Trading Education

Valuation In The Penny Stocks Market

What does this mean? It’s the calculation of a ratio that gives the current value of a stock. It works for regular stocks (Equal to more than $5.00), as well as penny stocks (lower than $ 5.00).

Two Different Values of A Common Stock

1) The stock price: This price is the current market stock price that you are able to see without having to do anything. When we say that we are trading penny stocks we categorize them by their stock’s price.

2) Intrinsic value: The intrinsic value on the other hand is not publicly available. It is the true value of the stock, it cannot be directly observed. In order to know it you will have to perform the calculation.

In penny stocks trading the intrinsic value is not really worth knowing since we are day traders. The value is more important for those who are trading the non-penny stocks, or long-term traders. Just wanted to brush up a little on it since it is a part of this topic at hand.

Price To Earning Ratio (P/E)

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This ratio has been considered as a very effective way of knowing the value of a stock. It can actually calculate the attractiveness of a stock. Depending on the result found from this calculation investors know whether or not they can proceed and buy.

This metric has been around for decades, created by Benjamin Graham also known as the father of value investing.

The formula used to calculate the price to earning ratio is :

P/E = Current share price / Earning per share

In other words it is the current share price of the stock divide by its earning per share. Although this ratio is very helpful to investors, you should not make your decision solely according to the result you get from this calculation. As you already know errors do happen and this ratio is not an exception. Sometimes companies make errors reporting their data which may result in inaccurate P/E ratio calculation.

Most penny stocks quote systems would have the P/E ratio calculated for you. This should save you some time. A low P/E ratio is what you would want to see, the lower it is the better it is for you.

But a very low P/E does not indicate a good sign. If investors are not investing into a company the value of the stock will fall and the P/E ratio would also be decreased.

Knowing this ratio number can help you to know penny stocks that are trading under value from those that are over value. You do not want to buy penny stocks that are currently trading over value, or else you put your money at the greatest risk.
