If identifying cheap stocks were easy, then we would likely all be doing it, and therefore would all be rich. Since we're not, and many investors know all too well the pain of overpaying for a stock, our next installment of Investing 101 is about putting the proper price tag on investments.
To do so, we brought in Jim O'Shaughnessy, founder of O'Shaughnessy Asset Management and author of "What Works on Wall Street" to talk about the two most common metrics for finding cheap stocks.
Price to Earnings, or P/E Ratio
If you had to pick just one method for determining whether or not a stock is cheap, the Price to Earnings, or P/E ratio, would have to be right at the top of the last. "Basic P/E is as simple as it gets," O'Shaughnessy says in the attached video. "It's probably the number that investors look at the most in trying to determine if a stock is cheap or expensive."
As the name implies, a P/E is just that: The ratio of a stock's price to its earnings, and it is typically expressed as a multiple of earnings. For example, if Nestron Inc was trading at $10 a share and had earned $1.00 per share in profits in the past year, Nestron would have a P/E of 10, or could be said to be trading at 10x earnings.Read More »from Basic Metrics for Finding Cheap Stocks