Silicon Investor (SI) -- The First Internet Community

STOCKTALK

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor. We ask that you disable ad blocking while on Silicon Investor in the best interests of our community. If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.

Pastimes : Stock & Related Info. Enter here once and be regular! -- Ignore unavailable to you. Want to Upgrade?

To: WEBNATURAL who wrote (36)	2/3/1999 8:44:00 AM
From: WEBNATURAL	Respond to of 125

Handy notes to refer back to: 10 Things Good to Know! 1. The stock market may not always seem rational, but it's usually right in the long haul. Over the short term, the market moves based on enthusiasm, fear, rumor and news. Over the long term, though, it is mainly earnings that determine whether a stock's price will go up, down or sideways. 2. Individual stocks are not the market. A good stock may go up even when the market is going down, while a stinker can go down even when the market is booming. 3. Prices are set by where a company appears to be going, not where it's been. Investors buy stocks with the expectation that they'll be able to sell them for higher prices at some time in the future. That means they expect that earnings will likewise grow. And if they don't, the best past performance in the world isn't going to help. 4. A stock's underlying value is not always reflected in its price. Because investors judge a stock based on its probable future profits, a $100 stock can be viewed as cheap if the company's prospects are bright, while a $2 stock can be expensive if its prospects are dim. 5. A little homework can go a long way. You can often get a sense of whether a stock is over- or undervalued by comparing its specific performance ratios, like price-to-earnings, debt-to-equity, price-to-sales and return on equity, to those of other companies in the same industry or to the market as a whole. 6. A quick way to judge whether a stock is expensive or cheap is to compare its P/E ratio to its projected growth rate. The Wall Street analysts who track stocks specialize, among other things, in predicting how fast a company's earnings will grow. By matching predicted five-year growth rates with price/earnings ratio (based on estimates for the year ahead), you can get an idea whether the stock is overvalued or undervalued: If the P/E is greater than the projected growth rate, the stock is pricey; if it's below it, the stock is cheap. 7. Don't ignore dividends. During a bull market like the one of the mid-1990s, investors sometimes sniff at dividends -- the small share of profits that some companies distribute to their shareholders one or more times a year. But when the market slows, dividends carry more of the load. Case in point: Between 1926 and 1997, reinvested dividends produced nearly half of the market's 10.9 percent average annual gain. 8. The Internet has become the best source of free information on stocks. Thanks to a proliferation of financial data on the 'net, the average person today can tap into information that would have been available only to investment professionals 10 years ago -- and much of it is free. 9. Borrowing money to buy stocks can increase your reward -- or your loss. Brokerages will typically lend up to 50 percent of the value of the stocks you already own free and clear towards the purchase of new shares, either in those or in other companies. This is known as "buying on margin." It can goose your returns if you bet right, and hurt you badly if you don't. 10. It's smarter to buy and hold good stocks than to engage in rapid-fire trading. Retail investors pay commissions and fees that total an average of 6 percent for one round-trip trade -- that is, to buy and sell the same shares of stock. So if you trade frequently for small gains, the cost of those trades can erode -- or even erase -- your profit on the transactions.

To: WEBNATURAL who wrote (36)	2/3/1999 8:46:00 AM
From: WEBNATURAL	Respond to of 125

More Good Thing From "The Man"! Legendary investor Benjamin Graham, used to talk about the stock market as a living, breathing thing. Mr. Market, he called it. "Mr. Market is very obliging indeed," he wrote in The Intelligent Investor, his classic 1949 book. "Every day he tells you what he thinks your interest is worth and furthermore offers to buy you out or to sell you an additional interest on that basis. Sometimes his idea of value appears plausible and justified by business developments and prospects as you know them. Often, on the other hand, Mr. Market lets his enthusiasm or his fears run away with him, and the value he proposes seems to you a little short of silly." That, in a nutshell, is the story of stocks. Some days their prices make sense. Other days they seem ridiculously expensive or cheap. The key to investing is to determine which is which on any given day, and then take advantage of it. That's how Warren Buffett, a former student of Benjamin Graham, made his billions. And that's what this installment of Money 101 will begin to equip you for. For starters, when you purchase a share of common stock, you are buying a piece of the company. The firm sold the shares originally in order to raise money -- sometimes at its initial public offering, or IPO. But since then, the shares have traded freely in the open market, rising or falling in price depending on the fortunes of the issuer. Your stake is generally very small. If you buy 100 shares of AT&T at a cost of several thousands of dollars, for example, you own just 0.0000001 percent of the firm. But even the smallest holding can occasionally bring huge rewards. Consider Microsoft. If you'd picked up 100 shares of the company in 1986, when the stock was first sold to the public, your piddling 0.000003 percent stake in the fledgling software firm would have cost you $2,100. By late 1998, after seven stock splits (see below), those 100 shares would have grown into 7,200 shares. And though that would have represented an even tinier percentage of the company than 100 shares did in 1986, that sliver of ownership would have grown in value to more than $800,000. Now obviously few people could afford to buy stock at $800,000 a share. That's why companies generally declare a stock split when the price climbs to somewhere between $60 and $120 a share. A two-for-one split, for example, means that if you used to own 100 shares, you now own 200. But the value of your total holding remains the same because the price of each individual share is cut in half. To understand why the value of a stock can rise so much over time, just consider what's happened to the company in the meantime. When you bought those 100 shares of Microsoft in 1986, your share of the ownership stood for about $135 a year in annual earnings. Twelve years later, it stood for $16,560. No wonder Mr. Market valued Microsoft so highly. In fact, while news reports and rumors may drive a stock's price up or down suddenly, the most important long-term factor influencing the price is earnings. If a company's earnings rise over time, its stock price will too. You can make money on stocks in two ways. The most important is the one we mentioned earlier: the price appreciation that occurs when a stock keeps rising. But many companies also pay yearly dividends, or cash payments that represent a portion of profits. The two kinds of earnings are treated very differently by the tax man. The appreciation in price is not taxed at all so long as you continue to hold the stock. It becomes taxable only when you sell the stock and realize a capital gain (the difference between what you paid for the shares, plus commission and fees, and what you received when you sold), and then only at the prevailing capital gains tax rates, which often are lower than the income tax rates. Your dividends, on the other hand, are taxed along with the rest of your income each year at a rate that's determined by your tax bracket. Thus, for buy-and-hold investors, stocks represent a great way to build up profits that can remain tax-free until you sell.

To: WEBNATURAL who wrote (36)	2/3/1999 8:48:00 AM
From: WEBNATURAL	Respond to of 125

More Good Info About Diversification! Avoid concentrating all your money in any single stock or type of issue. Few stocks perform like Microsoft, which has doubled, on average, every 14 months. Nor are all investors beating the bushes to find the next Microsoft. Why not? Because for every stock that delivers turbocharged returns, there are hundreds or thousands that simply dry up and blow away. So rather than risk plowing all their money into the next high-tech train wreck, most people fill their portfolios with a variety of different types of stocks that have different profiles of performance. Here are five of the major types: Growth stocks. Microsoft is a classic growth stock -- but any stock with rapidly rising profits fits the bill. Typically growth stocks trade at price/earnings ratios that are equal to if not greater than their expected growth rates (for more, see "Identifying bargains"). While growth investing can be highly profitable, it can also be risky because the same investors who love a stock when its earnings are expanding smartly may bail out in a hurry if the growth rate slows. That, in turn, can drive the stock's price through the floor. Momentum stocks. Think extreme growth investing. Momentum investors buy stocks in companies with earnings that are growing at increasingly higher rates. Indeed, some momentum investors will buy a stock simply because its price is going up. This can be a very lucrative investing strategy, but it only works for limited periods of time (as short as hours to minutes, for some day traders). The risk is that it's tough to pick when that time will end. And when the music stops, as it invariably does, anyone left holding an unloved momentum stock could see its value disintegrate. Value stocks. Another way of saying "cheap stocks." These are simply issues that are undervalued compared to their real earnings potential. The market is down on them because their earnings have taken a temporary hit, their product line is in a momentary lull, or some other passing event has knocked their price down. The key word here is "passing." A value investor bets that whatever ails these companies will end, and that -- given enough time -- their price will rise to reflect their true value. Oddly, value stocks are sometimes growth stocks that are past their prime. For example, IBM, one of the great growth stocks of the 1970s and '80s, fell from grace in the early '90s after several years of disappointing earnings. But some value investors determined that the company's earning power was much greater than Mr. Market was giving it credit for. Over the next few years, as that proved true, other investors clambered aboard, and the company became a growth stock once more. Cyclical stocks. Some stocks, like those of steel makers or oil producers, are considered cyclical because their companies' services or products aren't in constant demand throughout all parts of the business cycle. For example, steel makers see sales rise when the economy heats up, spurring builders to put up new skyscrapers and consumers to buy new cars. But when the economy slows, their sales lag too. And steel stocks, which rode up on as investors anticipated the boom, ride down on expectation of the bust. Investors in cyclical stocks are typically betting on the direction of the economy. Income stocks. Stocks that pay relatively high dividends, like utilities and real estate investment trusts (REITS). Income stocks are generally favored by conservative investors who want a steady stream of cash from their investments and count on the dividends to buoy the stock's price if the market takes a spill. Not all high-dividend stocks are good investments, however. If a company's stock falls because of poor performance, its dividend, when expressed as a percentage of its stock price, appears to shoot up. But if the performance continues to drag, the company may have trouble paying the dividend and be forced to cut or eliminate it altogether. In that case, the final prop for an already troubled stock will be knocked out. If you only began investing seriously over the last few years, you probably haven't given dividends a second look. After all, many of the great stocks of the early to mid '90s, like Dell, Microsoft and Cisco, didn't even pay dividends. And between 1990 and 1998, the aggregate dividend yield on the Standard & Poor's 500-stock index fell from 3.7 percent a year to as low as 1.4 percent. Why? The simplest explanation is that many companies just didn't have to offer dividends in order to get investors to buy their stock. After all, what's an extra 1.4 percent when the market is posting double digit gains year after year. Well unless our depleted ozone layer is replaced with laughing gas, the stock market won't post double-digit gains forever. And whenever that happens, dividends are likely to resume a more important role. Indeed, nearly half of the market's 10.9 percent average annual gain between 1926 and 1997 came from reinvested dividends. Dividends can also offer a clue as to where management thinks a company's earnings are headed. To understand why, consider what a dividend actually represents. Once a year, a company's board of directors votes to distribute a portion of its profits to shareholders. In doing so, they are, in effect, casting a vote of confidence in the business's long-term earning power. If the outlook is glum, chances are they'll cut the dividend or eliminate it, so the company can use the precious cash for more pressing needs. But if the outlook is good, and even despite any near-term difficulties, they'll vote to maintain or even increase the payout.

To: WEBNATURAL who wrote (36)	2/3/1999 8:50:00 AM
From: WEBNATURAL	Respond to of 125

Identifying Bargains! Here are some of the fundamental ways to size up a stock. How did legendary investor Warren Buffett make his money? Charles Munger, vice chairman of Buffett's company Berkshire Hathaway and a four-decade confidant, offers the following clue: "The way to win is to work, work, work, work and hope to have a few insights. How many insights do you need? Well, I'd argue that you don't need many in a lifetime. If you look at Berkshire Hathaway and all of its accumulated billions, the top ten insights account for most of it." This course can't offer Buffett-style insights, naturally; those you need to come up with on your own. But we can describe some of the basic ways that investors analyze stocks to determine whether or not they are good buys. What follows is an overview of some of the most common methods; we'll have more to say about several of these in future Money 101 lessons. Broadly speaking, there are two ways to approach stock analysis: you can either look at the technical indicators for a company, or at its fundamentals. We can't cover technical analysis in detail here -- it deserves a lesson unto itself -- but in essence, it's a highly mathematical way of evaluating investments. A technical investor might compare the performance of a number of stocks over the past year or so, for example, in order to find ones that appeared to be breaking out of their recent trading ranges, and then buy those issues in what amounts to a momentum play (see "Different strokes"). Or she might construct a computer model of the overall market and its relation to other economic factors, such as industrial capacity utilization, currency values or interest rates. The model would be set up to yield "buy" or "sell" signals for the market as a whole or for individual groups of stocks. Properly used, technical analysis can be a very powerful tool -- especially so for determining when to buy or sell. The alternative approach, fundamental analysis, is pretty good for helping determine what to buy or sell. Here, the aim is to look at the fundamentals of a company and its business outlook in an effort to identify those stocks to which Mr. Market has assigned an unreasonably low value. Here are some of the factors that investors may examine: Price/earnings ratio. A stock's price divided by its earnings per share. The higher the P/E ratio, the higher the expectation that earnings will continue to grow at a rapid pace. Traditionally, investors have looked at P/Es based on the previous 12 months' profits, known as trailing earnings. Today, though, investors commonly cite P/Es based on the consensus analysts' forecast of the next 12 months' profits, or forward earnings. The rationale for this change is that forward P/E is a better reflection of a stock's future value -- and that, after all, is what you're buying when you invest in stocks. But take care: all projections involve guesswork and analysts frequently err on the high side when making such forecasts. Profit margins. Income divided by revenues. Good margins for a software company might be 25 percent, while 2 percent is considered fabulous for a grocery chain. So when gauging a company's profit margin, be sure to compare it with that of other companies in the same industry. Debt-to-equity ratio. A company's debt divided by shareholder's equity (or the value of its assets after all liabilities have been subtracted out). This ratio is often used as a measure of a company's health: the higher it is, the more vulnerable a company's earnings may be to industry changes and swings in the economy. Return on equity. Net income divided by shareholder's equity, or, literally, how much a company is earning on its money. This ratio can be used to show how a company's earnings measure up against those of the competition, as well as how they compare with past performance. A rising return on equity (ROE) is a good sign in that case, and a falling ROE is often a warning. Price-to-book value ratio. A stock's price divided by its so-called book value, expressed on a per-share basis. The book value is calculated by adding up the worth of everything the company owns and then subtracting its debt and other liabilities. The price-to-book ratio compares the price that investors are willing to pay for the company to the value they would receive -- at least in theory -- if the company were totally liquidated. A service business that has few hard assets is likely to sport a high price-to-book ratio, while an auto maker, which probably owns a huge amount of expensive plants and equipment, is likely to have a low one. As with all ratios, this one is most useful when looked at in the context of a particular industry and a company's own history. PEG and PEGY ratio. The PEG, or price/earnings/growth, ratio is calculated by taking the P/E ratio based on forward earnings and dividing by the projected growth rate. Stocks with a PEG ratio of less than one (meaning that they are trading at less than their projected growth rate) are generally said to be cheap, while a PEG ratio of 1.5 or higher indicates a stock that may be overpriced. For stocks that pay a substantial dividend, the PEGY ratio -- which is the P/E divided by the projected growth rate and the dividend yield -- may be an even better measure than PEG alone. Keep in mind, though, that both PEG and PEGY are highly speculative measures, as they are based on projections and no one can really foretell the future. You can find measures like these at virtually any online investing site. In fact, thanks to a proliferation of financial data on the Internet, the average person today can tap into information that would have been available only to investment professionals 10 years ago -- and much of it is free. Popular sources include the Personal Finance section of America Online, Yahoo! Finance, Quicken.com, Investor.com, Money.com, Fortune Investor and many brokerage and mutual fund sites. You might use these measures as a gauge to check on a company that you hear described as a good investment. You can also use them to search for stocks directly, using a screening tool like those offered at many sites (Fortune Investor and Microsoft Investor among them). Either way, taken together with the latest news on a company (as opposed to rumors flying around Internet message boards), measures like these can give a rough idea of whether a stock is cheap, fairly priced or overpriced compared to others in its class.