Language of the Stock Market Part 2 Davis High School Financial Literacy Course

Researching a Stock

Book Value Net worth of a company Assets – Liabilities = Book Value Find info in company’s annual report Indicator of what would happen if company’s assets were sold, debts paid, and proceeds distributed to stockholders

Earnings Per Share After tax annual earnings =Earnings per share = Earnings per share Total shares of common stock Find information in business section of many newspapers how well company is doing Indicates how well company is doing quality of products customer service operations management

Price/Earnings (P/E) Ratio Relationship between price of one share of stock and annual earnings of company Price per share Price per share P/E ratio = P/E ratio Earnings per share of stock Information can be found in newspaper Most widely used critical measure of a stock’s price Represents how much investor is willing to pay for each dollar of company’s earnings

P/E Ratio Continued Most companies – 5 to 25 P/E ratio Most companies – 5 to 25 P/E ratio 7 – 10 financially successful7 – 10 – financially successful 15 – 25rapidly growing15 – 25 – rapidly growing 40 – 50 speculative40 – 50 – speculative Lower P/E – Lower P/E – higher dividends, less risk, lower prices, slow growth Higher P/E – Higher P/E – expected to have a lot of growth in the future

Beta stock volatility Measures stock volatility compared to overall changes in stock market Average Beta: +0.5 to +2.0 Average Beta: +0.5 to +2.0 To Find Beta: To Find Beta: Internet search “Stock ticker symbol + beta” Higher Beta = more risk = more potential for higher return Higher Beta = more risk (stock price change will be more drastic); also = more potential for higher return Example: Example: Beta +1.5; market up 10%, value of stock expected to rise 15%

Beta (continued) Negative beta = countercyclical stock Negative beta = countercyclical stock because price changes are opposite movements in business cycle. Conservative investors Conservative investors want beta of +1.0 or less; stock is less sensitive to changes in the market. Beta +1.1 to +2.0 – Beta +1.1 to +2.0 – stock is more sensitive to changes in market because moves at greater percentage.

Reading Stock Quotes

Year to Date % Change % change in stock price since January 1 of current year Example: Example: January 1 stock price, $43; July 30, $36; % change -16.3% YTD % 52-Week High Low StockDivYLD % P/EVol 100s HighLowCloseNet Chg AAR

52-Week High and Low Highest and lowest price stock was sold per share during last 52 weeks Highest: Highest: $43 Lowest: Lowest: $36 YTD % 52-Week High Low StockDivYLD % P/EVol 100s HighLowCloseNet Chg AAR

Stock Ticker Symbol Each company’s stock has an abbreviated trading symbol name Ticker Symbol Ticker Symbol YTD % 52-Week High Low StockDivYLD % P/EVol 100s HighLowCloseNet Chg AAR

Dividends Per Share annually Cash paid per share annually $10,000 30,000 shares If company paid $10,000 in dividends for 30,000 shares, dividends per share would be $0.33 ($10,000 / 30,000) Helpful when determining type of stock YTD % 52-Week High Low StockDivYLD % P/EVol 100s HighLowCloseNet Chg AAR

Dividend Yield Percentage % of price of share Dividend expressed as % of price of share Example: Example: Company paid $1.25 in dividends; stock market price is $50; dividend yield % is 2.5% ($1.25/$50) Helps to know how much income to expect: company paying high dividends is not reinvesting money to grow YTD % 52-Week High Low StockDivYLD % P/EVol 100s HighLowCloseNet Chg AAR

Price/Earnings Ratio Closing price of share compared to annual earnings per share Example: Example: stock’s market price, $50; earnings per share, $2.25, P/E ratio 22.2; for every dollar company earns, stock’s market price is worth $22.00 High number: people are optimistic about company and health of market. YTD % 52-Week High Low StockDivYLD % P/EVol 100s HighLowCloseNet Chg AAR

Volume Number of transactions to the share on the reported day Represented in hundreds: add two zeros to the number YTD % 52-Week High Low StockDivYLD % P/ E Vol 100s HighLowCloseNet Chg AAR

High and Low previous day Represents high and low selling price of one share for previous day YTD % 52-Week High Low StockDivYLD % P/EVol 100s HighLowCloseNet Chg AAR

Close Price of last share sold for the day YTD % 52-Week High Low StockDivYLD % P/EVol 100s HighLowCloseNet Chg AAR

Net Change Difference between closing price of share from prior day and current day YTD % 52-Week High Low StockDivYLD % P/EVol 100s HighLowCloseNet Chg AAR

How Well Stock Market Is Doing Overall

3 Basic Indices (Index) Dow Jones Industrial Average (“DOW”) Dow Jones Industrial Average (“DOW”) 30 leading industrial blue chip stocks Standard and Poor’s 500 Composite Index Standard and Poor’s 500 Composite Index Covers market activity for 500 stocks More accurate than DOW because it evaluates a greater variety of stock NASDAQ NASDAQ Monitors fast moving technology companies Speculative stocks, show dramatic ups and downs

Dow Jones

Ups and Downs Bull and Bear Bull Market Bull Market Market doing well Investors are optimistic about economy Investors are purchasing stocks Bear Market Bear Market Market is doing poorly Investors not purchasing Investors selling stocks

Purchasing Stock

Brokers Person licensed to buy and sell stocks; provide investment advice Purchase stocks on organized exchange (stock market) stock exchange Over ¾ of all stocks bought and sold on organized stock exchange NYSE – New York Stock ExchangeNYSE – New York Stock Exchange NASDAQNASDAQ AMEX – American Stock ExchangeAMEX – American Stock Exchange

New York Stock Exchange Wall Street Oldest; largest Started in 1792 Strictest company standards requirements DOW Jones

American Stock Exchange Began in 1849 New York Requirements not as strict as NYSE; allows younger, smaller companies to list

NASDAQ Stocks traded electronically over computer Requirements not as strict More volatile; companies are young and new

Regional Stock Exchanges Stocks traded to investors living in a specific geographical area Boston Cincinnati Philadelphia Spokane

Supply vs. Demand Stock exchange based upon laws of supply and demand Low stock prices: Low stock prices: many shares; few buyers High stock prices: High stock prices: few shares; many buyers

Mutual Funds Investment that is professionally managed; pooling investors monies to purchase securities in specific sectors Individual Ticker Symbol Market Specific: Technology, Agriculture, Money Markets Often used in Retirement Investment Options