Dog & Leash/ PE Ratio

Class Notes:

• Dog and the Leash: comparison between price levels and profit levels
• Dog: run ahead or trails behind the owner - represents price levels
• Owner: steadily walks onward - represents profit return, always brings the dog back 
• the further the dog gets away from the owner, the longer it takes to recover
• eg. Japan's dog (the prices) increased rapidly but earnings didn't, now their economy is taking a long time to recover
• Peak: price level of the stocks is high
• to figure out how the stocks are doing you must compare the price to the profits

• Market Capitalization: share price X total number of shares that exist = total price of the company 
• Johnson & Johnson: $210 billion

• PE Ratio: price to earnings ratio is a more accurate measure of how expensive a stock is than it's price
• divide price of the company by it's previous year's profit
• for J&J: $210 billion / $14.3 billion = 14.8
• J&J is currently 14.8 more times more expensive than the profit they made in 2012
• this is happening because the earnings have caught up with the price
• on average the DOW trades at 14.5 times earnings
• DOW half as expensive as it was in 2,000

• Shorting Stocks: borrowing stocks and promising to pay it back
• if the fund does bad you make money but if the fund does well you lose money
• very risky: either gain big or lose big

Further Research:

       After class when I went home I was realized I was still not 100% on how to define the P/E ratio and thus I decided to research it more.  What I found out was that the P/E ratio is only one component in determining the health in the stock.  Or according to Ken Little "The P/E is the most popular metric of stock analysis, although it is far from the only one you should consider".  I also learned that the definition of the P/E ratio is that company's stock price divided by it's earning per share (EPS).  For example, a company with a share price of $40 and an EPS of 8 would have a P/E of 5 ($40 / 8 = 5).  A key paragraph that made understanding P/E ratio came from the same author, Ken Little.  In it he said "What does P/E tell you? The P/E gives you an idea of what the market is willing to pay for the company’s earnings. The higher the P/E the more the market is willing to pay for the company’s earnings. Some investors read a high P/E as an overpriced stock and that may be the case, however it can also indicate the market has high hopes for this stock’s future and has bid up the price" 

Finance check:
      My finances are still coming along steadily, they haven't increased to greatly since the last big spending: interim.  However, with spring break coming up I anticipate a large increase on my tracking chart.  Which could raise my bills to an astonishing level.