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Key Fundamental Indicators
Typically what makes a stock's value rise is the same thing that makes any price go up: more buyers than sellers. Continue below.
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Stocks tend to increase when investors expect company profits to climb. This implies that stock market prices function as a leading indicator and are more useful as a predictor of future performance rather than as a reflection of recent history.
In fact, there are a variety of fundamental indicators that can help a savvy investor make a solid stock decision.
The first one is the Price-to-Earning ratio, also known as the P/E ratio.
A stock's P/E indicates how popular it is, or, in other words, how much the investors expect its earnings to grow over the coming year. The ratio is calculated by dividing the stock's price by its earnings per share for the past 12 months.
The P/E ratio is a key fundamental indicator of how cheap or expensive a stock is because it gauges inflation of price against inflation in earnings.
Typically, investors pay more per dollar of earnings at market tops and less at market bottoms.
Historically, a P/E of 18 or higher on the S&P 500 has signaled a high-risk zone for the stock market. By the same token, the blue chips market, which the S&P 500 represents, has traded below a P/E of eight or lower only 10 percent of the time.
Thus, a P/E of eight or lower has found the stock market in a low risk zone.
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