Jan 25, 2014

Stock Buy Break it Down - 5, Charts Gone Wild

Limp Jones
Yesterday, the stock market laid brown skid marks, Dow Jones lost 318 points, or 2%.  That's a big drop, and smells a little like 2008, when people's investments bled thousands of bucks a day.  The market's starting 2014 all sick and limp:

Warren Buffett once said this about investing:

Be bold when everyone else is afraid, and be afraid when everyone else is bold.  

In other words, when the market is tanking and people are panicked and selling, that can be an ideal opportunity to be bold and buy shares at a discount.  The hard part is knowing when prices have bottomed out and buying before they rise again.

Reading a Stock Chart
I'll walk through a stock chart and explain what all the gibberish means.  Chart's a snapshot of how a company's stock is performing, and provides info to help decide if you want to buy a slice.

We'll look at United Parcel Service's (UPS) and cover these components:

-Market capital
-Earnings per share

Go to Google.com/Finance to search for a company and find its chart.

Market Capital
The total value of shares issued by a company is called their market capital.  It tells you how large a company is, and is calculated as:

            Price per share  x  Number of Shares  =  Market Cap

UPS below, share price and total number of shares circled in blue, market cap in green.  Each share costs $96.33, there are 928.35 million shares.  Blue multiplied by blue equals green:

Companies are marked as small cap, mid cap or large cap.

Small cap refers to a smaller company with a market capital between $300 million and $2 billion.
Mid cap means a company's market capital is $2 billion to $10 billion.
Large is market cap > $10 billion.

Carmike Cinemas is a small cap company.
Hanes underpants is mid cap.
Coke, Target and Chipotle are large cap.

Investing in small cap stocks can be riskier than large cap, with a corresponding chance of higher payout in exchange for that risk.  Large cap usually pay dividends, small cap often don't.

Buying shares of a company provides you a tiny sliver of the ownership pie.  With that ownership comes benefits, a share of the profit in the form of dividends.  Not all companies pay dividends, many do.  If a corporation turns profit and chooses to share the booty by dividends, then shareholders receive cash or additional shares of stock.

UPS, dividend goodies circled:

EPS is earning per share, which is net income (profit) for the year, divided by total shares.  UPS returned some of that profit back to shareholders, the div/yield above indicates the dividend was $.62 per share last quarter, with a 2.57% annual yield.

Line graph above, you see those little blue "D" flags near the bottom?  They mark when dividends where paid (quarterly), with the dividends ranging from $.45 to $.62 per share.  In 2013, UPS paid out $2.48 in dividends per share.  If you owned 100 shares, you'd receive a check for $248.

Rather than receiving cash, you can opt to use that money to buy more shares.  That's what I do and recommend, since it adds a compounding aspect to make your investment grow more quickly.

Master Beta
Stocks are assigned a risk/volatility factor known as ╬▓eta.  The higher the beta, the higher the risk.

A beta value of 1 indicates a stock will move up and down with the market.  A beta less than 1 means a stock is less volatile than the market, beta greater than 1 is more volatile.

In UPS' case above, beta is .99, which means the stock price tends to move up and down with the market.  The squiggly chart plays this out, note the S&P 500 red line and the UPS blue line; they move nearly in sync.

A stock with a beta of 1.3 means it's approximately 30% more volatile than the market.  Larger companies that have been around for years tend to have a beta less than 1, which means their stock is stable but likely offers a lower return.

GreenGro stock I bought and sold 10 days later pocketed a $3,000 gain.  It has a beta of 8.5...highly volatile and risky!

Next at bat, we'll look at charts of a couple companies and compare their performance over time.

If you bought $1,000 worth of Sony shares in the year 2000, they'd only be worth $100 today.
If you bought $1,000 worth of Apple shares in the year 2000, they'd be worth $24,000 today.


1 comment:

  1. Anonymous1/26/2014

    my dad's quote: "for every seller there is a buyer." (When markets are functioning) they are just a clearinghouse. That stock you buy because you think their future is great is coming from somebody else who has the opposite view.


Thanks for the note, check back for my response!