- 1). Compare the two stocks' price-earnings ratio (P/E ratio). This is the market value per share divided by the earnings per share. In other words, it is the price of the share divided by the company's earnings per share. If a company had a price per share of $25 and an earnings per share of $3, the P/E ratio would be 8.3.
Typically, the higher a P/E, the more confident investors are about the stock. It means that they believe the stock is going to do better in the long run; therefore, they are willing to invest more per dollar of earnings. - 2). Compare the market capitalization of the two stocks. This is the overall size of the company. The market capitalization is the total number of shares of a stock multiplied by the cost of that share. If there were 10 million shares at $15 a share, the size of the company would be $150 million.
When comparing stocks, it is typically a safer investment to put the money into a larger company. However, safer doesn't always mean more profitable. Because of the sheer size of these companies, their value moves slower and, therefore, it can take a lot longer to profit. - 3). Pay attention to the volume of the two stocks. Comparing volume is an effective method of determining how a stock is going to perform. The volume is the total number of shares bought and sold in any given day. A high volume can help provide patterns for an investor to consider.
Any price move, whether up or down, on a stock that has a high volume is considered a strong move. For example, if a stock was having a continuous downward trend and then suddenly turned around, an amateur investor would think the stock was rebounding. However, if the volume of that stock was very small, this turnaround wouldn't be legitimate because it could have been one large investor turning the stock around for short-term gains.
Therefore, comparing the volumes is important because whenever a stock with a larger volume does something, it tends to be considered the trend that it might follow. If the stock continues to lower in price and there is a high volume, there is a chance that the stock isn't a good investment. Comparing the volumes will help determine which stock is the better investment.
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