When buying or selling securities, there are some basic terms you should know. These are commonly dealt with actual shares of a stock and are different from option contracts.
Many of these terms below are often used with fundamental analysis, a method for determining a stock’s real or “fair market” value.
Equity (or Stock)
A share of stock (or equity) is a stake in the underlying business for which you purchased a share. It represents the amount of money you would be owed if the company was liquidated and entitles you, as a shareholder, rights to make decisions within the company. Typically, a share will deem you one vote, with the majority shareholder(s) the ability to direct the company’s path.
Price-to-Earnings Ratio (or P/E)
Stock price ÷ annual earnings per share.
Annual Earnings per Share (or EPS)
Earnings ÷ outstanding shares of stock. Defines how much an investor is paying for $1 of earnings.
Price-to-Sales Ratio (or P/S)
Stock price ÷ annual sales per share. Defines how much an investor is paying for $1 of the company’s sales.
Price-to-Book Ratio (or P/B)
Stock price ÷ shareholders equity (or book value) per share.
Shareholders equity = Assets – Liabilities
It is essentially the portion of the company’s value that is available to shareholders if the company closed and sold its assets and paid off liabilities. Typically you would want to see the book value grow every year.