What Makes a Stock “Cheap”?

One of the most common pieces of advice for stock investors is to invest in undervalued stocks. But what exactly constitutes an undervalued stock?

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1. What is the most common metric used to value stocks?

  • P/E
  • P/B
  • ROE
  • All of the above
  • A, B correct

P/B (Price to Book) and P/E (Price to Earnings) are the two most widely used metrics for stock valuation. Meanwhile, ROE (Return on Equity) is employed to assess a company’s efficiency in utilizing its capital.

2. What P/B and P/E ratios indicate a cheap stock?

  • Ratios lower than industry averages
  • Ratios lower than the stock’s historical trading levels
  • Both answers above

Calculating these valuation metrics is just the first step. Investors must compare these ratios with industry peers, market benchmarks, or the stock’s own historical performance to determine if the current price is considered “cheap.”
However, it’s important to note that P/E and P/B are just two of many valuation methods and do not hold absolute significance.

3. Buying cheap stocks is the core of which investment strategy?

  • Short-term investing
  • Value investing
  • Long-term investing
  • Trend investing

Purchasing stocks at prices below their intrinsic value is known as value investing. This strategy is the cornerstone of legendary investors like Benjamin Graham and Warren Buffett.

Market Insights

– 19:28 01/10/2025

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