Valuing a company and comparing to share price
There are books on the subject of valuing stocks. P/E ratio has nothing directly to do with the value of a company. It may be an indication that the stock is undervalued or overvalued, but does not indicate the value itself. The direct value of company is what it would fetch if it was liquidated. For example, if you bought a dry cleaner and sold all of the equipment and receivables, how much would you get? To value a living company, you can treat it like a bond. For example, assume the company generates $1 million in profit every year and has a liquidation value of $2 million. Given the risk profile of the business, let's say we would like to make 8% on average per year, then the value of the business is approximately $1/0.08 + $2 = $14.5 million to us. To someone who expects to make more or less the value might be different. If the company has growth potential, you can adjust this figure by estimating the estimated income at different percentage chances of growth and decline, a growth curve so to speak. The value is then the net area under this curve.  Of course, if you do this for NYSE and most NASDAQ stocks you will find that they have a capitalization way over these amounts. That is because they are being used as a store of wealth. People are buying the stocks just as a way to store money, not necessarily make a profit. It's kind of like buying land. Even though the land may never give you a penny of profit, you know you can always sell it and get your money back. Because of this, it is difficult to value high-profile equities. You are dealing with human psychology, not pennies and dollars.
Earnings per share is the company profit (or loss), divided by the number of outstanding shares. The number should always be compared to the share price, so for instance if the EPS is $1 and the share price is $10, the EPS is 10% of the share price. This means that if the company keeps up this earning you should expect to make 10% yearly on your investment, long term. The stock price may fluctuate, but if the company keeps on making money you will eventually do so too as investor. If the EPS is low it means that the market expects the earnings to rise in the future, either because the company has a low profit margin that can be vastly improved, or because the business is expected to grow. Especially the last case may be a risky investment as you will lose money if the company doesn't grow fast enough, even if it does make a healthy profit. Note that the listed EPS, like most key figures, is based on the last financial statement. Recent developments could mean that better or worse is generally expected. Also note that the earnings of some companies will fluctuate wildly, for instance companies that produce movies or video games will tend to have a huge income for a quarter or two following a new release, but may be in the negative in some periods. This is fine as long as they turn a profit long term, but you will have to look at data for a longer period in order to determine this. "This is a classic correlation does not imply causation situation.  There are (at least) three issues at play in this question: If you are swing- or day-trading then the first and second issues can definitely affect your trading.  A higher-price, higher-volume stock will have smaller (percentage) volatility fluctuations within a very small period of time. However, in general, and especially when holding any position for any period of time during which unknowns can become known (such as Netflix's customer-loss announcement) it is a mistake to feel ""safe"" based on price alone. When considering longer-term investments (even weeks or months), and if you were to compare penny stocks with blue chip stocks, you still might find more ""stability"" in the higher value stocks.  This is a correlation alone — in other words, a stable, reliable stock probably has a (relatively) high price but a high price does not mean it's reliable. As Joe said, the stock of any company that is exposed to significant risks can drop (or rise) by large amounts suddenly, and it is common for blue-chip stocks to move significantly in a period of months as changes in the market or the company itself manifest themselves. The last thing to remember when you are looking at raw dollar amounts is to remember to look at shares outstanding.  Netflix has a price of $79 to Ford's $12; yet Ford has a larger market cap because there are nearly 4 billion shares compared to Netflix's 52m." "As I understand it, a company raises money by sharing parts of it (""ownership"") to people who buy stocks from it.  It's not ""ownership"" in quotes, it's ownership in a non-ironic way.  You own part of the company.  If the company has 100 million shares outstanding you own 1/100,000,000th of it per share, it's small but you're an owner.  In most cases you also get to vote on company issues as a shareholder. (though non-voting shares are becoming a thing).  After the initial share offer, you're not buying your shares from the company, you're buying your shares from an owner of the company.  The company doesn't control the price of the shares or the shares themselves. I get that some stocks pay dividends, and that as these change the price of the stock may change accordingly. The company pays a dividend, not the stock.  The company is distributing earnings to it's owners your proportion of the earnings are equal to your proportion of ownership.  If you own a single share in the company referenced above you would get $1 in the case of a $100,000,000 dividend (1/100,000,000th of the dividend for your 1/100,000,000th ownership stake). I don't get why the price otherwise goes up or down (why demand changes) with earnings, and speculation on earnings.  Companies are generally valued based on what they will be worth in the future.   What do the prospects look like for this industry?  A company that only makes typewriters probably became less valuable as computers became more prolific.  Was a new law just passed that would hurt our ability to operate?  Did a new competitor enter the industry to force us to change prices in order to stay competitive?  If we have to charge less for our product, it stands to reason our earnings in the future will be similarly reduced.   So what if the company's making more money now than it did when I bought the share? Presumably the company would then be more valuable. None of that is filtered my way as a ""part owner"".  Yes it is, as a dividend; or in the case of a company not paying a dividend you're rewarded by an appreciating value. Why should the value of the shares change? A multitude of reasons generally revolving around the company's ability to profit in the future." Price, whether related to a stock or ETF, has little to do with anything.  The fund or company has a total value and the value is distributed among the number of units or shares.   Vanguard's S&P ETF has a unit price of $196 and Schwab's S&P mutual fund has a unit price of $35, it's essentially just a matter of the fund's total assets divided by number of units outstanding. Vanguard's VOO has assets of about $250 billion and Schwab's SWPPX has assets of about $25 billion. Additionally, Apple has a share price of $100, Google has a share price of $800, that doesn't mean Google is more valuable than Apple.  Apple's market capitalization is about $630 billion while Google's is about $560 billion.  Or on the extreme a single share of Berkshire's Class A stock is $216,000, and Berkshire's market cap is just $360 billion.   It's all just a matter of value divided by shares/units. Imagine that I own 10% of a company, and yesterday my portion was valued at $1 Million, therefore the company is valued at $10 Million.  Today the company accepts an offer to sell 1% of the company for $500 Thousand: now my portion is worth $5 Million, and company is worth $50 Million. The latest stock price sets the value of the company. If next week the news is all bad and the new investor sells their shares to somebody else for pennies on the dollar, the value of the company will drop accordingly. When you buy shares, you are literally buying a share of the company.  You become a part-owner of it. Companies are not required to pay dividends in any given year.  It's up to them to decide each year how much to pay out. The value of the shares goes up and down depending on how much the markets consider the company is worth.  If the company is successful, the price of the shares goes up.  If it's unsuccessful, the price goes down.  You have no control over that.  If the company fails completely and goes bankrupt, then the shares are worthless. Dilution is where the company decides to sell more shares.  If they are being sold at market value, then you haven't really lost anything.  But if they are sold below cost (perhaps as an incentive to certain staff), then the value of the company per share is now less.  So your shares may be worth a bit less than they were.  You would get to vote at the AGM on such schemes.  But unless you own a significant proportion of the shares in the company, your vote will probably make no difference. In practice, you can't protect yourself.  Buying shares is a gamble.  All you can do is decide what to gamble on. "As I understand it, a company raises money by sharing parts of it (""ownership"") to people who buy stocks from it.  It's not ""ownership"" in quotes, it's ownership in a non-ironic way.  You own part of the company.  If the company has 100 million shares outstanding you own 1/100,000,000th of it per share, it's small but you're an owner.  In most cases you also get to vote on company issues as a shareholder. (though non-voting shares are becoming a thing).  After the initial share offer, you're not buying your shares from the company, you're buying your shares from an owner of the company.  The company doesn't control the price of the shares or the shares themselves. I get that some stocks pay dividends, and that as these change the price of the stock may change accordingly. The company pays a dividend, not the stock.  The company is distributing earnings to it's owners your proportion of the earnings are equal to your proportion of ownership.  If you own a single share in the company referenced above you would get $1 in the case of a $100,000,000 dividend (1/100,000,000th of the dividend for your 1/100,000,000th ownership stake). I don't get why the price otherwise goes up or down (why demand changes) with earnings, and speculation on earnings.  Companies are generally valued based on what they will be worth in the future.   What do the prospects look like for this industry?  A company that only makes typewriters probably became less valuable as computers became more prolific.  Was a new law just passed that would hurt our ability to operate?  Did a new competitor enter the industry to force us to change prices in order to stay competitive?  If we have to charge less for our product, it stands to reason our earnings in the future will be similarly reduced.   So what if the company's making more money now than it did when I bought the share? Presumably the company would then be more valuable. None of that is filtered my way as a ""part owner"".  Yes it is, as a dividend; or in the case of a company not paying a dividend you're rewarded by an appreciating value. Why should the value of the shares change? A multitude of reasons generally revolving around the company's ability to profit in the future." Earnings per share are not directly correlated to share price. NV Energy, the company you cited as an example, is an electric utility. The growth patterns and characteristics of utilities are well-defined, so generally speaking the value of the stock is driven by the quality of the company's cash flow. A utility with a good history of dividend increases, a dividend that is appropriate given the company's fiscal condition, (ie. A dividend that is not more than 80% of earnings) and a good outlook will be priced competitively. For other types of companies cash flow or even profits do not matter -- the prospects of future earnings matter. If a growth stock (say Netflix as an example) misses its growth projections for a quarter, the stock value will be punished.