PE is the most common valuation method we see, and the formula for pricing is P=PE*E. This means that the price of a stock is determined by two factors: valuation and earnings. To make money on a company's earnings, you need to have a deep understanding of the company's fundamentals so that you can have a forecast of future earnings.
Earnings are stable over a period of time, and the daily price changes we see are actually due to changes in people's valuation of the market, otherwise known as the heartbeat of the crowd.
In the author's opinion, the PE valuation method is best applied to the valuation of broad-based indices. In the history of countries around the world, market valuations are mean-reverting in the long run. For example, the median long-term price-to-earnings ratio in the United States and Europe is around 15 times. So buying when prices are cheap will give you a head start and give you a decent safety cushion.
PE is good for companies with relatively stable operations, such as blue-chip companies, typically such as those in the consumer goods sector.
(2) Price-to-book ratio PB
PB is mostly used for companies that have huge changes in earnings, such as cyclical industries, securities industry, etc. This valuation method is especially good. If the cyclical industry is still using PE to valuation, then you will fall into the low valuation trap, because PE is low when it is just the peak of the cyclical industry earnings, everything has a cycle, think about what will happen next.
In fact, at the bottom of the market, you can often see many companies with PBs below 1. A typical example of a company that has fallen below its net worth this year is a bank, with the CSI banking index now trading at a PB of just 0.88.
Price-to-earnings ratios are often used to look at the intrinsic value of a stock, and are mostly valued by long-term investors.
(3) Price-to-sales ratio PS
PS=share price/operating income per share=PE*average net profit margin
Can clearly reflect the potential value of companies in emerging markets, as a company's market share plays an increasing role in determining its viability and profitability in an increasingly competitive environment.
There are many companies where earnings can fluctuate dramatically, but sales revenue does not, and for valuing such companies, the price-to-sales ratio is a good choice. Net income can easily be manipulated by accounting methods, such as one-time charges, etc. In comparison, sales revenue is more realistic than earnings
Common stock
Common stock is defined as shares with ordinary rights in the management of the company's business and distribution of earnings and property, and represents the right to claim the earnings and residual property of the company after satisfying all claims for repayment of debts and the requirements of the preferred shareholders' rights of income and claims for compensation. The ordinary shares form the basis of the company's capital. Ordinary shares form the basis of a company's capital and are a basic form of stock. The shares traded on the Shanghai and Shenzhen stock exchanges are all common shares.
Common shareholders enjoy the following basic rights in proportion to their shareholdings:
(1) The right to participate in corporate decision-making. Common shareholders have the right to participate in general meetings of shareholders and have the right to propose, vote and elect, and may also appoint others to exercise their shareholders' rights on their behalf.
(2) The right to profit distribution. Common shareholders are entitled to receive dividends from the distribution of the company's profits. Dividends on common stock are variable and are determined by the company's profitability and its distribution policy. Common stockholders must receive a fixed dividend before preferred stockholders are entitled to dividend distribution rights.
(3) Preferred Warrants. If the company needs to expand and issue more common stock, the existing common stockholders have the right to buy a certain number of newly issued shares at a certain price below the market price according to the proportion of their shares, so as to maintain their original proportion of ownership of the enterprise.
(4) The right to distribution of surplus assets. In the event of bankruptcy or liquidation of a company, if the company's assets are still remaining after repayment of outstanding debts, the remaining portion will be distributed in the order of preferred shareholders first and common shareholders second.
Preferred stock
Preferred stock is relative to common stock. Preferred stock has priority over common stock in terms of the right to profit sharing and distribution of surplus property.
(1) Preferential distribution rights. When the company distributes profits, the shareholders who own preferred stock are more likely than the shareholders who hold common stock, to be distributed first, but enjoy a fixed amount of dividends, that is, the dividends of preferred stock are relatively fixed.
(2) Preferential claims. If the company is liquidated and the remaining property is distributed, the preferred stock is distributed before the common stock. Note: When a company decides not to distribute dividends for several consecutive years, preferred shareholders can enter the shareholders' meeting to express their opinions and protect their own rights.
Post-allotment stock
Post-allotment stock is stock that is at a disadvantage to common stock when it comes to distributions of interest or dividends of interest and residual property, and is generally a redistribution of residual interest after the distribution of common stock. If the company's earnings are huge and the number of post-allotment shares to be issued is limited, shareholders who buy post-allotment shares can achieve high returns. Post-allotment shares are generally underutilized because the funds raised do not generate immediate income and the range of investors is limited. Post-allotment shares are generally issued under the following circumstances:
(1) when a company issues new shares to finance the expansion of equipment, the new shares are issued as post-allotment shares before the new equipment is officially put into use in order not to reduce the dividends to the old shares;
(2) when a merger takes place, a portion of the post-allotment shares are delivered to the shareholders of the merged company in order to adjust the ratio of the merger;
(3) when a government-invested company, privately-owned shares are issued as post-allotment shares, and the shareholders of the merged company can obtain a high return. government investment in a company, the dividend on privately held shares is paid until a certain level is reached, and the shares held by the government are used as post-allotment shares.
Junk Stock
Stock in a company that is operating at a loss or in violation of the law.
High-performing stocks
Companies that are very well run and have a good track record, with earnings per share of $0.80 or more and a price-to-earnings ratio of 10-15 times or less.
Blue Chip Stocks
In the stock market, stocks of large companies that occupy an important and dominant position in the industry to which they belong, have excellent performance, are actively traded, and pay generous dividends are known as blue chip stocks.