- How to calculate price of a stock !

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How to calculate price of a stock !

Saturday, 07 July 2007

Hey you have come this far, reading this page be assured you are in the right place I have organized an easy to understand write-up on how you could evaluate a stock for its sensible price, here’s how..
The most common way to evaluate a stock for its price is its PE Ratio, this is the approach I follow and is by most of the market men out there who have made fortunes in stocks.
I will simplify this approach here please read ahead I am taking a fictional ABB company for the purpose of illustration.

Suppose if ABB Company shows net earnings of $ 100000 in its last year’s statement of account and the company has total 1000 shares outstanding the earnings per share of ABB Company translates to $ 100 per share and this figure is commonly referred to as Earnings Per Share or EPS in short, so the EPS of our fictional company ABB is $100 and if the Current Market Price or CMP of our company ABB is $ 1000 then we know by this figure that the price we are paying to buy a single share of this company is ten times of its last year’s earnings. In easy terms ABB’s Price to Earnings Ratio or the PE Ratio is 10.

Although there is no perfect barometer to evaluate a stock by its PE ratio, low PE stocks does not necessarily mean value deals or high PE stocks does not necessarily mean costly deals.

Be aware that the market always evaluates a stock for its expected future performance and never based on the company’s current performance..Be aware that the market always evaluates a stock for its expected future performance and never based on the company’s current performance always look for events in the offing that could change the company’s fortunes, mockingly this is what the market men look for in a company and the dearness of the stock increases with the optimism it has for its future.

With that being said most often a company’s price and the sum PE it commands in the market often reflects the dearness the stock commands among the share holders of the company.

High PE stocks often reflect optimism among the investors who are holding this company the reasons might well be that the company is going to realize higher earnings in its operations in the time to come or does have operations in a very lucrative sector.

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Most often Low PE stocks are mistrustful and it is very likely that the company has problems looming large and the future prospects of the company are in grave and disastrous future you should be cynical if you are going for Low PE stocks do an in-depth research and look for if the company is on the verge of turnaround.

But wait there is more to it then meets an ordinary eye while the market necessarily looks in the future of the company to weigh up for its price, there could be another side to this the CMP of a stock if it is a low PE stock or the PE could also be ZERO could also mean the market has punished or hammered the stock for its misfortunes and the hammering has caused the CMP to levels that the stock is available for a throw away price and here lies the catch the hatred towards the stock has pushed the CMP to its brink, and the company is on a turn around and likely to see good times ahead such stocks could be potential winners and fortune makers for you.

I go for value deals and look for stocks that market has hammered and on the verge of turn around. In conclusion get this right there on top of your mind the CMP of a stock is either because of optimism that surrounds the Company’s stock or the pessimism that led to the hammering of the stock that led to its throw away price state.
While I look for the later this is my approach I go for value deals and look for stocks that market has hammered and on the verge of turn around this approach has always rewarded me and I never lost money in stocks.

There are other methods of evaluating stocks I will cover in my next write-up how did you like my approach please leave a feed back for me here that would be an appreciation for my efforts in writing this article for you.

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Reviews (2)

1. Written by This e-mail address is being protected from spam bots, you need JavaScript enabled to view it , on 12-04-2008 14:04
PE with stocks movement for 200 days are important considerations.

2. Written by This e-mail address is being protected from spam bots, you need JavaScript enabled to view it , on 09-07-2007 05:53
always look for stocks that are trading above 20 times to its past years earnings and PE is not necessarily the right barometer to judge the stock price

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Although there is no perfect barometer to evaluate a stock by its PE ratio, low PE stocks does not necessarily mean value deals or high PE stocks does not necessarily mean costly deals.

There are other methods of evaluating stocks I will cover in my next write-up how did you like my approach please leave a feed back for me here that would be an appreciation for my efforts in writing this article for you.