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Understanding the P/E ratio is an important step in your education of how to best value and choose what stocks you want to buy. With a solid understanding of what a P/E ratio is and how investors use it to assign a relative value to the stock, you gain important insights into a complex part of the stock market. P/E ratio is one of many factors that investors consider when valuing equities -- because it includes several indicators of stock performance, it can help make important investment decisions. It's a critical part of learning about stock valuation.

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1. Defining P/E Ratio

The P/E ratio or price to earnings ratio is a way to measure a company's market price relative to its reported corporate earnings per share. It's a good ratio to use when comparing a stock to others when you're considering investing or selling off a stock.

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