key terms used in the stock market

EPS is Earnings per Share, it is the earnings of a company divided by the total number of shares. This is calculated every three months and hence for that period EPS remains the same.

PE ratio is the ratio of the market to earnings per share or simply put
PE of a company = Market price / Earnings per share (EPS)

So why are these terms important. These determine the performance of the company and hence are very important parameters you should look at while buying a share.

In case the PE ratio is very high say 100 then it means that the market is ready to buy the share at 100 times more than its current price. (meaning it has huge expectations by the market).

So should anyone buy stocks with very high PE ratio. This purely depends on the individual company. Does the company have enough in it to sustain such huge expectation.

Similarly, are the companies that have very low PE ratio are a good buy? Here again you should check the reason why the market sentiment is very bad about the company. Anywhere between 5-20 PE ration is a decent ratio

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