OK, here’s your formula: P / E = the PRICE of one share of a stock divided by how much profit, or EARNINGS, the company made per share the year before

If the price of a share of Company B is $90, and last year Company B earned a profit of $6 a share, the P/E ratio of Company B is: 90 / 6, which equals 15. Since it’s what you pay divided by what you make, the lower the better! The average P/E for the stock market is 14: the average for my stocks is 9.

P/E ratio is not the only thing to look at when picking a stock P/E ratio is not the only thing to look at when picking a stock. Also look at the dividend, or the amount companies making a profit often pay out (every quarter, half year, or year). A dividend is a type of income for the shareholder, similar to interest on a bond. In this case, the higher the better!

Also take a look at the high and low price of the stock for the past year. It’s usually bad to buy a stock at its yearly low. It’s a bust more often than a bargain. It can be bad to buy at the yearly high, too, unless you expect the stock to “take off”.

Other things to look at are how the company is managed (Are there smart people making the right decisions, or not?), and how the industry it’s in (oil, steel, entertainment, etc.) will do in the near future. Both of these require research and a broad background in the social sciences.

You ought to check out how the company you are thinking of investing in is doing compared to other companies in the industry. Finally, you need to know if the company does well in a bull market, a stable market, or a bear market (some actually do the latter, like mudders in horse racing), and make an informed guess about which of these markets we’ll be in.

This is all available at Yahoo This is all available at Yahoo! Finance and similar websites, as I’ll show you again.

But it’s very hard and time-consuming to do all this research, and you need a lot of practice. That’s why I say you’re not ready to be successful picking stocks, even after you learn all these terms. “Beware dumb luck: It ruins people.” (Montaigne) You, before this unit You, now You, when you’re ready to buy stock The Learning Curve

Be prepared to explain in your own words, in paragraph form, what a P/E ratio is, and what, besides P/E, is important to consider when picking a stock to buy on your own. That’s in addition to all four lessons in the book (Ch. 14).