How to Evaluate a Stock

by Contributor ; Updated July 27, 2017
Evaluate a Stock

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Thoroughly evaluating a stock is extremely important before buying it, especially in this volatile market. This article tells you how to evaluate a stock.

Step 1

There are many different ways to evaluate a stock. This article is geared more towards beginning investors, so keep that in mind. But if you have any more in depth questions, please feel free to ask.

Step 2

The most common way to evaluate a stock is with its price to earnings (P/E) ratio. This ratio is obtained by taking the price of the stock, and dividing it by the company's net income for the most recent year. So let's say the price of a stock is $30 per share, and it had earnings of $3 per share. Then its P/E ratio would be 10. Historically, stocks have P/E ratios of about 17-18 on average.

Step 3

The downside to just using P/E ratios is that they obviously can't tell you everything. Generally, stocks with lower ratios are preferred. And therefore stocks with high P/E ratios are not ideal. But a company might have a high P/E ratio, and also with high growth, which can justify the high P/E. Also you should keep in mind - when looking for stocks with low P/E ratios, there might be a reason. The company could be not doing very well.

Step 4

The price-to-book ratio is another good one. Is is also important to look at the growth prospects for the company, as well as its debt. I have written other articles that are in depth, so feel free to read them if you are interested.