On the P/E Ratio

        While researching, you may have come across something known as the P/E ratio, a numerical value that is an integral part of any investor's research. It is deceptively simple, calculated as the PRICE PER SHARE (the price the stock is trading at) divided by the EARNINGS PER SHARE (how much the stock has risen over the past twelve months). With this value, you can predict how a stock will behave over the next few months, and you can maximize your income.

        First, a small clarification. There are two types of P/E ratio: one for the past, one for the future. The trailing P/E ratio is calculated using the current price over the EPS (earnings per share) from the past twelve months. This is more accurate then the other type of P/E ratio, because it uses real earnings. The other type of P/E ratio is the foward P/E ratio. This is calculated using expected earnings, hence the "forward". As such, this value is usually less accurate and is not as reliable.

        Higher P/E ratios indicate the expectation of growth in a company by investors. A company with a high P/E ratio is expected to grow over the upcoming months and increase its earnings. If the stock does not live up to these expectations, the price of shares will drop. Additionally, higher P/E ratios mean that a stock is generally more "expensive" and is worth more then a stock with a low P/E ratio. A slowly-growing stock with a high P/E ratio is usually overvalued, and could plunge in the near future.

        Lower P/E ratios could potentially mean that the stock is undervalued, and may rise in the future. However, it could also mean that the company is heading for trouble, and could drop in the future.

        While the P/E ratio is an important and useful tool for investing, by itself it is not that helpful. In order to successfully invest, you should use the P/E ratio along with other numerical data.

Disclaimer: Trading stocks has extremely high risks, and should not be taken to lightly without a thorough understanding. This is written from a purely commentary point of view and is not meant to suggest buying, selling, or holding a stock. All traders must do their own research prior to investing. We (StockQuests) are unaffiliated with all of the companies that are mentioned on this blog, and can't be held responsible for any losses that may occur. Invest at your own risk.

Market Cap Vs. Enterprise Value

        Before buying a stock, you always want to consider their market caps and enterprise values. These two figures often tell you the size of the company, how big it is in relations to others, and how well it is doing. There are also many other factors to consider when evaluating a company, but for now, we will focus on market cap and enterprise value.
        Market cap is how much the stock market considers a company is worth. Enterprise value is how much the company is actually worth. Usually, you want the market cap to be lower so that the company is undervalued. If it is higher, it either means that other investors feel that the company has potential, or it is overvalued. These values should play a large role when choosing your investments.
        In addition, you should consider debt and cash. The difference between a company's market cap and enterprise value could be because of these two factors. If a company has taken on a lot of debt, its market cap will generally be lower due to the fact that it will have to pay back that money. If a company has a large amount of cash, its market cap will be higher because the cash counts as part of the company's assets. If a company has similar values for its debt and cash, they usually balance out. In those cases, the market cap and enterprise value will balance out.
        Companies that are smaller are generally dangerous investments because they can easily go bankrupt. However, if you are lucky enough to choose a good one, you could earn a lot of money. Larger companies tend to be more stable investments, but many of them are so big that they dominate the industry. They don't have a lot of room to grow.

Disclaimer: Trading stocks has extremely high risks, and should not be taken to lightly without a thorough understanding. This is written from a purely commentary point of view and is not meant to suggest buying, selling, or holding a stock. All traders must do their own research prior to investing. We (StockQuests) are unaffiliated with all of the companies that are mentioned on this blog, and can't be held responsible for any losses that may occur. Invest at your own risk.