If you are looking for buying any stock in the stock markets, you might have seen in the business columns or personal finance pages of the newspapers, that buying the stocks which have intrinsic value is always good and safe for the investors. This is also called value buying. To know about the intrinsic value of a stock, we also should learn about some fundamental parameters of the stocks. Let us see what are they and try to understand what is intrinsic value.
P E RATIO: P E Ratio or Price to Earnings Ratio is the measure of the price paid for a share relative to the annual net income or profit earned by the company, per share. A higher PE Ratio indicates the investors are ready to pay more for the stock, even the price is higher, compared to the price of a low PE Ratio stock. The PE Ratio, is expressed in terms of years, which is the period to give the investor back the value of its market price. PE Ratio denotes us the current demand for the stock.
A stock with a low PE, normally is cheap but all the cheap stocks may not have potential for good retuns. Investors must watch other aspects also, before they a stock with low PE Ratio.
PE Ratio can be calculated by the following formula:
PE Ratio = Market value per share Earnings per share(EPS)
where EPS = Net Income-Dividend Average ourstanding shares
PRICE TO BOOK VALUE: Price to Book Value or P/B Ratio is used to compare the current market price of the stock to the book value of the stock. Book Value is the value of all the tangible assets of the company after deducting the total liabilities. This ratio gives the investor some idea whether he is paying too much value for what would be left, if the company went bankrupt at the moment.
PB Ratio = Stock Price Tangible assets-Total liabilities
MARKET CAPITALISATION: Market Capitalisation is nothing but the value of all the shares of a company traded in the market. That means if the company is sold as of now, how much it gets value in terms of money. This is compared to other peer companies to assess the value of the shares.
DIVIDEND-YIELD: In a volatile market, investors who want to have steady income prefer the high dividend-yield stocks. It is for safer investment for the investors who do not like to make quick money or abnormal returns in the market. The dividend yield is a ratio of dividend paid to price of the share.
Along with all the above parameters, investors should make note of the history of the company, its business, promoter's integrity and qualifications, industry of the company and other economic conditions as a whole to make their investment secured and safe.