Common Stock Investing: Basic Terminology and Access to Data
The last six months have provided a substantial lift in the stock market, more as a result of continued stimulus efforts (primarily the Federal Reserves $600 billion purchase of government bonds in the open market), than as a result of genuine improvement in the economy. Thats not to say that some individual shares have not performed well, because they have. Readers may recall that in previous columns we have discussed the need to search for individual stocks based on their own merits, and not to simply buy stocks because we expect the market to rise. This approach has certainly borne true as many stocks have actually declined during the period, while stocks with good sales and earnings results have risen. As I expect the stock market to continue to be a selective investment medium in the coming months, it will help to review the meaning and the significance of the information available to us on a daily basis.
If you were to bring up a web page such as Yahoo Finance or MSN Money, you would see a blank search bar wherein you may type a stock quote symbol. The same page offers a search box to locate a stock quote symbol if you only know the name of the company and not its trading symbol. The symbols are standardized and used by all of the exchanges in the world, so that you will get the same results when checking on a stock on any market. Some symbols are very simple; the symbol for Ford Motor Company is F and for General Electric Company the symbol is GE. Once you know the symbol for the stock of the company you want to investigate, you are only seconds away from a great deal of information which can be used to improve your knowledge about the company and help to make investment decisions. Once you enter the quote symbol, you will be taken to a page with a great deal of information. Here is a sample of what you may see during the hours when the market is open, and what the information means:
LAST PRICE: this will be the last price at which the stock traded during the days session, e.g., $15.45
OPEN: this is the price of the first trade of the day, e.g., $15.62. US stock markets are officially open for trade from 9:30 AM to 4:00 PM (EST) daily. There is also a trading period from 8:00 AM to 9:30 AM and from 4:00 PM to 6:30 PM, known as pre market and post market trading respectively. These periods are set for trade to respond to company news which may come out before the market opens or after the market closes; it allows market access by both institutional and individual traders.
HIGH: this represents the highest price hit so far during that days session, e.g., $15.77
LOW: this is the lowest price hit so far during the days session, e.g., $15.42
CLOSE: this refers to the closing price on the previous business day so that you may determine if the stock price is higher or lower than the previous day, e.g., $15.81
VOLUME: this is the number of shares which have traded so far during the current trading session; this number is important when compared to the average trading volume
AVERAGE TRADING VOLUME: this is the average number of shares traded each day over the previous year. When you look at the current days volume compared to the average volume you will see if there are large discrepancies. Greater volume than normal results from news about the company or just greater interest in all stocks which will cause volume to rise above average, the volume numbers are important to investors as they signal the level of interest in a particular stock. Higher volumes with price rising is a positive indicator, while higher volumes with price falling is a negative indicator.
MARKET CAP (Capitalization): A dollar amount that equals the share price multiplied by the number of outstanding shares. Relatively, stocks are considered large cap if they have a market cap of $10-200 billion, mid if their market cap is between $2-10 billion, and small if the cap is between $500 million and $2 billion.
52 Week High: The highest price that the stock has traded for over the last 52 weeks (1 year).
52 Week Low: The lowest price that the stock has traded for over the last 52 weeks (1 year).
P/E: P/E (Price-to-earnings ratio) is a mathematical computation that takes a stocks current stock price and divides it by its previous annual earnings per share. A stock that sells for $20 dollars per share that earned $2 per share over the previous year would have a P/E of 10. You can compare the P/E of stocks in the same or similar industries to determine whether a stock is undervalued or overvalued based on its peers.
EPS (Earnings per Share): A companys profit, or earnings, divided by the number of outstanding shares. For instance, if a company earned $50 million in a year and had 10 million outstanding shares, the companys earnings per share would be $5. Again, this is a comparative tool to evaluate one stock against others when you are considering an investment.
DIVIDEND YIELD: Yield is a percentage that reflects the return received from dividends paid on stocks over the most recent quarter (multiplied out over a year) relative to its current price. For instance, a stock that is priced at $40 that most recently paid a quarterly dividend of $1 would have a yield of 10% ($1 x 4 quarters/$40 = 0.10 = 10%). Not all stocks pay dividends; stocks that have a long track record of paying dividends are sometimes called Blue Chip stocks in reference to the chip with the highest value in early 20th century casinos.
SHARES OUTSTANDING: The total number of shares that the company has issued for public trading.
INSTITUTIONAL OWNERSHIP: This reveals the number of shares held by professional money managers in their mutual funds, pension funds, etc. When compared to the shares outstanding, it gives the investor a perspective on what portion of the company is owned by professional money managers. This may be indicative of value given the greater experience and more informed decisions made by professionals. Collectively, the information provided on the quote pages of the various financial services web sites can provide a very good starting point for our evaluation of a common stock for investment. Once you have done the groundwork gathering this information, its time to seek a professional opinion such as that of BCU Investment Advisors to implement your decisions.
The views and opinions expressed herein are solely those of the author and do not necessarily reflect those of Baxter Credit Union, its Board of Directors, or its employees. The author is responsible for the content. Readers should consult with, and seek professional advice from their own attorneys, accountants, and financial advisors with respect to their individual financial needs and circumstances.
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