How to Value Stocks and Shares
Stocks and shares are one way that investors can invest in their favorite company. In exchange for the price of one share of stock, the investor receives the ability to share in share price appreciation and/or dividends. Since stocks and shares are traded on the market, the price of stocks is dependent upon supply and demand. While market value is one way to value stocks, the price to earnings ratio helps to gauge whether or not the market is over- or under-valuing stock price.
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Instructions
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Determine the current stock price of the company you are looking to value. For this example, let's say the current stock price is $10.
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Obtain the earnings per share of the company. You can research the earnings per share by contacting your stockbroker or looking at the most recent annual report, which can usually be downloaded from the company's website or requested from the Investor Relations department. For this example, let's say the earnings per share is $1.
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Divide the price of the shares by the earnings per share for the P/E ratio. The calculation is $10 divided by $1 or 10.
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Compare the P/E ratio with the P/E ratios of other companies in the same industry. For instance, a high P/E ratio signifies an overvalued stock, and a low P/E ratio signifies a undervalued stock.
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