| TERM |
STOCK DEFINITIONS |
| Earnings per Share. |
This is the total net earnings divided by the number of shares of
common stock outstanding. E/S is the single statistic of greatest
importance to analysts, since over time the price of any stock is
related first and foremost to earning power.
|
| Net Earnings. |
This represents what the company has left from its sales of products
or services after paying all expenses of doing business, including
taxes.
|
| Sales or Gross Revenues. |
This is the total of revenues, gross sales, or equivealent items
of items of income from operations.
|
| Net Income. |
This is the amount remaining from gross revenues after provisions
for all costs, expenses, property charges, interest and taxes.
|
| Dividends per Share. |
This is the cash payment made to shareholders in a calendar year.
This represents that portion of the corporation's earnings for a
given year which have been directed by the board of directors to
be paid out to the stock holders in cash. (Normally growth stocks
pay out a smaller portion of earnings in dividends than other
companies, usually 50% or less, the remainder of earnings is
retained for expansion of the business).
|
| P/E ratio. |
This is the price of one share of stock divided by the earnings
per share of one share of stock.
|
| Payout Ratio. |
This refers to the part of earnings which have been paid out
as cash dividends.
|
| Book Value. |
This is the net value of total corporate assets, i.e., what is
left over when all liabilities, including bonds and preferred
stock, are substracted from the total assets (plants, equipment
cash, inventories, accounts receivable, etc.). This is sometimes
called stockholder's equity. Many corporations show the Book Value,
over a period of years in their summary tables. A good growth
company will increase it's equity capital at a rate of at least
6% per year.
|
| Yield. |
This is calculated by dividing the present full year's dividend
by the present price of the stock. This is a percentage figure.
|
| Growth Companies. |
These are companies whose sales and earnings are advancing more
rapidly than the economy as a whole. (Our economy is advancing
at about 2.5% to 5% annually).
|
| NUMBER |
RULES for PICKING STOCKS |
| 1. |
Purchase stocks of leading companies in sound and essential industries.
Use Standard & Poor's Security Owner's Stock Guide for ranking puposes
and concentrate on firms that are rated A-plus or A-minus. The Stock
Growth and stability of earnings and dividends are key elements in the
rankings.
|
| 2. |
Buy stocks that pay at least as much as a savings account in a typical
bank - around 5 per cent - and that have a price-earnings ratio no higher
than the average quality stock - about 9 times earnings in today's market.
The median price ratio for all stocks with earnings is around 7.5 to 1.
|
| 3. |
Stick to companies that have better-than-average balance sheets, with
current assets that are at least twice current liabilites and with
comparatively little long-term debt. The more cash equivalent on the
asset side the better.
|
| 4. |
Concentrate on shares of firms that have a record of rising earnings
and dividends far at least five years with no more than one year of
decline during that period. These stocks should represent industries
where demand persists every year.
|
| 5. |
Book values are important but should not be inordinately stessed.
Railroads and basic industries, such as steel, have large assets
that are not meaningful from the investor's viewpoint. Finanical
firms, such as banks and insurance companies, however, are usually
good values when their shares sell for less than book value.
|
| 6. |
The ideal time to commence a buying program is after a long, severe
decline in which stocks generally have fallen 20 percent or more.
After such a decline, most quality stocks have limited downside
vulnerability.
|
| 7. |
Place a reasonable limit on your investment in any one stock and
figure this limit in dollars, not in the number of shares. Own stocks
in fairly equal amounts in at least five different companies, covering
three different industries.
|
| 8. |
After your portfolio is put together, let patience become your guide.
Do not look at your prices daily but rather weekly - or better yet
monthly, if you are a long-term investor.
|
| 9. |
Examine your portifolio at least once a year. Within a year's time
enough change can take place in industrial and economic conditions
to warrant the re-examination of your portifolio.
|
| 10. |
It is a good idea to sell the weakest stock in your portifolio each
year irrespective of its original cost, and to replace it with a
better security that has brighter prospects.
|
| Note: |
This material was taken from a magazine column Taking Stock in the
U.S. News & World Report.
|
| NUMBER |
RULES for NOT PICKING STOCKS |
| 1. |
Don't maintain an undiversified portfolio, one with fewer that seven
stocks in it. You're better off with ten go-go stocks than one blue
chip, as people who bought General Public Utilities found out when
Three Mile Island happened. If you have less that $15,000, diversify
through mutual funds.
|
| 2. |
Don't buy preferred stocks, other than convertibles. They're good
buys for corporations because of the dividend exclusion, but
individuals get better yields from bond.
|
| 3. |
Don't move a substantial portion of your wealth into or out of the
market at one time. Ease in, ease out.
|
| 4. |
Don't buy common stocks with money you feel you will need in less
than four years.
|
| 5. |
Don't buy stock that is getting a lot of favorable play in the press.
|
| 6. |
Don't buy stocks that are being pushed by a broker.
|
| 7. |
Don't buy a stock that is included in the Fortune 500 or Standard
& Poor's 500. The chances of such stocks being undervalued are
virtually nil.
|
| 8. |
Don't buy safe, low-risk stocks. Instead, buy growth stocks with
some of your money and, for balance, put the rest into bonds or
other minimum risk securities.
|
| 9. |
Don't buy stocks for a year after a presidential inauguration. For
some reason, the market almost always goes down in that period.
|
| 10. |
Don't follow anyone's "infallible system" for beating the market.
Anyone with a system that really worked would never share it with
others, because widespread use of it would cause the market to
adjust and nullify it.
|
| Note: |
This material was taken from a article by the American Association
of Individual Investors - phone: (312)280-0170).
|
Stock Definitions
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