Stock quotes, demystified

November 1, 2009

Math is hard. Poverty is harder.

Q: Dear Control Your Cash, how do I read a stock quote?

A: Considering that you’re just a literary construct and not an actual person, it doesn’t really matter.

Q: Thanks. You know how to make a girl feel special.

Tickers and charts are easy to understand if you know what you’re doing. Take stock ABC, for instance.

That’s not an idiom. Take stock ABC. That’s the ticker symbol for AmerisourceBergen, a drug wholesaler based out of suburban Philadelphia. ABC trades on the New York Stock Exchange, which is what the “NYSE” represents on this page.

The first line tells you what price a share of ABC last traded at (as of 1:49 p.m. ET today), and how much ABC gained or lost from the previous trading day (last Friday).

That covers everything down to the Previous Close line in the first column. Open means what price ABC first traded at today. That gives you an idea of what direction ABC’s price was heading in earlier, but it’s not as important at what ABC closed at.

Bid and Ask are a little more complicated. For large, heavily traded companies, Bid and Ask usually don’t apply. But for companies whose stock trades sporadically, they’re important. That’ll require us to look at a different company for a while; DEF.

DEF is Claymore/Sabrient Defensive Equity exchange-traded fund (more on these later), which is operated by Claymore, a Chicago financial firm. DEF trades on NYSEArca, a smaller, online-only exchange that features the stocks of small companies.

You’ll notice it’s been a few hours since someone bought DEF. For a decently sized company, that’d be all but impossible. Shares of DEF last traded at 20.77 (these numbers will obviously have changed by the time you read this.) But since then, no one’s been willing to buy it for that much, nor has anyone who owns it been willing to sell it for that little. Buyers are offering 20.77 for more shares, but there are none left at that price. Because no one’s willing to sell it for less than 20.79. The broker who bid 20.77 a share for DEF was willing to buy a lot consisting of 3500 shares at that price. The broker who was asking 20.79 a share for DEF was offering a lot of 2500 shares.

Alright, back to ABC. The 1-year target estimate is what some analyst thinks the price will be a year from now. Treat this with the skepticism it deserves.

Day’s range and 52-week range are self-explanatory. Volume is the number of shares that were traded today. But you can’t multiply Volume by Last Trade to get the dollar value of the number of shares traded today, because not all the shares traded at 24.60. (Of course not, they fluctuated between the numbers listed in Day’s Range.)

The (3m) after Average Volume means 3 months.

Market Capitalization is essentially what the company is worth. There are several ways to value a company, the most obvious one being what someone would be willing to pay for it. But since there’s probably no one who wants to buy every last share of ABC, the best we can do is multiply the price of a share by the number of outstanding shares. Makes sense, right? The chart tells us that ABC is thus worth $7.2 billion.

Which means we now have an idea of how many outstanding shares of ABC there are, which would be 293 million (give or take a tenth of a percent or so, thanks to rounding.) Not that that’s important in and of itself, but it does tell us that about .42% of ABC’s outstanding shares have changed hands today. Which means that 99.58% of ABC’s outstanding shares stayed right where they were. (When the hotties on Fox Business say that “trading was heavy today”, it’s relative. Trading is always pretty light.)

The next two items should be reversed. Let’s start with EPS, which is earnings per share. It’s how much money the company made (according to its annual income statement), divided by the number of outstanding shares. A little multiplication shows that ABC made about $486 million last year, which is excellent, especially considering ABC’s market capitalization. (ttm) means trailing 12 months; in other words, looking at the company’s earnings over the past year.

P/E is price/earnings ratio, which is a indirect measure of what investors think a company’s stock will be worth. It’s the stock price divided by EPS.

ABC investors are willing to pay $14.79 for every dollar of income the company generates annually. In other words, it would take about 14.79 years for the stock to earn enough to pay for itself.

Which isn’t bad. Say you have another investment, like a $100,000 house that you rent out. If it took you 14.79 years to collect enough rent to pay for the house, that’d be an annual rate of return of 6.76%.

P/E ratio is important enough that it warrants its own post, but for now just know that a high number (usually >17 or so) means that the stock is either overvalued, or investors think it’s going to earn a lot more in the future. A number from 0-10 means that the company stock is a bargain, or the company’s going to start earning less. (A negative number means the company’s losing money.) ABC’s P/E ratio just happens to be right around what’s normally considered fair value. P/E ratios depend hugely on what industry a company is in. For instance, a healthy electric utility will usually have a lower P/E than will a barely profitable tech company. Governments regulate utilities heavily, and while they’re profitable, they cost a ton to start up and their profits are usually limited if steady.

That leaves Dividend and Yield. Successful, consistently profitable companies pay shareholders a dividend – sometimes annually, sometimes quarterly, sometimes even monthly. It’s a piece of the profits earmarked just for this purpose. If that sounds unduly generous, keep in mind that the shareholders own the company: it’s their money. They authorize the board of directors to hire executives who’ll authorize dividends, and those directors and executives hold shares themselves.

To keep things uniform, dividends are expressed annually. So if a company happens to pay a quarterly dividend, the number listed here is 4 times that. Yield is the dividend divided by the share price.

Q: Wow, Control Your Cash. You’re really smart. Did I mention that I’m tall, blonde, statuesque and lonely?

A: Very funny.

Filed Under: Investments, Math Tagged With: , , , , , ,

You can’t spell online broker without broke

July 13, 2009

The danger in a direct mail offer is directly proportional to the number of exclamation points contained therein.

This item is a letter from TD Ameritrade, one of America’s premier discount brokerage houses. TD, which has enough spare cash that it can buy naming rights to the Boston Celtics’ arena, stands for Toronto-Dominion – one of the five banks that oligopolizes the financial industry in Canada. On the list of wretched ideas imported from the north, this offering ranks somewhere between SARS and Celine Dion.

Under the guise of offering you Free Investment Ideas! and Low-Cost Trades!, TD Waterhouse is indirectly encouraging you to weaken the economy. The fine print on this offer (not shown, like you were going to read it anyway) requires you to exercise your 100 trades within 60 days.

Buying or selling 100 securities in 2 months is one of the most efficient ways available to squander your money. Let’s examine why. Anyone dumb enough to take full “advantage” of TD Waterhouse’s generous offer is somewhere on a continuum between

-buying 50 stocks and selling 50 stocks and
-buying 100 stocks

in the allotted time. Let’s look at the first extreme example. Is it reasonable to assume that an amateur investor (or even a pro) could select 50 stocks and have them not only increase in value as a group, but increase by an amount greater than the interest to be gained by alternatively putting money in a certificate of deposit? The Dow has gained barely 1% in the past 60 days, but that comes with an asterisk. The two weakest of the Dow’s 30 components, General Motors and Citigroup, were relegated to the minors last month. Their replacements (Cisco and Travelers, respectively) artificially boost the numbers.

Granted, that’s the riskiest possible way to execute the 100 trades. What about the most conservative way? Buying 100 stocks in 2 months certainly fulfills one of the investor’s first commandments – diversify. It’d also be extraordinarily expensive. If you were to buy in the minimum standard quantities of 100-share lots, and only bought stocks that were trading at close to $1 (i.e. in danger of being delisted), you’d be spending approximately $10,000.

$10,000 to buy the most volatile stocks on the board? Sure, you could buy more expensive and thus presumably more stable stocks, but clearly it’ll cost you more. Buying a full portfolio of $5 stocks – which would still fall well short of blue-chip status – would cost you $50,000. If you’ve got $50,000 to invest, there are far better places to put it than in a basket of 100 low-cap companies. A mutual fund, for instance.

One of the most depressing places in the western world is the race and sports book at The Plaza casino in downtown Las Vegas. Most of its clientele is disheveled, grey-skinned men (they’re always grey, regardless of race) trying to make sense of the Daily Racing Form and its columns of jockey names and previous finishes and other minutiae only tangentially related to who’s going to win the 6th at Ruidoso Downs this afternoon. These men (and the occasional schlemiezel of a woman) subside on flat Schlitz and complimentary hot dogs, not to mention tobacco in all its suicidal forms. The only difference between those horse players (or their even more pathetic counterparts, the dog players) and the would-be tycoons plying their trades with TD Ameritrade? At least the race players get to watch their money disappear quickly. Nor do they hold on to an empty faith that they’ll somehow recover their losses, once their chosen mounts finish DFL.

Even despite a 20% “surge” in the last 4 months, the stock market is currently at only its 1999 levels. But bull market or bear, offering 100 free trades only encourages recklessness. It’s inaccurate to say there are literally no shortcuts to building wealth via investing in securities, but buying 1.67 stocks a day hardly lends itself to the cold fundamental analysis that successful investors swear by.

It’s almost always possible to make some money off some particular security investment. Take General Motors – a company that continues to be emblematic of the United States itself, for richer or for poorer. Could you build wealth with GM stock? Absolutely. Buy it on October 1, 1974 at 15 3/8. Sell it a quarter-century later at 87. Then immediately get certified as a United Auto Workers union member, so that when the stock trickles down to 27¢ and a future American president rearranges the traditional hierarchy of creditors to correspond with levels of generosity shown toward his campaign, you’ll be at the front of the line when it comes time to claim liquidated assets.

Obviously, these numbers were researched retroactively. That should tell you something. TD’s direct mail piece is the equivalent of the local methamphetamine dealer offering 100 free hits (or tabs, or tokes, or injections, or whatever units meth is measured in.) Not only is there no free lunch, there are no free trades. Especially not 100 at once.

If you’ve made it this far in the post then clearly you figure that by now, we’re saving our most fiery derision for TD Ameritrade itself, right? Wrong. TD Ameritrade’s just trying to make a buck. A licit buck that serves the purpose of extracting money from its idiots. TD Ameritrade is doing nothing illegal nor immoral. And yelling “stop me before I throw away my money again” doesn’t change that. Producers can’t produce demand: they can only produce products. Without users, there are no dealers. Without smokers, there are no tobacco conglomerates. Without a Lindsay Lohan or a Josh Hamilton, there’s no need for a Frank Lucas or a Ricky Ross. Without an Antão Gonçalves, there’s no Songhai Empire selling its citizens into slavery. And without idiots thinking that the stock market is a fecund garden ready to be harvested from the comfort of a laptop, there’s no purpose for a TD Ameritrade and its ridiculous offer of 100 free trades.

But hurry. This offer expires today.

Filed Under: Investments Tagged With: , , , , ,
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