Stocks are typically used to measure the value of a company as a whole, how it is viewed in the consumer market, as well as how successful the company is in its current market. When picking their stocks, investors intend to cultivate a successful portfolio with a specific achievement in mind. When an investor purchases a stock, they become a shareholder of the company - they now own part of the company. Furthermore, the company’s actions and success will now directly affect the investor’s portfolio.
A stock’s fundamental view is its market value per stock. There are four essential elements used to break down a stock’s value (ratios): Price to Book (P/B), Price to Earnings (P/E), price-to-earnings-growth (PEG) ratio, and dividend yield. Each of these will tell us a different aspect of stock; however, to effectively evaluate a stock, the ratios must be looked at cumulatively; they cannot stand alone.
The Price to Book ratio is looked at in protective measures. If the company is suddenly sold or crumbles, the P/B ratio evaluates its assets and anything that can be sold. An accurately low P/B rate is ideal for protecting you, the stockholder.
The Price to Earnings ratio is essentially how long it will take for a stock to pay back your investment. These ratios are only meant to be compared with those of similar companies around the same industry. High P/E ratios tend to come from risk-centered trades.
Price to Earnings Growth ratios are often looked closely together with the P/E ratios. In contrast with each other, the PEGs show a graph of the history of how the stocks have done, essentially the growth; the P/E ratios show a snapshot of where the stock is currently. As always, this is risk-involved and speculative, as there is no definitive way to guarantee that a stock will continue its progression trend of growth.
Lastly, dividend yield shows how much you will be getting paid in comparison to your money (that has been put into the market). It is often seen as a backup, and you will get paid even if the stock falters slightly. Dividends vary heavily based on the market we are looking at as well. A tech company tends to have little to no dividend yield, as they usually invest their earnings back into the company to grow. On the other hand, banks will have a higher dividend yield, as their growth simply stems from money.
It is also important to note that while these are the four main metrics of measurement, there are thousands more customized metrics to determine if a stock is of value to the consumer.