Catalyst Premium Stock Pick Service

Catalyst Stocks Premium Stock Pick Service

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Equity Securities Common Stock as Ownership Shares

Common stocks, also known as equity securities, or equities, represent ownership shares in a corporation. Each share of common stock entitles its owners to one vote on any matters of corporate governance put to a vote at the corporation's annual meeting and to a share in the financial benefits of ownership1 (e.g., the right to any dividends that the corporation may choose to distribute). The common stock of most large corporations can be bought or sold freely on one or more of the stock exchanges. A corporation whose stock is not publicly traded is said to be closely held. In most closely held corporations, the owners of the firm also take an active role in its management. Takeovers generally are not an issue. 'Sometimes a corporation issues two classes of common stock, one bearing the right to vote, the other not. Because of their restricted rights, the nonvoting stocks sell for a lower price, reflecting the value of control. 2The voting system specified in the corporate articles...

Stock Market Opportunities

A unique feature of China's stock markets is that companies may issue A shares and B shares. A shares are primarily for Chinese residents and are denominated in ren-minbi (RMB). B shares were exclusively for foreign investors, but in February 2001, the People's Republic of China (PRC) government allowed Chinese residents to purchase B shares. B shares are not convertible to A shares, but both types of shares give their owners the same rights with one exception dividends for B shares are in foreign currencies. The result is a segmented market in which A shares are much more numerous more than 1,000 companies have issued A shares (1,310 as of February 2007), but only a little over 100 have issued B shares (109 as of February 2007). The total number of A and B shares listed has increased from 53 in 1992 to 1,419 by early 2007. In addition to B share transactions, foreign investors can participate in China's stock markets through several other alternatives, including shares listed in Hong...

Modeling Of Stock Price Diffusion

Crete movement of a stock price over time through the diffusion equation, which combines the average return m and the volatility measured by the standard deviation o. where A is the difference operator (AS ASt St - St-At), S is the stock price, At is the time duration, and z is N(0,1) variable. Note that AS S is the relative change in the stock price, and the relative changes times 100 is the percentage change. Equation (1.4.1) seeks to explain how relative changes are diffused as the time passes around their average, subject to random variation. The diffusion equation (1.4.1) has two parts the first part of the percentage change is the average return m per time period (or drift), multiplied by the number of time periods that have elapsed the second part is the random component that measures the extent to which the return can deviate from the average. Also we see that the standard deviation is increased by the square root of the time change. The root term arises because it can be...

Century of Stock Market History The Level of Stock Prices in Early 1972

Investor's portfolio of common stocks will represent a small cross-section of that immense and formidable institution known as the stock market. Prudence suggests that he have an adequate idea of stock-market history, in terms particularly of the major fluctuations in its price level and of the varying relationships between stock prices as a whole and their earnings and dividends. With this background he may be in a position to form some worthwhile judgment of the attractiveness or dangers of the level of the market as it presents itself at different times. By a coincidence, useful statistical data on prices, earnings, and dividends go back just 100 years, to 1871. (The material is not nearly as full or dependable in the first half-period as in the second, but it will serve.) In this chapter we shall present the figures, in highly condensed form, with two objects in view. The first is to show the general manner in which stocks have made their underlying advance through the many cycles...

Reits Versus Preferred Stocks

Now let's take a look at how well REITs stack up against preferred stocks. Unlike bonds, preferred stocks do not represent the promise of the issuer to repay a specific amount at a specified date in the future, and in the legal pecking order their claims against the corporation are below those of every other creditor. Unless the terms of the preferred stock provide for the right of the holder to demand redemption, preferred shares have certain disadvantages They do not have a fixed maturity date, nor are their holders considered creditors. And they have little or no capital appreciation prospects. They do, however, provide relatively high yields during most market environments, many offering as much as 7 percent. niHI REITs are not as interest-rate sensitive as bonds, preferred stocks, or utilities. The problem here is, as with bonds, what you see is what you get pure yield and very little else. While the high dividends are enticing, preferred stocks, unlike REITs and common stocks,...

Contrarian View Of The Future Of The Us Stock Market

Since the 1930s, the United States has gone from a country in major crisis, mired in a deep depression, about to enter into a world war, with an undeveloped stock market compared to the more established European markets, to becoming the biggest economy in the world, the biggest stock market in the world, and having a currency so strong it has overtaken gold as the world standard. The United States went from a country on the financial brink to the only superpower on earth I don't believe we should rely on future good times in the stock market to gain back devastating losses to our portfolios during bear market years.

What Does the Current Stock Price Tell the Market

Current stock price indicates the amount that the marginal investor, given supply and demand considerations, is willing to pay to acquire a share of a particular stock. In the short run, this price may or may not have anything to do with the true long-term value of a company. The current price may be heavily influenced by a very temporary supply-and-demand imbalance or by the stock market's reaction to the receipt of new information. On Monday, May 4, faced with a tremendous increase in demand, the stock opened at 84.87 a jump of over 72 six times the closing stock price on the previous trading day. ENMD closed at 51.87, down 33 from its opening price. ENMD's trading volume on May 4 was 23,432,500 shares an increase from the 19,100 shares traded on May 1. On December 31, 2002, ENMD closed at 0.86 per share.

Common Stock as Ownership Shares

Common stocks, also known as equity securities or equities, represent ownership shares in a corporation. Each share of common stock entitles its owner to one vote on any matters of corporate governance that are put to a vote at the corporation's annual meeting and to a share in the financial benefits of ownership.2 The common stock of most large corporations can be bought or sold freely on one or more stock exchanges. A corporation whose stock is not publicly traded is said to be closely held. In most closely held corporations, the owners of the firm also take an active role in its management. Therefore, takeovers are generally not an issue.

Characteristics of Common Stock

The two most important characteristics of common stock as an investment are its residual claim and limited liability features. 2 A corporation sometimes issues two classes of common stock, one bearing the right to vote, the other not. Because of its restricted rights, the nonvoting stock might sell for a lower price. Figure 2.10 Stock market listings.

Understand the psychology of selecting stocks

You only go to parties when you've just made a sweet deal in the stock market. If you couldn't tell others of your shrewd stock picks and your latest killing in the market, there'd be little point to owning securities. While the thought has, hopefully, never crossed your mind of sending copies of a brokerage statement out to friends and relatives, you've been known on more than a few occasions to offer unsolicited stock tips and investment advice.

LOS 44f Describe and account for the relative popularity of the various capital budgeting methods and explain the

The Relationship Between NPV and Stock Price Since the NPV method is a direct measure of the expected change in firm value from undertaking a capital project, it is also the criterion most related to stock prices. In theory, a positive NPV project should cause a proportionate increase in a company's stock price. Example Relationship Between NPV and Stock Price Presstech is investing 500 million in new printing equipment. The present value of the future after-tax cash flows resulting from the equipment is 750 million. Presstech currently has 100 million shares outstanding, with a current market price of 45 per share. Assuming that this project is new information and is independent of other expectations about the company, calculate the effect of the new equipment on the value of the company and the effect on Presstech's stock price. The stock price should increase from 45.00 per share to 47.50 per share as a result of the project. In reality, the impact of a project on the company's...

Stock Prices Move as a Group

One concept that all analysts agree on is that stock prices tend to move as a group. Dow Average, Standard & Poor's, and Nasdaq (over-the-counter) stocks tend to move as a group. If they diverge from moving as a group, it is a signal of weakness in the stock market. The tendency of stock prices moving as a group is what makes up a trend. Divergences are changes in trend that show stocks not moving as a group. It is difficult to know whether the signal means a change in trend or the appearance of a secondary trend. However, the divergence is a technical signal of market weakness. There are also times when divergence occurs and the stock market ignores a divergence signal and continues to move upward. The investor who is aware of trends has the advantage of knowing whether the market is strong and in what direction it is going. First the divergence signal, then the reaction, followed by a turn in direction.

Foreign and International Stock Market Indexes

More recently, market-value-weighted indexes of other non-U.S. stock markets have proliferated. A leader in this field has been MSCI (Morgan Stanley Capital International), which computes over 50 country indexes and several regional indexes. Table 2.5 presents many of the indexes computed by MSCI.

TABLE 319 Mean Annual Returns of International Stocks Grouped by Market Capitalization 19861996

The authors' next step was to examine how value and growth stocks performed while controlling for size. This step involved constructing 16 different value growth and size portfolios (4X4 16) and investigating the interaction between these two fundamental factors. They found that international value stocks outperformed international growth stocks except when market capitalization was very small. For portfolio managers, these findings suggest that value stocks offered investors relatively more favorable returns than did growth stocks in international markets during the specific time period studied.

Risk Aversion Bottom Fishing Boosts Japanese Stocks and the

The year 1999 witnessed the simultaneous recoveries of East Asian and Russian economies following the market crisis of 1997-1998, and the continued boom into the equity markets of industrialized economies. Global fund managers exhibited a high degree of risk aversion from the emerging markets of Asia, Eastern Europe, and Latin America, opting to capitalize on higher growth in more developed economies. The Japanese yen was the highest-performing currency of 1999 as Japan offered the combination of industrialized economy status and cheap valuation, as the country was widely expected to finally recover from its decade-long economic slump. The buy-the-Japanese-dip strategy mobilized massive flows of funds into Japanese equities, propping up the yen across the board. While the introduction of the euro to currency trading replaced the national currencies of 11 European nations, U.S. equity markets were busy absorbing foreign flows chasing an increasingly solid bull market in high-growth...

Models of the Greatest Stock Market Winners 19531993

Now that you've previewed C-A-N S-L-I-M and know when to sell and cut a loss or nail down a profit, I should mention that a number of the models of Greatest Stock Market Winners, 1953 1993 we actually recommended or bought. Have you ever heard the saying those who can, do, and those who can't, either teach or write Well, we did the work, produced the results and now, afterwards, have put it down in writing to, we hope, help you.

Common Stock Theory of Investment

The research demonstrating the superiority of stocks became known as the Common Stock Theory of Investment.16 Smith himself was careful to not overstate his findings. He wrote Over a period of yeaOh e principal value of w ell-diversified holding common stocks of representativcorporations in ssentiaindustries tends to increase in accordance with the operation of compound interest . . . Such stock holding may be relied open a term 0f yearSo pay an average income return on such increasing values of something more than the average current rate on commercial paper.17 Yet Chelcie C. Bosland, a professor of economics at Brown University in the 1930s, claimed that the common stock theory was often misused to justify any investment in stocks no matter what the price. Bosland stated The purchase of common stocks after 1922 was more likely to result in profit than in loss. Even though this was largely a cyclical up-swing, many believed that it was a vindication of the theory that common stocks...

Growth Stocks in Distress An Opportunity

In contrast to other value funds, David likes to invest in growth stocks, but priced at value. We seek to buy blue-chip stocks with solidly proven earnings growth we don't want just cheap stock, we want growth, he stresses. This means companies that are growing ahead of the S& P 500, and we want financial strength. Additionally, we prefer strong cash flow. Another category of overreaction is crisis investing, which David defines as extreme overreaction. The market's reaction to the horrifying events of September 11 is one example. When it happened, investors thought people would completely stop flying, so all travel-related stocks were pummeled. At the time, David was a buyer of casino stocks, such as Harrah's. The casino stocks got hit hard, but with their strong financial conditions and an extreme overreaction in the marketplace, we were able to buy casino stocks at very cheap levels. Within several months, David's casino positions had already doubled in price. 1962 Stock Market...

Globalization of Stock Markets

All stock markets have come under increasing pressure in recent years to make international alliances or mergers. Much of this pressure is due to the impact of electronic trading. To a growing extent, traders view the stock market as a computer network that links them to other traders, and there are increasingly fewer limits on the securities around the world in which they can trade. Against this background, it becomes more important for exchanges to provide the cheapest mechanism by which trades can be executed and cleared. This argues for global alliances that can facilitate the nuts and bolts of cross-border trading, and can benefit from economies of scale. Moreover, in the face of competition from electronic networks, established exchanges feel that they eventually need to offer 24-hour global markets. Finally, companies want to be able to go beyond national borders when they wish to raise capital.

Example IBM Preferred Stock

As of April 2001, the depositary shares were trading at 25.4, within a narrow 52-week trading range of 25.00, 26.25 . Using the valuation formula for a consol, the shares trade at an implied yield of 7.38 . The total market capitalization of the IBM-A shares amounts to approximately 260 million. In comparison, the market value of the common stock is 214,602 million, which is more than 800 times larger.

The Relationship Between NPV and Stock Price

Since the NPV method is a direct measure ot the expected change in firm value from undertaking a capital project, it is also the criterion most related to stock prices. In theory, a positive NPV project should cause a proportionate increase in a company's stock price. Example Relationship Between NPV and Stock Price Presstech is investing 500 million in new printing equipment. The present value of the future after-tax cash flows resulting from the equipment is 750 million. Presstech currently has 100 million shares outstanding, with a current market price of 45 per share. Assuming that this project is new information and is independent ot other expectations about the company, calculate the effect ot the new equipment on the value ot the company, and the effect on Press tech's stock price. The stock price should increase from 45-00 per share to 47.50 per share as a result of the project. In reality, the impact of a project on the company's stock price is more complicated than the...

Fixed Rate Perpetual Preferred Stock

LOS 4l.h Calculate the value of noncallable fixed-rate perpetual preferred stock given the stocks annual dividend and the discount rate. Example Calculating the value of fixed-rate perpetual preferred stock United Publishing has a fixed-rate perpetual preferred stock outstanding with a dividend of 6 (based on an issue at par of 100). If the investors' required rate of return for holding these shares is 9.5 , calculate the current value of these shares.

International stock market indexes

As good as the stock market might have been in 2004 in the US, many foreign markets performed even better they were helped by a weak dollar which fell to a five year low against the euro dropping to 1.34 in December 2004 from a high of 0.8525 in October 2000. Hence, the merit of investing abroad rests not only on the merit of stocks indexes in different regions but also on the currencies in which they are denominated, as shown in Figure 2.1.

When did you first get interested in the stock market

I came from a family that never read The Wall SlreetJournal, never bought a share of stock, and never invested in mutual funds. I didn't know anything about the stock market until I was in college. When I attended the University of Arkansas, I took an investment course that sparked my interest. What about the course intrigued you It went down. That's when I learned my first and most important lesson about the stock market Stick to your own beliefs. Did that course clinch your decision to pursue a career in the stock market Yes. After I graduated, I moved to Dallas, which was the onlybig city I had ever visited, to look for ajob as a stockbroker. I thought being a stockbroker meant that you got to manage other people's money and play the stock market all day long. I quickly found out that it was more of a sales job, and quite frankly, I'm a terrible salesperson. I picked up my largest client because his own broker wouldn't answer the phone on the day of the October 1987 stock market...

The Bias Of Common Stock Investors

What discouraged common stock investors from buying REITs The flip side of the coin is that REITs' only business is real estate and stock investors didn't invest in real estate they focused primarily on product or service companies. Real estate was perceived as a different asset class from common stock this problem was particularly acute in the institutional world. Also, for years investors had been told that companies that paid out a high percentage of their income in dividends did not retain much of their earnings and therefore could not grow rapidly. Since, to most common stock investors, growth is the hallmark of successful investing, they didn't want to invest in a company that couldn't grow. Finally, some of the blame for lack of individual investors' interest in REITs can be laid at the feet of stockbrokers.

Getting Tips for Choosing Growth Stocks

Although the information in the previous section can help you shrink your stock choices from thousands of stocks to maybe a few dozen or a few hundred (depending on how well the general stock market is doing), the purpose of this section is to help you cull the so-so growth stocks to unearth the go-go ones. It's time to dig deeper for the biggest potential winners. Keep in mind that you probably won't find a stock to satisfy all the criteria presented here. Just make sure that your selection meets as many criteria as realistically possible. But hey, if you do find a stock that meets all the criteria cited, buy as much as you can When choosing growth stocks, you should consider investing in a company only if it makes a profit and if you understand how it makes that profit and from where it generates sales. Part of your research means looking at the industry (Chapter 12) and economic trends in general.

Stock Market Indexes Pricing and Risk

Stock market indexes are used to compute an average price for groups of stocks. A stock market index attempts to mirror the performance of the group of stocks it represents through the use of one number, the index. Indexes may represent the performance of all stocks in an exchange or a smaller group of stocks, such as an industrial or technological sector of the market. In addition, there are foreign and international indexes. 10.1 Stock Market Indexes In this section we discuss how Dow Jones, Standard and Poor's, NASDAQ, and Value Line calculate their indexes. These indexes depend on stock price, number of shares issued, stock splits, and dividends. However, these are not independent. For example, if a 50 stock with 100 shares issued splits two-for-one, then after the split there are 200 shares, each worth 25. If a 50 stock pays 10 stock dividend (worth 5 a share), then after the dividend the stock is worth 50 1.1 45.45. The oldest and most quoted stock market index is the Dow Jones...

Myth 2 indexing doesnt work in a Stock pickers market

Impact costs in particular are a function of the size of the player's trades. With large stocks, buy or sell orders of tens of thousands of shares are no big deal, but with a small stock it's easy to see the elephants once they are in the vegetable garden. Nimble traders jump in front with small trades (which they turn around and dump on the pachyderms at a profit), and the available supply of willing sellers is exhausted quickly. The larger the fund, the more this phenomenon will occur.

Dont Ignore Lucks Role in Stock Picks

When stock-market investors take a hit, they rail at their stupidity and question their investment strategy. But when lottery ticket buyers lose, they shrug off their bad luck and pony up for another ticket. Sure, if you lose a bundle in the stock market, it could be your fault. But there is a fair chance that the real culprits are bad luck and skewed expectations. If one of your stocks craters, that doesn't necessarily mean you are a fool and that your investment research was inadequate. By the same token, a soaring stock doesn't make you a genius. The fact is, the stock market is pretty darn efficient. When people buy stocks, they think they are playing a game of skill, says Meir Statman, a finance professor at Santa Clara University in California. When the stock goes down rather than up, they think they have lost their knack. But they should take heart. All they have lost is luck. And next time, when the stock goes up, they should remember that that was luck, too. Just as your...

The Dollar Versus The Stock Market

It stands to reason since both the dollar and the stock market are influenced by interest rate trends (as well as inflation) that there should be a direct link between the dollar and stocks. The relationship between the dollar and the stock market exists but is often subject to long lead times. A rising dollar will eventually push inflation and interest rates lower, which is bullish for stocks. A falling dollar will eventually push stock prices lower because of the rise in inflation and interest rates. However, it is an oversimplification to say that a rising dollar is always bullish for stocks, and a falling dollar is always bearish for equities. Figure 6.11 shows the dollar dropping from 1985 through 1987, during which time stocks continued to advance. Stocks didn't actually sell off sharply until the second half of 1987, more than two years after the dollar peaked. Going back to the beginning of the decade, the dollar bottomed in 1980, two years before the 1982 bottom in stocks. In...

Investor Expectations Regarding Stock Market Returns

What investment return should an investor expect from a diversified portfolio of common stocks As a proxy for the market, let's use the rate of return associated with the S& P 500 Index and compare its performance with the change in operating earnings per share associated with the stocks that comprise the S& P 500 Index. During the 70-year period from 1928 to 1997, the S& P 500 had a compound average return of 10.6 percent. In more recent years, stock return performance has gone from spectacular to abysmal. Look at Table 3-3. In calendar years 1997, 1998, and 1999, the total returns on the S& P 500 Index were 31 percent, 26.7 percent, and 19.5 percent respectively. But unless the companies are propelled by a similar percentage increase in profits or a general decrease in interest rates, general stock market performance that good can't last forever. It didn't the market turned, the bubble burst, and the stock market has experienced three years of negative numbers. The S&...

LOS 48g Calculate the cost of noncallable nonconvertible preferred stock

The cost of preferred stock (k ) is Example Cost of preferred stock Suppose Dexter has preferred stock that pays an 8 dividend per share and sells for 100 per share. What is Dexter's cost ot preferred stock Note that the equation kps Dps P is just a rearrangement of the preferred stock valuation model P Dps kps, where P is the market price.

Commodities Versus Stocks

Figure 6.14 compares the CRB Index to the Dow Industrial Average from 1985 through the third quarter of 1989. The chart shows that stocks and commodities sometimes move in opposite directions and sometimes move in tandem. Still, some general conclusions can be drawn from this chart (and from longer-range studies), which reveals a rotational rhythm that flows through both markets. A rising CRB Index is eventually bearish for stocks. A falling CRB Index is eventually bullish for stocks. The inflationary impact of rising commodity prices (and rising interest rates) will combine to push stock prices lower (usually toward the end of an economic expansion). The impact of falling commodity prices (and falling interest rates) will eventually begin to push stock prices higher (usually toward the latter part of an economic slowdown). The usual sequence of events between the two markets will look something like this A peak in commodity prices will be followed in time by a bottom in stock prices....

Can Stock Market Forecasters Forecast

The earliest study of which we are aware that pertains to the effectiveness of investment advice is Can Stock Market Forecasters Forecast by Alfred Cowles 3 rd, which appeared in 1933. The findings of this work are prescient of the efficient markets view of investment returns, which would become widely popular decades thereafter. The initial section of the work addresses the stock selection success of 20 fire insurance companies and 16 financial services. The second part deals with the stock market forecasting skills of 25 financial publications. In Cowles' investigation of the common stock investments of 20 leading fire insurance companies, the author explains that these companies have a lengthy history of investing compared to both financial services and to investment companies, which are of relatively recent origin. Because the insurance companies' average portfolio turnover is only about 5 a year, the analysis is confined to the actual purchases and sales during the examination...

How Are Expectations of Growth Factored into Stock Prices

Many investors don't understand how expectations of future corporate performance are reflected in the current price of a stock. Suppose DEF Growth Company announces that quarterly revenue and earnings have increased by 10 percent and DEF's stock price immediately declines by 25 percent. Why would this happen Easy If stock market analysts and institutional investors are expecting earnings or revenue growth for momentum stocks of 30 percent per year, those expectations are already factored into today's stock market price especially for growth stocks. Any performance that does not meet or exceed those growth expectations usually results in a sizeable drop in the stock's price. Growth stocks are companies whose rate of revenue or earnings growth (15 percent and up) greatly exceeds the growth rate of the economy as a whole (3 percent to 5 percent). If earnings growth for the stock meets market expectations, all other things equal, the stock return should be approximately equal to the...

2. The Current Stock Price Of Mcd Is 89.00. The Current Dividend For Mcd Is 2.50 And Dividends Are Expected To Grow At

The current stock price of MCD is 89.00. The current dividend for MCD is 2.50, and dividends are expected to grow at a constant rate of 8 . The required return for MCD is closest to 6. Restoration Software is a growth stock that has never paid a dividend. What phase of the life cycle is Aerosail most likely in, and which dividend discount model is most appropriate to value the company's common stock Phase Model

Only 3 to 5 Percent Maximum in the Stock Market

I asked this adviser to the superrich what percentage of the family office's assets were invested in the stock market. Why Because when you have that much money, neither the risk nor the volatility of the stock market is worth the gamble. Not now. Not ever. These people are at the End Game. They no longer have to play, and wouldn't think of it

Stock Market Volatility

Table 13-6 compares the RiskMetrics volatility forecasts for a group of 31 stock markets. The selected indices are those most recognized in each market, for example the S& P 500 in the US, Nikkei 225 in Japan, and FTSE-100 in Britain. Most of these have an associated futures contract, so positions can be taken in cash markets or, equivalently, in futures. Nearly all of these indices are weighted by market capitalization. Stock Market

Stock Market Indicators

Stock market indicators have come to perform a variety of functions, from serving as benchmarks for evaluating the performance of professional money managers to answering the question, How did the market do today Thus, stock market indicators (indexes or averages) have become a part of everyday life. Even though many of the stock market indicators are used interchangeably, it is important to realize that each indicator applies to, and measures, a different facet of the stock market. The most commonly quoted stock market indicator is the Dow Jones Industrial Average (DJIA). Other popular stock market indicators cited in the financial press are the Standard & Poor's 500 Composite (S& P 500), the New York Stock Exchange Composite Index (NYSE Composite), the NASDAQ Composite Index, and the Value Line Composite Average (VLCA). There are a myriad of other stock market indicators such as the Wilshire stock indexes and the Russell stock indexes, which are followed primarily by...

Model of the Behavior of Stock Prices

In this chapter we derive a continuous-variable, continuous-time stochastic process for stock prices. An understanding of this process is the first step to understanding the pricing of options and other more complicated derivative securities. It should be pointed out that in practice we do not observe stock prices following continuous-variable, continuous-time processes. Stock prices are restricted to discrete values (usually multiples of and changes can be observed only when the exchange is open. Nevertheless, the continuous-variable, continuous-time process proves to be a useful model for most purposes.

Sources of Dollar Risk in International Stocks Exchange Rate Risk

Table 9-3 analyzes the stock market risk (measured as the standard deviation) for dollar investors in foreign stocks over the period from January 1970 through December 1996. The local risk is the risk calculated It is very important to note that the total risk of holding foreign equities is substantially less than the sum of the local and exchange risks. This is because these risks are not perfectly correlated, so movements in the exchange rate and the local stock market frequently offset each other. In fact, for some countries, such as the United Kingdom, the exchange risk offsets the local risk so much that a U.S. holder of British equities since 1970 has experienced less volatility in dollar returns than a British investor does in pounds sterling

Diversification to Foreign Stocks Optimal Allocation for Foreign Equities

It might surprise investors that the principal reason for investing in foreign stocks is not that their expected return is better than in the U.S. (although Figure 9-3 shows the risk-return trade-offs for investing in U.S. and foreign equities for dollar-based investors. These are based on the historical returns to these assets over the past 27 years, during which foreign returns did slightly outpace U.S. returns. A minimum risk occurs with 25 percent allocated to foreign stocks, although portfolio theory suggests that investors should increase the foreign allocation to 38.9 percent, called the efficient portfolio, if foreign returns higher than those in the past also hold in the future. holding periods of ten or more years. In any case, multiple-year analysis involving U.S. and foreign stocks is unlikely to change the allocation appreciably since mean reversion of equity returns prevails in foreign stock markets as well as the U.S. Even if foreign returns are not expected to exceed...

The Process For Stock Prices

It is tempting to suggest that a stock price follows a generalized Wiener process that is, that it has a constant expected drift rate and a constant variance rate. However, this model fails to capture a key aspect of stock prices. This is that the expected percentage return required by investors from a stock is independent of the stock's price. If investors require a 14 percent per annum expected return when the stock price is 10, then, ceteris paribus, they will also require a 14 percent per annum expected return, when it is 50. Clearly, the constant expected drift-rate assumption is inappropriate and needs to be replaced by the assumption that the expected drift, expressed as a proportion of the stock price, is constant. The latter implies that if S is the stock price, the expected drift rate in S is S for some constant parameter, p Thus, in a short interval of time, At, the expected increase in S is pS At. The parameter, x, is the expected rate of return on the stock, expressed in...

Chinese Stock Markets

We now take a closer look at stock market trends to see how the results of the Shanghai and Shenzhen exchanges compare to New York markets. While it is beyond the scope of this chapter, data comparison of Chinese markets with European markets, as well as other emerging markets in general and those in the region in particular would reveal what commonalities and anomalies characterize the Chinese situation. In analysing the stock market trends, we are struck by similarities with Japan in the 1980s. Like Japan in the late 1980s, China is booming and accumulating huge US dollar reserves because of the trade surplus. It is a population of savers. Yet, the motivations of Chinese savers differ from the Japanese. This also reflects the changing nature of the resource and production chain. It is now even easier to outsource aspects of production. Like Japanese, China needs to import vast amounts of energy and commodities. The study of anomalies and other aspects of the Chinese markets is just...

Emphasizing Financial Stocks

Exposure to the stock market in favor of bonds and emphasizes financial stocks, which would benefit in a low-rate environment. Ms. Cohen, conversely, maintains a healthy exposure to the stock market and emphasizes not just finan-cials, but also economically sensitive stocks such as autos and housing-related stocks. She further expects to emphasize later-cyclical commodity stocks as the year unfolds and the economic pace quickens. James Weiss, deputy chief investment officer for growth equities at State Street in Boston, and David Shulman, chief strategist at Salomon Brothers, concur with much of Mr. Clough's analysis of the economy. Mr. Weiss says the recent uptick in cyclical stocks should be mostly ignored, and he favors steadier growth in defensive sectors like health care and beverages.

Comparison of Two Growth Stocks

Some investors buy stocks while others sell because they anticipate the future in different ways. Some sell because when they look a few months ahead they see a possible recession coming. Others, looking farther ahead, buy because they believe that the price of the stock already discounts a possible recession. They are anticipating the business recovery, and the vast growth of revenues and earning power that they see in some companies. The chart illustrates the turnaround that began in 1962 when new management assumed control of the company. The arrow points to the superperformance price phase. The earnings of the company have been sensitive to business cycles, resulting in volatile stock-price performance. Chart by Securities Research Company

Us And Japanese Stock Markets

Figure 8.11 through 8.15 provide a comparison of the American market (utilizing the Dow Jones Industrial Average) and the Japanese market (utilizing the Nikkei 225 Stock Average). The fit between these two markets isn't as tight as that between the American and British markets. Still, there's no question that they have an impact on one another. Figure 8.11 demonstrates the global bull market from 1985 through 1989 as reflected in the world's two largest stock markets. Japanese Stocks (Nikkei 225) Japanese Stocks (Nikkei 225)

Example 52 One Period Stock Price Movement as a Bernoulli Random Variable

Suppose we describe stock price movement in the following way. Stock price today is S. Next period stock price can move up or down. The probability of an up move is p, and the probability of a down move is 1 - p. Thus, stock price is a Bernoulli random variable with probability of success (an up move) equal to p. When the stock moves up, ending price is uS, with u equal to 1 plus the rate of return if the stock moves up. For example, if the stock earns 0.01 or 1 percent on an up move, u 1.01. When the stock moves down, ending price is dS, with d equal to 1 plus the rate of return if the stock moves down. For example, if the stock earns -0.01 or -1 percent on a down move, d 0.99. Figure 5-1 shows a diagram of this model of stock price dynamics. FIGURE 5-1 One-Period Stock Price as a Bernoulli Random Variable End-of-Period Stock Price FIGURE 5-1 One-Period Stock Price as a Bernoulli Random Variable End-of-Period Stock Price We will continue with the above example later. In the model of...

Managing Risk in Volatile Stocks

To look for the maximum play for your buck, while still managing your risks, you cannot get involved with every volatile name possible. Some experienced traders prefer to trade no more than one NASDAQ stock at a time. Be careful about wanting to shoot the whole wad, says one. If you get caught in one of these volatile stocks that jump rapidly, you're dead. You shouldn't be in them. You are better off sticking to Microsoft or Compaq markets for two points' profit. There's nothing better than liquidity. Buy two hundred thousand and make two hundred thousand dollars. Stay patient and get your trade.

The Importance of Earnings in Stock Market Analysis

While the equity market is sensitive to major economic reports and the activities of the Fed and the Treasury, it is also strongly influenced by corporate earnings news. Stock market performance is frequently expressed in terms of price to earnings (P E) ratios. If a stock's price rises faster than its current or projected earnings, investors may become concerned that the P E ratio is too high and the stock is overvalued.

Modeling Stock Market Prices

In his doctoral thesis 2 written in 1900, Bachelier laid the groundwork for the study of stock market pricing. A discussion of different approaches is given in 6 . Much of the material in this and the next section follows arguments developed in 23 . We now discuss the pricing of options. Because the price of an option depends, in large part, on the price of the underlying stock, we first discuss the pricing of stocks, which in turn depends on how stock market prices are modeled. The BINOMIAL MODEL of stock prices is a discrete model. We assume that a stock trades during a fixed time interval 0,T , and we divide the interval into n equally spaced subintervals The model is the following If the stock price is S(tj) at time tj, then we assume that it may increase to price Su (tj+i) with probability P (tj) at time tj+i or decrease to price SD(tj+i) with probability 1-P(tj).ii We also assume that the price changes S(ti) - S(to), S(t2) - S(ti), , S(tn) - S(tn-i) are independent. Then at each...

Trading Stocks with MTPredictor

However, when you move to the stock market, and in particular individual stocks, then you will find that individual stocks en masse will move in the same direction as the overall market. I do appreciate that this is a generalisation, and individual stocks can, and often do, move against the main market but generally, most stocks will move with the main market. As such, I hope you can all see that it makes sense to orientate your trading on individual stocks to be in tune with the main market. The question I would like to ask here is how would this have affected your scans of US stocks on any individual day

Recognizably Overpriced Stocks Can Exist

This simple observation that prices are set by the optimistic investors and that these are sometimes wrong is useful. It can explain why there do appear to be overvalued stocks that are widely agreed to be overvalued. 8 Ofek and Richardson, Dotcom Mania The Rise and Fall of Internet Stock Prices. 9 The only weak point in the argument is that to the extent these investors did not have the same optimism about payoffs that existing investors had, their beliefs would now get incorporated into stock prices. The problem is that the selling by most of these investors need not be caused by less optimism about returns (although this was probably true of some), or even about risk in some absolute sense, but merely by a desire for diversification. The incremental effect of a share of the risk of a portfolio is greater when there is already much of the stock in the portfolio than when there is little. The result (using Markowitz optimization or something similar) is that the premium (often called...

Some Money Fleeing Financial Stocks Went To Gold Shares The Bottom Chart Is A Ratio Of The Crb Index Divided By

In December, the ratio broke out to the upside and confirmed that a trend change had, in fact, taken place. The pendulum, which had favored bond prices for a year, now showed commodity prices in the ascendancy. That crucial shift explains the dramatic move away from interest-sensitive stocks toward commodity stocks. And, in doing so, this shift also warned of the uptick in interest rates which began to push stock prices lower.

Will The Stock Market Crash And Would It Influence Other Markets

There are several ways to analyse risk in the stock markets. WTZ uses two basic models to predict stock market crashes including the bond-stock return difference, discussed in Chapters 23 and 25. It is very good at predicting crashes over about a one year period, based on long term (10 to 30 year) interest rates compared to the current past earnings yield and a short term behavioral finance sentiment measure based on relative put and call option prices (high relative call prices presage crashes). Since puts and calls on the index in Iceland are not publicly traded but rather are over the counter between banks and their customers, it is hard to get the data for the latter measure. But the data is available for the bond-stock measure. To put the experience of Iceland in context, we first look at the bond-stock measure for the US, the UK, Japan, France, and Germany (as of July 12, 2006). The danger zone requires a long bond rate well past 2.5 and close to 3 . We see from Table 19.4 that...

Valuation Of Internet Or Highgrowth Stocks

Growth investors place emphasis on the earnings growth relative to the market price. That is, growth investors are willing to pay more for a company that they believe has superior growth prospects that are not already reflected in the stock's price. Simply put, growth stocks command a higher stock price earnings per share (P E) ratio.

Economic Growth and Stock Prices

It surprises the general public (and often the financial press) when a strong economic report actually sends the stock market lower. But economic growth has two important implications, and each tugs the stock market in the opposite direction. A strong economy increases future earnings of firms. This is bullish for stocks, but it also raises interest rates, and bonds are the major financial asset that competes with stocks for investors' funds. If interest rates rise, bonds become more attractive, which means that stock prices must fall to attract buyers. On the other hand, a weak economic report lowers future expected earnings, but since interest rates also decline, stock prices might move up. At the exact time of economic announcements, many stock traders, especially those trading in the stock index futures market, look at the movements in the bond market to guide their trading. This is particularly true of portfolio managers who actively apportion their portfolio between stocks and...

Convertible Preferred Stocks

A convertible preferred stock is a hybrid security that possesses characteristics of both stocks and bonds. Generally, these stocks provide investors with higher current income than common stocks. This higher yield offers protection from downside price risk. If the common stock declines, the higher yield of the convertible preferred stock prevents it from falling as low as the common shares. In theory, the convertible stock will fall in price until its current yield approximates the value of a nonconvertible bond with a similar yield, credit, and maturity. A convertible preferred stock also provides the investor with the opportunity to participate in the upside potential of the common shares. Since it is convertible into common shares, when the common rises, the convertible stock will rise as well. However, because the convertible stock provides high income and has the potential for capital gains, it is priced at a premium to the common stock. This premium is reflected in the rate at...

The Cost of Preferred Stock and Amount Outstanding

Preferred stock is a hybrid financial instrument that usually represents a small portion of a company's capital structure. Preferred stock is an ownership claim on the assets of the corporation that is senior to common stock (hence the adjective preferred) but is junior to that of debt. The dividends that corporations pay on preferred stock and common stock, unlike the interest payments on debt, are not tax-deductible payments. However, if a corporation owns stock in another corporation, it is allowed a tax deduction (the dividends received deduction, or DRD) on the dividends it receives. Because of the tax advantages, it is advantageous for a corporation to own stock in another corporation. Also, the tax act passed in May of 2003 temporarily reduced to 15 the tax rate on dividends on certain common and preferred stocks. Over the past 20 years, investment bankers and corporate issuers have gotten mighty fancy in the use and structure of preferred stock. Many options and complex...

Individual Stocks And The Valuation Cycle

The valuation cycle applies to almost every investment asset. In this chapter we have applied it to stock market indexes. It also can be applied to individual stocks. A small group of large company growth stocks that were popular among investors in the late 1990s make for a good study. In 1999 Dell Inc. had a P E ratio of about 90. Hewlett-Packard's was at 45 Texas Instruments' was 116 and Wal-Mart Stores' was 56. These are extraordinarily high P E ratios, well above long-term averages for these stocks and for the market indexes. After the stock market peak in early 2000, the earnings per share for these companies generally continued to increase. There were some pauses in the growth, especially from 2000 to 2002. But in general earnings per share rose after 1999. Clearly, as Rational Beliefs Theory explains and most investors know, stock prices over any period other than the very long term do not fluctuate with underlying economic fundamentals. Stock prices can rise faster than...

Cost of Preferred Stock and Stock Outstanding Our Recommendation

When we approach a valuation and can find no good quote for preferred stock or a quote for a preferred stock issue of a comparable company, we ballpark the yield on preferred by splitting the difference between the pretax cost of debt and the cost of common equity. Likewise, it sometimes may be difficult to find market value quotes for the outstanding preferred stock of the corporation to determine market capitalization amounts. We've found that, if there is not a large amount of preferred stock outstanding, using the book value of preferred stock, as opposed to market value, does not bias significantly the valuation. We use book values for amounts outstanding of preferred stock in our valuation examples. The valuation inputs relating to preferred stock are today's yield level associated with the preferred stock of the company, and the amount of preferred stock outstanding. For simplicity, use book value for preferred stock if the market value isn't available.

Buy Stocks You Understand

When it comes to evaluating high-technology stocks the investor can have a problem. Most of us are not experts in electronics, physics, or engineering. Moreover, estimating the profit potential of new products is often complicated. High P E ratios and erratic earnings trends are features found in many of these stocks. antipollution devices, and real estate development. How does an individual investor get insight regarding the future of a company like that I have had some success by noting that the management was trying to raise the price of the company's stock by increasing the earnings per share. This can be accomplished not only by increasing earnings but by decreasing the number of shares outstanding. The reduction is accomplished by techniques such as offering to exchange debentures for common stock, or by having the company purchase its own shares on the open market. Since conglomerates often acquire other companies by exchanging stock, their managements sometimes appear to be...

The stock market and real estate

Many bubbles in stock markets are related to bubbles in real estate. There are three different types of connections between these two asset markets. One is that in many countries, especially smaller countries and those in the early stages of industrialization, a substantial amount of the stock market valuation consists of real estate companies, construction companies, and firms in other industries that are closely associated with real estate, including banks. A second connection is that individuals whose wealth has increased sharply as a result of the increase in real estate values want to keep their wealth diversified and so they buy stocks there aren't many other easy ways to diversify wealth. The third connection is the mirror-image of the second the individual investors who have profited extensively from the increase in stock market valuations buy larger and more expensive first homes and second homes. The fluctuations in the Manhattan real estate market have been tied to the...

Example 73 The Effect of Commercial Paper Issuance on Stock Prices

Commercial paper (CP) is unsecured short-term corporate debt that, like U.S. Treasury bills, is characterized by a single payment at maturity. When a company enters the CP market for the first time, how do stock market participants react to the announcement of the CP ratings Nayar and Rozeff (1994) addressed this question using data for the period October 1981 to December 1985. During this period, 132 CP issues (96 industrial and 36 non-industrial) received an initial rating in Standard & Poor's CreditWeek or Moody's Investors Service Bond Survey. Nayar and Rozeff categorized ratings as superior or inferior. Superior CP ratings were A1 + or A1 from Standard & Poor's and Prime-1 (PI) from Moody's. Inferior CP ratings were A2 or lower from Standard & Poor's and Prime-2 (P2) or lower from Moody's. The publication day of the initial ratings was designated t 0. The researchers found, however, that companies themselves often disseminate the rating information prior to publication...

Do We Know Which Stocks Are Overvalued

Despite the Fundamental Index concept being elementary and its construction crystal clear, more so than some traditional indexes, the concept has still been labeled active management by some. Jack Bogle, for example, claims that the Fundamental Index approach is based on some ability to discern which stocks are undervalued and which are overvalued the values are and which way share prices of individual stocks are heading. Rather, it is an index designed to eliminate the structural flaw in capitalization weighting whereby the weights in the portfolio are linked to the price hence, to the pricing error of each stock.

Presidential Elections and the Stock Market

The four-year bull market-bear market pattern cannot be guaranteed to continue in the future, but there is a good, specific reason for believing that it will. The political party that is in control of the White House and the executive branch of the Federal Government is understandably reluctant to lose the office because of voter dissatisfaction with poor economic conditions in the country, such as high unemployment, declining business profits, and falling stock prices. As a result, most recent presidential-election years have been prosperous years and incumbent administrations will try to make them prosperous in the future. But after the election there is less concern for maintaining a high level of prosperity and there is increased determination to Individual investors should be aware of this government-related cyclical pattern or scenario in order to plan the timing of purchases and sales more effectively. Presidential-election years are likely to witness a strong stock market, but...

Diversifying I Stock Portfolios

Although the game's get-out-of-jail-free card was one of the few ties to the present-day stock market, I've recently had a tiny epiphany. On some atavistic level I've likened hotel building to stock buying and the railroads and utilities to bonds. Railroads and utilities seemed safe in the short run, but the ostensibly risky course of putting most of one's money into In this rather primitive setting, many aspects of the stock market can already be discerned. The forebears of technical traders might be those who buy from booths where crowds are developing, while the forebears of fundamental traders might be those who coolly weigh the worth of the goods on display. The seers are the progenitors of analysts, the sales people progenitors of brokers. The bullhorns are a rudimentary form of business media, and, of course, the goods on sale are companies' stocks. Crooks and swindlers have their ancestors as well with some of the booths hiding their shoddy merchandise under the better goods.

Debate On Price Elasticity Of Common Stock

Price elasticity of the supply curve. Using a game theory model, Bagwell (1991a) proved that if the supply schedule of common stock is positively sloped, stock repurchases would impose a high cost on bidders. This is because shareholders selling the stock back to the firm value the firm's stock less than those retaining their shares. Therefore, bidders need to offer a higher price to acquire shares of the target firm. Using Dutch auction data, Bagwell (1991b, 1992) found that supply curves are positively sloped with an average slope of 1.46 and an average arc (point) price elasticity of 1.65 (0.68). This indicates that firms face upward-sloping curves and shareholders' valuations are very heterogeneous when they repurchase shares in (nondiscriminatory pricing) Dutch auction. On the demand side, many empirical works show that stock prices drop significantly when the supply of stocks is increased dramatically. Loderer et al. (1991) found that price decreases upon the announcement of...

Stock Prices and Long Run Performance

Aharony, Jones, and Swary (1980) show that when firms file for bankruptcy, their common stock prices decline significantly, on average (controlling for differences in firms' risk and market movements). Moreover, for up to five years before they enter bankruptcy, firms' stock prices significantly underperform the market. Gilson, John, and Lang (1990) document that when distressed firms successfully restructure their debt out of court, their risk-adjusted stock prices increase by over 40 percent, on average, from the time they first default on their debt. In contrast, firms that file for Chapter 11 suffer an average 40 percent stock price decline. This difference suggests that for most firms, it is significantly less costly to resolve financial distress out of court. Hotchkiss (1995) shows that after firms leave Chapter 11, they tend to be significantly less profitable than the average for their industries. Consistent with Hotchkiss, Gilson (1997) finds that roughly one in four...

Risk Control Against a Stock Market Index

The objective in equity indexing is to match the performance of some specified stock market index with little tracking error. To do this, the risk profile of the indexed portfolio must match the risk profile of the designated stock market index. Put in other terms, the factor risk exposure of the indexed portfolio must match as closely as possible the exposure of the designated stock market index to the same factors. Any differences in the factor risk exposures result in tracking error. Identification of any differences allows the indexer to rebalance the portfolio to reduce tracking error. To illustrate this, suppose that an index manager has constructed a portfolio of 50 stocks to match the S& P 500. Exhibit 19.13 shows output of the exposure to the Barra risk indices and industry groups of the 50-stock portfolio and the S& P 500. The last column in the exhibit shows the difference in the exposure. The differences are very small except for the exposures to the size factor and...

Predictable Patterns Based on Past Stock Prices

The first set of anomalies is patterns based on past stock prices. The random walk theory states that stock price changes have the same distribution and are independent of each other, so the past movement or trend of a stock price or market cannot be used to predict its future movement (Malkiel 1973 Fama 1970). This is the idea that stocks take a random and unpredictable path. A follower of the random walk theory believes it is impossible to outperform the market without assuming additional risk. Critics of the theory, however, contend that stocks do maintain price trends over time. In other words, that it is possible to outperform the market by carefully selecting entry and exit points for equity investments. In this section, we review evidence on some prominent patterns in stock prices.

Traders Index And Other Stock Market Indicators

The Traders' Index (TRIN) is a leading stock market indicator. It shows when major rallies and declines get ready to reverse by measuring the intensity of optimism of the dominant market group. Excessive optimism is associated with market tops and excessive pessimism with bottoms. New market developments have changed TRIN over the years listed stock options, index arbitrage, dividend recapture plays, and so on. The original interpretation of TRIN had to be adjusted, but TRIN continues to stand out as one of the best stock market indicators. It helps in timing stock trades as well as trades in stock index futures and options.

Current Stock Price and Shares Outstanding

The current stock price is an important input because it affects the market capitalization of the corporation and its WACC. As the stock price increases, the percentage of the company's market capitalization that is represented by stock increases. Since common stock is the cost-of-capital component with the highest yield, as the company's stock price increases its cost of capital increases. The Internet can give you current stock prices, usually with a small delay. MSN.com has an easy-to-use stock quote service on its home page. When you plug in the company's name or stock symbol into the slot you get a current quote (20-minute delay) for the stock and you are whisked to MSN Investor where additional screens and data are available. Yahoo Finance has a similar setup and service. Numerous free Web sites offer quotes, and your choice of site depends upon your own preferences.

Company Preferred Stock Yield

If the company has preferred stock outstanding that is traded on an exchange, the Internet-related quote services that we described above give you preferred stock prices for the company. To get the yield for a preferred stock that has no stated maturity, simply divide the dividend rate by the preferred stock price. For example, an issue of preferred stock of Consolidated Edison has a dividend of 5.00 per year and was trading on September 18, 2002, at a price of 77.08. Its yield is calculated by dividing 5.00 by 77.08 ( 5 77.08) 6.49 percent.

Limiting the Downside by Focusing on Undervalued Stocks

A number of the traders interviewed restrict their stock selection to the universe of undervalued securities. Watson focuses on the stocks with relatively low price earnings ratios (8 to 12). Lauer will look for stocks that have witnessed market-adjusted declines of at least 50 percent. Okumus buys stocks that have declined 60 percent or more off their highs and are trading at price earnings ratios under 12. He also prefers to buy stocks with prices as close as possible to book value.

Value of Debt and Preferred Stock Outstanding

Book values of debt and preferred stock are listed in the balance sheet section of the corporation's annual reports. The best (and to our knowledge, only) way to get an accurate reading of total market value of debt and preferred stock is the old-fashioned way price each separate issue and aggregate the values. For some companies, like Cisco, which has no debt or preferred stock outstanding, this exercise is easy. For corporations like Consolidated Edison, which has 38 issues of various types of debt outstanding, this procedure can be tedious. What is a rational way of handling this potentially time-consuming problem Here's how we do it. If we're just making a quick and dirty valuation to see how a company is trading by comparing it to its rough intrinsic value, we use the book value of debt and preferred stock as reported in the company's annual or quarterly report. If we are being employed under a consulting contract on a grossly overpaid hourly basis to perform a valuation, we...

Declines in Individual Stocks vs Declines in the Stock Market

The stock market, on the other hand, as represented by market averages that include many companies, declines most often because of Federal Government policies such as increasing income taxes, which causes company profits to decline. But the government policy most often used has been to increase the cost of credit and decrease its availability, which is effective in slowing down business activity. Other reasons for declines include the overpricing of numerous stocks, as in late 1961 and late 1968, and widespread investor pessimism, as during the period between 1946 and 1949. The main warning signals for an individual investor to look for, therefore, are the signs of a government-induced slowdown in business activity, which would affect company profits and stock prices. Successful stock market investments are more likely to result from the use of a logical strategy for buying and selling than from a random approach or from the one decision method that has been widely accepted by many...

Excessive Volatility of Stock Market Prices

Shiller (1981) rocked the world of economists and financial practitioners when he produced evidence suggesting that the stock market is excessively volatile. If true, this finding would be an outright refutation of the efficient market hypothesis (EMH) and must result from irrational investment behavior. Excessive volatility would be a natural outcome of over-reaction and lead to mean reversion. It is consistent with predictions from behavioral finance as explained earlier. To demonstrate that stock prices are excessively volatile Shiller used a long time series of value and annual dividends on the S& P (the market) portfolio over the period 1871-1979,

Empirical Analysis With World Stock Market Indexes

We report below the in-sample estimation results for Equations (25.11) and (25.12) for the most important world stock market indexes (the time t is converted in units of one year, 1 365 0.002739. . .). We found that estimating LPPL for anti-bubbles was much easier when using a single-digit time variable t, for example 9, instead of a triple-digit variable 2009. Furthermore, estimating models with log-prices was much simpler than models with prince in levels in the latter case a more careful choice of the starting values has to be made. Interestingly, we noticed that if a time series was clearly NOT following a LPPL anti-bubble pattern, then the model using prices in levels was never able to reach numerical convergence, even after a careful choice of starting values. Instead, the model using log-prices always converged but with the parameters 3 > 1 and m < 4. To increase estimation efficiency and to reduce the parameter space, we used here for the first time the following...

Common Stock Prices And Values

Broadly speaking, the price of common stocks is governed by the prospective earnings. These prospective earnings are, of course, a matter of estimate or foresight and the action of the stock market on this point is usually controlled by the indicated trend. The trend is gauged in turn from the past record and current data, although at times the expectation of some quite new development will pay a determining part. The price of common stocks will depend, therefore, not so much on past or current earnings in themselves as upon what the security buying public thinks the future earnings will be. (There are also important influences of a general or technical nature affecting stock prices such as credit, political, and psychological conditions which may not be closely related to any estimate of future earnings but such influences will either eventually reflect themselves in the earnings or else prove to be quite temporary.) In the ordinary case the price of a common stock is the resultant...

Special Kinds Of Equity Investments Small Cap US Stocks

The heavyweight stocks that drive indices such as the Dow Jones Industrials, S& P 500, and Nasdaq, and the performance of most mutual funds, are large-capitalization stocks. You should routinely consider diversifying out of reliance on large-caps by investing in small-caps, companies whose stock market capitalization is generally ranked as less than 1 billion. The premier index of such investments is the Russell 2000. (It is made up of the next 2000 stocks after Russell has compiled the Russell 1000 of large-cap stocks.)

Step One Turn off the Stock Market

Remember that the stock market is manic-depressive. Sometimes it is wildly excited about future prospects, and at other times it is unreasonably depressed. Of course, this behavior creates opportunities, particularly when shares of outstanding businesses are available at irrationally low prices. But just as you would not take direction from an advisor who exhibited manic-depressive tendencies, neither should you allow the market to dictate your actions. The stock market is not a preceptor it exists merely to assist you with the mechanics of buying or selling shares of stock. If you believe that the stock market is smarter than you are, give it your money by investing in index funds. But if you have done your homework and understand your business and are confident that you know more about your business than the stock market does, turn off the market. Buffett is telling us that he does not need the market's prices to validate Berkshire's common stock investments. The same holds true for...

Stock Market Performance

The stock market's performance is measured by the S& P 500, which is a broad and frequently used index for benchmarking fund performance. Of the 10 years of negative stocks performance, 7 occurred during a Republican-controlled White House versus 3 under Democratic control. Of the 28 years of positive stock performance, 19 occurred during bipartisan control between the White House and Congress.

Temptation to Select Most Volatile Stocks

Experience profits more rapidly, make up for past losses, and outperform the market. In fact, though, this approach is an abandonment of conservative principles. You need to continue to carefully select value stocks and then protect their equity value. That is the truly conservative strategy. Investors who like the idea of using options also face danger if and when they pick stocks inappropriate for the conservative risk profile. If you shop option premiums with the idea of buying stock and then discounting your purchase price with covered calls, you are taking the wrong approach. A conservative application of options requires that you first select stocks based on fundamental analysis and comparison that you pick stocks with lower-than-average volatility and potential for price appreciation and that the capital structure, revenue and earnings, PE ratio, dividend history, and other indicators of your stocks are a good fit for your conservative standards. Then you use various...

The Aggregate Stock Market Explaining Past Behavior

It has been well documented that the stock market is a leading economic indicator.13 This means that it tends to fall before a recession and to rise before an economic recovery. However, the relationship is far from perfectly reliable. Most scholars and serious analysts would agree that, although the stock market appears to have a substantial life of its own, responding perhaps to bouts of mass euphoria and then panic, economic events and the anticipation of such events do have a substantial effect on stock prices. Perhaps the two factors with the greatest impact are interest rates and corporate profits. Figure 18.8 shows the behavior of the earnings-to-price ratio (i.e., the earnings yield) of the S& P 500 stock index versus the yield to maturity on long-term Treasury bonds since 1955. Clearly, the two series track each other quite closely. This is to be expected The two variables that affect a firm's value are earnings (and implicitly the dividends they can support) and the...

Allocate about onequarter of your stock portfolio to international equities divided approximately equally among Europe

This recommendation is based on the analysis in Chapter 9 and the principle of risk diversification. Since almost two-thirds of the world's capital is now located outside of the United States, international equities must be the basis of any well-diversified portfolio. Japanese stocks, despite their long bear market, should not be excluded because they have a low correlation with the rest of the world's markets, making them good diversifiers for a portfolio. There are three ways to invest in international stocks open-ended mutual funds, which allow for buying and selling shares from investors at the net asset value of their portfolio closed-end funds, which trade like shares of a portfolio and are run by an active manager and the newest innovations, WEBS (World Equity Benchmark Shares) and Country Baskets, which are pools of funds invested in a broad index of foreign stocks. As with smaller capitalization stocks, the evidence in favor of indexing international stocks is not yet as...

Should cautious investors overweight value stocks

Over the longest periods of time, by most measures, value stocks are shown to have outperformed growth stocks (see Figure 7.3). Despite this, by the traditional measure of risk, the volatility of returns, value stocks (in aggregate) have usually appeared to be safer or at least less risky than growth stocks (see Figure 7.4). Nevertheless, investors who wish to tilt their investments to profit from this need to be confident of being able to withstand the prolonged periods of underperforming the market and other investors. During the late 1990s growth stocks outperformed value stocks by more than 60 in just over two years, a process that was reversed in the subsequent 18 months (this is reflected in Figure 7.5 on page 104). Few investors have the confidence to withstand being on the wrong side of such swings without making a mistaken reaction that would cost them dearly. As most equity investors now appreciate, maintaining balance is a prerequisite to sleeping easily. Meanwhile, the...

What is the Right PE Ratio to Pay for a Growth Stock

In contrast to brand-name consumer stocks, the technology stocks failed badly. IBM, which commanded a 35 P-E ratio in the early 1970s, was actually worth only 15.4 times earnings despite its recent stellar comeback. And while investors paid 45.8 times earnings for Xerox, it was worth only 18.3 times earnings on the basis of its future growth. Polaroid sported the highest P-E, selling for a fantastic 94.8 times earnings, almost six times higher than was justified by its future returns. Despite its mix of winners and losers, an equally weighted portfolio of Nifty Fifty stocks was worth 40.5 times its 1972 earnings, marginally less than the 41.9 ratio that investors paid for them. 7 Finance theory states that the required return on an individual stock is also related to its beta with the market. Making this correction does not materially change the estimates given in Table 7-1. See Jeremy Siegel, The Nifty-Fifty Revisited Do Growth Stock Ultimately Justify Their Price idohmal of...

Forecasting the Stock Market

What can we learn from all of this about the future rate of return on stocks First, a note of optimism. Although timing the stock market is a very difficult and risky game, it may not be impossible. For example, we saw in Chapter 12 that some variables such as the market dividend yield seem to predict market returns. The most popular approach to forecasting the overall stock market is the earnings multiplier approach applied at the aggregate level. The first step is to forecast corporate profits for the coming period. Then we derive an estimate of the earnings multiplier, the aggregate P E ratio, based on a forecast of long-term interest rates. The product of the two forecasts is the estimate of the end-of-period level of the market. Of course, there is uncertainty regarding all three inputs into this analysis the actual earnings on the S& P 500 stocks, the level of Treasury yields at year end, and the spread between the Treasury yield and the earnings yield. One would wish to...

Tests of Predictability in Stock Market Returns

Returns over Short Horizons Early tests of efficient market were tests of the weak form. Could speculators find trends in past prices that would enable them to earn abnormal profits This is essentially a test of the efficacy of technical analysis. The already cited work of Kendall and of Roberts,7 both of whom analyzed the possible existence of patterns in stock prices, suggests that such patterns are not to be found. One way of discerning trends in stock prices is by measuring the serial correlation of stock market returns. Serial correlation refers to the tendency for stock returns to be related to past returns. Positive serial correlation means that positive returns tend to follow positive returns (a momentum type of property). Negative serial correlation means that positive returns tend to be followed by negative returns (a reversal or correction property). Both Conrad and Kaul8 and Lo and MacKinlay9 examine weekly returns of NYSE stocks and find positive serial correlation over...

Software that scans historical stock prices and identifies swing

Trading patterns - SwingTracker is a real time charting program available at www.mrswing.com that is designed to identify swing trading opportunities. While SwingTracker has many features (described in the Appendix), the scan feature is used to identify stocks whose price action show patterns that make them good candidates for swing trading. The scan feature allows you to identify patterns based on price history, volume history, moving averages, technical indicators, candlestick criteria, and fundamental company characteristics. Scan criteria are saved in a scan library so they can be used over and over again. A scan scenarios (also called a template) can be used to evaluate patterns in over 6000 stocks on the NYSE, the AMEX, and the NASDAQ. This evaluation happens in real time. During the day, you can use SwingTracker to watch the price and volume behavior of individual stocks. You can easily monitor stocks on a favorites list, and set alerts to tell you when particular prices are...

LOS 46b Calculate the component costs of 1 debt 2 preferred stock 3 retained earnings three different methods and 4

The cost of preferred stock (& ps) is Pnet net issuing price after deducting flotation costs Example Cost of preferred stock Suppose Dexter has preferred stock that pays an 8 dividend per share and sells for 100 per share. If Dexter were to issue new shares of preferred, it would incur a flotation (or underwriting) cost of 5 percent. What is Dexter's cost of preferred stock Note that the equation kps Dps Pnet is just a rearrangement of the preferred stock valuation model P0 Dps kps, where P0 is the actual market price today. P0 equals 100 in this example. But the cost of preferred stock ( ps) will be just a bit higher than the rate required by investors (kps) because of the need to compensate for flotation costs. (See Exam Flashback 2.) The opportunity cost of retained earnings (ks) is the required rate of return on the firm's common stock. The rationale here is that the firm could avoid part of the cost of common stock outstanding by using retained earnings to buy back shares of...

Stock Prices Reflect the Law of Supply and Demand

Jack Eckerd

One of the first subjects covered in a college economics course is commercial competition and the law of supply and demand. Individuals compete in buying and selling services and commodities of all kinds. As buyers, individuals seek to pay as little as possible for the goods, services, or property they want. But they find that others are also in the market for the same things and, as a result, they often have to pay more than they had planned. As sellers, individuals seek to dispose of their goods for the highest possible price, but since many others are trying to do the same thing they often have to settle for less than they had hoped. When the items being bought and sold are popular common stocks, the supply can often be insufficient to meet the demand. The result is an increase in the price of the stock, which brings forth a bigger supply from sellers and reduces the demand of buyers so that a temporary equilibrium is achieved. The supply is determined primarily by the number of...

Stocks and Stock Markets

Stock represents ownership of a corporation. The stockholders, or shareholders, are the holders of the stock. There are different types of stock, but in this book we study common stock.1 1 Owners of common stock have voting rights and are entitled to the earnings of the company after all obligations are paid. The first stock market in the United States originated in Philadelphia in 1790. It eventually became known as the Philadelphia Stock Exchange. The New York Stock Exchange (NYSE), initiated in 1792, is the largest stock exchange in the world. As many as one billion shares are traded during a single day on the NYSE. Trading on this exchange occurs auction style. The buyers and sellers have the option of sending bids and offers to the exchange and accepting the bids and offers from others at the exchange. Stock is sold to the highest bidder and bought at the lowest offer. The NASDAQ (National Association of Securities Dealers Automatic Quotation System) is another major United...

The Defensive Investor and Common Stocks

Investment Merits of Common Stocks In our first edition (1949) we found it necessary at this point to insert a long exposition of the case for including a substantial common-stock component in all investment portfolios.* Common stocks were generally viewed as highly speculative and therefore unsafe they had declined fairly substantially from the high levels of 1946, but instead of attracting investors to them because of their reasonable prices, this fall had had the opposite effect of undermining confidence in equity securities. We have commented on the converse situation that has developed in the ensuing 20 years, whereby the big advance in stock prices made them appear safe and profitable investments at record high levels which might actually carry with them a considerable degree of risk.t The argument we made for common stocks in 1949 turned on * At the beginning of 1949, the average annual return produced by stocks over the previous 20 years was 3.1 , versus 3.9 for long-term...

Stock Market Profits

Jenkins was bom in Schenectady, New York on March 12, 1949. From earliest childhood lie was fascinated with the stock market and studied every book and publication he could find regarding the subject. He studied Economics and Business Administration at Washington & Ixc University and graduated with a B.S. in Commerce in 1971. In 1975 he received an MBA from George Mason University. In 1984 Mr. Jenkins moved to New York City to become a professional trader for a number of specialist firms on the NYSE. In 1985 he founded the investment newsletter Stock Cycles Forecast. Because of the widespread notoriety this letter received in precisely predicting the final stock market high in August 1987 and specifically calling for a 500 point drop in the Dow that would end by October 19th of that year, Mr. Jenkins has become a frequent commentator on television and often the subject of numerous popular financial magazine and newspaper articles. As I look back over 42 years of life I...

Forex Versus Stocks

What are the differences between trading in the FOREX and operating in the stock market There are no restrictions on short selling. unlike the stock market, the FOREX has no restrictions to open sell positions (short). In the FOREX, there is a chance to buy or sell regardless of whether the market is bullish or bearish. Owing to the fact that in the FOREX there is always someone buying a currency and selling another at What, then, is the relationship between the stock market and the FOREX The stock market serves as a key indicator for the FOREX market. Technology has facilitated the possibility of investing in markets other than the local market country, no matter their geographic location. Therefore, it has forged a relationship between the stock market and the currency of the country like this If the stock market is going upward, it increases the investment in dollars, but in a market that is on the downside, investors tend to sell shares of companies in that country, attempting to...

The Stock Market

The stock market, also known as the equity market, is heavily influenced by economic factors. Strong economic activity is the impetus behind healthy growth in corporate profits, also known as earnings. In the long run, corporate earnings drive stock prices. In general, a healthy economy should yield a bull market because company earnings are growing. Conversely, poor economic prospects yield a bear market because earnings are falling. Investors in the stock market are not inflation lovers. In an expanding economy, accelerated inflation will curtail increases in stock prices even if corporate profits are rising. After all, some of the profit gain is due to rising prices, not increased worker productivity or higher sales volumes. Declining interest rates are typically associated with growth in interest-sensitive sectors such as housing and capital investment. Thus falling interest rates are a boon to the stock market, too. In addition, the present value of capital increases with low...

Stock Market Indexes

The daily performance of the Dow Jones Industrial Average is a staple portion of the evening news report. While the Dow is the best-known measure of the performance of the stock market, it is only one of several indicators. Other more broadly based indexes are computed and published daily. In addition, several indexes of bond market performance are widely available.

The US stock markets

There are two ways to trade stocks based on bids and offers It is the specialist's responsibility to maintain a fair and orderly market. One example of this would be a situation where there is a huge sell order coming into the market but there are almost no buyers - without the specialist's help the stock price would dump irrationally. It is his responsibility to buy the stock in this situation and to keep the stock at a fair level. The specialist is therefore always the buyer of last resort.

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