Stock Investing For Dummies, 5th Edition - Paul Mladjenovic (2016)

Part II. Before You Start Buying

IN THIS PART …

Know the best information sources for finding great stocks.

Discover how to find and choose a good stock brokerage firm.

Investigate the key elements of a great growth stock.

Find out how to choose a solid dividend-income stock.

Familiarize yourself with technical indicators for short-term stock moves.

Chapter 6. Gathering Information

IN THIS CHAPTER

Using stock exchanges to get investment information

Applying accounting and economic know-how to your investments

Keeping abreast of financial news

Deciphering stock tables

Understanding dividend dates

Recognizing good (and bad) investing advice

Knowledge and information are two critical success factors in stock investing. (Isn’t that true about most things in life?) People who plunge headlong into stocks without sufficient knowledge of the stock market in general, and current information in particular, quickly learn the lesson of the eager diver who didn’t find out ahead of time that the pool was only an inch deep (ouch!). In their haste to avoid missing so-called golden investment opportunities, investors too often end up losing money.

remember Opportunities to make money in the stock market will always be there, no matter how well or how poorly the economy and the market are performing in general. There’s no such thing as a single (and fleeting) magical moment, so don’t feel that if you let an opportunity pass you by, you’ll always regret that you missed your one big chance.

For the best approach to stock investing, build your knowledge and find quality information first so you can make your fortunes more assuredly. Before you buy, you need to know that the company you’re investing in is

·        Financially sound and growing

·        Offering products and/or services that are in demand by consumers

·        In a strong and growing industry (and general economy)

Where do you start, and what kind of information do you want to acquire? Keep reading.

Looking to Stock Exchanges for Answers

Before you invest in stocks, you need to be completely familiar with the basics of stock investing. At its most fundamental, stock investing is about using your money to buy a piece of a company that will give you value in the form of appreciation or income (or both). Fortunately, many resources are available to help you find out about stock investing. Some of my favorite places are the stock exchanges themselves.

Stock exchanges are organized marketplaces for the buying and selling of stocks (and other securities). The New York Stock Exchange (NYSE; also referred to as the Big Board), the premier stock exchange, provides a framework for stock buyers and sellers to make their transactions. The NYSE makes money not only from a cut of every transaction but also from fees (such as listing fees) charged to companies and brokers that are members of its exchanges. In 2007, the NYSE merged with Euronext, a major European exchange, but no material differences exist for stock investors. In 2009, the American Stock Exchange (Amex) was taken over by (and completely merged into) the NYSE. The new name is NYSE Amex.

The main exchanges for most stock investors are the NYSE and Nasdaq. Technically, Nasdaq isn’t an exchange, but it’s a formal market that effectively acts as an exchange. Because the NYSE and Nasdaq benefit from increased popularity of stock investing and continued demand for stocks, they offer a wealth of free (or low-cost) resources and information for stock investors. Go to their websites to find useful resources such as:

·        Tutorials on how to invest in stocks, common investment strategies, and so on

·        Glossaries and free information to help you understand the language, practice, and purpose of stock investing

·        A wealth of news, press releases, financial data, and other information about companies listed on the exchange or market, usually accessed through an on-site search engine

·        Industry analysis and news

·        Stock quotes and other market information related to the daily market movements of stocks, including data such as volume, new highs, new lows, and so on

·        Free tracking of your stock selections (you can input a sample portfolio or the stocks you’re following to see how well you’re doing)

tip What each exchange/market offers keeps changing and is often updated, so explore them periodically at their respective websites:

·        New York Stock Exchange: www.nyse.com

·        Nasdaq: www.nasdaq.com

Grasping the Basics of Accounting and Economics

Stocks represent ownership in companies. Before you buy individual stocks, you want to understand the companies whose stock you’re considering and find out about their operations. It may sound like a daunting task, but you’ll digest the point more easily when you realize that companies work very similarly to the way you work. They make decisions on a daily basis just as you do.

Think about how you grow and prosper as an individual or as a family, and you see the same issues with businesses and how they grow and prosper. Low earnings and high debt are examples of financial difficulties that can affect both people and companies. You can better understand companies’ finances by taking the time to pick up some information in two basic disciplines: accounting and economics. These two disciplines, which I discuss in the following sections, play a significant role in understanding the performance of a firm’s stock.

Accounting for taste and a whole lot more

remember Accounting. Ugh! But face it: Accounting is the language of business, and believe it or not, you’re already familiar with the most important accounting concepts! Just look at the following three essential principles:

·        Assets minus liabilities equals net worth. In other words, take what you own (your assets), subtract what you owe (your liabilities), and the rest is yours (your net worth)! Your own personal finances work the same way as Microsoft’s (except yours have fewer zeros at the end). See Chapter 2 to figure out how to calculate your own net worth.

A company’s balance sheet shows you its net worth at a specific point in time (such as December 31). The net worth of a company is the bottom line of its asset and liability picture, and it tells you whether the company is solvent (has the ability to pay its debts without going out of business). The net worth of a successful company grows regularly. To see whether your company is successful, compare its net worth with the net worth from the same point a year earlier. A firm that has a $4 million net worth on December 31, 2014, and a $5 million net worth on December 31, 2015, is doing well; its net worth has gone up 25 percent ($1 million) in one year.

·        Income minus expenses equals net income. In other words, take what you make (your income), subtract what you spend (your expenses), and the remainder is your net income (or net profit or net earnings — your gain).

A company’s profitability is the whole point of investing in its stock. As it profits, the business becomes more valuable, and in turn, its stock price becomes more valuable. To discover a firm’s net income, look at its income statement. Try to determine whether the company uses its gains wisely, either by reinvesting them for continued growth or by paying down debt.

·        Do a comparative financial analysis. That’s a mouthful, but it’s just a fancy way of saying how a company is doing now compared with something else (like a prior period or a similar company).

If you know that the company you’re looking at had a net income of $50,000 for the year, you may ask, “Is that good or bad?” Obviously, making a net profit is good, but you also need to know whether it’s good compared to something else. If the company had a net profit of $40,000 the year before, you know that the company’s profitability is improving. But if a similar company had a net profit of $100,000 the year before and in the current year is making $50,000, then you may want to either avoid the company making the lesser profit or see what (if anything) went wrong with the company making less.

Accounting can be this simple. If you understand these three basic points, you’re ahead of the curve (in stock investing as well as in your personal finances). For more information on how to use a company’s financial statements to pick good stocks, see Chapters 11 and 12.

Understanding how economics affects stocks

Economics. Double ugh! No, you aren’t required to understand “the inelasticity of demand aggregates” (thank heavens!) or “marginal utility” (say what?). But a working knowledge of basic economics is crucial (and I mean crucial) to your success and proficiency as a stock investor. The stock market and the economy are joined at the hip. The good (or bad) things that happen to one have a direct effect on the other. The following sections give you the lowdown.

Getting the hang of the basic concepts

remember Alas, many investors get lost on basic economic concepts (as do some so-called experts that you see on TV). I owe my personal investing success to my status as a student of economics. Understanding basic economics helps me (and will help you) filter the financial news to separate relevant information from the irrelevant in order to make better investment decisions. Be aware of these important economic concepts:

·        Supply and demand: How can anyone possibly think about economics without thinking of the ageless concept of supply and demand? Supply and demand can be simply stated as the relationship between what’s available (the supply) and what people want and are willing to pay for (the demand). This equation is the main engine of economic activity and is extremely important for your stock investing analysis and decision-making process. I mean, do you really want to buy stock in a company that makes elephant-foot umbrella stands if you find out that the company has an oversupply and nobody wants to buy them anyway?

·        Cause and effect: If you pick up a prominent news report and read, “Companies in the table industry are expecting plummeting sales,” do you rush out and invest in companies that sell chairs or manufacture tablecloths? Considering cause and effect is an exercise in logical thinking, and believe you me, logic is a major component of sound economic thought.

When you read business news, play it out in your mind. What good (or bad) can logically be expected given a certain event or situation? If you’re looking for an effect (“I want a stock price that keeps increasing”), you also want to understand the cause. Here are some typical events that can cause a stock’s price to rise:

·        Positive news reports about a company: The news may report that the company is enjoying success with increased sales or a new product.

·        Positive news reports about a company’s industry: The media may be highlighting that the industry is poised to do well.

·        Positive news reports about a company’s customers: Maybe your company is in industry A, but its customers are in industry B. If you see good news about industry B, that may be good news for your stock.

·        Negative news reports about a company’s competitors: If the competitors are in trouble, their customers may seek alternatives to buy from, including your company.

·        Economic effects from government actions: Political and governmental actions have economic consequences. As a matter of fact, nothing (and I mean nothing!) has a greater effect on investing and economics than government. Government actions usually manifest themselves as taxes, laws, or regulations. They also can take on a more ominous appearance, such as war or the threat of war. Government can willfully (or even accidentally) cause a company to go bankrupt, disrupt an entire industry, or even cause a depression. Government controls the money supply, credit, and all public securities markets. For more information on political effects, see Chapter 15.

Gaining insight from past mistakes

Because most investors ignored some basic observations about economics in the late 1990s, they subsequently lost trillions in their stock portfolios during 2000–2002. During 2000–2008, the United States experienced the greatest expansion of total debt in history, coupled with a record expansion of the money supply. The Federal Reserve (or “the Fed”), the U.S. government’s central bank, controls both. This growth of debt and money supply resulted in more consumer (and corporate) borrowing, spending, and investing. The debt and spending that hyperstimulated the stock market during the late 1990s (stocks rose 25 percent per year for five straight years during that time period) came back with a vengeance afterwards. When the stock market bubble popped during 2000–2002, it was soon replaced with the housing bubble, which popped during 2005–2006.

Of course, you should always be happy to earn 25 percent per year with your investments, but such a return can’t be sustained and encourages speculation. This artificial stimulation by the Fed resulted in the following:

·        More and more people depleted their savings. After all, why settle for less than 1 percent in the bank when you can get so much more in the stock market?

·        More and more people bought on credit (such as auto loans, brokerage margin loans, and so on). If the economy is booming, why not buy now and pay later? Consumer credit hit record highs.

·        More and more people borrowed against their homes. Why not borrow and get rich now? “I can pay off my debt later” was at the forefront of these folks’ minds at the time.

·        More and more companies sold more goods as consumers took more vacations and bought SUVs, electronics, and so on. Companies then borrowed to finance expansion, open new stores, and so on.

·        More and more companies went public and offered stock to take advantage of the increase in money that was flowing to the markets from banks and other financial institutions.

In the end, spending started to slow down because consumers and businesses became too indebted. This slowdown in turn caused the sales of goods and services to taper off. Companies were left with too much overhead, capacity, and debt because they had expanded too eagerly. At this point, businesses were caught in a financial bind. Too much debt and too many expenses in a slowing economy mean one thing: Profits shrink or disappear. To stay in business, companies had to do the logical thing — cut expenses. What’s usually the biggest expense for companies? People! Many companies started laying off employees. As a result, consumer spending dropped further because more people were either laid off or had second thoughts about their own job security.

As people had little in the way of savings and too much in the way of debt, they had to sell their stock to pay their bills. This trend was a major reason that stocks started to fall in 2000. Earnings started to drop because of shrinking sales from a sputtering economy. As earnings fell, stock prices also fell.

remember The lessons from the 1990s and 2000s are important ones for investors today:

·        Stocks are not a replacement for savings accounts. Always have some money in the bank.

·        Stocks should never occupy 100 percent of your investment funds.

·        When anyone (including an expert) tells you that the economy will keep growing indefinitely, be skeptical and read diverse sources of information.

·        If stocks do well in your portfolio, consider protecting your stocks (both your original investment and any gains) with stop-loss orders. (See Chapter 17 for more on these strategies.)

·        Keep debt and expenses to a minimum.

·        If the economy is booming, a decline is sure to follow as the ebb and flow of the economy’s business cycle continues.

KNOW THYSELF BEFORE YOU INVEST IN STOCKS

If you’re reading this book, you’re probably doing so because you want to become a successful investor. Granted, to be a successful investor, you have to select great stocks, but having a realistic understanding of your own financial situation and goals is equally important. I recall one investor who lost $10,000 in a speculative stock. The loss wasn’t that bad because he had most of his money safely tucked away elsewhere. He also understood that his overall financial situation was secure and that the money he lost was “play” money — the loss wouldn’t have a drastic effect on his life. But many investors often lose even more money, and the loss does have a major, negative effect on their lives. You may not be like the investor who can afford to lose $10,000. Take time to understand yourself, your own financial picture, and your personal investment goals before you decide to buy stocks. See Chapter 2 for guidance.

Staying on Top of Financial News

Reading the financial news can help you decide where or where not to invest. Many newspapers, magazines, and websites offer great coverage of the financial world. Obviously, the more informed you are, the better, but you don’t have to read everything that’s written. The information explosion in recent years has gone beyond overload, and you can easily spend so much time reading that you have little time left for investing. In the following sections, I describe the types of information you need to get from the financial news.

tip Appendix A of this book provides more information on the following resources, along with a treasure trove of some of the best publications, resources, and websites to assist you:

·        The most obvious publications of interest to stock investors are The Wall Street Journal (www.wsj.com) and Investor’s Business Daily (www.investors.com). These excellent publications report the news and stock data as of the prior trading day.

·        Some of the more obvious websites are MarketWatch (www.marketwatch.com), Yahoo! Finance (http://finance.yahoo.com), Bloomberg (www.bloomberg.com), and Investing.com (www.investing.com). These websites can actually give you news and stock data within minutes after an event occurs.

·        Don’t forget the exchanges’ websites that I list in the earlier section, “Looking to Stock Exchanges for Answers.”

Figuring out what a company’s up to

Before you invest, you need to know what’s going on with the company. When you read about the company, either from the firm’s literature (its annual report, for example) or from media sources, be sure to get answers to some pertinent questions:

·        Is the company making more net income than it did last year? You want to invest in a company that’s growing.

·        Are the company’s sales greater than they were the year before? Keep in mind that you won’t make money if the company isn’t making money.

·        Is the company issuing press releases on new products, services, inventions, or business deals? All these achievements indicate a strong, vital company.

Knowing how the company is doing, no matter what’s happening with the general economy, is obviously important. To better understand how companies tick, see Chapters 11 and 12.

Discovering what’s new with an industry

As you consider investing in a stock, make a point of knowing what’s going on in that company’s industry. If the industry is doing well, your stock is likely to do well, too. But then again, the reverse is also true.

Yes, I’ve seen investors pick successful stocks in a failing industry, but those cases are exceptional. By and large, it’s easier to succeed with a stock when the entire industry is doing well. As you’re watching the news, reading the financial pages, or viewing financial websites, check out the industry to ensure that it’s strong and dynamic. See Chapter 13 for information on analyzing sectors and megatrends.

Knowing what’s happening with the economy

No matter how well or how poorly the overall economy is performing, you want to stay informed about its general progress. It’s easier for the value of stock to keep going up when the economy is stable or growing. The reverse is also true: If the economy is contracting or declining, the stock has a tougher time keeping its value. Some basic items to keep tabs on include the following:

·        Gross domestic product (GDP): The GDP is roughly the total value of output for a particular nation, measured in the dollar amount of goods and services. It’s reported quarterly, and a rising GDP bodes well for your stock. When the GDP is rising 3 percent or more on an annual basis, that’s solid growth. If it rises but is less than 3 percent, that’s generally considered less than stellar (or mediocre). A GDP under zero (a negative number) means that the economy is shrinking (heading into recession).

·        The index of leading economic indicators (LEI): The LEI is a snapshot of a set of economic statistics covering activity that precedes what’s happening in the economy. Each statistic helps you understand the economy in much the same way that barometers (and windows!) help you understand what’s happening with the weather. Economists don’t just look at an individual statistic; they look at a set of statistics to get a more complete picture of what’s happening with the economy.

Chapter 15 goes into greater detail on economics and its effect on stock prices.

Seeing what politicians and government bureaucrats are doing

Being informed about what public officials are doing is vital to your success as a stock investor. Because federal, state, and local governments pass literally thousands of laws, rules, and regulations every year, monitoring the political landscape is critical to your success. The news media report what the president and Congress are doing, so always ask yourself, “How does a new law, tax, or regulation affect my stock investment?”

tip You can find laws being proposed or enacted by the federal government through the Thomas legislative search engine (http://thomas.loc.gov/home/thomas.php), which is run by the Library of Congress (www.loc.gov). Also, some great organizations inform the public about tax laws and their impact, such as the National Taxpayers Union (www.ntu.org). Chapter 15 gives you more insights into politics and its effect on the stock market.

Checking for trends in society, culture, and entertainment

As odd as it sounds, trends in society, popular culture, and entertainment affect your investments, directly or indirectly. For example, a headline such as “The Graying of America — More People Than Ever Before Will Be Senior Citizens” gives you some important information that can make or break your stock portfolio. With that particular headline, you know that as more and more people age, companies that are well positioned to cater to that growing market’s wants and needs will do well — meaning a successful stock for you.

Keep your eyes open to emerging trends in society at large by reading and viewing the media that cover such matters (Time magazine, CNN, Fox News, and so on). What trends are evident now? Can you anticipate the wants and needs of tomorrow’s society? Being alert, staying a step ahead of the public, and choosing stocks appropriately gives you a profitable edge over other investors. If you own stock in a solid company with growing sales and earnings, other investors eventually notice. As more investors buy up your company’s stock, you’re rewarded as the stock price increases.

Reading (And Understanding) Stock Tables

The stock tables in major business publications such as The Wall Street Journal and Investor’s Business Daily are loaded with information that can help you become a savvy investor — if you know how to interpret them. You need the information in the stock tables for more than selecting promising investment opportunities. You also need to consult the tables after you invest to monitor how your stocks are doing.

Looking at the stock tables without knowing what you’re looking for or why you’re looking is the equivalent of reading War and Peace backwards through a kaleidoscope — nothing makes sense. But I can help you make sense of it all (well, at least the stock tables!). Table 6-1 shows a sample stock table. Each item gives you some clues about the current state of affairs for that particular company. The sections that follow describe each column to help you understand what you’re looking at.

Table 6-1 A Sample Stock Table

52-Wk High

52-Wk Low

Name (Symbol)

Div

Vol

Yld

P/E

Day Last

Net Chg

21.50

8.00

SkyHighCorp (SHC)

 

3,143

 

76

21.25

+.25

47.00

31.75

LowDownInc (LDI)

2.35

2,735

5.9

18

41.00

–.50

25.00

21.00

ValueNowInc (VNI)

1.00

1,894

4.5

12

22.00

+.10

83.00

33.00

DoinBadlyCorp (DBC)

 

7,601

   

33.50

–.75

remember Every newspaper’s financial tables are a little different, but they give you basically the same information. Updated daily, these tables aren’t the place to start your search for a good stock; they’re usually where your search ends. The stock tables are the place to look when you own a stock or know what you want to buy and you’re just checking to see the most recent price.

52-week high

The column in Table 6-1 labeled “52-Wk High” gives you the highest price that particular stock has reached in the most recent 52-week period. Knowing this price lets you gauge where the stock is now versus where it has been recently. SkyHighCorp’s (SHC) stock has been as high as $21.50, whereas its last (most recent) price is $21.25, the number listed in the “Day Last” column. (Flip to the later section “Day last” for more on understanding this information.) SkyHighCorp’s stock is trading very high right now because it’s hovering right near its overall 52-week high figure.

Now, take a look at DoinBadlyCorp’s (DBC) stock price. It seems to have tumbled big time. Its stock price has had a high in the past 52 weeks of $83, but it’s currently trading at $33.50. Something just doesn’t seem right here. During the past 52 weeks, DBC’s stock price has fallen dramatically. If you’re thinking about investing in DBC, find out why the stock price has fallen. If the company is strong, it may be a good opportunity to buy stock at a lower price. If the company is having tough times, avoid it. In any case, research the firm and find out why its stock has declined. (Chapters 11 and 12 provide the basics of researching companies.)

52-week low

The column labeled “52-Wk Low” gives you the lowest price that particular stock reached in the most recent 52-week period. Again, this information is crucial to your ability to analyze stock over a period of time. Look at DBC in Table 6-1, and you can see that its current trading price of $33.50 in the “Day Last” column is close to its 52-week low of $33.

remember Keep in mind that the high and low prices just give you a range of how far that particular stock’s price has moved within the past 52 weeks. They can alert you that a stock has problems or tell you that a stock’s price has fallen enough to make it a bargain. Simply reading the “52-Wk High” and “52-Wk Low” columns isn’t enough to determine which of those two scenarios is happening. They basically tell you to get more information before you commit your money.

Name and symbol

The “Name (Symbol)” column is the simplest in Table 6-1. It tells you the company name (usually abbreviated) and the stock symbol assigned to the company.

tip When you have your eye on a stock for potential purchase, get familiar with its symbol. Knowing the symbol makes it easier for you to find your stock in the financial tables, which list stocks in alphabetical order by the company’s name (or symbol depending on the source). Stock symbols are the language of stock investing, and you need to use them in all stock communications, from getting a stock quote at your broker’s office to buying stock over the Internet.

Dividend

Dividends (shown under the “Div” column in Table 6-1) are basically payments to owners (stockholders). If a company pays a dividend, it’s shown in the dividend column. The amount you see is the annual dividend quoted for one share of that stock. If you look at LowDownInc (LDI) in Table 6-1, you can see that you get $2.35 as an annual dividend for each share of stock that you own. Companies usually pay the dividend in quarterly amounts. If I own 100 shares of LDI, the company pays me a quarterly dividend of $58.75 ($235 total per year). A healthy company strives to maintain or upgrade the dividend for stockholders from year to year. (I discuss additional dividend details later in this chapter.)

The dividend is very important to investors seeking income from their stock investments. For more about investing for income, see Chapter 9. Investors buy stocks in companies that don’t pay dividends primarily for growth. For more information on growth stocks, see Chapter 8.

Volume

Normally, when you hear the word “volume” on the news, it refers to how much stock is bought and sold for the entire market: “Well, stocks were very active today. Trading volume at the New York Stock Exchange hit 2 billion shares.” Volume is certainly important to watch because the stocks that you’re investing in are somewhere in that activity. For the “Vol” column in Table 6-1, though, the volume refers to the individual stock.

Volume tells you how many shares of that particular stock were traded that day. If only 100 shares are traded in a day, then the trading volume is 100. SHC had 3,143 shares change hands on the trading day represented in Table 6-1. Is that good or bad? Neither, really. Usually the business news media mention volume for a particular stock only when it’s unusually large. If a stock normally has volume in the 5,000 to 10,000 range and all of a sudden has a trading volume of 87,000, then it’s time to sit up and take notice.

remember Keep in mind that a low trading volume for one stock may be a high trading volume for another stock. You can’t necessarily compare one stock’s volume against that of any other company. The large cap stocks like IBM or Microsoft typically have trading volumes in the millions of shares almost every day, whereas less active, smaller stocks may have average trading volumes in far, far smaller numbers.

The main point to remember is that trading volume that is far in excess of that stock’s normal range is a sign that something is going on with that stock. It may be negative or positive, but something newsworthy is happening with that company. If the news is positive, the increased volume is a result of more people buying the stock. If the news is negative, the increased volume is probably a result of more people selling the stock. What are typical events that cause increased trading volume? Some positive reasons include the following:

·        Good earnings reports: The company announces good (or better-than-expected) earnings.

·        A new business deal: The firm announces a favorable business deal, such as a joint venture, or lands a big client.

·        A new product or service: The company’s research and development department creates a potentially profitable new product.

·        Indirect benefits: The business may benefit from a new development in the economy or from a new law passed by Congress.

Some negative reasons for an unusually large fluctuation in trading volume for a particular stock include the following:

·        Bad earnings reports: Profit is the lifeblood of a company. When its profits fall or disappear, you see more volume.

·        Governmental problems: The stock is being targeted by government action, such as a lawsuit or a Securities and Exchange Commission (SEC) probe.

·        Liability issues: The media report that the company has a defective product or similar problem.

·        Financial problems: Independent analysts report that the company’s financial health is deteriorating.

remember Check out what’s happening when you hear about heavier-than-usual volume (especially if you already own the stock).

Yield

In general, yield is a return on the money you invest. However, in the stock tables, yield (“Yld” in Table 6-1) is a reference to what percentage that particular dividend is of the stock price. Yield is most important to income investors. It’s calculated by dividing the annual dividend by the current stock price. In Table 6-1, you can see that the yield du jour of ValueNowInc (VNI) is 4.5 percent (a dividend of $1 divided by the company’s stock price of $22). Notice that many companies report no yield; because they have no dividends, their yield is zero.

remember Keep in mind that the yield reported on the financial sites changes daily as the stock price changes. Yield is always reported as if you’re buying the stock that day. If you buy VNI on the day represented in Table 6-1, your yield is 4.5 percent. But what if VNI’s stock price rises to $30 the following day? Investors who buy stock at $30 per share obtain a yield of just 3.3 percent (the dividend of $1 divided by the new stock price, $30). Of course, because you bought the stock at $22, you essentially locked in the prior yield of 4.5 percent. Lucky you. Pat yourself on the back.

P/E

remember The P/E ratio is the ratio between the price of a stock and the company’s earnings. P/E ratios are widely followed and are important barometers of value in the world of stock investing. The P/E ratio (also called the earnings multiple or just multiple) is frequently used to determine whether a stock is expensive (a good value). Value investors (such as yours truly) find P/E ratios to be essential to analyzing a stock as a potential investment. As a general rule, the P/E should be 10 to 20 for large cap or income stocks. For growth stocks, a P/E no greater than 30 to 40 is preferable. (See Chapter 11 and Appendix B for full details on P/E ratios.)

In the P/E ratios reported in stock tables, price refers to the cost of a single share of stock. Earnings refers to the company’s reported earnings per share as of the most recent four quarters. The P/E ratio is the price divided by the earnings. In Table 6-1, VNI has a reported P/E of 12, which is considered a low P/E. Notice how SHC has a relatively high P/E (76). This stock is considered too pricey because you’re paying a price equivalent to 76 times earnings. Also notice that DBC has no available P/E ratio. Usually this lack of a P/E ratio indicates that the company reported a loss in the most recent four quarters.

Day last

The “Day Last” column tells you how trading ended for a particular stock on the day represented by the table. In Table 6-1, LDI ended the most recent day of trading at $41. Some newspapers report the high and low for that day in addition to the stock’s ending price for the day.

Net change

The information in the “Net Chg” column answers the question, “How did the stock price end today compared with its price at the end of the prior trading day?” Table 6-1 shows that SHC stock ended the trading day up 25 cents (at $21.25). This column tells you that SHC ended the prior day at $21. VNI ended the day at $22 (up 10 cents), so you can tell that the prior trading day it ended at $21.90.

Using News about Dividends

Reading and understanding the news about dividends is essential if you’re an income investor (someone who invests in stocks as a means of generating regular income; see Chapter 9 for details). The following sections explain some basics you should know about dividends.

tip You can find news and information on dividends in newspapers such as The Wall Street Journal, Investor’s Business Daily, and Barron’s (you can find their websites online with your favorite search engine or just check out Appendix A).

Looking at important dates

remember To understand how buying stocks that pay dividends can benefit you as an investor, you need to know how companies report and pay dividends. Some important dates in the life of a dividend are as follows:

·        Date of declaration: This is the date when a company reports a quarterly dividend and the subsequent payment dates. On January 15, for example, a company may report that it “is pleased to announce a quarterly dividend of 50 cents per share to shareholders of record as of February 10.” That was easy. The date of declaration is really just the announcement date. Whether you buy the stock before, on, or after the date of declaration doesn’t matter in regard to receiving the stock’s quarterly dividend. The date that matters is the date of record (see that bullet later in this list).

·        Date of execution: This is the day you actually initiate the stock transaction (buying or selling). If you call up a broker (or contact her online) today to buy a particular stock, then today is the date of execution, or the date on which you execute the trade. You don’t own the stock on the date of execution; it’s just the day you put in the order. For an example, skip to the following section.

·        Closing date (settlement date): This is the date on which the trade is finalized, which usually happens three business days after the date of execution. The closing date for stock is similar in concept to a real estate closing. On the closing date, you’re officially the proud new owner (or happy seller) of the stock.

·        Ex-dividend date: Ex-dividend means without dividend. Because it takes two days to process a stock purchase before you become an official owner of the stock, you have to qualify (that is, you have to own or buy the stock) before the two-day period. That two-day period is referred to as the “ex-dividend period.” When you buy stock during this short time frame, you aren’t on the books of record, because the closing (or settlement) date falls after the date of record. See the next section to see the effect that the ex-dividend date can have on an investor.

·        Date of record: This is used to identify which stockholders qualify to receive the declared dividend. Because stock is bought and sold every day, how does the company know which investors to pay? The company establishes a cut-off date by declaring a date of record. All investors who are official stockholders as of the declared date of record receive the dividend on the payment date, even if they plan to sell the stock any time between the date of declaration and the date of record.

·        Payment date: The date on which a company issues and mails its dividend checks to shareholders. Finally!

For typical dividends, the events in Table 6-2 happen four times per year.

Table 6-2 The Life of the Quarterly Dividend

Event

Sample Date

Comments

Date of declaration

January 15

The date that the company declares the quarterly dividend

Ex-dividend date

February 8

Starts the two-day period during which, if you buy the stock, you don’t qualify for the dividend

Date of record

February 10

The date by which you must be on the books of record to qualify for the dividend

Payment date

February 27

The date that payment is made (a dividend check is issued and mailed to stockholders who were on the books of record as of February 10)

Understanding why certain dates matter

remember Two business days pass between the date of execution and the closing date. Two business days also pass between the ex-dividend date and the date of record. This information is important to know if you want to qualify to receive an upcoming dividend. Timing is important, and if you understand these dates, you know when to purchase stock and whether you qualify for a dividend.

As an example, say that you want to buy ValueNowInc (VNI) in time to qualify for the quarterly dividend of 25 cents per share. Assume that the date of record (the date by which you have to be an official owner of the stock) is February 10. You have to execute the trade (buy the stock) no later than February 8 to be assured of the dividend. If you execute the trade right on February 8, the closing date occurs two days later, on February 10 — just in time for the date of record.

But what if you execute the trade on February 9, a day later? Well, the trade’s closing date is February 11, which occurs after the date of record. Because you aren’t on the books as an official stockholder on the date of record, you aren’t getting that quarterly dividend. In this example, the February 8–10 period is called the ex-dividend period.

tip Fortunately, for those people who buy the stock during this brief ex-dividend period, the stock actually trades at a slightly lower price to reflect the amount of the dividend. If you can’t get the dividend, you may as well save on the stock purchase. How’s that for a silver lining?

Evaluating Investment Tips

Psssst. Have I got a stock tip for you! Come closer. You know what it is? Research! What I’m trying to tell you is to never automatically invest just because you get a hot tip from someone. Good investment selection means looking at several sources before you decide on a stock. No shortcut exists. That said, getting opinions from others never hurts — just be sure to carefully analyze the information you get. Here are some important points to bear in mind as you evaluate tips and advice from others:

·        Consider the source. Frequently, people buy stock based on the views of some market strategist or market analyst. People may see an analyst being interviewed on a television financial show and take that person’s opinions and advice as valid and good. The danger here is that the analyst may be biased because of some relationship that isn’t disclosed on the show. Analysts are required to disclose conflicts of interest on business channels.

warning It happens on TV all too often. The show’s host interviews analyst U.R. Kiddingme from the investment firm Foollum & Sellum. The analyst says, “Implosion Corp. is a good buy with solid, long-term upside potential.” You later find out that the analyst’s employer gets investment banking fees from Implosion Corp. Do you really think that analyst would ever issue a negative report on a company that’s helping to pay the bills? It’s not likely.

·        Get multiple views. Don’t base your investment decisions on just one source unless you have the best reasons in the world for thinking that a particular, single source is outstanding and reliable. A better approach is to scour current issues of independent financial publications, such as Barron’s or Money magazine, and other publications (and websites) listed in Appendix A.

·        Gather data from the SEC. When you want to get more objective information about a company, why not take a look at the reports that firms must file with the SEC? These reports are the same reports that the pundits and financial reporters read. Arguably, the most valuable report you can look at is the 10K. The 10K is a report that all publicly traded companies must file with the SEC. It provides valuable information on the company’s operations and financial data for the most recent year, and it’s likely to be less biased than the information a company includes in other corporate reports, such as an annual report. The next most important document from the SEC is the 10Q, which gives the investor similar detailed information but for a single quarter. (See Chapter 12 for more information about these documents.)

tip To access 10K and 10Q reports, go to the SEC’s website (www.sec.gov). From there, you can find the SEC’s extensive database of public filings called EDGAR (Electronic Data Gathering, Analysis, and Retrieval system). By searching EDGAR, you can find companies’ balance sheets, income statements, and other related information so that you can verify what others say and get a fuller picture of what a business is doing and what its financial condition is.