What is the price-to-earnings ratio?

The P/E ratio measures the relationship between a company's stock price and its
earnings per issued share.

 A high P/E ratio could mean that a company's stock is overvalued, or

that investors are expecting high growth rates in the future.

What is the debt-to-equity ratio?

“It’s a simple measure of how much debt you use to run your business,”

The Return On Equity ratio essentially measures the rate of return that
the owners of common stock of a company receive on their shareholdings. Return
on equity signifies how good the company is in generating returns on the
investment it received from its shareholders.

What is the profit margin?

Profit margin is the ratio of profit remaining from sales after all expenses have
been paid.

A profit margin ratio is often used by investors and creditors to

determine a company's ability to convert the profit made from
sales into net income. Creditors are interested in these figures
so that they can ensure a company makes enough money to
repay its loans, while investors are looking for assurance that
there is enough profits to be able to distribute dividends.
How stock markets are regulated
Note
The SEC is the top regulatory agency responsible for overseeing the
securities industry. It registers new securities and handles all of the filings
that public companies must make, such as annual and quarterly reports.

How does stock market works

The stock market helps companies raise money to fund operations by

selling shares of stock, and it creates and sustains wealth for individual
investors.
Companies raise money on the stock market by selling ownership stakes to
investors. These equity stakes are known as shares of stock. By listing shares
for sale on the stock exchanges that make up the stock market, companies get
access to the capital they need to operate and expand their businesses without
having to take on debt. In exchange for the privilege of selling stock to the
public, companies are required to disclose information and give shareholders
a say in how their businesses are run.
Investors benefit by exchanging their money for shares on the stock market.
As companies put that money to work growing and expanding their
businesses, investors reap the benefits as their shares of stock become more
valuable over time, leading to capital gains. In addition, companies
pay dividends to their shareholders as their profits grow.

How Does the Stock Market Work?

The stock market provides a venue where companies raise capital by selling shares of stock, or
equity, to investors. Stocks give shareholders voting rights as well as a residual claim on
corporate earnings in the form of capital gains and dividends.
Individual and institutional investors come together on stock exchanges to buy and sell shares in
a public market. When you buy a share of stock on the stock market, you are not buying it from
the company, you are buying it from an existing shareholder.

What happens when you sell a stock? You do not sell your shares back to the company, but
instead, sell them to another investor on the exchange.

KEY TAKEAWAYS

 Stocks represent ownership equity in the firm and give shareholders voting rights as well as a
residual claim on corporate earnings in the form of capital gains and dividends.
 Individual and institutional investors come together on stock exchanges to buy and sell shares in
a public venue.
 Share prices are set by supply and demand as buyers and sellers place orders

An investment bank is a financial services company that acts as an intermediary in large

and complex financial transactions. An investment bank is usually involved when a startup
company prepares for its launch of an initial public offering (IPO) and when a corporation
merges with a competitor.

HOW DOES INFLATION AFFECT STOCKS?

Inflation hurts stocks overall because consumer spending drops. Value
stocks may do well because their prices haven't kept up with their peers.
Growth stocks tend to be shunned by investors.

When Inflation Rises, Interest Rate Hikes Follow

Higher inflation by itself isn’t necessarily bad for stock prices. Rising prices
boost corporate profits, especially if companies can pass on higher input costs
to their customers via price hikes.

Higher interest rates are an entirely different story for stocks when inflation
gets out of hand. The remedy is higher interest rates, and rising rates make
credit more expensive for companies and consumers, discouraging them from
spending and investing.
For stock investors, shares can act as a hedge against inflation in the
long run. This means that the monetary value of a stock or share
portfolio can appreciate over an inflationary period so that the ‘real’
wealth it stores – the goods or services it can be exchanged for –
remains constant despite higher prices.

In the case where inflation stems from higher input costs (known as
cost-push inflation), for example, once businesses have had enough
time to adapt to the inflationary pressures and to adjust their own
prices, revenues will increase and normal profit rates may resume.

Unexpected inflation is the problem

The stock market, of course, anticipates that there is a certain amount of
inflation each year and adjusts what the expected returns should be against
the expected inflation.

If, for example, investors expect a return of roughly 6% a year after inflation
(including dividends), and inflation is 2% a year, investors will come to expect
a roughly 8% return a year when inflation is factored in (this is in fact about
the long-term return on stocks, over many decades).

But if inflation suddenly goes from 2% to, say, 4% very quickly, history
indicates the overall market will react negatively.

That’s because investors will now demand a higher return to compensate for
the now-higher risk. Instead of an 8% return, investors may demand a 10%
return. Prices will likely drop.

This change in expectations is evident in the historic record. A 2000 study

conducted by Steven A. Sharpe at the Federal Reserve concluded that
“market expectations of real earnings growth, particularly longer-term growth,
are negatively related to expected inflation ... inflation also increases the
required long-run return on stocks.”