Basic Research: Definitions
Welcome back. There you have been for a week, your bookmarked finger on the page where you do the research for your stock buys. Time to press on.
We left off at Moneycentral.msn.com, looking up the information readily available on the Internet (if, of course, you know where to look). We saw some preliminary information about our example company, Starbucks (stock symbol SBUX) and its opening price, closing price, volume. But there’s more — lots more.
Staying with Starbucks for the example, we can look at another important piece of information, which can be found in the box also in front of you on the msn site: the 52-week high and low. Within the last year, you are given the highest price the Starbucks stock reached, and the lowest price to which it fell. So, you can look at the current price and make a few determinations:
Is the stock price today closer to its 52 high or low? This is important because you might want to buy the stock as it’s bouncing off the lowest price. (Buy low, sell high.) This is, of course, if you are assuming that the stock is ready to move higher again for whatever reasons. Or, perhaps it is at its 52 week high, in which case the momentum might continue to carry it higher and higher still. (A bullet has upward momentum until, at some point, it begins to fall a bit toward earth.)
To the right of this information on the screen, in a box of its own, is a chart of the day’s stock price for Starbucks (only if you’re looking at it during open market hours). This will show you the progress either up or downward in price of the stock on that given day. Did the stock turn downward in price after the market opened? Is it going to go down further? Or should you buy it now, before it turns upward again? Will it turn upward again? So many questions, so many possible answers.
But isn’t this why you’re investing in the stock market — to capture that unknown but powerfully potent and potential stock price appreciation?
Still looking at that chart, you see some numbers and letters down at the bottom: these indicate charts you can pull up if you so wish, to check the stock price of Starbucks for the past month, the past year, the past three years, etc. These charts will give you a visual aid as to how the stock has done in the past. Very helpful — use them often.
In the far right column on the page you see “Market Cap.” This is the value of the company in millions or billions of dollars. It is derived from the stock price multiplied by the number of shares outstanding of the stock. Starbuck’s market capitalization as I look at the current information is more than 25 and a half billion dollars.
That’s a lot of coffee beans, isn’t it? It shows you that the company is solid, large and formidable. Not newly formed, not sparsely endowed, but one of the great American corporations that is available for you to own a piece of, if you so wish.
“Total Shares Out” means total number of stock shares outstanding, floating around in the stock universe. In fact, it is called the “float,” that number, meaning there are, for Starbucks, more than 755 million shares. You can choose to buy 100 or 1000 of them and be a part owner in the company, a voting shareholder just like everyone else who owns stock in Starbucks. (I don’t know about you, but this gives me a frisson of excitement as I write it.)
“Avg. daily volume” means the average number of shares that trade hands during the normal stock market hours. Here, in the information I’m reading, it’s around 6 and 3/4 million shares a day. That means that on any average day, this number of Starbucks shares is bought and sold. Someone decides to sell his or her 1000 shares, and someone else out there in the universe decides he or she can’t live without those same 1,000 shares … thus, a trade is made. Multiply this transaction by billions each market day and you have the ebb and flow, supply and demand, of the stock market.
“P/E” is the next figure given, which is the price to earnings ratio. This is a formula derived from the stock price and the number of shares outstanding of the stock. Needless to say, since the stock price fluctuates, the P/E ratio fluctuates also, but it is an indication of the growth potential of a stock. The higher the P/E ratio is, the more growth necessary to sustain its earnings. So, if you’re looking for safety, for example, you might want to find a stock that had a low P/E, which would indicate that it didn’t have to grow by leaps and bounds to be successful as a stock purchase.
Feeling overwhelmed? Let’s stop for a week. Read through this material a few more times during the week and we’ll have another go at research information when we meet next.
It will be the non-Internet kind of research, so you bookish/magazine ladies will be much more at home!