What is the value of a stock?
- Yechiel Roth CPA, CFP, PFS
- Aug 27, 2020
- 1 min read
Updated: Dec 29, 2020
The current price of a stock is decided by the market, it is the price at which sellers and buyers are ready to trade. But what is the underlying value?
A stock gives you ownership of a slice of a company, every share has an amount of income or loss that is allocated per share which is called Earnings Per Share, management who is voted in by the stockholders, will usually decide how much of that profit should stay in the company and how much should be distributed as a Dividend.
The basic value of a stock is the present value of all the future dividends, however many investors will look more at the Earnings Per Share which relates to future potential dividends than current dividends.
The price of a share divided by its earnings is called the P/E Ratio, the S&P has historically traded at around 15 times earnings and is trading now at around 30 times earnings.
The current high P/E ratio in the market may reflect optimism about future income, very low yields on other assets like bonds, speculation or some combination of these factors.
Reading about what a stock’s value really means made me realize it’s not just the price on a screen but a mix of earnings, future growth expectations, and underlying company worth that investors try to understand with ratios and comparisons like P/E and book value to gauge fair value . That whole idea took me back to late nights in school when I needed online calculas class help just to keep everything balanced between study and life.
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I read the post and it explains that a stock’s value is really about what future profit or dividends it might give you, not just the price you see on the market, and things like the P/E ratio help show this idea. When I was stressed over a long report, I once used NEBOSH Assignment Help late at night to sort my thoughts and calm my nerves, and it reminded me that understanding basics makes hard topics feel easier.
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