Value Investing


For any investor who wants to evaluate a business’s true worth or value, he or she must know certain investment terms as well as how to use those terms to evaluate the approximate value of a business.

Advertisement

Price To Earnings Ratio:

The P/E ratio is the price an investor is paying for $1 of a company's earnings or profit. In other words, if a company is reporting basic or diluted earnings per share of $3 and the stock is selling for $45 per share, the P/E ratio is 15 ($45 per share divided by $3 earnings per share = 15 P/E).

The Standard & Poor's 500, often abbreviated as the S&P 500, or just the S&P, is an American stock market index based on the market capitalizations of 500 large companies having common stocks listed on the NYSE or NASDAQ. It is widely used by institutional investors to evaluate the performance of mutual funds, and many consider it one of the best representations of the U.S. stock market.

On average since its inception, the S&P 500 has produced a rate of return around 7% per year. If you invested $100 when the index was first created, it would be worth about $57,819.60 based on a 7% rate of return. Incidentally, many investment pundits considered 15 times the price to an earning (P/E) ratio as an ideal when investing in stocks or the index, since at that price, it represents the 6.66% (100/15) rate of return.

Next »

Back »

Advertisement

Advertisement

Advertisement