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A $500 stock can be cheaper than a $50 one — the number that tells you
💡 Share price alone says nothing about value; the P/E ratio shows how much you're paying per dollar of a company's earnings.
Beginners often assume a stock trading at $50 is "cheaper" than one at $500. But share price alone tells you almost nothing — a company can slice its ownership into a billion shares or a hundred million, which changes the sticker without changing the business. To judge cheapness, investors use the price-to-earnings (P/E) ratio: the share price divided by the company's annual earnings per share.
The P/E answers a simple question: how many dollars are you paying for each dollar of profit the company earns? A P/E of 20 means you're paying $20 for every $1 of yearly earnings. Put differently, if profits stayed flat, it would take 20 years of earnings to recoup your purchase price. A $500 stock with a P/E of 15 is arguably "cheaper" than a $50 stock with a P/E of 60.
A high P/E usually signals that investors expect fast future growth — they'll pay a premium today for bigger profits tomorrow (this is why many tech stocks carry lofty P/Es). A low P/E can mean a bargain, or a warning that the market expects the business to shrink. The ratio is a starting point for comparison, not a verdict — it's most useful when comparing similar companies in the same industry.