Comparing stock prices is a good way to determine if a given stock is a good value relative to other stocks in its sector, or just to examine stocks priced above or below a given threshold. It is easy to do stock price comparisons on the Internet, and many tools are available to screen stocks according to your own criteria. Using fundamental analysis to compare stock prices is the traditional approach to long-term investing, while using technical analysis to quantify movements in stock price can be an excellent short-term approach.
Analyze the Company's P/E Ratio
The most traditional method of determining whether a stock is valued properly is to analyze this ratio of its price to the company's annual earnings per share. The P/E ratio is at the core of fundamental analysis. According to Investopedia, P/E stands for price-earnings ratio, which analyzes the stock price per share, in comparison to a company's earnings per share in order to determine how valuable a stock truly is.
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For example, if XYZ earned $8.50 per share last year and the stock is trading at $125 per share, the stock has a P/E ratio of approximately 15-to-1. In other words, the stock is trading at 15 times the annual earnings. Generally, the lower the P/E ratio, the better value the stock represents. Older blue chip companies typically trade at eight to 12 times earnings, while highflying technology companies can trade at 30 to 40 times earnings or more. A company can even be losing money and trade at a high price.
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Compare Stock Price to Others
Groww reports that you should compare share prices to other companies in the same sector in order to see how a company is performing in relationship to similar companies. It stands to reason that two or more publicly traded companies in the same business should be roughly similar in stock price, but this is rarely the case. This means that you can look at a given sector and make informed choices about which stocks in that sector you most want to invest in.
By analyzing an entire business sector (airlines, banking, construction, etc.), you get a feel for which are the best performing stocks in that particular sector. Comparing the stock prices side by side often reveals which companies are best poised for growth in that sector. Google Finance offers excellent sector coverage, to help you find the best stocks to invest in, given your financial goals.
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Analyze Biggest Winners and Losers
Most stock-quoting systems will give you access to the biggest price and percentage movers of the day. Stocks that gained or lost the greatest dollar amount or percentage make for interesting analysis and potential investments. Stocks that lost much of their value one day might be due for a nice rebound the next.
Likewise, by studying the stocks that gained a great deal in a given day, you may be able to identify other stocks poised to make a similar move. While the market is exceedingly difficult to predict, sometimes it is possible and that can result in quick gains. Alternatively, you can take a longer-term approach and measure a company's trajectory over months and years to see where it makes sense to invest with an eye for the future.