# Understanding the Stock Market, Learning About the PE Ratio

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Do you know the stock market? In this article on understanding the stock market, we are going to learn more about the P / E ratio.

Understanding the Stock Market – The P / E Ratio

If you've ever read anything about the stock market I'm sure you would have heard the term P / E ratio. This term refers to the price / earnings ratio and when it comes to valuing stocks, this is one of the oldest and most frequently used metrics.

Although this is an easy indicator to calculate, it can actually be quite difficult to interpret. In some situations it can be informative and in others it doesn't make sense, and because of this investors often abuse the P / E ratio.

The P / E ratio is the ratio of a company's share price to its earnings per share. To calculate it, you just need to divide the market value per share by the earnings per share (EPS). The P / E ratio will typically be calculated using EPS from the past four quarters (known as the ending P / E). it can also be calculated using the estimated earnings over the next four quarters (referred to as anticipated or projected P / E).

Once you've calculated the P / E ratio, there are a number of ways you can use it. Theoretically, the P / E tells us how much investors are willing to pay per dollar of earnings. A P / E ratio of 20 tells us that investors are willing to pay \$ 20 for every dollar in earnings. The P / E can also be seen as a reflection of the market's optimism about a company's growth prospects.

If the company has a higher P / E than the market or industry average, it means the market is expecting big things over the next few months or years.

The P / E ratio is a much better indicator of a stock's value than the market price alone. All things being equal, a \$ 10 stock with a P / E of 75 is much more expensive than a \$ 100 stock with a P / E of 20. Remember, this is the case. there are limits to this form of analysis, you can't just compare the P / Es of two different companies.

A common mistake newbie investors make is short selling stocks because they have a high P / E ratio. Evaluating a security purely on the basis of a simple metric like P / E is a very bad idea and can get you in serious trouble.

So what have we learned about the P / E ratio. Even if that doesn't tell us much, it can be helpful to compare the P / E of one company to another in the same? sector, the market in general or the companies' own historical P / E ratios. Headline analysis requires a lot more than just understanding a few ratios, while P / E is part of the puzzle, it's not the end of everything.