Common Stock Investing Appendix B, Part VI Are Stock Market Indices and Stock Prices Leading Economic Indicators? Is this Information Useful?

Here’s what you get when buying Stock Committee on Uniform Securities Identification Procedures OWNERSHIP IS FREELY TRANSFERABLE

How are Stock Prices reported? The Dow 30 Largest and Most Widely Held Public Companies Standard & Poor’s (S&P) 500 Large-Cap (>$3B) Companies traded on NASDAQ and NYSE National Association of Securities Dealers Automated Quotations 3,000 US/Foreign Growth/Technology Stocks

Why is a Stock’s Price (Value?) what it is? EFFICIENT MARKET HYPOTHESIS Stock Prices “Reflect All Publically- Available Information” Theory: “Prices are Never Under- or Over-Valued” CAN’T BEAT MARKET

Isn’t it all about “Interpreting” Information? How does Information effect a Firm, its Industry and the Economy? "I'd be a bum in the street with a tin cup if the markets were efficient." "I'd be a bum in the street with a tin cup if the markets were efficient."

RISK RISK (effects Value) CA $ H If, When and How Much CA $ H EXPECTED RATE OF RETURN Risk Aversion (%) What’s the VALUE of an Asset (Stock)? Future CA $ H to be Received while Owning Asset  For Stockholders = Company’s Future Net Income Future CA $ H to be Received while Owning Asset  For Stockholders = Company’s Future Net Income

Net Income (EPS) Expected Rate of Return Expected Rate of Return = Value * How much Less? Factor in Margin-of-Safety (Contingency ) Compare Your Value to Market’s Price If Price less* than Value, then Buy

Risk-Free Rate of Return (2 Yr. Treasury) + Systematic Risk (Inflation – CPI Change) + Equity Risk Premium (Firm Specific Risk) Total = Rate that Compensates for All Ownership Risks If Expected Rate of Return measures Risk, How to Calculate it?

How is a Stock’s Price reported? ttm = Twelve Trailing Months S EPS = Earnings (Net Income) Per Share $70 to $90 = 29% Gain Don’t Forget Cash Dividends