Inside Online Investing: A Stockbroker Tells You What You Really Need to Know
From Chapter 8 - How to Read Stock Quotes
What Makes a Ticker Symbol Tick
You can tell what exchange a stock trades on by the number of letters in its ticker symbol. Stocks traded on the New York Stock Exchange have one, two or three letters in their symbols. Stocks traded on the American Stock Exchange have three letters. For example:- Sears Roebuck
- General Motors
- Exxon-Mobil
- Xerox
| S | ||
| GM | ||
| XOM | ||
| XRX |
Having a one-letter ticker symbol is something of a status symbol. There can only be twenty-six at most, after all, and one-letter symbols were given to the most actively traded stocks to make it easy on telegraph operators. It's kind of like being a celebrity who only needs one name, like Charo.
Stocks that trade on the Nasdaq and over-the-counter exchanges have four-letter ticker symbols. Some examples:
- Microsoft
- Cisco Systems
- Intel
- Ericsson
| MSFT | ||
| CSCO | ||
| INTC | ||
| ERICY |
As you can see, Nasdaq ticker symbols always have four letters except with they have five. That fifth letter, if there is one, has a special meaning. Here are some of the more commonly used fifth letter suffixes:
|
A |
Class A shares |
Q |
Filed for Bankruptcy |
|
B |
Class B shares |
W |
Warrants |
|
D |
Newly Issued Shares |
X |
Open End Mutual Funds |
|
E |
Delinquent Filings |
Y |
American Depository Receipts |
|
F |
Foreign Ordinary Shares |
|
|
If the stock's ticker symbol has five letters ending with an F or a Y, you know it's a foreign stock. Mutual funds have five letter symbols that end with an X.
Letters D and E sometimes get attached to the end of a four-letter symbol temporarily. That can get confusing because when the symbol changes the old one doesn't work anymore, and the computer will return a message like “symbol not found”. Sometimes people think the company disappeared. Letter D means "newly issued shares" and sometimes gets attached to a symbol after a stock split or reorganization. After a while, the newly issued shares aren't so new anymore and the D gets dropped. Now anyone who uses the five-letter symbol gets "symbol not found" and has to go back to the four-letter symbol. The ticker gets an E attached to the end if the company has not filed its mandatory reports to the SEC by the deadline date (that's usually not a good sign). When they've completed their filing, the E is dropped.
There are times when two letters have to be added to the ticker, such as when a bankrupt company is also delinquent in filings (sounds like a sinking ship to me). Well, five letters is the limit on any ticker, so the symbol has to be changed to a five-letter symbol where the last two are Q and E.
Let's Crunch the Numbers: Technical Quote Information
The most important things a stock quote will give you are of course the current and historic prices of the stock you're looking at. So let's look first at the technical information – that is the information that describes this stock's trading activity.
Let's look at each bit of information at a time. Not every quote server is going to provide all the possible information you might see, but as a ready reference for you I will include what you might see.
- Last Trade - or simply "Last". This is the most recent price at which this stock traded at the time you got the quote. Some stocks trade continually, so this was the very last price traded at the instant you got the quote. If you get this quote when the market is closed, then this is the very last price the stock was traded at this day, and that’s what will be quoted in the newspapers.
- Change - or sometimes "Net Change". This is the difference between the last trade just quotes and the previous business day's closing price. The change is preceded by a plus sign if it’s greater than the closing price or a minus sign if it's less. From that figure, we say if the stock is up or down.
Ex.: International Paper (IP) last traded at 37.70, down 1.82. That means the last trade on IP was at $37.70 and that is $1.82 lower than the previous day's closing price. Therefore IP must have closed the previous day at $39.52.
- Previous Close - The closing price as of the previous business day. Of course that's also the difference between the last trade and the net change.
- Percent Change - Some quote servers will also give you the percentage difference between yesterday's closing price and the last trade. In the last example, if IP fell $1.82 from the close of $39.52 and is now at $37.70, the change is approximately minus 4.5%.
- Volume - This is the cumulative number of shares traded so far that day. Every morning, the volume starts at zero and climbs from there.
- Bid and Ask - These are the two critical numbers to look at when you trade, because they tell you what you can trade at right now.
- The bid price tells you what the highest price someone is willing to pay for a stock at this moment, therefore this is the price you'd expect to get if you enter a sell order now.
- The ask price (sometimes called the offer) is the lowest price someone is willing to sell this stock right now. That means if you place a buy order right now that's what you'd expect to pay.
Ex.: Back to the IP quote, the last trade was $37.70, and while that's an important number - it's the price of the most recent execution - it is history now. If I'm trading right now, I want to know the current quote more than I want to know what just happened (even if that was only seconds ago).
IP Last: 37.70 Chg: -1.82 Bid: 37.70 Ask 37.71
This is important. Even though shares of IP most recently traded at $37.70 I will probably not be able to buy them at that price at this instant. If I want to buy right now, someone is willing to sell his or her shares at $37.71. If I want to sell right now, someone will buy them from me at $37.70.
The point here is that the "last trade" figure does not tell me everything I need to know. If I only looked at the last trade and placed a sell order, I might be very disappointed to see that I got four cents a share less than I expected.
To better illustrate this quoting process, let's take a look at the classified ads in the newspaper under autos and you’ll see something like "For sale: '68 Dodge Dart, $7800 OBO". The ask price for the Dart is $7,800. If someone came up saying, "I gotta buy a Dodge Dart right now for whatever it’s going for" he’d pay $7,800 and go home with a Dart. Well, it’s a little more likely that someone call on the ad with a counter offer. The first caller may offer $5,000, the second caller may offer $5,250, and the third may offer $5,750 and so on. Each time someone calls in, the bid price on the Dodge Dart keeps going up. The seller now has to decide whether or not he'll take the highest bid, or hold out for his price or a better bid. After the third call, the Dart is now bid at $5,750 and asking $7,800.
- The difference between the bid and the ask price is called the spread. The spread is the profit center for securities dealers, who buy and sell from their own accounts. Generally speaking, the more thinly a stock is traded, the wider the spread will be. Conversely, the more actively a stock is traded, the more likely the spread will be narrower.
- Size - This tells you how many shares are wanted to buy at the bid price, and how many shares are offered for sale at the ask price. The number of shares is quoted in lots, and each lot equals one hundred shares. The size is usually quotes as two numbers, the first is the size of the bid and the second is the size of the ask. Coming back to the IP example:
IP: 37.70 -1.82. Bid 47.21 Ask 47.26 Size 40 x 3.
If you really want to sound like a pro, you can say IP is "bid at 37.70 ask 37.71, 40 by 3". This says that there are orders to buy as many as 40 lots (4,000 shares) at $37.70 and 3 lots (300 shares) offered for sale at $37.71.
Size is used as a measure of liquidity at these quoted prices. With only 300 shares being offered for sale at $37.71, it's quite possible and perhaps likely that one buyer could move the market by buying up those 300 shares and "taking out" the supply at the current ask price. With all the shares offered for sale at $37.71 now bought, the ask price is likely to move up. We'll see this process in more detail in Chapter 11.
Note: Some quote servers will quote the two numbers separately as "bid size" and "ask size".
- Day High and Day Low - The highest trade and the lowest trades made so far today.
IP 37.70 -1.82 Day High 39.35 Day Low 37.40
So far today, some people paid as much at $39.35 for IP, and some paid as little at $37.40. The price of IP fluctuated by nearly $2 throughout the day.
- Year High and Year Low - This is the highest and lowest prices these stocks have traded over the last 52 weeks. IP during the last 52 weeks was as high as $46.20 and as low as $30.70. The time period covered is always a rolling 52 weeks, so as each new week comes up, the very first week in the period covered is dropped.
- Tick - Each trade that takes place on the exchange is called a tick. It’s like one click on the ticker tape. The price of the last trade is compared to the one immediately prior. If the last is higher than the one immediately prior, the stock is on an uptick. If the last trade is lower, the stock is on a downtick.
- Quote servers will usually display the tick as a plus or minus sign. Sometimes the tick is quoted separately and sometimes it puts a plus or minus sign is in front of the last trade. If the last trade on IP says -37.70, it means the last trade reported at $37.70 puts the stock on a downtick, so the trade immediately prior to the last trade must have been higher than $47.25.
- Some quote servers also quote tick volume, which is how many shares traded on the last transaction, and number of ticks which is the number of transactions reported so far that day.
- Some quote servers will also quote the time of the last trade. It’s always quoted in Eastern Time, and may be on the standard or the military clock (i.e. last trade was at 1:30 or 13:30).
- The quote server may also indicate on which exchange this stock primarily trades. This will almost always be the New York Stock Exchange (NYSE), American Stock Exchange (AMEX), the Nasdaq, or the OTC Bulletin Board.
Putting the Fun in Fundamental Analysis
You can start analyzing a company right here from the stock quote. Some quote servers like Yahoo! let you choose between simple and detailed quotes. If you're going to do some research, you will need the most information you can get, so select a detailed quote.Let's take a look at some fundamental quote fields now.
- Earnings Per Share or EPS - A corporation strives to make profits, and you may want to buy shares in that corporation for a piece of those profits. Since you buy a specific number of shares, it may be useful to know how much each share earns. Take the net profits the company made after taxes and divide that by the total number of shares in the corporation.
So let's look at the drug company Schering-Plough. Last year (over the last four quarters) Schering-Plough earned $2,423,000,000 net. That’s a nice chunk of change, so you want to get a piece of the action. But how much does each piece contribute towards that $2.4 billion? Well, Schering-Plough has nearly 1.5 billion shares outstanding. Each share you buy is one and a half billionth of the total company (kind of puts it in perspective, doesn't it?). So let's do the math.
$2.4 billion in earnings/1.5 billion shares = $1.64 per share
Each share you buy contributed $1.64 towards that $2.4 billion last year.
Usually, Earnings Per Share is calculated using the actual earnings over the last 12 months. Sometimes, however, you may hear about forward earnings. That means that instead of using the actual last twelve months, the quote server may use the last six months of actual earnings and the estimated earnings of the next six months. Obviously this allows some room for error, but a lot of what drives stock prices isn't the earnings that's already happened, but the expectations of future earnings.
- Price to Earnings (or P/E) Ratio - We’ve already figured out how much each share contributes to the total earnings. Now, let's figure out how much you have to pay to get a piece of the action. The P/E Ratio relates the company's earnings per share to the current market price.
Schering-Plough closed yesterday at $48.32 a share. We've already figured out that each share earned $1.64 last year. So if we divide the current market price by the EPS:
$48.32 / $1.64 = 29.64
So the market values Schering-Plough right now at nearly 30 times its last year's earnings. This value is based on overall perceptions about Schering-Plough's rate of growth; that it will grow fast enough to warrant paying 30 times last year's earnings.If earnings are negative (meaning they lost money), the quote server may show P/E as a negative number, or may say "Not Available".
- Price to Sales (or P/S) Ratio - You might see this as Price to Revenue Ratio. It's the current market value divided by the last 12 months sales. Sales or Revenue is how much the company took in (the top line number), and Earnings is how much they kept after expenses (the bottom line number).
3M Corp. had $16.1 billion in sales last year. They have 391.3 million shares outstanding. Divide shares into sales and each share took in about $41.15 in revenue. 3M Corp. (MMM) is trading around $120 a share. $120 / $41.15 is about 2.92.
- Dividend - A dividend is each shareholder's paid-out portion of the company's profits (a corporation's board of directors determines how much of the profits will be paid out, and how much will be put back into the company). This will tell you how much of a dividend each share received over the last year.
General Electric (GE) for example paid 72 cents dividend for each share last year. Like most companies, GE pays its dividend quarterly or every three months. If we do the math, we can figure that GE paid 18 cents a share every three months over the last year. If you own 100 shares of GE, you get a check for $18.00 every three months. Note: some quote servers report the quarterly, not annual dividend.
Understand that this is a "backward" looking figure, and next year's dividend payments will not necessarily be the same as last year's. Every three months the company's board of directors meets and votes on what the dividend payment will be. Hopefully they vote to increase it fairly regularly, but not always. AT&T recently went from paying 24 cents a share dividend to paying 4 cents, which really reflects how Ma Bell has changed. They used to be a utility, now they're a telecom company, and decided they had to pay a dividend more in line with other telecom stocks.
Companies are not required to pay a dividend. Rather than pay cash to shareholders, the board decides to put that money back into the company. Growth companies generally pay little to no dividend. Microsoft for example has never paid a cash dividend until very recently, and now they have a lot of cash to fund acquisitions or to weather out economic slowdowns.
- Dividend Yield - Sometimes just "yield". What kind of return would you get on your money if you buy a stock at the current price? We can figure that out by taking last year's dividend payment and dividing it by the current price per share.
Infosys Tech (INFY) paid 16 cents last year, and is now trading at $66 a share. $0.16 / $66 = .0024 or 0.24%. So why would anyone invest in Infosys when it yields just one quarter of one percent? Obviously it's not for the great dividend yield, so it must be for the company's growth prospects that would hopefully more than make up for its low dividend.
- Shares Outstanding - tells you how many shares this company has out in the public hands. Some companies are much larger than others are of course. While Amazon.com has 25 million shares outstanding, General Electric has 41 billion shares.
- Market Capitalization - Market cap is figured by taking the current price per share times the number of shares outstanding. In theory, this would be what it would cost to buy the whole company.