How Stocks are Traded Wall Street – Mr. Arbiter

How Stocks Are Valued Companies have a wide range of choices in structuring the price of their stock when going public. The rule of thumb is, the more shares issued, the lower the price per share.

How Stocks Are Valued For example, if a company wants to raise $200 million, it could issue: 10 million shares at $20 per share 20 million shares at $10 per share 40 million shares at $5 per share This concept helps to illustrate that the price of the share is not the true indicator of its value.

How Stocks Are Valued The only thing a higher price stock actually means is that you are buying fewer shares. Here’s an example: Berkshire Hathaway recently closed at $199,500 per share while the price if Tetra Technologies was around $8 per share. You could buy one share of Berkshire Hathaway or 24,938 shares of Tetra.

Price Earnings Ratio The formula for calculating the Price Earnings Ratio or PE Ratio is Price per share/earnings per share in the previous year. There is no specific number that makes a stock a good buy. The PE Ratio is considered along with: Is the company growing or shrinking? How many of the last five years did the company show a profit? How fast has the stock price appreciated? Does it pay dividends? What is it’s sector and capitalization?

PE Ratios Today, the average PE Ratio for US companies is around 15. Average PE Ratio of the S & P 500 Jan 1, Jan 1, Jan 1, Jan 1, Jan 1, Jan 1, Jan 1,

Historical Average PE Ratios- S & P 500

Stock Exchanges The New York Stock Exchange was the first stock exchange in the United States in It is still located on Wall Street in Lower Manhattan.

Stock Exchanges NASDAQ The NASDAQ was founded in 1971 by the National Association of Securities Dealers. NASDAQ stands for National Association of Securities Dealers Automated Quotation System. It has no physical location as a market. All of the trading takes place electronically. The stocks traded on NASDAQ are often referred to as “Over-the-Counter” since there is no middle man on the trading floor.

Stock Exchanges Around the World The NYSE and the NASDAQ are the first and second largest stock exchanges in the world respectively. The next largest are in order: London Tokyo Hong Kong Shanghai Canada Germany Australia Bombay

Major Market Indexes An index is a survey of the stock market. An index company such as Dow Jones picks a limited number of stocks that it believes represent the broader market or a sector within the market. They average the performance of these stocks and use that to arrive at a number that investors can use as a bench mark to gauge the performance of the market. They can also use the index to compare individual stocks within the industry or to compare indexes to each other.

The Three Major US Indexes Dow S & P 500 NASDAQ Composite

The Dow The Dow Jones Industrial Average was the first index in the US dating back to It tracks the performance of the top 30 companies in the World that are traded on the NYSE. The DOW 30 represent 25% of the US market in terms of total value. The DOW 30 are large-well established stocks that typically pay dividends and are more consistent (less volatile) performance. DOW 30 stocks are known as Blue-Chip Stocks.

Factoids As you might have guessed, "blue chip" comes straight from the color of high value chips one found on poker tables at the turn of the century. Index is one of the few rare words that has two acceptable plural forms: Indexes and Indices. Either are acceptable, but “indexes” has become the Americanized version. Both Dow-Jones and Standard and Poor’s have both been owned by Mega-publisher McGraw Hill since 2012.

S & P 500 Stands for Standard & Poor’s 500. It encompasses the performance of the top 500 publically –traded stocks on the NYSE and NASDAQ. The S & P 500 represents abut 70% of the US market in terms of value. It is considered a Leading Economic Indicator which means that what happens to the S & P 500 is a predictor of what will happen to the US economy.

NASDAQ Composite The NASDAQ Composite is a compilation of the 5000 largest companies that are traded on the NASDAQ exchange. As with the NASDAQ Exchange, the Composite Index is heavily weighted with technology stocks. Because of their size and nature, these stocks tend to be more volatile, hence, more risky.

Wilshire 5,000 Total Market Index This is a compilation of the top 6,700 stocks traded on all US exchanges. 5,000 was the original figure, but the index has grown in order to stay proportionally representative. This index is the most diverse of the major indexes and also the newest; created in 1974.

Russell Indexes The Russell Indexes are designed to reflect it’s member’s capitalization. This makes this index useful for investors that trade based on a company’s capitalization. The Russell 3,000 Index is a compilation of the largest US traded stocks based exclusively on capitalization. The Russell 2,000 Index consists of the smallest 2,000 companies from the Russell 3,000 Index. The Russell 2,000 is the more widely publicized index.

Passive vs. Active Investing Passive investing styles and active investing styles are on a continuum and are not mutually exclusive. At the passive end are savings account-only investors that are seeking the most risk-free investments. At the polar opposite, active investors are the day-traders. The most common investment style is in the middle, this is knoiw as buy and hold. Buy and hold begins as an active style and in seeking growth, becomes passive, or long-term.

Managed Investments A common tool used by more passive stock market investors is managed investments. The consist of two primary types: Exchange Traded Funds (ETF’s) Mutual Funds

A Mutual Fund is a Corporation that holds a portfolio of investment assets based on a stated investment strategy. Mutual Funds derive their value from the value of their investment portfolio at the end of the trading day. Professional Management is an essential aspect of Funds.

Origin of Mutual Funds The first mutual funds were created in 1924 Investment Act of 1940 They gained popularity in 1975 with a change in the tax laws Today worldwide holdings in mutual funds are over $26 Trillion

Fund Expenses Management Fees Non-Management fees 12b-1 Fees Brokerage Commissions

Load and No-Load Funds No-Load Funds Usually not marketed through brokers so no commission is charged to the purchaser Load Funds Purchased through a stock broker and generally have a 3 to 5% sales charge depending on the size of the block purchased.

Net Asset Value Prices of mutual funds are quoted at the Net Asset Value of the prior day’s close. Net Asset Value is referred to as NAV It represents the total value of all of the fund’s holdings divided by the total number of the fund’s outstanding shares. Project Demo

Exchange Traded Funds (ETF’s) An ETF is a marketable security that tracks an index, commodity or bond. ETF’s hold the underlying securities and sell shares to investors. Unlike mutual funds that price once a day at the end of trading, ETF’s fluctuate in value throughout the day. ETF’s have a higher degree of liquidity and lower fees than mutual funds, making them more attractive to retail investors.

Bio-Tech ETF