan. Though we do our best, it's definitely a bit tricky to explain a concept like P/E ratios in a 1-2 minute long video! We offer a free course "The Value of a Stock" where we also explain the power of the P/E ratio. Feel free to check it out, Jan: http://bit.ly/1pqi5Z4
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