P/E Ratio
Price-to-earnings ratio, a stock's price divided by its earnings per share, used to gauge how expensive it is.
The P/E ratio compares a company's share price to how much it earns per share, giving a rough sense of how much investors pay for each unit of profit. A high P/E can signal strong growth expectations or an overvalued stock, while a low P/E may indicate a bargain or a struggling business. P/E is most useful when comparing similar companies in the same industry, not across very different sectors. It is one input among many, not a standalone buy or sell signal. Index investing sidesteps the need to judge individual P/E ratios.
Example
A stock trading at $100 with earnings of $5 per share has a P/E of 20, meaning investors pay $20 for every $1 of annual profit.
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Related terms
Stock (Share)
A share of ownership in a company that entitles the holder to a portion of its profits and assets.
Dividend Yield
The annual dividend payment of a stock or fund expressed as a percentage of its current price.
ROI (Return on Investment)
A measure of profit relative to the amount invested, expressed as a percentage.
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ETF (Exchange-Traded Fund)
A fund that holds a basket of assets (stocks, bonds, or commodities) and trades on a stock exchange like an individual stock.
Dollar-Cost Averaging (DCA)
An investment strategy of regularly investing a fixed amount regardless of market price, reducing the impact of volatility over time.
Compound Interest
Interest earned on both the initial principal and the accumulated interest from previous periods, creating exponential growth over time.
FIRE (Financial Independence, Retire Early)
A financial movement focused on aggressive saving and investing (often 50–70% of income) to achieve financial independence and the option to retire decades earlier than traditional retirement age.
Net Worth
The total value of all your assets (cash, investments, property) minus all liabilities (loans, mortgages, credit card debt).
Asset Allocation
The strategy of dividing investments among different asset classes — stocks, bonds, real estate, cash — to balance risk and return according to your goals and risk tolerance.