How to calculate overvalued and undervalued stocks

Many investors wonder how to figure out whether a stock is overvalued and should not be at the top of their buying list. The price-to-earnings (P/E) ratio, also known as an "earnings multiple," gives you a quick way to figure out a stock's value, but it doesn't mean much until you know how to read the result.

Signals of Overvalue

A stock is thought to be overvalued when its current price doesn't line up with its P/E ratio or earnings forecast.

If a stock's price is 50 times earnings, for instance, it's likely to be overvalued compared to one that's trading for 10 times earnings.

Some people think the stock market is efficient. They'll say that value is factored into stock prices almost right away.

Overvalued stocks in india

But others, like fundamental analysts, think you'll always find wrongly valued stocks in the market because people sometimes depend on their feelings instead of their logic when they invest.