If you’re new to investing, you’ve probably heard terms like “P/E ratio,” “dividends,” and “market cap.” At first, they might sound like confusing financial jargon, but don’t worry—once you break them down, they’re actually very simple. Let’s go through them one by one.
1️⃣ Price-to-Earnings Ratio (P/E Ratio)
Think of the P/E ratio as the price tag of a company’s stock compared to how much money the company makes.
Formula (don’t worry, it’s simple):
P/E = Stock Price ÷ Company’s Earnings per Share
Example: If a company’s stock costs $20 per share, and it earns $2 per share, then:
P/E = 20 ÷ 2 = 10
This means investors are paying $10 for every $1 the company earns.
Low P/E (like 8–12): Stock might be cheap compared to earnings.
High P/E (like 30–50): Stock might be expensive, or investors expect big growth in the future.
Simple analogy: Imagine buying a shop. If the shop makes ₦1m profit yearly and the seller asks for ₦10m, the P/E is 10.
2️⃣ Dividends
Dividends are rewards companies give to shareholders, usually in the form of cash payments.
Not all companies pay dividends.
Big, stable companies (like MTN, Coca-Cola) often do.
Fast-growing companies (like tech startups) usually reinvest profits instead of paying dividends.
Example: If you own 10 shares of a company and it pays a ₦5 dividend per share, you’ll receive ₦50.
Simple analogy: Think of dividends like fruit from a tree. You planted the tree (bought the stock), and sometimes it gives you fruit (cash payouts). This payment could be quarterly or annually.
3️⃣ Market Capitalization (Market Cap)
Market cap tells you how big a company is in the stock market.
Formula: Market Cap = Stock Price × Number of Shares
Categories:
Large-cap: Big companies (Dangote Cement, MTN, Apple, Microsoft).
Mid-cap: Medium-sized companies.
Small-cap: Smaller, riskier companies.
Example: If a company has 1 million shares, each worth $50, then:
Market Cap = 1,000,000 × $50 = $50 million
Simple analogy: Market cap is like the total size of the pizza. Even if one slice (share) is small, the whole pizza (company value) can be huge.
🎯 Quick Recap for Beginners
P/E ratio = price vs. earnings (is it cheap or expensive?).
Dividends = cash rewards for shareholders.
Market cap = the total size/value of the company.
These three terms are like the ABCs of investing. Once you understand them, you’ll be more confident reading stock news and making better investment decisions.
