Stocks Part 1 – Understanding the Numbers and Ratios (basic)
A constant goal that I have is to educate clients. My hope is that when clients hear terms in the media or in casual conversation that they could have some understanding of what is being discussed. The other day a client asked me what a “price per earnings ratio” was (otherwise known as a “P/E ratio”; as I was explaining it, it quickly opened up a huge can of worms on the various numbers you hear of around stock. As I go through these terms, I encourage you to pull up a stock online on a website such as Yahoo Finance or Google Finance. When you do, you’ll see a list of terms and number by them. This is what I will explain:
Price – This is usually the most obvious one on the screen. It will say how much one share of the company is selling for and also how much it went up or down.
Previous Close, Opening Price (or just “Open”), 52-week Range, Day’s Range – These are all numbers about where a stock’s price has been recently. The idea is to help an investor tell how it has behaved yesterday and in the past year. Sometimes you’ll hear “XYZ trading at 52-week highs…” (or “52-week lows”).
Shares – To make sure we’re on the same page, a stock “share” is a fractional ownership in a company. This number tells you the number of shares outstanding. If it’s a big company, they may have a few billion shares outstanding.
Market Cap (or shorter as “mkt cap”) – This is short for “market capitalization”. It is the total value of the company as measured by share price. If you multiply the current “price” by the number of outstanding “shares” you should get this number. Some common terms you’ll hear are: micro cap, small cap, mid cap, large cap, or mega cap.
EPS (or “earnings per share”) – This is a ratio meant to help investors tell how relatively expensive an individual stock (or wider stock index) is. It is calculated by taking a company’s earnings (or “net income – dividends on preferred stock”) and dividing it by the current share price. If a company earned $75 per share and the share price is $25, then the EPS is 3.0. However, this can vary from stock-to-stock based on the number of shares outstanding. Have many lower priced stock shares will make EPS lower.
P/E (or “price per earnings ratio” – This is meant to also tell you more about how relatively expensive or inexpensive a stock is, but to ask equalize the information (because EPS varies so much on shares outstanding). It’s found by dividing the share price by EPS. In our above example, if the share price is $25 and EPS is 3.0, then the P/E ratio is: 8.33.
These are the basic ones, in Part 2 of this I’ll go over some more advanced terms.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results.