The Absolute Beginner

"Beginners need lovin' too"

Before I delve any further into my ‘Education’ segment, I want to catch those up who I have dubbed, “The Absolute Beginners”. These are the people who know absolutely nothing about the stock market, which is fine (there are millions who know absolutely nothing about the stock market). Hopefully, this article can catch these beginners up so they can understand the ‘Education’ segment.

What are shares?

When you own shares of stock, you own a part of the corporation. The sale of stock by a corporation is a way for them to raise income. This is done when a company releases shares in its initial public offering (IPO). After the IPO is released, shares are traded (Sold and Bought) amongst investors.

Which companies are traded publicly?

From the burger you ate earlier today (McDonalds), to the shirt you have on your back (Ralph Lauren), to the very computer you are reading this article on (Dell). These are just three examples. There are way too many companies to list (thousands!). If you enjoyed a restaurant you dined at the other night, see if they are publicly traded! If a certain brand of clothing fits and looks better on you than others, see if they are publicly traded! You can usually find this by looking them up on a search engine or just click this link and entering the company’s name.

I found the company I was looking for!.. What are all these numbers?

If you look at Starbucks’ Yahoo Finance page you will stumble upon two columns that consist of numbers. What do these numbers mean?

Column 1:

Last Trade: The current price of one share

Trade Time: Don’t worry

Change: The increase or decrease from the previous trading day

Prev Close: The price of one share the previous trading day

Open: The cost of one share at the start of today’s trading day

Bid: Don’t worry

Ask: Don’t worry

1y Target Est: The price analyst estimate one share will be worth in 1 year

Column 2:

Day’s Range: The high and low of this current day

52wk Range: The high and low of the past 52 weeks

Volume: The number of shares either bought or sold in today’s trading day

Avg Volume (3m): The average daily volume from the past 3 months

Market Cap: The total value of the company’s outstanding shares

P/E: Price to Earnings Ratio (Wrote a previous article explaining this)

EPS: Earnings Per Share

Div & Yield: The amount of dividend given per share

What else should I know?

- There are 4 quarters in a year. In each quarter the company reports its earnings.

- Yahoo finance is an investor’s best friend.

I know this was brief, but hopefully this might answer some questions for the ‘Absolute Beginner’. Read some of the other articles and put the pieces together! If you have any questions feel free to leave a comment.

Im a beginner and/ or a poor college student.. Which online broker is right for me?

There is only one online broker for beginners and/or poor college kids and that online broker is Scottrade! At Scottrade, it’s only $7 a trade, they have 306 local branches, and is only $500 to open an account. At an online broker like TD Ameritrade, it'll cost you about $10 a trade, and you must put in a $2000 minimum to open an account! I don't know about you, but Im a poor college student (I CANNOT AFFORD THAT). TD Ameritrade also has hidden fees that'll bite you right on your keester!

Here's how you open an account:

1. Have a checking account handy (cannot pay cash, check ONLY)

2. Have $500 in your checking account or more depending on your fiscal situation. (Remember, $500 is only the minimum)

3. Find your local Scottrade office (no, you cannot sign up online, but this is your future we're talking about, get off your lazy ass and do it!)

4. Wait a day for your funds to get into your account

5. Start investing!.. Wisely of course.

Final Thought: I am dubbing Scottrade the official online broker of the beginner and/ or poor college student! At only $7 a trade and $500 min. startup, you cannot go wrong.

http://www.scottrade.com

Check back tomorrow! Before I continue with the rest of my 'Education' segment, I will be addressing the 'Absolute Beginners' and hopefully catch them up.

The PE ratio

Education Pt. II

I cannot stress how important it is to educate yourself before taking the plunge into the stock market. If you do not care about educating yourself, it will be more like taking a plunge into shark infested waters. You WILL get eaten alive! This is why I am continuing the 'Education' segment today with the basic practices of the PE ratio along with a few tricks I have learned. The PE ratio is just one of the many weapons we investors have to judge a company. The PE ratio is a very good indicator of whether a company is over or under valued (hopefully you now see why this is so important).

But what is a PE ratio?

The PE Ratio or the Price to Earnings Ratio is the price of a company’s share divided by the company’s earnings per share (EPS). Say a company has a share price of $50 and an EPS of $2; this gives them a PE ratio of 25. Ideally, you want a company with a low PE ratio. The average PE ratio for an S&P 500 company is about 15. Though you want a company with a low PE ratio, a higher PE ratio does not mean the stock price will not go up.

Is their PE ratio too high?

If the company is a fast grower (+25% growth for the next 5 years) it is acceptable to have a higher than average PE ratio. If you thought Chipotle’s (CMG) PE ratio was too high at 30, which is a bit overvalued for a restaurant, you would have missed out on the 100% return the ensued. Another example is Starbucks (SBUX). Until recently, they were usually boasting a PE of about 40, which is a bit above average for their industry, but take a look at their chart since their inception in early 1990’s. I think we can both agree that they did better than okay.

Is it too high yet?

When the PE is high enough for you to drop your jaw, like in the case of Jones Soda (JSDA), and the growth and earnings guidance is not there to bail you out, run. Jones Soda had a very impressive run that shot from $12 a share to more than $30, only to come crashing straight back to reality. When their stock price was more than $30, they were hauling around a PE of more than 300, with a next year PE of 90. One of their nearest competitors, Hansen Natural (HANS), is still in the growth stages of their company and ironically shares almost the same 5 year growth of about 30-35% as Jones Soda. And what was Hansen’s PE during all of this? Their PE was and still is a very sustainable 40 with a forward PE of 20. What gives Jones Soda’s stock the privilege to be valued more than 7 times as much (according to the PE ratio) as a successful company such as Hansen? This formula, along with shrinking guidance, equated to Jones falling right back to where they belong. The same goes for Blue Nile (NILE), which sports a PE of almost 90 and a forward PE of 60. I was backing this company when it was worth $30 a share with a PE of about 30 and it is now at $80. It's time to let go (Pigs get slaughtered)! Blue Nile will not have the same catastrophic crash as Jones, because their PE is not as outrageous, but I am looking for a bit of a pullback.

Final Thoughts:
- Use the PE to let you know whether the company is overvalued or undervalued.

I want to start investing!.. Where do I start?

Education

“The best investment one can make”

Before you start investing your hard earned cashed blindly, whether it was from working, inheritance, or theft, remember that obtaining those dead presidents was the easy part. If you are not willing to learn the fundamental part of the game, you might as well buy a lottery ticket, or put your money in a mutual fund.

Here is a quick review of how to see if a company has good fundamentals or not. Most of this should make sense to you.

Income Statement - Apple's Income Statement

- Examine the company’s ‘Gross Profits’ year over year. The company’s ‘Gross Profits’ should be growing every year. (Who wants to invest in a company that has lower profits year after year?)

Balance Sheet – Apple’s Balance Sheet

- Examine the ‘Total Current Assets’. The total current assets should be rising every year like the ‘Gross Profits’ in the Income Statement.

- Scroll down to inspect the ‘Long Term Debt’ and to a lesser extent ‘Short Term Debt’. The company should have enough ‘Total Current Assets’ to cover all of the ‘Long Term Debt’, but in Apple’s case, they have 0 debt. (We check this to assure the company is not a candidate for bankruptcy.)

Analysts Estimates – Apple’s AE

- Look at the ‘Earnings History’ and see if the company’s earnings have been beating estimates. Though earnings can be unpredictable, I have found that a company that beats their earnings regularly is a very good sign.

- It is important to check the ‘EPS (Earnings per Share) Trends’. See if the estimates have been rising or shrinking. If the ‘EPS Trend’ has been rising, this is considered a good sign.

- Scroll down to ‘Growth Est.’ and look at growth for the next five years (we’re thinking long-term here). If the company has +20% growth, we’re dealing with a fast grower, which usually give you the best return over time.

Now, just because a company doesn’t have high growth does not mean it has poor fundamentals. For example, look at Coca-Cola’s AE. Notice that they only have about 9% growth. Though coke is what we would consider a ‘slow grower’, they have done quite well this year (up about 22% since the same time last year). You can use the company’s five year growth to determine what type of company you’re dealing with (whether it’s a fast grower, slow grower, stalwart, etc.), but we’ll talk about that later.

By looking at these three pages you can get a basic understanding of what kind of company you’re dealing with and its financial shape. This is just scratching the surface in analyzing a company, but it’s a good start.

Recommended Reading:
'One up on Wall St.' by Peter Lynch
'Beating the Street' by Peter Lynch
Here is a link for some other good suggestions.

Check back tomorrow! I will discuss the P/E Ratio in part II of this 'Education' segment.