Wealth-Coaching

Deciphering a market conversation is often like trying to translate a foreign language.  The terms they use are so arbitrary that they are difficult to put into context.

Some help for the rest of us:

Price charts: A price chart graphically illustrates a stock’s price action over a selected period — one year, for instance. Some investors, called technical analysts or chartists, feel it’s a waste of time examining financial statements, dissecting analysts’ forecasts or pondering a firm’s prospects vis-a-vis the competition. Instead, they believe that a price chart tells them everything they need to know about a stock.

Valuation ratios: These help you to understand how the market views a company. Most market players are "growth" investors, meaning that they prefer stocks with strong future sales and earnings growth expectations. High valuation ratios signal that a firm is in favor with growth investors.

The price to earnings, or P/E, is the most widely followed ratio. It compares the recent share price with 12 months of earnings, expressed on a per-share basis. For instance, the P/E would be 10 if it earned $5 per share and recently traded at $50 per share. Growth stocks usually trade at P/Es above 20, and P/Es below 15 identify value-priced stocks. Stocks with P/Es between 15 and 20 could be either growth or value, depending on the circumstances.

Price/sales (P/S) compares the recent share price with 12 months of sales per share. Some investors prefer P/S instead of P/E because sales generally don’t fluctuate as much from quarter to quarter as earnings. Also, you can still calculate P/S, but not P/E, when a company reports a loss (negative earnings). P/S ratios of 4 and above usually identify growth-priced stocks while ratios below 2 signal value stocks.