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: April 7, 2021

The High Dividend Strategy: Pros and Cons Let's start with the bottom line about investing in high dividend stocks: It works, but there are significant wrinkles.  A while back, I did a 20-year study of investing in high dividend stocks.  The approach was straightforward.  I began with the S&P 500 universe and divided it into 10 groups of 50 stocks each.  The groups were arranged by dividend yield, highest to lowest, at the beginning of each of the years.   I then tracked the total returns (dividends plus capital appreciation) of these groups for the full period. The results were illuminating.   The highest total returns were from the group with the highest dividend yields.   The returns then descended in perfect order down to the group with the lowest dividend yields.   What's more, the aggregate return from the group with the highest returns was greater than that of the Standard & Poor's 500 and its volatility over the period was lower. That did not mean all
Post a Comment
Read more

Sound Advice: April 21, 2021

How is the Market Doing? Despite all the noise being trumpeted by the media, the daily prattle about market moves is often wide of the mark and overloaded with information that is misleading or just plain inaccurate.   How else to explain a jump of several hundred points one day followed by a plunge the next day?   That makes no sense. Over time, the foundation for stock valuations is underlying profitability of the companies involved.   As profits increase, stock prices rise, though not necessarily in perfect reflection.   The relationship tends to be meaningful over extended periods, but often not in shorter spans of time.   That’s all about changes in investor psychology.   So let’s begin by defining the “market”.   If we are referring to stocks, the most common reference is to the Dow Jones Industrial Average, which consists of 30 major companies whose progress might be considered representative of the U.S. economy as a whole. The majority of the companies included here are r
Post a Comment
Read more

Sound Advice: April 14, 2021

Up, Down & Sideways   In past years, the warmer months brought with them a time to turn one’s thoughts to more blissful endeavors.   Although childhood may have been many years ago, what lingers is the apparent freedom from care we felt when at last we were done with school.   Much has changed since those halcyon days when time hardly seemed to move.   Back then, the days went by slowly and the important decisions were few.   Now it’s almost as if you don’t know which direction to turn first. It’s all about communications and the seeming necessity of keeping up to date with what’s going on.   Much of the rising flow of developments may have little impact, but even so it’s no longer a time when we can disconnect until September. From an investment perspective, the challenge is to sort through the rapidly growing mountain of information to isolate the data that is critical and take action where it is needed.   On a grand scale, it’s a matter of separating the wheat from the cha
Post a Comment
Read more