How can you tell if a stock price is too high or too low?

1 ANSWERS

1. Kuljit Grewal
   

   The father of value investing - Benjamin Graham, who inspired the greatest investor of our time Warren Buffet had a rule of thumb when it came to valuing investments (stock). This rule was as follows; a stock is undervalued if its price is at least a third (33%) below its intrinsic value. Intrinsic value of a stock is determined by first looking at a stock's Price to Earnings ratio (P/E). This is determined by dividing the stock's current trading price by the resulting calculation of the company's overall earnings divided by the number of shares outstanding (Earnings Per Share - EPS). The formula for calculating EPS can be found here - http://www.investopedia.com/terms/e/eps.asp. If the number that comes from the P/E ratio is greater than 33% of the stock's current trading price it is overvalued to some degree according to the Godfather of Investing. This of course is a very basic look at a complex topic. For a great detailed read, check out the value investing write up here - http://www.investopedia.com/university/value-investing/value-investing3.asp .

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