Every man needs to be about his business, the business of making money. The obvious means are to get a job, then a paycheck and hopefully stash some dough in a 401k or IRA if you want to play it safe. Fair enough, but those that want to win big tend to invest in the markets… ’cause that’s where the big return is if you know what you’re doing. However, do you really know what your doing? Chances are that you don’t have a clue, but no worries ’cause were here to help you understand the basics of the Stock market and hopefully you won’t loose your shirt, ya dig? Cool.
We hear about the market all the time: The Dow (Dow Jones Industrial Average) is up today, the Dow is down to day, it always makes the headlines, bud do we know what that means? Obviously, stocks and the stock market are important, but what is a stock? What is a stock market? Good questions, so lets tackle a few things first: A stock, at its core, represents ownership of a company’s assets and profits. A dividend on a share of stock represents that share’s portion of the company’s profits, and is distributed yearly. One measure of the value of a company is the product of the number of shares that investors own multiplied by the share price. This value is called the capitalization of the company. Stocks in publicly traded companies are bought and sold at a stock market (also known as a stock exchange). Ever hear of the New York Stock Exchange (NYSE), bingo.
The stock exchange is where all the buying and selling takes place, and allows the price of a stock to be known every second of the day. Investors can watch as a stock’s price fluctuates based on news from the company, media reports, national economic news and lots of other factors. Buyers and sellers take all of these elements into account. The price of a stock also reflects the dividend that the stock pays, the projected earnings of the company in the future.
If a company traditionally pays out most its profits to its shareholders, it is generally called an income stock. The shareholders get income from the company’s profits. If the company puts most of the money back into the business, it is called a growth stock. The company is trying to grow larger by increasing the amount of equipment and the number of people who run it.
Now that we have the primer, lets discuss the other layers that involve the stock market. The Dow Jones Industrial Average is just one of many broad averages that are designed to tell the public how companies traded on the stock market are doing in general. For example, the Dow Jones Industrial Average is simply the average value of 30 large, industrial stocks. Big companies like General Motors, Goodyear, IBM and Exxon are the companies that make up this index. The S&P 500 is the average value of 500 large companies. The Russel 2000 index averages the values of 2,000 smaller companies.
What these averages tell you is the general health of stock prices. If the economy is doing well, then the prices of stocks as a group tend to rise in what is referred to as a “bull market.” If it is doing poorly, prices as a group tend to fall in what is called a “bear market.” The averages reveal these tendencies in the market as a whole.
There are three big stock exchanges in the United States:
•NYSE – New York Stock Exchange
•AMEX – American Stock Exchange
•NASDAQ – National Association of Securities Dealers
Typically, a person calls a stock broker in a firm that is authorized to trade at the exchange, such brokerage houses like Merrill Lynch, Charles Schwab and Morgan Stanley. When we call up a broker at one of these companies, they relay the trade to the floor of the appropriate exchange, and a representative of the company (or computer representing the company) makes the trade on our behalf. The broker earns a commission (generally $10 to $100 per trade, depending on the broker) to provide this service. Nowadays, trading is easier because it can be done online.
Are we ready to start trading? Maybe, but in order to pick the right stock you have to know how to read a Stock Table/Quote.
All financial paper has stock quotes that will look something like the below:
Columns 1 & 2: 52-Week High and Low – These are the highest and lowest prices at which a stock has traded over the previous 52 weeks (one year). This typically does not include the previous day’s trading.
Column 3: Company Name & Type of Stock – This column lists the name of the company. If there are no special symbols or letters following the name, it is common stock. Different symbols imply different classes of shares. For example, “pf” means the shares are preferred stock.
Column 4: Ticker Symbol – This is the unique alphabetic name which identifies the stock. On TV, we have seen the ticker tape move across the screen, quoting the latest prices alongside this symbol. If we’re looking for stock quotes online, we always search for a company by the ticker symbol.
Column 5: Dividend Per Share – This indicates the annual dividend payment per share. If this space is blank, the company does not currently pay out dividends.
Column 6: Dividend Yield – The percentage return on the dividend. Calculated as annual dividends per share divided by price per share.
Column 7: Price/Earnings Ratio – This is calculated by dividing the current stock price by earnings per share from the last four quarters.
Column 8: Trading Volume – This figure shows the total number of shares traded for the day, listed in hundreds. To get the actual number traded, add “00” to the end of the number listed.
Column 9 & 10: Day High and Low – This indicates the price range at which the stock has traded at throughout the day. In other words, these are the maximum and the minimum prices that people have paid for the stock.
Column 11: Close – The close is the last trading price recorded when the market closed on the day. If the closing price is up or down more than 5% than the previous day’s close, the entire listing for that stock is bold-faced. Keep in mind, you are not guaranteed to get this price if you buy the stock the next day because the price is constantly changing (even after the exchange is closed for the day). The close is merely an indicator of past performance and except in extreme circumstances serves as a ballpark of what you should expect to pay.
Column 12: Net Change – This is the dollar value change in the stock price from the previous day’s closing price. When you hear about a stock being “up for the day,” it means the net change was positive.
Quotes on the Internet
Nowadays, it’s more convenient for most to get stock quotes off the Internet. To get quotes, simply enter the ticker symbol into the quote box of any major financial site like Yahoo! Finance, Marketwatch or MSN Money.
The example below shows a quote for Microsoft (MSFT) from Yahoo! Finance. Interpreting the data is exactly the same as with the newspaper.
Now that you have the treatment on understanding the stock market, hopefully the funny numbers in the Financial section of your favorite newspaper make a lot more sense, buddy.