One day, Zippy (the rabbit) was saving up his allowance to buy a new game. But Steady (the turtle) had a different idea.
“Hey Zippy, buying a game with your allowance is fine, but what if you bought shares of the game company instead?”
Steady nodded slowly. “That’s an interesting idea. But if you’re going to buy stocks, you need to know whether they’re overpriced or a good deal.”
What is PER?
“Overpriced or a good deal? How can you tell?” asked Zippy.
“That’s where PER (Price-to-Earnings Ratio) comes in,” explained Steady.
“PER?”
“Yes! PER tells you whether a stock’s price is high or low compared to the company’s earnings.”
“How do you calculate it?”
“It’s simple. PER is calculated like this:”
PER = Stock Price ÷ Earnings Per Share (EPS)
“For example, let’s say a game company earns 1 dollar per share in a year. If the stock price is 10 dollars, then…”
“10 ÷ 1 = 10!” Zippy shouted.
“Exactly! That means the PER is 10.”
What Happens When PER is High?
“So, what does it mean if PER is 10?” asked Zippy.
“If PER is high, the stock might be expensive. But just because a stock has a low PER doesn’t mean it’s a good buy. If a company has strong growth potential, even a high PER might be worth it.”
“I see! So, I shouldn’t just look for stocks with a low PER.”
Steady nodded. “That’s right! It’s important to consider the company’s future, not just the PER.”
Zippy Aims to Be an Investor!
Zippy’s eyes sparkled. “Alright! I’m going to be an investor too! But first… I’ll buy my new game!”
Steady chuckled. “Zippy, investing is about being patient and consistent.”
“Of course! I’ll enjoy learning about investing just like playing games!”
Quiz Time! Become a PER Master!
- What is the formula for calculating PER?
a) Stock Price × Earnings Per Share (EPS)
b) Stock Price ÷ Earnings Per Share (EPS)
c) Stock Price – Earnings Per Share (EPS)
- If a stock has a high PER, what does it mean?
a) It might be expensive
b) It might be cheap
c) It doesn’t tell us anything
- Should you buy stocks based only on PER?
a) YES!
b) NO!
Answers: 1. b / 2. a / 3. b
How many did you get right? Keep learning about investing and become a smart investor like Steady!
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