Friday, May 8, 2009

An introduction to stocks

Companies raise money by issuing stocks. This is a brief introduction to common stocks — ordinary shares with voting rights attached. A company may have more than one class of stock, with different voting rights and dividend payments for each, e.g., class A and class B.

When you purchase stocks (shares, equities), you essentially own a piece of that company (and can go around and brag about it). As a shareholder, you have a claim on its assets, earnings, and have a say in its management. Even though you may not own stocks directly (in your portfolio), you most probably do in mutual funds or your pension plan.

Stocks are riskier investments that savings accounts, GICs, and bonds, but with risk comes the potential for bigger gains.

Here is information about a stock representative of what you'll find on any investment site. This one is a snapshot from the Globe and Mail (where a new format for stock quotes is in Beta) of Royal Bank of Canada common stock (its symbol here is RY-T; Yahoo! Canada Finance uses RY.TO) during a trading day in Toronto. We'll go through its main bits of information.

C$ 43.990 — the current price at 1:43pm (the quotes outside trading platforms are usually delayed, here by 15 minutes), which represents a net gain of 52 cents (or +1.20%) over yesterday's closing price (which was 43.99 - 0.52 = $43.47); the Open price (at which Royal Bank shares first traded today), at $43.24, was therefore slightly lower than yesterday's close
High, Low — today's price fluctuation
Bid, Ask — information on the current bid - ask haggle on the trading floor
Volume — the number of shares traded so far today
52-wk High, 52-wk Low — the trading price range of the stock during the last year (see also the one-year chart later below); if you were smart & lucky you would have bought Royal Bank on February 24th of this year (02/24)
Mkt Capmarket capitalization (market cap): the total dollar market value of all of a company's outstanding shares, i.e., the number of all its shares multiplied by the current share price. This figure gives you a company's size, as opposed to its sales or total asset figures. RBC's $61B makes it a large-cap company
EPS (ttm)earnings per share in the past twelve months
P/Eprice/earnings per share. Generally speaking, a high ratio of the share price to the company's earnings per share (a more expensive stock) suggests that investors are expecting higher earnings growth in the future, in comparison to companies with a lower P/E (cheaper stocks)
Forward P/Eforward price/earnings
PEGprice/earnings to growth
Annual Div. — some companies are even more attractive to the long-term investor, as they also issue dividends (usually quarterly) - part of the company's earnings are returned directly to its shareholders. For each Royal Bank share an investor receives $2.00 annually, which works out to a Yield (based on yesterday's closing price) of 2/(43.99-0.52) = 4.6%. So if you buy shares at roughly this price you'll get a return of 4.6% (unless the company gets into cash-flow troubles and cuts the dividend in the future, unlikely in the case of a Canadian bank) plus whatever appreciation the share price achieves (capital gains). Both dividends and capital gains are taxed outside a registered plan such as an RRSP or TFSA, but at a lower rate that interest income.

The quote box described above relates directly to the intraday chart below. The red dashed line is previous day's closing price. The trading volume is also tracked.

And here is the one year chart:

On the same Web page you'll also find the latest headlines related to the company, its annual financial results, and earnings estimates.

Finally, this chart compares Royal Bank's stock to the S&P/TSX Composite index (whose symbol on Yahoo! Canada Finance is ^GSPTSE) since 1995:

The two small, black arrows indicate stock splits, detailed at the bottom of the chart. In a split a company's existing shares are divided into multiple shares. Although the number of shares outstanding increases by the specific multiple, the total dollar value of the shares remains the same, as no real value is added. In a 2:1 split, you receive one additional share for each share you hold. One reason for stock splits is that a company's share price has grown too high for many investors to buy in round lots (for instance, this one). Pre-split chart values are adjusted, to provide a consistent picture.

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