So you’re thinking about buying a stock or two.Maybe you want to become an investor.Maybe you just want more return on your money than a savings account or CD can offer you.Either way, you have a lot to learn before you can confidently make a decision about stocks.One thing that is vital to your knowledge of stocks is the terms and vocabulary associated with stocks.If you don’t understand those, you won’t understand what to look for in buying a stock or how your stocks are doing.One term that is especially important to the stock market is “earnings per share.”This brief article will teach you what “earnings per share” are, as well as what kind of earnings per share you should be looking for before buying a stock.
The term earnings per share refers to the profit received from one investment round.In other words, it is the part of a company’s profit that is given to each outstanding share of common stock (an outstanding share is the total amount of all shares minus treasury stock.Treasury stock is stock that is purchased back by the company it belongs to.Common stock is the type of stock that employees of a corporation hold.The public invests in preferred stock, which is like common stock but with a few additional privileges).
But why are earnings per share important to the stock market?The answer to this is found in how earnings per share are calculated.A company can be analyzed on two levels: the whole company level (which includes things like revenue, income and sales) or “per share.”Calculating earnings per share is a method used to determine the value of a company.To do this you must divide a company’s profit for a given period of time (usually 3 months or 12 months) by the “weighted average common shares.”
Earnings per share are a very important variable when determining a share’s price.There are two aspects to look at when deciding whether or not to invest in a particular stock.The first is the current earnings per share.This number is a reflection of what a company has been doing for the past period.The second is the trend or future earnings per share.This number is a prediction of what the company will do during the next period.
Earnings per share may increase or decrease depending on how the actual earnings of a company compare with the estimates of investors and brokers.A stock may drop when the actual earnings per share do not meet the projections of the analysts; a stock may increase when the earnings per share meet or exceed the expectations of the analysts.So the earnings per share of a company are good when the prices surge and they are bad when prices drop.Basically before you buy a stock you should look at the trend in the earnings per share: have they been good or bad?Are they projected to continue in the same pattern?
You should look at both the current earnings per share and the future earnings per share.Obviously you would want to be as informed as possible before investing your money.And although the current earnings per share are important, the thing you want to focus on the most is the future earnings per share. Those are the numbers that will give you a clue as to what a particular stock is projected to do over the next period.
Bear in mind that earnings per share are not always a perfect reflection or prediction of what a company is doing.A company may have excellent earnings per share for the current period, but then experience a sudden and drastic decrease in sales and so their earnings per share (and your stocks along with it) plummet.On the other hand, a company may not have the best earnings per share for a period, but then they experience a sudden and unexpected boom in business, causing their earnings per share (and your stocks) to become much more profitable.