Understanding Stock Prices

5 49 Understanding Stock Prices Many people think that all they have to know about a stock is its share price. While this is an important piece of information, it’s only one piece of the puzzle. Nevertheless, stock price is important. After all, since the stock market is an auction, you should know how much a stock costs, and most important, what it’s worth before you buy or sell it. Basic Stock Quote A stock quote (or quotation) is simply the current price of a stock. An example of a stock quote is given in Figure 5-1. If you don’t know the current price of a stock, you can simply ask your broker, for example, “Could you give me a quote for Cisco?” In the example in Figure 5-1, the person will reply, “$15.04.” This simply means that if you wanted to buy one share of Cisco at that moment, it would cost you $15.04. For many people, the stock quote is the most important piece of information they can receive about a stock; it tells them exactly how much it will cost them to buy the stock, or what they will receive if they sell it. CHAPTER 10381_Sincere_01.c 7/18/03 10:57 AM Page 49 Copyright © 2004 by The McGraw-Hill Companies, Inc. Click here for Terms of Use. For years, some stock exchanges were unwilling to give out real- time stock quotes and news unless they were paid exorbitant fees for the information. Individual investors who didn’t pay the fees received free stock quotes, but with a 20-minute delay. Today, however, it’s very easy to get free real-time stock quotes any time of the day or night. You can look on financial television programs like CNBC, Bloomberg, or CNNfn. If that is inconvenient, you can pick up the phone and call your stockbroker (if you have one). If you are patient, you can always wait for tomorrow’s newspaper. The easiest way of checking stock quotes is by logging on to the Internet. There are hundreds of financial sites that provide real-time quotes. As you can see in Figure 5-1, each stock has it own ticker symbol. (In addition to stocks, mutual funds, index funds, bonds, and options have ticker symbols.) Some are easy; for example, the stock symbol for IBM is IBM. The symbol for Microsoft is MSFT, that for AT&T is T, that for General Electric is GE, and that for Cisco Systems is CSCO. If you aren’t sure of the exact ticker symbol, type in the name of the com- pany, and the computer will give you the ticker symbol in seconds. Most people refer to a stock by its symbol rather than its full name. Every experienced investor has memorized the ticker symbols for the most popular stocks. You can tell what exchange the stock is listed on by counting the number of letters in the symbol. If the stock is on the Nasdaq, the symbol will have 4 or 5 letters. If the stock is on the NYSE, it will have 1, 2, or 3 letters. Detailed Stock Quote Let’s take a look at a detailed stock quote for Cisco Systems (CSCO), shown in Figure 5-2. 50 U NDERSTANDING S TOCKS Symbol Last Trade Change Volume CSCO 9:49am 15.04 +0.21+1.42% 6,007,203 Chart, Financials, Historical Prices, Industry, Insider, Messages, News Options, Profile, Reports, Research, SEC Filings, more . . . Figure 5-1 10381_Sincere_01.c 7/18/03 10:57 AM Page 50 Bid: This is the price you will receive if you want to sell the stock. Ask: This is the price you will pay if you want to buy the stock. Previous Close: The stock closed at this price on the previous day. When you look at the detailed stock quote in Figure 5-2, you will see two stock prices, one higher than the other. These are the bid price and the ask price. The bid and ask prices are extremely important but also confusing (at least they were to me). The lower price (the one on the left) is the bid price (or offer price), which is the price you will receive if you own the stock and want to sell it. In Figure 5-2, the bid price for Cisco is $15.05. The higher price (on the right) is the ask price, the price you will have to pay if you want to buy this stock. The ask price for Cisco is $15.07. The difference between the bid and ask prices is called the spread. In Figure 5-2, the difference between the bid price ($15.05) and the ask price ($15.07) is 0.02. A few years ago, when stock quotes were in fractions, the spread on some stocks was very high, sometimes as much as a dollar. UNDERSTANDING STOCK PRICES 51 Views: Basic - DayWatch - Performance - Real-time Mkt - Detailed - [Create New View] CISCO SYSTEMS (NasdaqNM:CSCO) - Trade: Choose Brokerage Last Trade Change Prev Cls Open Volume 9:49am–15.06 +0.23 (+1.55%) 14.83 15.12 6,103,711 Day’s Range Bid Ask P/E Mkt Cap Avg Vol 14.96–15.19 15.05 15.07 40.08 108.8B 81,647,045 52-wk Range Bid Size Ask Size P/S Div/Shr Div Date 8.12–21.92 22,300 10,400 5.55 0.00 22-Mar-00 1y Target Est EPS (ttm) EPS Est PEG Yield Ex-Div 15.34 0.37 0.54 1.27 N/A 23-Mar-00 Chart, Financials, Historical Prices, Industry, Insider, Messages, News Options, Profile, Reports, Research, SEC Filings, more . . . Figure 5-2 10381_Sincere_01.c 7/18/03 10:57 AM Page 51 When the spreads were very wide, if you bought a stock and then sold it quickly, you would immediately lose money on the spread. The lower the spread, the better for investors. Because of decimalization (instead of displaying stock quotes in fractions, the exchanges now dis- play them in decimals), the spread between the bid and ask prices is often quite small, sometimes only a penny or two. That makes it fairer for investors. Other important information is how much the stock has risen or fallen in both absolute and percentage terms during the day. In Figure 5-2, Cisco is up 0.23, or 1.55 percent. Many people also look at the 52-week lows and highs to get an idea of where the stock price has been in the past. The detailed stock quote also gives the market capitalization, the outstanding shares, how much dividend the company pays (if any), and the volume. (In the detailed stock quote example, note that you can do a historical price search as well as do extensive research on any stock or mutual fund.) You can learn a lot by studying the detailed stock quote. Stock Price Keep in mind that the detailed stock quote is just a quick snapshot of what is happening with the stock. Although these numbers can be use- ful, if you want to really get to know a stock, you’ll have to dig deeper, as you’ll learn as you read the rest of the book. A lot of people don’t real- ize that the stock price is just one small piece of information you need to know about a stock. Some claim that it’s the least important piece! Too many people believe that the stock price determines whether a stock is a bargain or not. What many people don’t realize is that a stock selling for $50 can be a better value than a stock selling for $10. If the $10 stock has little or no earnings and loads of debt, you’d be better off buying fewer shares of the $50 stock rather than more shares of the $10 stock. (Warren Buffett once said, “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.”) That’s why some investors spend so much time looking at ratios like the P/E (when you divide a stock price by its earnings per share, you end up with a P/E, or price/earnings, ratio) to determine what is a fair price. 52 U NDERSTANDING S TOCKS 10381_Sincere_01.c 7/18/03 10:57 AM Page 52 After all, you don’t want to be the kind of person who knows the price of everything but the value of nothing (to paraphrase Oscar Wilde). After-Hours Trading: Making Money 24 Hours a Day During the bull market, a lot of people, myself included, thought that people would flock to the after-hours market. We figured that people who couldn’t trade during the day would be eager to trade at night. As the markets fell, so did interest in after-hours trading. In the middle of the bull market, online and traditional brokerage houses were aggressively offering clients the ability to trade at any time of the day or night. But as the market plum- meted and investors lost money, the after-hours market fizzled out. Although professional traders continue to trade at night, only a handful of investors still participate in the after-hours market. (The after-hours market also includes the premarket, which usu- ally begins around 8:00 a.m. EST.) After-hours trading works like this: The major stock exchanges remain open for electronic trading through electronic communica- tion networks (ECNs) so that investors can trade outside of regular hours. Only a few million shares are traded in the after-hours mar- ket, unlike the regular market, where billions of shares are traded during the day. In fact, the volume is so small that most investors would be well advised to avoid night trading altogether (unless you take the time to thoroughly understand how it works). The low volume can cause strange things to happen to stock prices. If you are unfamiliar with after-hours trading, you can end up buy- ing or selling a stock for a terrible price. Trading after hours is a tricky strategy, and my advice is to do most of your investing and trading during the regular market. In the next chapter, you will learn how to buy and sell stock. UNDERSTANDING STOCK PRICES 53 10381_Sincere_01.c 7/18/03 10:57 AM Page 53 This page intentionally left blank. . years ago, when stock quotes were in fractions, the spread on some stocks was very high, sometimes as much as a dollar. UNDERSTANDING STOCK PRICES 51 Views:. before you buy or sell it. Basic Stock Quote A stock quote (or quotation) is simply the current price of a stock. An example of a stock quote is given in Figure