Understanding Fractions, Ratios, and Percentages in stock market

Fractions in stocks

Generally, a “Fraction” represents a piece of a whole. Fractions can be applied in any field to analyze or consider something in parts rather than as a whole. The most relatable and comprehensive example of a fraction is pizza slices. If a whole pizza is evenly divided into six slices or parts. If you take out a slice of pizza from the whole, you’ll be left with only 5 parts left. If representing it as a fraction you will have 5 over 6, or 5/6.

In a fraction, the bottom number represents the whole while the top number represents the fraction of how much is left over the whole.

When it comes to your investment portfolio, fractions are commonly used in pie charts. However, in a pie chart, the parts are not equally divided as in the case of pizza. The major reason for this is that some stocks weigh more than the others. If your portfolio is made up of different company stocks like Apple (AAPL), Netflix (NFLX), and Facebook (FB), it is possible to have each stock weigh differently on the whole. That is, they take up different amounts on the whole. However, you can still divide your portfolio into equal parts and get the fraction of each stock in the portfolio.

Fractions should only be used to look at parts of a whole, but not to compare different entities. In that, you can use a fraction to see how much your portfolio is made up of each stock, but not using your portfolio’s fractions to compare a company’s stock price with the amount of money it makes.

Percentages in Stocks

Percentages are useful for comparing things within a whole. Fraction brings out the parts of a whole to be considered, while the percentage is used to compare these different parts. In simple terms, a percentage tells you how much one thing differs in relation to another thing through calculation. A common example is using a percentage to see how much your current portfolio has grown compared to when it started.

Percentages are similar to fractions but they have a constant denominator of ‘100’, whereas fraction’s denominators differ by their whole. Anytime you see the “%” sign it means “Out of 100.” Fractions can be easily converted to percentages for comparison purposes.

You can use percentages to calculate your portfolio return. (The Gain/Loss (%) is what is referred to as a Portfolio Return).

A portfolio return is calculated by looking at the current value of a portfolio and comparing it with the starting value, multiplying by 100.

It can also be calculated as thus:

((Current Value / Starting Value) – 1) * 100

Percentages are used to calculate growth in something over time. It can also be used to compare parts of a whole when the denominator is greater than 10.

Ratios in Stocks

Ratios are similar to fractions. The major difference is that ratios are used to compare different things. To compare a company’s stock price with how much money it earns per share, the Price-to-Earnings Ratio is what to use. A fraction cannot be used to compare ratios because the price of a stock is not included in how much a company makes on each share. To know this, the P/E ratio must be used.

You can either get the P/E ratio on the Quotes page or calculate it yourself. For example, if you want to calculate the P/E ratio of Microsoft Corp. (MSFT)  and the stock price is $102.10, while the earnings-per-share (EPS) for the last 12 months is $9.78, you can show the ratio as

$102.10: $9.78 (that is, $102.10 ‘to’ $9.78)

To calculate the value, simply divide the number on the left by the number on the right and you’ll get the price-to-earnings ratio:

        102.10 / 9.78 = 10.5 = PE Ratio

The price-to-earnings (P/E) ratio gives you an idea of how much a company’s current income is valued by investors. A high P/E ratio means that investors are positive that a company’s revenue will grow in the future while a low P/E ratio means that investors doubt that a company’s revenue will grow rather slowly.