Trading Terminology

The Forward P/E Ratio is simply a stock’s share price divided by future analyst projections of the company’s earnings. While analyst projections can be fairly accurate, they are also subject to bias and could vary greatly from actuality.

The P/E Ratio is simply a stock’s share price divided by the company’s earnings. A high P/E ratio indicates that a company could be overvalued by investors, while a low P/E ratio indicates that a company could be undervalued by investors.

In psychology, “herd mentality” refers to the individual’s proclivity to follow the group rather than their intuition. The same principle can be applied to the stock market. An investor may emulate the trades of others rather than using their judgment. The same can be true concerning stock analysts: an analyst may be more likely to agree with others than disagree. This phenomenon can result in market bubbles when optimism is high, or market panics when optimism is low

Stock analysts evaluate companies and offer their opinions about future trajectories of a given stock price. They consider historical performance, industry growth, management guidance, and other factors to make projections and ratings. Analysts may issue ratings of “Buy,” “Sell,” or “Hold,” for example. Analyst upgrades or downgrades, such as a change from “Hold” to “Buy,” have the potential to move stocks in either direction. It is also important to understand that some analysts carry more respect and weight than others.

Stocks react to positive news by trading at higher prices as trader confidence in the stock rises. A “gap” occurs when a stock opens at a price significantly higher than the previous day’s close. The “go” occurs when the stock rallies with an upward trend throughout the day.