Today, we’ll take a look at part two of our three part series on investing outside of the TSP. This one may be of particular interest to a lot of our readers as it discusses stocks.
It seems like every day we hear about a new stock trader that made millions of dollars through a few successful trades. This is certainly the exception to the rule. While stocks such as Facebook, Amazon, Netflix, and Google (see FANG) are publicized as high-fliers, stock picking is generally quite difficult. We’ll begin by starting with the basics.
Stocks are issued by companies to raise capital (money) in exchange for partial ownership of a company. They are first offered in an initial public offering where they are traded on a stock exchange. Uber, for example, recently debuted as a publicly traded stock and raised a significant amount of capital in its IPO. Once you buy a stock, you generally have voting rights (exercised at shareholder meetings) and own a proportion of the company’s assets and earnings. Some companies and individuals seek to purchase large stakes in a company for controlling authority. In your case, you’re probably looking to make money.
Stocks generally pay off in two ways: they appreciate in value or pay dividends. Stocks tend to appreciate in value based on good news. A stock, for example, will increase in value with news of a lucrative deal with a partner, a new product, or excellent earnings as more people look to purchase that stock. When more people demand the stock than are selling, the price goes up. Generally, the higher the earnings and earnings growth of the company, the higher the stock price. Dividends are payments by a company to its shareholders as a reward for owning the company. Dividends are typically computed as a percentage of payout divided by share price. A $100 stock that pays a $1 dividend annually would have a 1% dividend.
While there are many methods to trading — and we won’t go into those in detail here — lets take a look at a few key metrics you should know for every stock. The chart above shows Apple at the close of trading for 10 June 2019 (The US Stock market is open from 9:30AM to 4:00PM EST) where the stock was trading at $192.58. You can see the day’s range, year’s range, and previous closing price on the chart. A few key highlights include:
Volume: The number of shares traded that day (25.43 million) which generally fluctuates based on big news. Today was below Average Volume, which means the stock traded less than it usually does.
1Y Target Est: The one year estimate based on a number of analysts’ opinions as to what the stock will be trading at a year from now. This number is certainly not a guarantee.
Market Cap: The total value of the company based on the number of shares multiplied by the price of those shares.
PE Ratio: This one is important. This is the price of the stock divided by the EPS or earnings per share. A lower number here means the price of the stock is lower relative to its earnings. EPS or earnings per share growth is what usually drives share price growth as higher earnings drive more people to purchase the stock.
Earnings Date: The date the company is next expected to release earnings. Earnings usually result in price changes based on earnings expectations and prices go up or down.
Dividends: The amount you are paid annually to own the stock by the company. These are computed on an annual basis and usually you receive 1/4 of the dividend quarterly.
We now have a basic understanding of how stocks create investment returns and how to read a basic stock chart. In summary: stock returns are driven by appreciation and dividends. Appreciation is driven by an increase in demand for the stock relative to the stocks supply. If anyone is interested in additional stock information, trading strategies, and other methodologies please let me know. Please share this post with your friends! $