Skip to main content

Sound Advice: September 8, 2021

Wall Street Lingo Translated – Part II

Beta

The beta is a measure of market sensitivity (volatility) relative to the Standard & Poor’s 500 Index, which has a beta of 1.00.  A stock that moves 20% more than the S&P in either direction would have a beta of 1.20.  A well-constructed portfolio aimed at delivering worthwhile returns while managing sensitivity (a.k.a., risk) would have an average beta below 1.00

Bid and Asked Prices

There are actually two prices for each stock.  One is the bid price, which is the price a trader (usually an exchange specialist who handles huge quantities of shares) will pay to buy a stock from an investor. The other is the asked price, which is the price a trader will sell a stock for.  The difference between the bid and asked prices is known as the spread, which tends to be quite narrow in the case of actively traded stocks.

The situation with bonds is similar, though spreads tend to broaden when the trade involves a relatively small number of bonds.  For that reason, individual investors are usually better served by investing in bond funds, which buy in huge quantities that are bought with minimal spreads.

Round Lot

This is a phrase from decades ago that has largely gone the way of the dodo.  There was a time when most stocks were bought in 100-share lots, otherwise known as round lots.  When stocks were bought in other than round lots, they were known as odd lots, for which there was an additional charge.  Those conventions are gone and today stocks can even be bought in fractional shares.

Surprises

Surprises are what make stocks jump or fall unexpectedly.  These surprises are reports of profits significantly above or below the level that Wall Street analysts and the investing public had been led to expect.  Although earnings tend to be the focus, surprises can also be in revenues, backlogs or incoming order flow.  In each case, the impact on the stock’s price may be significant.

Target Price

One of the most tempting - - - and dangerous - - - numbers regularly bandied about is the target number for share prices.  Target numbers are found on many investing websites.  They are meaningless.  Why?  Because attempts to come up with future prices tend to be based on projections of future profits multiplied by the typical past valuation rates, i.e., price-earnings multiples.  In other words, how much investors had valued those profits in the past.

The flaws of this speculation are several.  The first is the projection of future profits, which at best is a good guess, but more often than not no better than dart throwing.  The second is the hoped-for valuation rate.  The third is a projection of where the market will be at some time in the future.  Both of these are iffy since the market and individual stocks almost always sell well above or below what might be considered a normal valuation range.

N. Russell Wayne, CFP®

Any questions?  Please contact me at nrwayne@soundasset.com 

Comments

Post a Comment

Popular posts from this blog

Sound Advice: July 16, 2025

Fixed annuities are poor investments Fixed annuities are often criticized as poor investments for several reasons, despite their reputation for providing stable, predictable income.  Here are the key drawbacks and concerns:   High Fees and Commissions Internal Fees:  Fixed annuities can carry a range of fees, including administrative charges, mortality expense risk fees, and rider fees. These can add up to 2%–4% per year, significantly eroding returns over time. Commissions:  Sales agents and financial advisors often receive high commissions for selling annuities—sometimes as much as 5%–8% of the invested amount. This creates a financial incentive for advisers to recommend them, even when they may not be the best fit for the client. Comparison to Other Investments:  Mutual funds and ETFs typically have much lower fees and commissions, making them more cost-effective for long-term growth. Limited Growth a...
Post a Comment
Read more

Sound Advice: October 8, 2025

How many investors have outperformed the stock market over the last 20 years? Very few investors have outperformed the stock market over the past 20 years.   Data shows that only about 6% to 8% of actively managed equity funds in the U.S. beat the market over this period, with the vast majority—over 90%—underperforming the S&P 500 or equivalent broad indexes. Percentage of Investors Beating the Market Only 8% of equity funds investing in large companies managed to outperform the market over a recent 20-year span. About 94% of all domestic funds underperformed the S&P 1500 Composite Index from 2005-2024. Over shorter timeframes (5-10 years), typically fewer than 15-20% of fund managers beat the S&P 500, and performance persistence is rare. Why It Is Rare The S&P 500’s high returns have proven immensely difficult to beat, especially as indexing has become popular and markets have ...
Post a Comment
Read more

Sound Advice: January 15, 2025

Why investors shouldn't pay attention to Wall Street forecasts   Investors shouldn't pay attention to Wall Street forecasts for several compelling reasons: Poor accuracy Wall Street forecasts have a terrible track record of accuracy. Studies show that their predictions are often no better than random chance, with accuracy rates as low as 47%   Some prominent analysts even perform worse, with accuracy ratings as low as 35% Consistent overestimation Analysts consistently overestimate earnings growth, predicting 10-12%                 annual growth when the reality is closer to 6%.   This overoptimism can                 lead investors to make overly aggressive bets in the market. Inability to predict unpredictable events The stock market is influenced by numerous unpredictable factors, including geopolitical events, technological changes, and company-specific news.   Anal...
Post a Comment
Read more