As a potential investor, you are going to have to learn how to treat the stock market as your playground. That might be a very light way to look at a platform where billions of dollars are traded every year. But if you want to succeed as an investor, you need to develop a certain degree of comfort when working with the stock market. Without this kind of “coziness” with the market, it will be difficult for you to make sound investment decisions.
One reason for this is that the stock market has a language all its own that you have to understand. The old adage “When in Rome do as the Romans do.” While you need not follow what other investors will tell you, you do need to know how to understand stock-market speak. It’s going to be full of many words that are quite new to you so be patient and persistent. You will eventually be speaking the language—and more importantly, understanding the charts and reports that companies will dish out which will help you make good investment decisions.
To become familiar with the market’s movements and the market as a whole, you can begin by reading the business section of a newspaper or news website. It’s understandable to prefer the sports or entertainment or lifestyle section but the business section is where you can find current information about the stock exchange and the companies that trade there.
Another reason why you should read the business section every day is because this is your source of information about companies that may be potentially good investments. For example, you’ll learn more about a new vehicle that a company is going to be releasing soon which can potentially generate huge sales or about a breakthrough drug about a disease that is sure to get a lot of revenues for the pharmaceutical firm because of the huge number of patients who will need it.
Now you have to remember that a news article is just a reporting of the facts. This should be your stepping stone towards doing a more in-depth research of the company to determine if it is indeed a worthy investment.
A news article should lead you to the library and/or the Internet. These are the two best places in the world where you can deepen your knowledge about a particular company. In the library (whether in your university or community), you can have free access to a lot of resources about various firms. For example, you can read the Value Line Investment Survey which analyzes almost 2,000 firms. There are also other sources that you can get from your librarian to enhance your knowledge.
The Internet is a convenient place to start being comfortable with the stock market. One advantage that online research has over library research is that the information you’ll find about a company is updated, even to the very minute you are surfing the web. With paper research, you will have to take the information you find as of the date of printing of a particular publication. If something happened between the date of printing to the time you are doing your research that could have affected the stock price, you might be making an investment without the benefit of complete knowledge.
However, you also need to be careful when doing Internet research. There are literally millions of websites there and not all of them give correct and reliable information. In fact, many of these websites advertise investment services and you may just end up losing money if you get information from them.
There are a lot of reputable internet sites, though, that you can rely upon to give unbiased news and information. Financial websites like Forbes, Bloomberg, MarketWatch, Nasdaq, Yahoo! Finance and the US Securities and Exchange Commission or SEC website provide free information that you can use to be gain familiarity with the market.
The SEC website provides the annual and quarterly reports for firms that are publicly-traded. You are going to have to read these reports before you make the decision to buy their stock or not.
A newspaper lists down each stock that trades on such platforms as New York Stock Exchange and the Nasdaq. You will generally find the following chart on the newspapers and it’s important that you understand what the figures and letters mean: (Note: Stock name and figures are for illustrative purposes only).
High Low Stock Div Yld PE Vol High Low Close Chg
100 90 ABC 1.02 1 20.6 3500 100 95 98 +0.5
Stock. This refers to the name of the stock. In this case, our imaginary stock is ABC.
52-Week High & Low. This refers to the highest and lowest price which the stock has traded in the past 52 weeks or one year. In this case, the highest price at which stock ABC has traded is $100 while the lowest is $90. You can utilize this information to check the fluctuation of the stock in the past year. If the stock is now closely trading at its lowest level, you might want to check out its other fundamentals to see if it is still worth investing in. Sometimes, economic or political conditions may have brought about the decline and not really the company itself. If this is the case, it might be a good idea to acquire the stock when it is sold at a lower price.
Div. Div refers to dividend or more specifically, the dividend amount paid per one share that an investor owns. In this case, company ABC gives a dividend of $1 per one share. That means that if you have a thousand shares of the company, you would have a dividend of $1000 each year. If that dividend amount is given quarterly, you can expect to get $250 every four months.
Yld. This is calculated by dividing the dividend by the stock’s latest closing price. If the stock has a dividend of $1 and it is divided by a closing price of $98 then you get a yield of 1.02.
P/E. This refers to the price-to-earnings ratio. This is computed by dividing the closing stock price of the company by its earnings per share the year before. This is a gauge of how the stock’s recent price measures up against its earnings. If company ABC is currently trading at $97 per share and its earnings over the past year is pegged at $4.7 per share then its PE ratio is 20.6. Large cap stocks should have PE ratios that are lower than 20 while for other securities, the PE ratio should not go above 40.
Also, PE ratios should be used to compare companies in the same industry. You can’t compare the PE ratio of an airline company to that of a pharmaceutical firm. However, you can compare the PE ratio of one airline to another to determine which one is worth investing in.
Vol. This refers to the number of shares that are traded the day before. Be alert to sharp falls or increases in the stock volume of a company. These are indicators that something significant is happening. It could be that people are buying more of the stock because they believe it has potential or that they are unloading their holdings because they think that a company is ready to fold. Whatever the reason, be alert to volume changes and find out what is causing it. Decide to buy or sell only after you have done the necessary research.
High & Low. High refers to the highest price that the stock traded in the day before while low refers to the lowest price at which it traded also the day before.
Close. Some newspapers label this category as Last and this refers to the last price of the stock the day before. In the case of ABC, the stock closed at $98 per share in the preceding day.
Chg. Chg stands for change or net change. This refers to the difference in the closing price of the stock and the last price in the preceding day. In company ABC’s stock, the net change is +0.5. This means that since the closing price listed is $98, then the stock closed 50 cents higher than the day before when it closed at $97.50.
The table presented above is just one of the many tables that you will have to be familiar with if you want to move fluidly and comfortably in the stock market. That will be given in the reports that will follow. However, you should be careful not to be very paranoid when you are monitoring these stock market listings. Remember that you are in this for the long haul so daily fluctuations in stock should not be a cause for concern. It is the monthly and yearly performance that you will want to watch out for. It also prevents you from being so stressed about your stock investments.
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