Stock Trading

This is what everyone is looking for: stock tips. Also some of the standard ‘Stock Market 101’ type info.

What are the Basic Terms for Stock Trading?

Misc. Stock Market Related Definitions

By the way you can find more in our glossary.

The January effect – Historical tendency for stock prices to increase in January more than any other month

Market Order – Buy or sell for whatever you can get for it ASAP.

Stop Order – A Stop Order is when you tell the broker to trade your stock once it reaches a certain price (above or below what you bought it at).  Once it hits that price, it turns into a “market order” and gets executed at whatever the going rate is.

Limit Order – A Limit Order is where you tell the broker to ONLY execute at a specific price (above or below).  Example – buy 100 shares at no more than 20.  Or sell 100 for no less than 20.

NAV – Net Asset Value – Current value of a mutual fund

CAPM – Capital Asset Pricing Model – Values various investments based on their risk vs. return characteristics

Round Lot – Stocks are sold in lots of 100.

Odd Lot – When stocks are sold in quantities less than 100

Specific risk – The risk associated with buying only one stock.

Penny stocks – Stocks that are priced at under $5.00 each share and can even be priced under $1.00.

The greater fool theory – Buying something for no other reason than the belief that you will be able to sell it to some other sucker for a higher price

Long position – When you buy a stock with the hope that it will increase in price.

Short Position – When you sell a stock (that is borrowed) with the hope that it will decrease in price (so that you can buy them cheaper to replace the stock you borrowed).  Short sellers think the price will decrease.

Markets – are self-regulating

SEC – Securities and Exchange Commision – enforcement agency – insider transactions – try to ensure a fair market. (Officers, directors, key employees cannot buy or sell share of the company without filling a report)

Insider transactions – Officers, directors, key employees cannot buy or sell share of the company without filling a report with the SEC.

Penny stocks – brokers selling small companies (usually non-NYSE members)

Full service broker – has polished stuff on everything – usually cost approximately 2% of transaction (broker gets 1/3 of that)

Discount broker – no advice or recommendations

Beta – tends to show how a stock will move relative to the market.  If beta is greater then 1, it will tend to move more than the market (because of specific risk)

Alpha – the characteristic line showing the specific risk if alpha is zero then no specific risk.

Bull market – when asset prices are rising

Bear market – when asset prices are falling

Inflation – not good for stocks or bonds

Long position – Buying stocks is said to be long (expect increase in stock’s price)

Short position – Short selling –  Selling a borrowed stock. Short selling corrects overpriced stocks.  (Going short is anticipating the market decreasing)

Margin – borrowing from broker (Borrow after $25000 is spent @ 11%, maximum = $50,000)  Margin deposit can be T-bills, cash, or non-margin stocks

Squeeze on the shorts – people trying to cover their short interest causes prices to increase.

The Basic Stock Trading Formulas

used to date:

PE Ratio = Price / Earnings

Return on equity they earn ______ on every $ of equity = earnings per share / stockholders equity

DPS = dividends per share (yearly)

Dividend yield = dividends per share / stock price

Dividend pay out ratio = dividends per share / earnings per share

Total return = (ending price + div. income received / beginning price) – 1

Earnings per share = current (last 12 months)

Earnings per share = earnings available to shareholders / # shares outstanding

Earnings per share growth = return on equity x (1-Pay out ratio)

Pay out ratio =  dividends per share / earnings per share

Net working capital = current assets – current liabilities

Profit margin = net income / net sales

Turn over = net sales / total assets

Leverage = total assets / current earnings

For every sales dollar, they earn___________ = net income / net sales

For every dollar they invested they got ________ worth of sales = net sales / total assets

For every $1 they have ______ working for them = Total assets / shareholders equity –

Internal growth or implied sustainable growth = return on equity  x (1 – pay out ratio)

NAV per share, net asset value per share = total value of portfolio / number of shares outstanding in fund

Retention ratio = (1- pay out ratio)