The stock market is a marketplace where traders buy and sell shares or ownership in companies.

 These stocks are called equities and trade on well-regulated exchanges. Barberis explains why stock prices often climb so high and fall so low by drawing on psychological experiments. He shows that people are loss averse, and the pain of losses depends on how many gains they’ve previously experienced.

1. Price-to-earnings ratio

The price-to-earnings ratio (P/E) measures the market value of a stock by its earnings per share. This metric is useful because it helps investors compare the value of different stocks and industries. It also allows them to determine whether a company is overvalued or undervalued. A high P/E ratio typically indicates that a stock is expensive, while a low P/E ratio suggests that the stock is undervalued.

The formula for the P/E ratio is relatively straightforward: the current stock price divided by the company’s earnings per share. The denominator can be the trailing earnings per share, the estimated earnings per share for the next 12 months, or a combination of the two. The trailing P/E is the most common metric because it is based on past performance, which is more objective than estimates that may be subject to change and manipulation.

However, there are a few important limitations to be aware of when using this metric. For example, a company’s profits can fluctuate significantly quarter after quarter based on one-time gains or losses. This can make the P/E ratio seem volatile, and it can be misleading for investors. In addition, a company that isn’t profitable or has negative earnings can’t be valued with a P/E ratio. For this reason, some investors choose to use a different metric when making investment decisions.

2. Price-to-book ratio

One of the best ways to select profitable stocks is by using the price-to-book ratio. This financial metric shows how much investors are willing to pay for a company’s shares relative to its book value of equity. A low price-to-book ratio can be a sign that the stock is undervalued and potentially profitable. However, it’s important to consider other metrics when analyzing a stock.

The price-to-book ratio is calculated by dividing the market price of a stock by its book value per share. Book value is a company’s total tangible net assets, minus its total liabilities and intangible assets like patents and goodwill. It’s usually found on a balance sheet, and is equal to the carrying amount of the assets minus depreciation. This metric is sometimes referred to as the P/B multiple, and its inverse is called the price-to-equity ratio.

The P/B ratio can help you identify undervalued stocks that have experienced a lot of growth. However, it’s important to remember that this ratio can vary depending on the industry, and a company’s P/B may be higher or lower than other companies in the same industry. For example, technology companies may have a higher P/B than manufacturing companies. This is because technology companies often have a large proportion of intangible assets. It’s also important to note that a high P/B ratio can be a sign of overvaluation, so be careful when analyzing a stock.

3. Earnings per share

If you want to invest in stocks, you’ll need to know about earnings per share (EPS), a key metric that measures profitability on a per-share basis. In short, EPS is the amount of net income that a company makes over a specific time period, typically quarterly or annually, divided by the number of outstanding shares of common stock.

Investors track a company’s EPS to get an idea of its progress and determine its valuation. A high EPS can signal that the company is thriving and may be worth investing in, while a low EPS could indicate that the company is struggling or that its products or services aren’t in demand.

To calculate EPS, you need to subtract preferred dividends from a company’s net income over a given time period and then divide that figure by the total number of outstanding shares of the company’s common stock. However, you should also take into account that the company’s diluted EPS figure can include shares from stock options, convertible shares of preferred stock and warrants that can be converted into common stock.

If a company’s EPS doesn’t meet analysts’ consensus estimates, this can lead to market panic and even short selling, where investors borrow stocks they don’t own with the intention of selling them later at a lower price to make a profit. This is a big risk and it’s usually best to avoid this strategy.

4. Dividends

In addition to a company’s earnings per share, investors should also consider the stability of dividend payments. Many companies offer dividend reinvestment plans (DRIPs), which allow shareholders to automatically reinvest cash dividends in additional shares of the company. These reinvestments can increase the overall value of the portfolio over time.

Many investors seek dividend-paying stocks as a source of regular income, and companies that maintain consistent dividends may be able to sustain their payments even in difficult economic conditions. Furthermore, the announcement of a dividend can boost demand for a stock and increase its share price.

Another factor to consider is whether a company’s dividends are qualified, meaning they qualify for preferential tax treatment. To qualify, dividends must be paid from a publicly-traded corporation and must be a portion of the company’s profits. Dividends from real estate investment trusts, mutual funds and exchange-traded funds are typically not considered qualified dividends.

The stock market is a complicated and unpredictable place, but by understanding the basics of fundamental analysis and applying basic screening techniques, you can reduce the number of potential candidates for your portfolio. Once you have a smaller list of potential stocks, it’s easier to apply more in-depth research and technical screens. This will help you find the right mix of stocks to meet your investing goals.