Understanding and Managing Investments

Interpreting the Daily Stock Market Quotations

Current technology allows for instantaneous information on all sorts of investment topics: the price of various stocks, the number of shares that have traded, and the performance of the different stock indexes. These indexes include the Dow Jones Industrials, NYSE Composite, NASDAQ, S&P 500, and others. Choose the average that makes you happiest — at that particular point in time. Blink and it’s changed, anyway.

Getting to know the stock quotations

The daily price quotations for stocks appearing in the newspapers and on television are much easier to decipher than they used to be. Until the Common Cents Stock Pricing Act was passed in 1997, the prices used to be in dollars and fractions, with halves, quarters, eighths, and sometimes even sixteenths and thirty seconds. Beginning in August 2000, the stock market began changing the prices to decimals until all of the stocks and markets were converted.

Computing percent change

As a part of the daily reports on the stock market, you’re told not only how much the stocks went up or down but also the percent change. Basically, percent change is the change (how much the price went up or down) divided by the starting amount. If the price of the stock goes up, the percent change is a positive number. If the price goes down, the result is negative.

Using the averages to compute prices

The different stock market indexes (or averages) all give interpretations of the status of the price of stocks. For instance, the Dow Jones Industrial Average (DJIA) is based on the prices of 30 representative stocks — but not their exact stated prices, because a factor enters into the picture. The factor, or dividing number, is used on the actual prices to try to standardize the prices when stock splits are involved; you get a more accurate picture of the value of the stock when increasing the number of shares is taken into account.

Employing the Dow Jones Average

The Dow Jones Industrial Average (DJIA) isn’t really an average of the values of the 30 selected stocks; it’s a sum of the worth of those stocks. And the DJIA doesn’t consist of just industrial stocks anymore. You have technology and energy stocks and a smattering of the different types of commonly held stocks, such as McDonald’s, Coca-Cola, Microsoft, Home Depot, and Wal-Mart.

Wrangling with the Ratios

The different stock averages or indexes offer a measure of the activity and worth of stocks as a whole. Ratios, such as earnings per share, price-earnings, yield, return on investment, return on assets, and profit ratio, offer information on the individual stocks. The numbers associated with each ratio allow you to compare the stocks to one another on another front. In this section, I show you the various computations necessary for the ratios.

Examining the stock yield ratio

The stock yield ratio abbreviated Yld on a stock report, is the ratio of the annual dividend per share and the current value per share of the stock. The stock yield ratio changes when either the dividends change or when the price of the stock changes. By referring to Table 11-1, you can see columns for the dividend (Div), the yield (Yld), and the current price of the stock (Last). If you divide the dividend by the stock price, you get a percentage — which is how the value is reported under the yield.

Earning respect for the PE ratio

The price-earnings ratio, or PE ratio, is determined by dividing the price per share by the earnings per share. The earnings in this case aren’t the dividends paid to the stockholder. The earnings used in the PE ratio are the profits of the particular company. So the PE ratio is determined by dividing the number of shares the company is offering by the profit associated with those shares. Try out the following example to better understand what I mean.

Last word

You can determine the earnings per share of stock if you have the price of the stock and the PE ratio. (Refer to the previous section, “Earning respect for the PE ratio,” for details on how to compute the PE ratio.) You may be wondering whether you can determine the earnings per share if you don’t have the PE ratio available.

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