Question

Explain in 500 words or more why you would or would not recommend investing in Amazon stock. Describe the relationship between the value of the stock and the price to earnings ratio. What information does the Market Capitalization (Market Cap) and Beta provide to the investor?

Answer 1

Value of the stock is the price paid by the investor to by the share of the company and it can flcuate on the basis of the company annual report and the earning news posted by company. If a company releases a glowing earnings report, then investors will likely feel more optimistic about its potential profitability and on the other hand if the company posted negative earnings or is the subject of bad press, its stock price can quickly fall. and it changes according the emotions of investor in the comapany

Price to Earning(P/E)  ratio measures the relationship between a company's stock price and its earnings per share of stock issued. The P/E ratio is calculated by dividing a company's current stock price by its earnings per share

While a company's stock price reflects the value that investors are currently placing on that investment, a stock's P/E ratio indicates how much investors are willing to pay for every dollar of earnings.But higher P/E never means high earning as some companies are overvalued and some are undervalued.

Market Capitalization is the total value of the company that is the current trading price of the comapany share multiply with the total no of outstanding share present in the market. It shows the net present worth of the company in the market.

Beta measures the responsiveness of a stock's price to changes in the overall stock market. On comparison of the benchmark index (NSE,TYO) to a particular stock returns, a pattern develops that shows the stock's openness to the market risk. This helps the investor to decide whether he wants to go for the riskier stock that is highly correlated with the market (beta above 1), or with a less volatile one (beta below 1).

Beta is the key factor used in the Capital Asset Price Model (CAPM) which is a model that measures the return of a stock. The volatility of the stock and systematic risk can be judged by calculating beta. A positive beta value indicates that stocks generally move in the same direction with that of the market and the vice versa.