In the next few articles, the term "earnings" and "earnings per share" will be used very frequently. In fact, in the analyses that follow, earnings will be paramount; they'll be used in some shape or form pretty continuously. The main focus will be on earnings per share. We're focused on buying shares of common stock, so normalizing the earnings to the number of shares makes sense.
So before discussing Earnings per Share or EPS, the term should be defined. EPS (Earnings per Share) is Net Income (after dividends have been paid on preferred shares) divided by the number of shares outstanding. Since the number of outstanding shares fluctuates a lot, the "profit" is actually dividend by the average number of outstanding shares. Each of those two new terms needs to be discussed.
This article is not even near completion; however, a few people noticed it in the blog line-up and asked for a preview. So, I have decided to publish it early, but it will be updated pretty regularly over the next six to eight months.
DRIPS are dividend reinvestment plans, whereby some or all of a cash payment is reinvested as shares of common stock. They allow investors to benefit from a compounding effect: earning dividends on previously issued dividends. The advantages and disadvantages of DRIP programs are discussed later. The process of how to set up a DRIP directly with a company; that is, without using a brokerage service, is also described.
There are two types of option: puts and calls. Each option contract has a similar structure. For a given company, only the price and time period differ. Let's used the hypothetical XYZ Company again and discuss a Call Option and a Put Option.
Net Income is another term for profit. You'll hear a range of different was of discussing income; for example, operating income is a term that's discussed often. However, Net Income has a special meaning. In another paper called Dollars and Sense, a company called Clayton Homes was used as an example. Clayton Homes no longer exists as a public company; nonetheless, its income statement from 1999 will be used as an example.
A margin account is something similar to a checking account with overdraft protection! With a margin account, you can purchase shares even if you don’t have cash; the only thing you need to have is marginable securities in your account.
]]>Short selling is the sale of something that you don’t own. It’s most often associated with the sale of common stock. You’ll hear on TV reports about a “short squeeze,” or that the shorts are hurting.
]]>The best way to start off your research on a company is to get ther annual report. The annual report is a publication from the management of the company to shareholders. The report details what the company does and what it plans to do; key news; who the main players are; a list of the board of directors; financial information with some explanations. I’ll touch on the annual report later.
]]>According to Peter Lynch, it’s staring you right in the face! Peter Lynch has the philosophy that you know from your experience at work or at home, who provides the best service. Chances are when you investigate further, you will fine an excellent company behind that superb service.
The best way to find a good company is to look for one. I know that this statement is trite, but it is also very true. In the next few chapters you will learn about the NAIC methods for analyzing companies. One thing will be clear: good companies jump off the page at you. Let me tell you how these tools work; you’ll get more information as we proceed.
When listening to the national news, radio stations or other financial news outlets, one often hears about the Dow, the NASDAQ, the S&P, the Russell the Wilshire and so on. Each of these things is an “index”: a snapshot of the market or part of the stock market.
]]>In this section we'll look at some other definitions. For example, it's important to know the fiscal year for the company; it may not coincide with the calendar year that we all know and love. An introduction will be given to the business cycle; understanding the business cycle is important to learning about the main characteristic of a growth company: it ignores the cycle. We'll take about recessions and who in the US decides if one has hit. We'll touch on the life cycle of a company and finally discuss mutual funds and professional money managers.
This section delves into two questions often asked by investors: what is a spread and what is a stock split?
]]>Nowadays there are a number of ways you can buy or sell a company; however, no matter how the trade is initiated, the ensuing sequence of events is the same.
Let’s say you are sitting at your computer and you want to buy 500 shares of Microsoft (MSFT). What you have to do is to give instructions to your broker. In this example, the instructions are being given electronically; however, if you called the broker or visited her office, the same information would be required. Keep one thing in mind: in most cases, the firm you use is an "introducing broker": they take orders but don't execute them. They're somewhat akin to a waiter or waitress: someone else does the cooking.
]]>Before we talk about exchanges, let me just tell you what a broker is. If you’ve ever bought or sold a house, you know already. A broker is someone who brings a buyer and seller together and facilitates a transaction between them. A stockbroker is someone who facilitates the buying and selling of shares and receives a commission for the transaction by way of compensation. A stockbroker is not a financial advisor (though some are certified as such), or a securities analyst.
Many discount brokers are actually "introducing brokers," meaning that they take orders but the trade is actually executed by someone else--a clearing firm. If you are working with one of these small, online discount brokers, you'll often receive statements from a clearing broker; the introducing broker passes orders through to the clearing broker.
There are millions of corporations in the United States, but only a small percentage is "public." That is, the ownership interest in the company?the shares of its common stock?may be bought and sold on an exchange or market. Most corporations are closely held; that is, there is a well defined number of owners of the company and these owners don't change radically over time. Most companies can survive and thrive without the added expense due to regulatory oversight of "going public"; that is, of creating the ability to sell shares to any interested party?the general public.
]]>There are basically two ways to get capital, which is funds for a company: you can borrow it or you can ask people for money. Typically, if you ask people for money, they'll want something in return--an ownership interest in the company. So by asking people for funds instead of borrowing, you can raise money be selling part of the company to other people. These people are then shareholders.
It’s hard to answer this question without addressing the issue of “what is a company?” first. So, let’s start there.
Let’s say you had a great idea and decided to try and profit from it. You could set up a separate activity, a company, let's say, to do just that. The company would be formed with a goal in mind, an objective of some type, with the obvious intent of trying to make a profit for the owner. Well, there are three basic ways that one can establish a company: (i) continue to be or form a sole proprietorship, (ii) create a partnership or (iii) establish a corporation. The latter two exist to raise capital?funds to exploit your idea so you and your investors can profit?there's an additional valid reason to form a corporation.