How to Value a Stock: A Simple and Helpful Guide

When it comes to valuing stocks, there are several things worth knowing. Check out this guide here on how to value a stock.

Even though the number of stocks available is dropping, There are still about 11 companies per 1 million people in the United States. This leaves you with plenty of options for investing your money.

The first step in entering the stock market is to understand how to value a stock. You want to choose a stock based on your ability to grow your money.

Keep reading to learn about four different methods for valuing stock.

How to Value a Stock

When it comes to valuing a stock, there are four fundamental ratios to look at.

• Price-to-Book Ratio
• Price-to-Earnings Ratio
• PEG Ratio
• Dividend Yield

If calculating ratios and doing math aren’t your thing, you can use a free stock valuation tool. These services will calculate the valuations for you.

The Price-To-Book Ratio (P/B)

This is a valuation that looks at what the company would sell for if it was broken up and sold off today. This is helpful because sometimes a company will look like its struggling, but in reality, it’s in a growth phase.

These companies have valuable assets that make the company worth more. This includes property, equipment, and holdings.

Price-To-Earnings Ratio (P/E)

Sometimes you’ll see a stock shoot up in value, but there are no earnings behind it to support the increased value. The P/E ratio will tell you if the stock can maintain that increase or if it will eventually fall back down again.

This ratio will tell you how long a stock will need to repay your investment should the business remain the same. Let’s assume you bought a stock at $20 a share. The company posts earnings of $2 per share.

The P/E ratio is 10. This means that you’ll make your money back in 10 years if nothing else changes.

The PEG Ratio

The P/E ratio is helpful but doesn’t give you a full picture of the company’s worth. You need to combine it with the PEG ratio. This ratio also factors in the historical data of the company’s growth.

Most people use this ratio to compare stocks to determine which is the better investment. The lower the ratio, the better of a deal you’re getting on the company’s future earnings.

Dividend Yield

A dividend gives investors a sort of safety net when the value of a stock drops. Companies will pay stock owners a certain percentage of the value of the stock. This is like a regular paycheck that can happen quarterly, semi-annually, or annually.

Some industries consistently pay higher dividends than others. Tech firms tend to reinvest their profits. But banks and utility companies will pay higher dividends.

Start Investing Today

Now that you understand the basic methods for how to value a stock, you’re ready to start researching possible investments. Start with industries and companies that you’re familiar with.

Look at these four different valuations to determine your level of risk and potential for earning.

Check out the economy section of our blog for more financial advice and tips.