The first step in understanding the market is to understand a typical stock quote. People, LOVE stock quotes… even if they don’t understand what half of the values are, why they matter, or what the shorthand even stands for! They love them, because there are lots of little numbers and percentages and ratios, and nothing makes you look smarter on the bus than reading the final pages of the business section where all the numbers are. Well, perhaps that is an antiquated notion… Nowadays, it would be looking up real time quotes on your ‘IPhone 3GS.’
Now, Let us pray… And now, let us look at a typical stock quote!
As you can see, there is a veritable assload of information in this little box. Let’s take it from the top! The top line shows the price, below it you can see the time (as of 4:05pm EST) The little red arrow and the -0.06 means the stock has lost .06 points, during the day this number goes up and down, but the market closes at 4:00pm, so that’s the end of market price (We will not be discussing after-hours trading in this blog because I do not agree with it.)
Below it, you see the day’s low and high. I think these are self-explanatory… The VOLUME is the number of shares that traded that day, this particular stock traded 23.14 million shares that day. Below it, is the 30-day average volume, also self explanatory.
Market Cap. Is short for Market Capitalization, and is the total worth of all the outstanding shares. In this company’s case it is 61.48 billion dollars. To reach this number, you multiply the number of outstanding shares by the individual share price and BAM, Market Cap. This figure is typically used to categorize companies by size, and is not a measure of how good/bad they are doing.
The Shares Out is the number of shares outstanding, in this case there are 3.61 billion shares out on the market.
Revenue is also pretty self explanatory, it is the amount of money brought in by the company. Again, this should NOT be used to judge the company for one very important reason… This just tells us how much came in, not how much went out, or more importantly HOW it went out.
Earnings refers to the amount of profit (or lack thereof) of a company during a period, either quarterly or yearly. Earnings are very important, but are not the only thing that must be considered… From the earnings number we can see how profitable a firm is. But there is a caveat, numbers can be played with and sometimes spectacular earnings can be produced by a one-time event like a sale of some property or a business unit. One must see beyond earnings to understand if they are going to continue in the long term or not. Companies also issue something called “Guidance” which is what their projected expectations for the year are… Often times you will hear people say “So and So lowered their guidance due to the availability of more absorbent maxi pads…” This is Jargon for “Things are gonna get worse.”
EPS is short for Earnings Per Share. This one is also self explanatory, but bears discussion. The “Earnings Per Share” are what each individual share earned in profit in that specific period. In this case, Each share was worth $1.23 in profit for that period. I know, I know… Why does it cost $17.01 when it’s only earning me $1.23… Actually, unless they declare a $1.23 dividend (which wouldn’t happen) it wouldn’t earn you a goddamned dime.
The 52-Wk Low and High are the Lowest and Highest prices this stock has reached in the last 52-weeks (a year). From this we can get an idea of how the stock has performed, and if we see something like a Low of $0.79 and a High of $100.00, we might just want to go see WHAT happened before we take that plunge. This is a useful number for wrapping your mind around the semi-long term performance of a stock… Most online stock quotes nowadays have adjustable 3mnth, 6mnth, 1yr, 5yr, 10yr charts at the click of a button, very nice, but you will still also see the figures above displayed on the table! Tradition!
Prev. Close and Today’s Open speak for themselves…
Dividend and Dividend Yield give you the amount (if any) of dividend paid, and how it stacks up against the share price… The higher the dividend yield (typically) the higher the dividend. In our example above, this company pays a $0.25 dividend per share (probably each quarter [only if they declare one]) which amounts to 1.45% of the cost of a share. I warn you, do not think that a stock with a 10000% dividend yield is the one to buy… Dividends are fickle, and are not reason alone to invest in a company. In our grandparent’s day, it was a reason, a company like Parker Hannifin has paid a dividend for FIFTY-ONE YEARS STRAIGHT. But nowadays, many companies do not pay them at all.
The Beta is a measure of Volatility. A beta of “1” tells you that the company is moving in line with the general market, below “1” means it will be less volatile than the market, and above “1” means it will be MORE volatile than the market. As you can imagine, much like gambling, investing yields higher returns to those who engage in higher risk. It also destroys people in the same way as gambling, so beware.
Finally we get to the P/E Ratio! P/E stands for Price/Earnings and it is just that… the ratio of the share price to the earnings. You will notice there are 2 P/E ratios, the first one, labeled (TTM) stands for “Trailing-Twelve Month” and gives you an idea of what a 12-month time frame looks like, today it would be Aug09-Aug08, etc. The one labeled (Fwd.) is the FORWARD price/earnings ratio. This figure is a projection using expected earnings rather than past or current data. Not at all as reliable.
So… Where do we go from here? As I said, I am not going to give you stock tips, so we are going to skip the choosing of your particular stocks. I don’t want to know what formula you used, I don’t want to know what your cousin Bernice told you to invest in, or what San Lazaro told you to invest in during a dream, I don’t care, I don’t want to know. Let’s just say for argument’s sake that you are going to buy 5 companies, $1000.00 each, as we discussed yesterday.
Are we going to buy them all at once? NO!
Are we going to buy them using ‘Market Orders’ FUCK NO!
Let’s proceed by stepping back… There is a multitude of ways to buy and sell a stock. You can place a market order, a g-t-c limit order, a day order, a fill-or-kill order, a sell-stop order, a buy-stop order, a trailing stop order, a stop-limit order, tick sensitive, m-i-t, OCO, Discretionary… *faint*
Oh come now, don’t be a little punk ass bitch, it’s not that bad… Really, they break down into a few simple categories and do a few simple things which once thought about, make sense just from the name. Let’s talk about the basics first.
Market Order – Means BUY RIGHT NOW at whatever price. I don’t like market orders, they are an excuse for you to get screwed over a few extra pennies. I never, ever, use market orders. I don’t recommend you use them either.
Limit Order – A limit order means that you place a price limit on how much you are willing to pay per share. Limit orders come in several flavors:
· G-T-C – Good-Till-Cancelled limit orders are just that, good until you cancel them or they are fulfilled. For example, if you wanted to buy 10 shares of GE at $10.00 limit, good-till-cancelled, your order would remain open until the stock reached 10.00, at which point the brokerage buys 10 shares or until you cancel it.
· A day order expires at the end of the trading day. In other words, if I setup a $10.00 limit on ten shares of GE this morning, the order will automatically expires when the market closes that day.
· A Fill-or-Kill limit order either results in a sale or a cancelled order.
· An OCO or (One-Cancels-Other) order is one where you wish to place two different orders, only one of which will be fulfilled… In other words, you place one limit order for 10 shares of Microsoft at $20.00 and one limit order of 10 shares of Cisco at $20.00, whichever hits that limit amount first will be purchased and the other order will be cancelled.
Stop Order – A stop order tells the brokerage to buy or sell above or below a certain point. And like limit orders, they come in 31 flavors:
· Buy Stop Order – A Buy Stop Order is usually used by short sellers, though it can also have uses for those who invest long… A Buy Stop instructs the brokerage to BUY shares once the price goes above a certain point. The reason why short sellers tend to use this more than anyone else is due to the fact that shorts need to ‘cover’ (more on this next section) in order actually make any money.
· Sell Stop Order – A Sell Stop Order tells the brokerage to sell if the stock falls below a certain point. Let’s say for example you set a Sell Stop at $10.00, if the stock falls to ten dollars, the brokerage will immediately try to sell the stock at the best available market price.
· Trailing Stop Order – A Trailing Stop Order sets a parameter which tells the brokerage to sell when a certain number is reached. A simple example… I place a trailing-stop order to sell 100 shares of Microsoft if the price falls $2.00 below market price. If it falls a dollar, nothing happens, if it falls a $1.99 nothing happens, but once it hits $2.00 the brokerage will sell at best market price. The nice thing about trailing stops is that they adjust with the stock price, in other words, if Microsoft goes up to $30.00 a share, my trailing stop will be $28.00. These also come in ‘limit order’ flavor (My preference)… this type of order isn’t used enough in my opinion. It is quite a useful little tool.
· Stop Limit Order – A stop limit order is just like a stop order except it has a price sell limit instead of market sell limit.
As you can see, there are many different ways to buy and sell a stock… most brokerages charge extra for fancy orders like Trailing Stops, but for those disciplined enough to use and keep up with them they can be a blessing. Think about it, in a way some of these order types keep a constant, second to second watch on the market for you… there is no way in hell you could be as precise as a Trailing Stop, so why not use them?
Well… Sometimes you can’t. For those of us in the commercial banking industry and other sensitive industries there exist workplace investment policies… I won’t go into the specifics of mine, but I will tell you that it is draconian enough where the only type of orders that make any sense for me are day limit orders. If you are under the auspices of such an organization, they will likely be your best bet as well. Otherwise, please look into some of the funkier flavors listed above, they might just mean less work and more profit.
So, we are *finally* ready to purchase our stocks… as I said before, it would be foolish to purchase all the shares at once. Why? Because the market fluctuates… If you spread your lots out you have a better chance of getting the best price possible. Now, there is a warning here… this is STUPID to do if you are buying 5-10 shares… keep in mind your brokerage is going to charge you PER transaction, so each lot will cost you whatever the commission is. You will absolutely blow any possible savings out of the water if you buy 10 lots of 10 shares. This strategy should only be used for large lots where a dollar difference could mean a hundred dollars savings.
For simplicity’s sake, let’s say we now own 100 shares each of 5 stocks, totaling a $5,000.00 investment. Congratulations… you are now a self-directed investor…. Now what?
Tune in tomorrow for the thrilling conclusion of… How to keep calm and not lose your ass!
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