In Stock Market Investing Tips #2 and #3, we learned that value investing, more for the individual investor, mainly focuses on fundamental analysis, while growth investing focuses more on technical analysis. If you are not familiar with these terms, you may want to go back to these posts before proceeding.

In today’s blog, as well as the next few blogs in this series, we’ll go over a few key terms used in the stock market industry. Understanding these terms will later help you in evaluating potential stocks and ETFs for your portfolio (ETFS are “Exchange Traded Funds, or a ready made portfolio of stocks that you can trade just like a single stock).

I’ll provide quick definitions here, with a link to more detail should you be interested.

EPS- (Earnings per Share):
The earnings per share (”EPS”) is the total company net earnings divided by the total number of shares on the market. e.g. Profit divided by outstanding shares.

A normal EPS falls between $1 and $5 dollars. The higher the better, of course!


P/E Ratio- (Price to Earnings Ratio):
The Price to Earnings Ratio (”P/E”) is the selling price of the shares on the market divided by the earnings of each of those shares.

To paraphrase Jason Kelly in “The Neatest Little Guide to Stock Market Investing” , suppose a stock selling for $100 dollar on the stock market (price per share in the equation above) earned $10 per share (earnings per share in the equation above) last year, while a stock selling for $20 earned $1. The $100 stock has a P/E of 10, while the $20 stock has a P/E of 20.

What this tells you: Which one is better? The $100 stock is better, because you are getting more earning power for your share.

Bottom Line: The lower the P/E the better.

Dividend Yield:

Dividend Yield is a company’s annual cash dividend divided by cost per share. I like dividends!

Not all companies have dividends. Value stocks tend to have them, while growth stocks tend not to, reinvesting their profits back into the company for continued accelerated growth.Phew, that’s enough for today!

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