We all want to earn a lot of money in the stock market. we dream that we will be rich one day. But the sad reality is little difference you have to understand the rule of the share market .you also have to understand the share is overvalued or undervalued. The thing which helps you to understand is the PE ratio.
let us understand what is PE ratio?
PE ratio means the price to earn.
It means to earn one rupee how much people are ready to pay. if a company's PE ratio is 20 it simply means investors are ready to pay 20 rs to earn 1 rs.
The less the PE the more the valuation you are getting from a stock.
the rule of thumb is to buy at less PE and sell when the PE is high.
In this article, we discuss the different pe ratio and their meaning, every time you invest in the market you always look at the PE ratio of a company.
How PE ratio can calculate
PE ratio can be calculated by its market price and EPS.
here EPS means earning per share.
PE ratio =Market price/EPS
It is telling you How much you are ready to pay to earn 1 rupee of that share.
NOW LET US TAKE AN EXAMPLE
ABC COMPANY PRICE = 100
EPS =5
THEN THE PE = 100/5=25
That means investors are paying 25 rs to earn one rupee of ABC stock, which is telling you the value of the company.
NOW UNDERSTAND PE RATIO VALUE TO DECIDE TO OVERVALUE OR UNDERVALUE
25-above ---Much EXPENSIVE--- SELL TO BOOK PROFIT OR CAN START SIP
20-25 --- EXPENSIVE----- CAN BOOK 80% OF MONEY, CAN START SIP
15-20----- AVERAGE --- CAN INVEST FOR LONG TERM AND CAN START SIP
12-15---- QUALITY --- CAN BUY LUM SUM AND CAN START SIP WITH INCREASING AMOUNT
BELOW 12--- UNDERVALUE - CAN BUY BIG AND START SIP WITH INCREASING AMOUNT OVER TIME.
PE is not the only thing you should look for buying share but also look at other things before investing .you should always consult your financial advisor before investing.
PE ratio is really helpful in understanding or invests time in an index fund or ETF.
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