What is Bank Guarantee? – Different Types of Guarantees
The scope of trade has been widely expanded in the modern world. There are many kinds of organizations, private and public which trade with each other. A lot of the time, trades happen between big and small organizations and sometimes these trades happen when both parties are present in different countries. In such cases, there […]
Introduction to Finance in Sports Management
The business of sports is one of the largest businesses in the world today. Across the world, there is a wide variety of leagues across different sports that generate a lot of wealth as well as media attention. The turnover of big leagues in different sports runs into billions of dollars annually. Prominent examples of […]
Minimum Viable Product
We have already learned about the technique of proof of concept in the previous article. However, proof of concept isn’t the only technique that is used by entrepreneurs. There are other techniques that are frequently used as well. Minimum viable product is one of those techniques which is widely used by several entrepreneurs. In this […]
Advantages and Disadvantages of Variable Lease
In the previous article, we have already seen what a variable lease is and how it is different from traditional leases which are used by retail companies across the world. We are now also aware of the manner in which variable leases are structured. We know that the popularity of variable leases has been rapidly […]
Types of Market Participants in Forex Market
The $4 trillion dollar Forex market witnesses a lot of market participants. However, all of these participants have different motives. An understanding of these motives is required to predict their behavior in the markets. Also, some of these participants have deeper pockets, better information and are more active than the others. Therefore, any student of […]
Most investors do not invest directly in the company i.e. they are not promoters of the company. Rather they invest in the company through the stock market. This means that they buy shares at a certain value and make a profit only when the price of the shares go up or they get regular dividends from their investments or a combination of both. This is the reason why investors are particularly interested in how the current share price of the company compares with its fundamentals. Market related ratios help investors use the numbers stated on the balance sheet to better their understanding of the same.
Market related ratios compare the current stock price of the company which is being quoted on the stock exchange to various balance sheet, income statement and cash flow items. One component of all market related ratios is the current stock price.
It is important to understand that the quoted stock price is not the actual price of the share. The stock price just means the price that you are paying to obtain a fraction of the earnings of the company. So if you are buying 1 share at USD 10 and there are 100 shares, you own 1% of the company. This 1% ownership means you get 1% of the profit, which in our case is let’s say USD 2. Hence the actual price you are paying is USD 10 to buy a future recurring profit stream of USD 2 per share. Of course these profits subject to risks and that is what makes investing challenging.
Since the quoted stock price is not the actual price, market related ratios offer a window to analysts using which they can gauge whether a stock is over or under valued and then act accordingly.
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