Investing All-in-One For Dummies. Eric Tyson

Investing All-in-One For Dummies

the trading day represented in Table 1-1. Is that good or bad? Neither, really. Usually the business news media mention volume for a particular stock only when it’s unusually large. If a stock normally has volume in the 5,000 to 10,000 range and all of a sudden has a trading volume of 87,000, then it’s time to sit up and take notice.

Keep in mind that a low trading volume for one stock may be a high trading volume for another stock. You can’t necessarily compare one stock’s volume against that of any other company. The large-cap stocks like IBM or Microsoft typically have trading volumes in the millions of shares almost every day, whereas less active, smaller stocks may have average trading volumes in far, far smaller numbers.

The main point to remember is that trading volume that is far in excess of that stock’s normal range is a sign that something is going on with that company. It may be negative or positive, but something newsworthy is happening with that company. If the news is positive, the increased volume is a result of more people buying the stock. If the news is negative, the increased volume is probably a result of more people selling the stock. What are typical events that cause increased trading volume? Some positive reasons include the following:

Good earnings reports: The company announces good (or better-than-expected) earnings.

A new business deal: The firm announces a favorable business deal, such as a joint venture, or lands a big client.

A new product or service: The company’s research and development department creates a potentially profitable new product.

Indirect benefits: The business may benefit from a new development in the economy or from a new law passed by Congress.

Some negative reasons for an unusually large fluctuation in trading volume for a particular stock include the following:

Bad earnings reports: Profit is the lifeblood of a company. When its profits fall or disappear, you see more volume.

Governmental problems: The stock is being targeted by government action, such as a lawsuit or a Securities and Exchange Commission (SEC) probe.

Liability issues: The media report that the company has a defective product or similar problem.

Financial problems: Independent analysts report that the company’s financial health is deteriorating.

Check out what’s happening when you hear about heavier-than-usual volume (especially if you already own the stock).

Yield

In general, yield is a return on the money you invest. However, in the stock tables, yield (“Yld” in Table 1-1) is a reference to what percentage that particular dividend is of the stock price. Yield is most important to income investors. It’s calculated by dividing the annual dividend by the current stock price. In Table 1-1, you can see that the yield du jour of ValueNowInc (VNI) is 4.5 percent (a dividend of $1 divided by the company’s stock price of $22). Notice that many companies report no yield; because they have no dividends, their yield is zero.

Keep in mind that the yield reported on the financial sites changes daily as the stock price changes. Yield is always reported as if you’re buying the stock that day. If you buy VNI on the day represented in Table 1-1, your yield is 4.5 percent. But what if VNI’s stock price rises to $30 the following day? Investors who buy stock at $30 per share obtain a yield of just 3.3 percent (the dividend of $1 divided by the new stock price, $30). Of course, because you bought the stock at $22, you essentially locked in the prior yield of 4.5 percent. Lucky you. Pat yourself on the back.

P/E

The P/E ratio is the relationship between the price of a stock and the company’s earnings. P/E ratios are widely followed and are important barometers of value in the world of stock investing. The P/E ratio (also called the earnings multiple or just multiple) is frequently used to determine whether a stock is expensive (a good value). Value investors find P/E ratios to be essential to analyzing a stock as a potential investment. As a general rule, the P/E should be 10 to 20 for large-cap or income stocks. For growth stocks, a P/E no greater than 30 to 40 is preferable. (See Chapter 4 in Book 3 for full details on P/E ratios.)

In the P/E ratios reported in stock tables, price refers to the cost of a single share of stock. Earnings refers to the company’s reported earnings per share as of the most recent four quarters. The P/E ratio is the price divided by the earnings. In Table 1-1, VNI has a reported P/E of 12, which is considered a low P/E. Notice how SHC has a relatively high P/E (76). This stock is considered too pricey because you’re paying a price equivalent to 76 times earnings. Also notice that DBC has no available P/E ratio. Usually this lack of a P/E ratio indicates that the company reported a loss in the most recent four quarters.

Day last

The “Day Last” column tells you how trading ended for a particular stock on the day represented by the table. In Table 1-1, LDI ended the most recent day of trading at $41. Some newspapers report the high and low for that day in addition to the stock’s ending price for the day.

Net change

The information in the “Net Chg” column answers the question, “How did the stock price end today compared with its price at the end of the prior trading day?” Table 1-1 shows that SHC stock ended the trading day up 25 cents (at $21.25). This column tells you that SHC ended the prior day at $21. VNI ended the day at $22 (up 10 cents), so you can tell that the prior trading day it ended at $21.90.

Using News about Dividends

Reading and understanding the news about dividends is essential if you’re an income investor (someone who invests in stocks as a means of generating regular income; see Chapter 3 in Book 3 for details). The following sections explain some basics you should know about dividends.

You can find news and information on dividends in newspapers such as the Wall Street Journal (www.wsj.com), Investor’s Business Daily (www.investors.com), and Barron’s (www.barrons.com/).

Looking at important dates

To understand how buying stocks

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