Back To Basics: How to Value a Stock

Last week's frightening plunge has forced investors to ponder--some for the first time--just how to determine what a stock is worth.

There was little doubt for the generations of Americans that hewed to the teachings of Benjamin Graham and David Dodd, the legendary prophets of value investing. In the 1930s they preached that the price of a company's stock should be tightly pegged to its profits--the famous price-to-earnings ratio, or P/E, derived by dividing a stock's price by its earnings per share. The dividend yield (the payout as a ratio of the stock price) also mattered. On that basis, stocks have...

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