When it comes to buying a stock, do the current annual earnings per share matter

If you are a new investor or are just thinking of beginning to dabble in stocks and the stock market, you must first learn the vocabulary of the world of finance. And along with the many terms involved in finance, you must also learn the terms of economics and the stock market. At some point while you are beginning to make your investments, you may want to buy or sell more stock than what you already have invested in.

Regardless of the kinds of stock you invest in or when you decide to buy and sell, there are certain terms that you terms that you must be familiar with before you can make an educated decision about your investments. You must be able to understand the language of the stock market world in order to function to the best of your ability and reap the highest profit possible. A term included in this essential vocabulary is "earnings per share." The following article will discuss exactly what "earnings per share" is, as well as whether or not they matter when it comes to buying (or selling) stock.

The term earnings per share refers to the earnings returned on an investment round, or in other words, the portion of a company's profit allotted to each outstanding share of common stock. (An outstanding share is the total of all issued shares minus treasury stock. Treasury stock is stock that is bought back by the company to whom it belongs. And common stock is also known as "ordinary shares," and is the type of stock that employees of a corporation hold. The public can invest in "preferred stock." Preferred stock is a share of stock that has additional privileges beyond common stock.)

Calculating earnings per share is a method used to determine the value of a company. A company can be analyzed on two levels: the whole company level (including revenues, income, sales, etc) or "per share." So if you are a business owner and are thinking of allowing your company stocks to be made available to the public, you must be able to calculate your earnings per share. Even if you decide against making your stocks public, you should still be able to find your earnings per share. Or if you are simply an investor you should also be able to understand what earnings per share are so that you make educated decisions about your stocks.

Earnings per share are calculated by dividing a company's profit by the "weighted average common shares" or the net income-preferred dividends by "weighted average common shares." This may be understood more easily if seen in its calculation formula:

Earnings per share = Profit
Weighted average common shares

Earnings per share = Net income-preferred dividends
Weighted average common shares

Weighted shares are used because they yield a more accurate number. The reason for this is that the number of outstanding shares can change over time. The results are more accurate if the calculation uses the number of shares outstanding at the end of a period or the average number.

Earnings per share are usually considered the most important variable in determining a share's price. However, the current annual earnings per share are not what matters. It's the trend and future earnings projections that matter. So when you are thinking of buying or selling stock, you don't want to look at the current annual earnings per share for a given company. You want to look at the forecasted earnings per share. Those are the numbers that will give you a clue to what that particular stock is going to do in the future.

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