Have you ever watched the tickers on the New York stock exchange rush by, and wonder what they mean? Every day, we hear about the stock market in one way or another: It’s ups, it’s downs, and everything in between. Did you know however, that despite the prominence of “market talk” around the water cooler, the average person doesn’t know how to read most of the information posted about a stock and its value?
Many people invest on stock based on brand strength and emotion bias. Your everyday investor often uses the logic of I like this company, so I should buy their stock, or I hear good things about X, so I should probably buy the stock of X. In some cases this kind of investing works out, because often what is popular is what is doing well in the market. Other times it can lead to disaster.
Luckily, we believe in smart investing, and want to use every resource we have available to increase our wealth! Along with the daily price of a given stock are posted numbers that show us an inside look at a company’s strengths, weaknesses, future for growth, and so much more. For those who do not do their research, the stock market is nothing more than a large game of roulette. For those who know how read the cryptic language, the information is a map to the prospective future of the company. The information is freely posted for all to see, and it is up to us to know what to do with it. I want to be a better, more informed investor, and spent the majority of my free time this week researching how to evaluate companies and their stocks. I decided to start with the basics and brush up on stock information.
The first step to understanding stock information is knowing where to look for it. There are numerous search engines that will yield you quick results for free. I personally prefer Google Finance, but some other options include Yahoo Finance, MSN Money, money.cnn.com, and many others. Each have their pro’s, con’s, and personal layouts. I personally like Google because it has a nice, direct interface with all of the information I want to see right on top. I encourage you to explore around and see which site fits your needs.
Pick a company
Once you decide on a search engine that is right for you, the next step is to pick a stock to research. This is where we put a disclaimer! IT TAKES A LOT OF TIME AND RESEARCH TO PICK SUCCESSFUL STOCKS. The purpose of this article is not to pick successful stock, but to learn how to read about the stocks you are interested in. Ok, moving on, think of your favorite company, product, food, whatever. Search whatever company you are thinking of and add the word stock behind it in your search bar. Now that you have picked a stock to research, you may be greeted by various numbers and categories that look something like this:
Let’s Break Down Each Section Piece by Piece
- First, each stock has an abbreviation called a ticker symbol. Each ticker symbol varies by company, but examples of the abbreviation include Ford as: F, McDonalds as: MCD, Tesla as: TLSA, ect.
- Once you find a stock, the first and largest number you will see is the price of the stock at that given moment. To the right of that number is how much the stock has changed since closing yesterday. Positive means the price has gone up, and a negative means the price has gone down.
- Range: The highest and lowest prices the stock has traded for in the most recent day of trading.
- 52 week open: The highest and lowest prices the stock has traded for in the past year (52 weeks)
- Open: The price the stock sold for at opening this morning.
- Vol/Avg: The volume is the number of shares being traded today, while the avg is the average volume of shares traded over the most recent 30 days. These numbers tell us how many people are buy/selling stock in a given company.
- Mkt Cap: The generalized value of a company based on its stock value. It can be thought of as the price of the stock multiplied by the number of stocks for sale.
- PE: This is another tricky value. PE is a company’s price to earnings ratio. It is the share price divided by the earnings per share. To over-generalize, a PE can reflect a company’s anticipated growth/success, and likewise its potential failure. The important thing to remember is that companies can be over/undervalued. Just because a company is doing well and is ANTICIPATED to grow, it does not guarantee that it will. Likewise, a company with a low PE may be on its way to failure, or it may be an underdog that takes everyone by surprise. This is just one more value that can be used to make assumptions about a stock, but we all know what they say about assumptions…
- Div/Yield: Div is the latest dividend paid out to stock owners. You can think of it similar to a company paying you interest for investing it in. The Div value is the amount of interest per share that a company pays you for holding a stock. Dividend Yield is calculated by dividing the amount of dividends paid in a year per stock by the price per stock. What it represents is how much money you are being paid per dollar you are invested in the company’s stock. Why is it important? Let’s say that company A pays you $1 for every $10 dollars you invest. That means company A is paying you a dividend rate of 10% (1/10) .Now, company B pays you $1 for every $50 dollars you invest. That means company B is paying a dividend rate of 2.5% (1/50).
- EPS: Earnings per share is a measurement of a company’s profits. The mathematical formula is Net income- dividends, all divided by outstanding shares. Although it is a reflection of a company’s profits, it is not necessarily a reflection of a company’s success! You can use it as another component to compare companies with, but should not place a high value on only one component.
- Shares: The number of shares held by the company and investors.
- Beta: This is one of the more interesting components. A beta is a reflection with how volatile or aggressively a stock price can change based on the economy. If a stock has a high beta, you may see prices rise or fall GREATLY based on the economy. A low beta means the price is not as directly affected by the economy. What constitutes a high or low beta? We use 1 as our baseline. A beta of 1 means that the stock is likely to be as volatile as the rest of the market. So if a stock has a beta of 1.3, we can say that the stock may be 30% more volatile that the market. Keep in mind, beta doesn’t mean a stock is good or bad. It is simply a reflection of its capacity for rapid fluctuations, be it positive or negative.
Lastly, you notice on the image there are red and blue lines going across. The blue line represents our selected stock. The red line can be thought of as how the rest of the “general market” has performed through the same amount of time. It is important to note, that the values on the right side are percentage changes and not specific dollar amounts. We can say for instance, that in October the average stock value was down while our selected stock was up, but it does not guarantee that our stock will always be above average.
For the future
Researching stocks is a time consuming, and detail oriented task. There are large rewards for those who can master the art of stock evaluation, but the first step to mastery is to make sure you understand all the moving pieces. We will continue our series on stocks and valuations in the future. Readers, what stock did you use for the example, and what did you learn or find most valuable from this article? For those of you who are experienced, what more would you add?