13020045 Common Stock Basics

8/14/2019 13020045 Common Stock Basics

1/62

Common Stock BasicsCommon Stock Basics1. Definition: Stocks are A type of security that signifies ownershipin a corporation and represents a claim on part of the corporation'sassets and earnings.

2. Types: Common Stock (usually entitles the owner to vote at

shareholders' meetings and to receive dividends). Preferred(generally does not have voting rights, but has a higher claim onassets and earnings than the common shares). Class A:A classification of common stock that may be accompanied bymore voting rights. Class B: a classification of common stock thatusually does not have as many or may not have any voting rights to

elect officers to the Board of Directors of a Corporation.3. Represents OWNERSHIP in the Corporation.


2/62

Common Stock BasicsCommon Stock Basics4. Owners are also referred to as shareholders orequity owners.

5. Street name: A brokerage account where the customer's

securities and assets are held in the name of the brokeragefirm, rather than you holding the stock certificate yourself. Thecustomer is still listed as the real or beneficial owner.

6. Board of Directors: A group of individuals that are elected as, orelected to act as, representatives of the stockholders toestablish corporate management related policies and to make

decisions on major company issues. Such issues includethe hiring/firing of executives, dividend policies, optionspolicies and executive compensation. Every public companymust have a Board of Directors.


3/62

Common Stock BasicsCommon Stock Basics7. Dividends. Distribution of a portion of a company's earnings, decided by

the board of directors, to a class of its shareholders. The dividend ismost often quoted in terms of the dollar amount each share receives (i.e.dividends per share or DPS). It can also be quoted in terms of a percentof the current market price, referred to as dividend yield. Dividends maybe in the form of cash, stock or property. Most secure and stablecompanies offer dividends to their stockholders. Their share prices mightnot move much, but the dividend attempts to make up for this.In the U.S., dividends face double taxation - the amount comes from after-tax income the company generated and the recipients pay taxes on them.

As of 2003, cash dividends are taxed at a maximum rate of 15% as long

as the stock has been held for at least 60 out of the 120 days beginning60 days prior to the ex-dividend date. If you have held the stock for aperiod of less than this the dividend will be taxed at your regular incomelevel.


4/62

Common Stock BasicsCommon Stock Basics

8. Dividend Payout Ratio: The percentage of earnings paid toshareholders in dividends.

Calculated as:

The payout ratio provides an idea of how well earnings support thedividend payments. More mature companies tend to have ahigher payout ratio.


5/62

Common Stock BasicsCommon Stock Basics9. Capital Gain: Profit that results when the price of a security held

by a mutual fund rises above its purchase price and the securityis sold (realized gain). If the security continues to be held, thegain is unrealized. A capital loss would occur when the opposite

takes place.

10. Growth Stock: A stock that experiences a continued period ofgrowth exceeding that of the economy. Generally, the duration isover a year in length.

11. Income Stock: A stock that has a high, consistent, dividend

paid annually.12. Speculative Stock: Stocks that offer the potential for substantial

price appreciation, usually because of some special situationsuch as new management or the introduction of a promising newproduct.


6/62

Common Stock BasicsCommon Stock Basics

13. Cyclical Stocks: these are stocks whose earnings and overallmarket performance are closely linked to the general state of theeconomy.

14. Defensive Stocks: these stocks tend to hold their own, and evendo well, when the economy starts to falter.

15. Mid-cap stocks: are medium-sized companies, generally withmarket values of less than $4-$5 billion but more than $1 billion.

16. Small-cap stocks: are stocks that generally have market valuesof less than $1 billion but can offer above-average returns.


7/62

Other Common Stock ValuesOther Common Stock Values17. Par Value: A dollar amount that is assigned to a security

when representing the value contributed for each share in cashor goods.

18. Book Value: the value of the equity of the firm divided by thenumber of shares outstanding.

19. Liquidation Value: the value obtained for selling all theassets of the corporation on the auction block.

20. Market Value: the current market price of the stock times thenumber of shares outstanding.

21. Investment (Intrinsic) Value: the value of the corporationbased on discounted cash flow analysis and the incomegenerating capacity of the firm.


8/62

Valuation of Common StockValuation of Common Stock

1. Dividend Valuation ModelA model for determining the intrinsic value of a stock, based on a future

series of dividends that grow at a constant rate. Given a dividend pershare that is payable in one year, and the assumption that the dividendgrows at a constant rate in perpetuity, the model solves for the present

value of the infinite series of future dividends.

Where:D = Expected dividend per share one year from now

k = Required rate of return for equity investorG = Growth rate in dividends (in perpetuity)


9/62

Valuation of Common StockValuation of Common Stock2. Capital Asset Pricing Model

A model that describes the relationship between risk and expected return and that isused in the pricing of risky securities.

The CAPM says that the expected return of a security or a portfolio equals the rate on arisk-free security plus a risk premium. If this expected return does not meet or beatthe required return, then the investment should not be undertaken. The securitymarket line plots the results of the CAPM for all different risks (betas).


10/62

Common Stock as an Inflation HedgeCommon Stock as an Inflation Hedge

- Protection Against Inflation

Over the last thirty years the S&P 500has averaged approximately 12% annual

compound return.

- Inflation has averaged approximately

5.4% during the same time period.


11/62

Common Stock as an Inflation Hedge:Common Stock as an Inflation Hedge:

S&P LT Bonds LTGovt Bonds T. Bills CPI

Last 10: 13.8% 11.3% 11.9% 5.6% 3.5%

Last 20: 14.6% 10.6% 10.4% 7.3% 5.2%

Last 30: 10.7% 8.2% 7.9% 6.7% 5.4%

Last 40: 10.8% 6.8% 6.4% 5.7% 4.5%

Last 50: 11.9% 5.8% 5.3% 5.7% 4.4%

Source: Ibbotson and Sinquefield, Stocks, Bonds, Bills and Inflation 2007

yearbook, Chicago.


12/62

The Panic of 1987The Panic of 1987Index arbitrage and portfolio insurance (programmed

trading) were the major cause. From Tuesday 10/13/87 to10/19/87, the DJIA fell 769 points or 31%. On 10/19/87 the

DJIA fell508 points or 22.6%. On 10/28/29 the DJIA fell11.7%.

Mutual funds and pension funds use portfolio insurance.Portfolio insurance is a strategy that uses computer based

models to determine an optimal stock/cash ratio atvarious market prices. Two insurance users called forsales equaling 50% in response to a 10% decline in theS&P 500 Index.


13/62

Stock Market BasicsMost stocks are traded on exchanges, which are places where buyersand sellers meet and decide on a price. Some exchanges arephysical locations where transactions are carried out on a tradingfloor.

The purpose of a stock market is to facilitate the exchange of securitiesbetween buyers and sellers, reducing the risks of investing.


14/62

Stock Market Basics

The primary market is where securities are created (by means of an IPO)while, in the secondary market, investors trade previously-issuedsecurities without the involvement of the issuing-companies. Thesecondary market is what people are referring to when they talk aboutthe stock market. It is important to understand that the trading of acompany's stock does not directly involve that company.

The most prestigious exchange in the world is the New YorkStock Exchange (NYSE). The "Big Board" was founded over200 years ago in 1792 with the signing of the Buttonwood

Agreement by 24 New York City stockbrokers and merchants.Currently the NYSE, with stocks like General Electric,McDonald's, Citigroup, Coca-Cola, Gillette and Wal-mart, is themarket of choice for the largest companies in America.

Types of Markets


15/62

Stock Market Basics

the OTC and Nasdaq

The second type of exchange is the virtual sortcalled an over-the-counter (OTC) market, ofwhich the Nasdaq is the most popular. Thesemarkets have no central location or floor

brokers whatsoever. Trading is done through acomputer and telecommunications network ofdealers. It used to be that the largest companieswere listed only on the NYSE while all othersecond tier stocks traded on the other

exchanges. The tech boom of the late '90schanged all this; now the Nasdaq is home toseveral big technology companies such asMicrosoft, Cisco, Intel, Dell and Oracle.


16/62

Stock Market Basics

theAMEX

The third-largest stock exchange by tradingvolume in the United States. The AMEX islocated in New York City and handles about 10%of all securities traded in the U.S.

The AMEX has now merged with the Nasdaq. Itwas known as the "curb exchange" until 1921.

It used to be a strong competitor to the New YorkStock Exchange, but that role has since been

filled by the Nasdaq. Today, almost all trading onthe AMEX is in small-cap stocks, exchange-traded funds and derivatives.


17/62


18/62

Stock Market Basics

Reading Stock Quotes

Column 5: Dividend Per Share - This indicates the annual dividend payment per share. If this space isblank, the company does not currently pay out dividends.

Column 6: Dividend Yield - The percentage return on the dividend. Calculated as annual dividends pershare divided by price per share.

Column 7: Price/Earnings Ratio - This is calculated by dividing the current stock price by earnings pershare from the last four quarters. For more detail on how to interpret this, see our P/E Ratio tutorial.

Column 8: Trading Volume - This figure shows the total number of shares traded for the day, listed inhundreds. To get the actual number traded, add "00" to the end of the number listed.

Column 9 & 10: Day High and Low - This indicates the price range at which the stock has traded atthroughout the day. In other words, these are the maximum and the minimum prices that people have

paid for the stock.


19/62

Stock Market Basics

Reading Stock Quotes

Column 12: Net Change - This is the dollar value change in the stock pricefrom the previous day's closing price. When you hear about a stock being

"up for the day," it means the net change was positive.

Quotes on the InternetNowadays, it's far more convenient for most to get stock quotes off the

Internet. This method is superior because most sites update throughout the

day and give you more information, news, charting, research, etc.


20/62

Stock Market Basics

The use of "The use of "bullbull" and "" and "bearbear" to describe markets comes from the" to describe markets comes from theway in which each animal attacks its opponents. That is, away in which each animal attacks its opponents. That is, abull thrusts its horns up into the air, and a bear swipesbull thrusts its horns up into the air, and a bear swipesits paws down. These actions are metaphors for the movementits paws down. These actions are metaphors for the movement

of a market: if the trend is up, it is considered a bull market. Andof a market: if the trend is up, it is considered a bull market. Andif the trend is down, it is considered a bear market.if the trend is down, it is considered a bear market.

The Bull marketThe Bull market is when everything in the economy is great, peopleis when everything in the economy is great, peopleare finding jobs, gross domestic product (GDP) is growing, andare finding jobs, gross domestic product (GDP) is growing, andstocks are rising. Things are just plain rosy! Picking stocksstocks are rising. Things are just plain rosy! Picking stocks

during a bull market is easier because everything is going up.during a bull market is easier because everything is going up.Bull markets cannot last forever though, and sometimes they canBull markets cannot last forever though, and sometimes they canlead to dangerous situations if stocks become overvalued. If alead to dangerous situations if stocks become overvalued. If aperson is optimistic and believes that stocks will go up, he orperson is optimistic and believes that stocks will go up, he orshe is called a "bull" and is said to have a "bullish outlook".she is called a "bull" and is said to have a "bullish outlook".

Animals in the

Market


21/62

Stock Market Basics

Bear Markets

Bear Markets characterize the attitude of investors

who believes that a particular security or marketis headed downward. Bears attempt to profitfrom a decline in prices. Bears aregenerally pessimistic about the state of a givenmarket. Bearish sentiment can be applied to all

types of markets including commodity markets,stock markets and the bond market.


22/62

Stock Market Basics

Selling Short

The selling of a security that the seller does notown, or any sale that is completed by thedelivery of a security borrowed by the seller.Short sellers assume that they will be able tobuy the stock at a lower amount than the price atwhich they sold short.

Selling short is the opposite of going long. That is,short sellers make money if the stock goes

down in price.This is an advanced trading strategy with many

unique risks and pitfalls. Novice investors areadvised to avoid short sales.


23/62

Investing in Equities

Common StockInvestments


24/62

A. Basic Characteristics 1. Equity Capital

2. Types

a. Growth Stock

b. Income Stock

c. Speculative Stock

d. Cyclical Stock

e. Defensive Stock


25/62

Common Stock as an Inflation Hedge

Protection Against Inflation

Over the last thirty years the S&P 500has averaged approximately 11%annual compound return.

Inflation has averaged approximately5.4% during the same time period.


26/62

Types of Security Analysis

1. Fundamental Analysis

2. Technical Analysis


27/62

The Father of Fundamental Analysis:

Benjamin Graham

Who was Benjamin Graham?

Fundamental Analysis: A method of evaluating asecurityfactors. Fundamental analysts attempt to studyeverything that can affect the security's value, includingmacroeconomic factors (like the overall economy andindustry conditions) and individually specific factors(like the financial condition and management ofcompanies).

Sources: Security Analysis (Graham and Dodd); The Intelligent Investor(Graham)


28/62

Ben Graham and Mr. Market:

Long ago Ben Graham described the mental attitude towardmarket fluctuations that I believe to be most conducive toinvestment success. He said that you should imagine marketquotations coming from a remarkably accommodating fellownamed Mr. Market who is your partner in a private business.Without fail, Mr. Market appears daily and names a price at whichhe will either buy your interest or sell you his. Even though thebusiness that the two of you own may have economiccharacteristics that are stable, Mr. Markets quotations will beanything but stable. For, it is sad to say, Mr. Market is a fellowwho has incurable emotional problems. At times he falls euphoricand can see only the favorable factors effecting the business.When in that mood, he names a very high buy-sell price because

he fears that you will snap up his interest and rob him of imminentgains. At other times he is depressed and can see nothing buttrouble ahead for both the business and the world. On theseoccasions he will name a very low price, since he is terrified thatyou will unload your interest on him.


29/62

Ben Graham and Mr. Market

Continued: Mr. Market has another endearing characteristic: He

doesnt mind being ignored. If his quotation isuninteresting to you today, he will be back with a new onetomorrow. Transactions are strictly at your option. Underthese conditions, the more manic-depressive his behavior,the better for you.

But, like Cinderella at the ball, you must heed onewarning or everything will turn into pumpkins and mice:Mr. Market is there to serve you, not to guide you. It is hispocketbook, not his wisdom, that you will find useful. If heshows up someday in a particularly foolish mood, you are

free to either ignore him or to take advantage of him, but itwill be disastrous if you fall under his influence. Indeed, ifyou arent certain that you understand and can value yourbusiness far better than Mr. Market, you dont belong in thegame. As they say in poker, If youve been in the game 30minutes and you dont know who the patsy is, youre the

patsy.


30/62

Grahams Fundamental

Investment Rules

1. Adequate Size

2. Sufficient Strong FinancialCondition

3. Earnings Stability 4. Dividend Record

5. Earnings Growth

6. Moderate Price/Earnings Ratio 7. Moderate Ratio of Price to Assets


31/62

Terms

1. Net Current Assets (NCA) Defined as:

Current Assets

- Current Liabilities

- Long-Term Debt

- Preferred Stock

NCA Total

NCAc = NCA/# of Common Shares


32/62

Terms (continued)

2. Data Source S&P Stock Guide

Value Line, etc.

3. Earnings Per Share (EPS) 4. Market Price

5. Book Value Per Share

6. Dividends Per Share 7. Current Ratio


33/62

Terms (continued)

8. Total Debt

9. Equity

10. Growth

g = [ (1 + RP,-1)(1 + RP,-2) ... (1 + RP,-10)] -11/n


34/62

The Graham Model

1. Group A Criteria#1: E/P > 2 (AAA Yield)(1 pt.)

E/P > 1.33 (AAA Yield) (1/2 pt.)

#2: P/E < .4 (Avg. P/E in last 3 yrs.) (1 pt.)

P/E < .4 (Avg. P/E in last 10 yrs.) (1/2 pt.)

#3: P/Bk < 2/3 (1 pt.)

P/Bk < 1 (1/2 pt.)

#4: D/P > .67 (AAA Yield) (1 pt.)

D/P > .50 (AAA Yield) (1/2 pt.)

#5: P/NCA < 1 (1 pt.)

P/NCA < 1.33 (1/2 pt.)


35/62

The Graham Model

2. Group B Criteria#6: CR > 2 (1 pt.)

CR > 1.8 (1/2 pt.)

#7: TD/E < 1.0 (1 pt.)

TD/E < 1.2 (1/2 pt.)#8: TD/NCA < 2 (1 pt.)

NCA > 0 (1/2 pt.)

#9: G10 > 7%/YR. (1 pt.)

G5 > 7%/YR. (1/2 pt.)

#10: No more than 2 declines in earnings of 5% each overthe last 10 years for one full point.

No more than 3 declines in earnings of 5% or more in last10 years for one-half point.


36/62

The Influence of Philip

Fisher

The characteristics of a business that most impressed Fisherwas:

a companys ability to grow sales and profits over theyears at rates greater than the industry average.

In order to do so, a company needed to possess productsor services with sufficient market potential to make itpossible for a sizable increase in sales for at least severalyears.

Fisher was not so much concerned with the consistent

annual increase in sales in any given year, rather, hejudged a companys success over a period of severalyears. He was aware that changes in the business cyclecould and would have a material effect on sales andearnings in any given year.


37/62

The Influence of PhilipFisher

Fisher identified companies that, decade bydecade, showed promise of above-averagegrowth. The two types of companies that couldexpect to achieve above-average growth were

companies that, were (1) fortunate and ableand were (2) fortunate because they are able.

Fisher also found that a companys research anddevelopment efforts contribute mightily to thesustainability of the companys above-average

growth in sales. Even non-technical businessesneed a dedicated research effort to producebetter products and more efficient services.


38/62

The Influence of PhilipFisher

Sales Organization: Fisher also examined a companys salesorganization. According to him, a company could developoutstanding products and services, but unless they wereexpertly merchandised, the research and developmenteffort would never translate into revenues.

Profits and Costs: Fisher also examined a companys profitmargins, its dedication to maintaining and improvingprofit margins, and, finally, its cost analysis andaccounting controls. Fisher sought companies that werenot only the lowest-cost producer of products or servicesbut were dedicated to remaining that way.


39/62

Contemporary

Fundamentals: Peter Lynchs Ten Golden Rules of

Investing:

1. Dont be intimidated by experts (ex spurts).

2. Look in your own backyard.

3. Dont buy something you cant illustrate with a crayon.4. Make sure you have the stomach for stocks.

5. Avoid hot stocks in hot industries.

6. Owning stocks is like having children. Do not have more than

you can handle.

7. Dont even try to predict the future.8. Avoid weekend worrying. Do not get scared out of good stocks.

Own your mind.

9. Never invest in a company without first understanding its finances.

10. Do not expect too much, too soon. Think long-term.


40/62

Contemporary

Fundamentals:

Peter Lynchs mistakes to avoid:

1. Thinking that this year will be any differentthan any other year

2. Becoming too concerned over whether thestock market is going up or down

3. Trying to time the market

4. Not knowing the story behind the company in

which you are buying stock

5. Buying stocks for the short-term


41/62

Contemporary

Fundamentals:

Lynch Maxims:

1. A good company usually increases its dividends every

year.

2. You can lose money in a very short time, but it takes along time to make money.

3. The stock market isnt a gamble as long as you pickgood companies that you think will do well and not

just because of the stock price.

4. You have to research the company before you putmoney into it.


42/62

Lynch Maxims (cont.)

5. When you invest in the stock market you should alwaysdiversify.

6. You should invest in several stocks (5).

7. Never fall in love with a stock, always have an open mind.

8. Do your homework.

9. Just because a stock goes down doesnt mean it cant golower.

10. Over the long-term it is generally better to buy stocks in smallcompanies.

7. Never buy a stock because it is cheap, but because youknow a lot about it.

Source: One Up On Wallstreet, by Peter Lynch


43/62

Sir John Marks Templeton

Who is Sir John Marks Templeton?John Templeton borrowed $10,000 and started a brilliant investment

career, which enabled him to be one of two investors to become

billionaires solely through their investment prowess. Templeton

has had decade after decade of 20% plus annual returns and

managed over $6 Billion in assets. Templeton is generallyregarded as one of the worlds wisest and most successful

investors. Forbes Magazine said,

Templeton is one of a handful of true investment greats in a

field of crowded mediocrity and bloated reputations.

Templeton holds that the common denominator connectingsuccessful people with successful enterprises is a devotion to

ethical and spiritual principles. Many regard Sir John as the

greatest Wallstreet Investor of all time.


44/62

Sir John Mark Templeton

Sir Johns 16 Rules for InvestmentSuccess:1. Invest for maximum total real return including taxes andinflation.

2. Invest. Dont trade or speculate.3. Remain flexible and open-minded about types ofinvestments. No one kind of investment is always best.

4. Buy at a low price. Buy what others are despondentlyselling. Then sell what others are despondently buying.

5. Search for bargains among quality stocks.

6. Buy value not market trends or economic value.

7. Diversify. There is safety in numbers.

8. Do your homework. Do not take the word of experts.Investigate before you invest.


45/62

Templetons 16 Rules

9. Aggressively monitor your investments.

10. Dont panic. Sometimes you wont have everything soldas the market crashes. Once the market has crashed, dontsell unless you find another more attractive undervaluedstock to buy.

11. Learn from your mistakes, but do not dwell on them.

12. Begin with prayer, you will think more clearly.13. Outperforming the market is a difficult task, you must

outthink the

managers of the largest institutions.

14. Success is a process of continually seeking answers to

new questions.15. There is no free lunch. Do not invest on sentiment. Never

invest in an IPO. Never invest on a tip. Run the numbersand research the quality of management.

16. Do not be fearful or negative too often. For 100 years

optimists have carried the day in U.S. Stocks.


46/62

Investing in Equities

Technical Analysis


47/62

A. Definition

Technical analysis really just studies supply and demand in amarket in an attempt to determine what direction, or trend,will continue in the future. In other words, technicalanalysis attempts to understand the emotions in the marketby studying the market itself, as opposed to itscomponents. If you understand the benefits and limitationsof technical analysis, it can give you a new set of tools orskills that will enable you to be a better trader or investor.

Technical Analysis is the belief that

important information about futurestock price movements can be

obtained by studying the historical

price movement.

1st Qtr 2nd Qtr 3rd Qtr 4th Qtr 0

10

20

30

40

50

60

70

80

90

1st Qtr 2nd Qtr 3rd Qtr 4th Qtr

A ti


48/62

Assumptions

1. The Market Discounts Everythingtechnical analysis assumes that, at any given time, astock's price reflects everything that has or could affectthe company - including fundamental factors. Technical

analysts believe that the company's fundamentals, alongwith broader economic factors and market psychology,are all priced into the stock, removing the need to actuallyconsider these factors separately. This only leaves theanalysis of price movement, which technical theory viewsas a product of the supply and demand for a particular

stock in the market.


49/62

Assumptions

2. Price Moves in TrendsIn technical analysis, price movementsare believed to follow trends. This means

that after a trend has been established,the future price movement is more likelyto be in the same direction as the trendthan to be against it. Most technical

trading strategies are based on thisassumption.

A ti


50/62

Assumptions

3. History Tends To Repeat Itself

Another important idea in technical analysis is that historytends to repeat itself, mainly in terms of price movement.The repetitive nature of price movements is attributed tomarket psychology; in other words, market participantstend to provide a consistent reaction to similar marketstimuli over time. Technical analysis uses chart patternsto analyze market movements and understand trends.Although many of these charts have been used for morethan 100 years, they are still believed to be relevant

because they illustrate patterns in price movements thatoften repeat themselves.


51/62

Technical Analysis Assumptions:

Technical analysts base their buy and selldecisions on the charts they prepare of recordedfinancial data

1. Market value is determined by the interaction of supplyand demand.

2. Supply and demand are governed by numerous factors,both rational and irrational.

3. Security prices tend to move in trends that persist for anappreciable length of time, despite minor fluctuations inthe market.

4. Changes in a trend are caused by shifts in supply and

demand.5. Shifts in supply and demand, no matter why they occur,

can be detected sooner or later in charts of markettransactions

6. Some chart patterns tend to repeat themselves.

T f T h i l Ch t


52/62

Types of Technical Charts:

Bar Charts

Trading Days

Dollar

Price of

Stock

H

L

C


53/62

Types of Technical Charts:

Line Charts: a graph of successive daysclosing prices

Trading Days

Closing

Prices


54/62

B. Approaches to

Technical Analysis 1. The Dow Theory

The Dow theory views the movement of market

prices as occurring in three categories1. Primary Movements: bull and bear markets

2.Secondary Movements: up and downmovements of stock prices that last for a few

months and are called corrections3. Daily Movements: meaningless random dailyfluctuations


55/62

B. Approaches to Technical

Analysis (continued) 2. Trading Action

a. Concentrates on minor trading

characteristics in the market b. Examples include:

1. Monday is the worst day to buy stocks,Friday is the best.

2. If January is a good month for themarket then chances are good a good yearwill occur.


56/62


Analysis (continued) 3. Bellwether Stocks

a. A few major stocks in the market are

consistently highly accurate inreflecting the current state of themarket.

IBM

DuPont AT&T

Exxon

GM


57/62

Approaches to Technical

Analysis (Continued): 4. Relative Strength

The basic idea behind relative strength

is that some securities will increasemore, relative to the market, in bullmarkets and decline less, relative tothe market, in bear markets.

Technicians believe that by investing inthose securities that exhibit relativestrength higher returns can be earned.


58/62


Analysis (continued)

5. Technical Indicators

a. Market Volume -- a measure of investorinterest

1. STRONG when volume goes up in risingmarket or drops during declining market

2. WEAK when volume goes up in decliningmarket or decreases during a rally


59/62


Analysis (continued) Example

On June 3, 2003 Advances = 930

Declines = 691

Difference = + 239

On June 11, 2003

Advances = 651 Declines = 920

Difference = -269

Conclusion: A weak market.


60/62



b. Breadth of the Market

1. Considers the advances anddeclines in the market.

2. As long as advances outnumberdeclines a strong market exists.

3. The spread is used as anindicator of market strength.


61/62



c. Short Interest-- measures the number of stocks

sold short When the level of short interest is high, by historical

standards, then the situation is optimistic.

d. Odd-Lot Trading: Theory of Contrary Opinion If the amount of odd-lot purchases start to exceed odd-lot

sales by a widening margin, it may suggest thatspeculation is occurring among small investors. This isthe first signal of an upcoming bear market.


62/62

Review Questions: Section 3 What are two theoretical ways to determine the value ofCommon Stock?

Net Current Asset in the Graham model is defined as?

Why do we calculate geometric instead of linear growthrates?

The Graham model is a fundamental valuation model?Explain.

Define technical analysis.

What are Bellweather stocks? Who was Peter Lynch and what is he primarily known for?

What are Lynchs 10 golden rules for investing?

13020045 Common Stock Basics

Documents

Transcript of 13020045 Common Stock Basics