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Chapter 9 Stock Market Information—Where to Get It
“It’s not the bulls and the bears on Wall Street that make you lose money;it’s the bum steers.”
Do I Need to Read This Chapter?
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• Am I eager to jump into the stock market,but feel a little short on general preparations? • Am I totally clear on “P/E,”“100s,”and all the other shorthand notations for stocks in the financial pages? • Can I identify and analyze the five key indicators in judging a stock’s value? • Do I understand the key stock market indexes? • Have I developed the thick skin and commonsense attitude required to play the market?
Now that you know the basic characteristics of the different kinds of stocks,let’s take a look at some of the things you should know to get started in stock market investing.People will spend 5 to 10 hours in comparison shopping for a television that cost $300 but will put $5,000 into a stock after a 5-minute phone call from a broker.The next time you want to buy a stock,spend time learning about the market and its offerings.Pretend you
are shopping for a TV.Remember this advice:“Buy on rumor.Sell on news.” Facts are your most important asset.
How Do You Learn about Investing in the Stock Market?
An investor’s most important tool is information:information about stock prices,movement in the market,and likely business trends.Without plenty of sound information,investment decisions are pure guesswork.The first place to look for information about any stock is the financial pages of your newspaper,and the best place to start is with the columns listing the current stock prices on one or more of the major organized exchanges.Figure 9.1 provides
Figure 9.1 A Sample Stock Page
HIGH LOW STOCK DIV P/E 100S HIGH LOW LAST CHANGE (1) (1) (2) (3) (4) (5) (6) (6) (7) (8)
44 16 EWS 2.50 9 69 35.25 34 35 +.50 1. High and Low. These are the highest and lowest prices paid for the stock during the previous year (over 52 weeks). This entry shows that the highest price paid for EWS stock during the previous year was $44 per share; the lowest price, $16 per share. 2. Stock. Stocks are listed alphabetically by an abbreviated form of the corporate name. 3. Dividend. The rate of annual dividend is shown; it is generally an estimate based on the previous quarterly or semiannual payment. This entry shows that EWS is paying an annual dividend of $2.50 per share, or about 7 percent yield (2.50 ÷ 35). 4. Price/Earnings Ratio. This is the ratio of the market price of the stock to the annual earnings of the company per share of stock. As you’ll learn later, this is an important indicator of corporate success and investor confidence. 5. Shares Traded. This is the number of shares sold for the day, expressed in hundreds. In the example shown, 6,900 shares of EWS stock were traded. The figure does not include odd-lot sales. Note: If the number in this column is preceded by a “z,” it signifies the actual number of shares traded, not hundreds. 6. High and Low. These are the highest and lowest prices paid for EWS stock during the trading session (that is, the business day). The highest price paid for EWS stock today was $35.25 per share; the lowest price, $34 per share. Stock prices are shown in dollars and cents. 7. Closing Price. This is the final price of EWS stock for the day. In this case, it was $35 per share. 8. Change. The difference between the closing price of the stock for this session and the closing price for the previous session. Since EWS stock closed at $35 per share, up 50 cents from the previous close, yesterday’s closing price would have been $34.50.
explanations of the information you’ll find in those columns and what it means for you as a prospective investor.It shows a typical listing for a stock traded on one of the major exchanges.
Newspaper listings are useful, but consider them just a starting point for getting information and analyzing the value of a particular stock. Prudent would-be investors should also consult a corporation’s annual report, newspaper and magazine articles about the business, stock market newsletters, and columnists’ comments. And the advice of your broker can also be helpful.
What Statistics Should You Know to Evaluate Stocks?
The following statistics are the “big five”when it comes to judging the value of a stock’s offering: 1.Earnings per share 2.Book value 3.Price/earnings (P/E) ratio 4.Yield 5.Rate of return
These are the building blocks,so let’s examine them one by one: 1. Earnings per share.The current earnings-per-share figure is one basic measure of the success of a corporation.It is computed by taking the corporation’s net profit after taxes,subtracting any preferred-stock dividends,and dividing the remainder by the number of outstanding shares of common stock.For example,suppose MASTCA Corporation earned a net profit of $4,300,000 last year, paid a dividend on preferred stock of $300,000,and has 800,000 outstanding shares of common stock.The earnings per share for the corporation are $5: $4,300,000 Net profit after taxes − 300,000 Dividend on preferred stock $4,000,000 ÷ 800,000 Outstanding shares of common stock = $5 Earnings per share
2. Book value.This is one measure of the value of the assets of the corporation.
It is computed by taking the value of the assets,subtracting amounts due to creditors and preferred stockholders,and dividing the remainder by the number of outstanding shares of common stock.To take another simple example,suppose MASTCA Corporation owns assets valued at $30 million, has debts totaling $10 million,and has 800,000 shares of common stock outstanding.The book value of MASTCA Corporation is $25 per share. $30,000,000 Assets −10,000,000 Debts and value of preferred stock $20,000,000 ÷ 800,000 Outstanding shares of common stock = $25 Book value per share 3. Price/earnings (P/E) ratio.This important index allows you to compare the market price of the stock to its demonstrated earning power.A low P/E ratio—say,under 7—shows that the company has high earnings relative to the current market price of its stock and suggests that the market has undervalued the stock.The stock is probably a good buy at its current price.Stocks with low price/earnings ratios can reward you in two ways: • If they’re undervalued,their prices should eventually go up. • If the market as a whole slumps,they may not sink as much. For cautious investors,stocks with a low P/E ratio make sense.A host of different studies have shown that,as a group,such stocks perform better, over the years,than a group with medium or high P/E ratios.Conversely,a high P/E ratio (15 or more) shows that the market expects large future gains from the company and has therefore driven up the price of the stock.The
P/E ratio is computed by dividing the stock’s market price by the company’s earnings per share.If a company’s stock is selling at $35 per share and the company has earnings of $3 per share,the P/E ratio is 35 ÷ 3,or 11.6,which is a bit lower than the average P/E ratio of 13. 4. Yield.This figure offers another indication of how reasonable the current price of a stock is.It is a percentage determined by dividing the current annual dividend per share by the current market price of a share.If a corporation is paying an annual dividend of $2.50 per share and the stock is selling at $35 per share,then the yield is 2.50 ÷35,or about 7.1 percent. 5. Rate of return.The rate of return on a given stock is a measure of the total profit you gain from holding that stock for a specified period of time.
Computing the rate of return involves several steps.First,find the total market value of your stock at the end of the period in question.Add to this figure the total amount of dividends earned by the stock during the period.
Divide this sum by the total market value of the stock at the start of the period.Subtract 1,and multiply by 100.The resulting figure,expressed as a percentage,is your rate of return for the period.
Here’s an example.Suppose you bought 100 shares of stock at $24 per share. You’ve held the stock for one year.The stock paid a $2-per-share dividend during the course of the year.At the end of the year,it has a market value of $25 per share.The rate of return for this stock is 12.5 percent,calculated in this way: $2,500 Market value of stock at end of period + 200 Dividend paid during period $,2,700 ÷2,400 Market value of stock at start of period 1.125
1.125 – 1.0 = .125 × 100 = 12.5% rate of return
What Are Stock Market Indicators?
It has been said that the stock market is a “leading”indicator,meaning that stock prices reflect expectations of future growth and profits.The market is not designed to show current conditions.Most market indexes will move in tandem,but there is a considerable difference in their performances in the long run.The reason is that the indexes are composed of different stocks. Below is a list of three of the most widely accepted stock market indexes and the types of stocks they include. 1. Dow Jones Industrial Average (DJIA).In attempts to gauge or predict largescale trends in stock market values,the Dow Jones Industrial Average is most often cited.The most frequently mentioned of four Dow Jones averages (covering industrial stocks,transportation stocks,utility stocks,and a composite average),the DJIA is a barometer of stock market trends based on prices of 30 large U.S.corporations listed on the NYSE.Every day,the fluctuations in the prices of these stocks are combined by adding up the prices of the 30 stocks and dividing the result by a designated factor of 0.3 (usedto compensate for complicating situations,such as stock splits and
Table 9.1 DJIA Stocks, May 2007
Alcoa Inc (AA) Home Depot Inc (HD) Altria Group Inc (MO) Amer Intl Group Inc (AIG) Honeywell Intl Inc (HON) Merck Co Inc (MRK) Amer Express Inc (AXP) Hewlett-Packard (HWQ) Microsoft CP (MSFT) Boeing Co (BA) Intl Business (IBM) Pfizer Inc (PFE) Machines Citigroup Inc (C) Intel Cp (INTC) Procter & Gamble (PG) Caterpillar Inc (CAT) Johnson & (JNJ) AT & T Inc (T) Johnson DC Du Pont E I DE NEM (DD) J.P. Morgan (JPM) United Tech (UTX) Chase Co Walt Disney (DIS) Coca Cola Co (KO) Verizon Commun (VZ) General Electric Co (GE) McDonald’s CP (MCD) Wal-Mart Stores (WMT) General Motors (GM) 3M Company (MMM) Exxon Mobil CP (XOM)
periodic substitutions in the list of stocks used).The 30 stocks that made up the DJIA during 2006 are shown in Table 9.1. 2. Standard & Poor’s Composite Index.This index,better known as the S&P 500,began in 1957 and is presently one of the 12 leading economic indicators.Although the DJIA is much older than the S&P,many investors believe that the S&P better measures the performance of blue chip stocks because of its broad base of 500 stocks (compared with the DJIA’s 30).
These 500 stocks,which are traded on the New York and American Stock
Exchanges and on the over-the-counter (OTC) market,are in turn broken up into subindexes (400 industrial,40 public utilities,40 financial companies, and 20 transportation companies) so that a broad base is represented.
Unlike the DJIA,which measures the returns of a small sector of the stock market,the S&P 500 measures the performance of many relatively smaller stocks as well as the blue chip ones.Investors mistakenly think that this index would be composed of the 500 largest traded companies,but that is not the case.There is a committee of eight who hold a monthly meeting to decide which corporations stay and which ones go.Whereas the DJIA simply adds up the current day’s prices of its 30 stocks in its index and begins its calculations from that total,the S&P is weighted by market value (number of shares multiplied by price).Thus each stock can influence the result in proportion to its market value.Another point is that the DJIA moves more dramatically than the S&P 500.In a broad market move,the S&P usually moves 1 point for every 7 points lost or gained by the DJIA.
3. Nasdaq Composite.This index,begun in 1971 by the National Association of
Securities Dealers,traces thousands of stocks traded on Nasdaq (formally, the National Association of Securities Dealers Automated Quotations).
Like the S&P 500,the index is market weighted so that the larger stocks will influence the index more than the smaller ones.
In summary, the only way to approach the stock market is with good, old-fashioned common sense:
1. Avoid hot tips. If a friend or your brother knows about a hot tip, so do hundreds of other people. Remember, hot tips can get you burned. 2. Don’t fall in love. Don’t get married to a stock even if it’s your employer’s stock that you have accumulated over the years. Weed out those stocks that are not meeting your objectives, even if it’s the first stock you ever bought. 3. Compare your portfolio. Check on your total return by adding up the stock’s price change and dividends for a specific period and then dividing the total by the price at the start of that period. Multiply the result by 100. This will give you a percentage, which is a fair comparison to other types of investments.
Remember that with stocks you own; with bonds you lend. 4. Have a bit of patience. Except for wild speculation, take your time. Sell, not on the basis of the stock’s performance over a short period of time, but rather on the concept of the long run. Remember that the longer the holding period, the more likely you will gain a profit in spite of the inevitable interim ups and downs. On the buy side, the same rule applies. Don’t get bullied into purchasing something that “can’t wait.” Good investments can wait. 5.When stocks fall, they are cheaper, and it may be the time to buy, not sell. When stocks have increased and are high, it may be the time to sell.
Don’t let fear (stocks falling) and greed (stocks rising) make your decision for you. 6.Stock market terms in a falling market (taken with a grain of salt):
P/E ratio. The percentage of investors wetting their pants as the market keeps crashing.
Broker. Poorer than you were last year.
“Buy, buy”. What you said to your money in 2002.
Standard & Poor. Your life in a nutshell.
Market correction.The day after you buy stocks.
Cash flow. The movement your money makes as it disappears down the toilet.
Futures. If you trade this too much, you won’t have one.
It is true that there is no way to tell where the market will be a year or two from now,but by keeping informed,you stand a better chance in this rollercoaster market we are now experiencing.
And on the topic of the market,did you know that Wall Street is a place where the day begins with good buys?
It’s a Wrap
• Successful stock investments are based on sound information,not hot tips or guesswork. • The five key indicators in judging a stock’s value are earnings per share, book value,price/earnings ratio,yield,and rate of return. • The three leading market indexes—the Dow Jones Industrial Average,
Standard & Poor’s Composite Index,and the Nasdaq Composite— attempt to measure the strength and direction of the U.S.stock market.
