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Common Stock Investing Appendix B, Part VI Are Stock Market Indices and Stock Prices Leading Economic Indicators? Is this Information Useful?

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Presentation on theme: "Common Stock Investing Appendix B, Part VI Are Stock Market Indices and Stock Prices Leading Economic Indicators? Is this Information Useful?"— Presentation transcript:

1 Common Stock Investing Appendix B, Part VI Are Stock Market Indices and Stock Prices Leading Economic Indicators? Is this Information Useful?

2 Heres what you get when buying Stock Committee on Uniform Securities Identification Procedures Ownership is Freely Transferable

3 How are Stock Prices reported? Indexes: DJIA, NASDAQ and S&P 500 The Dow 30 Largest and Most Widely Held Public Companies Standard & Poors (S&P) 500 Large-Cap (>$3B) Companies traded on NASDAQ and NYSE National Association of Securities Dealers Automated Quotations 3,000 US/Foreign Growth/Technology Stocks

4 How is a Stocks Price reported? ttm = Twelve Trailing Months S EPS = Earnings (Net Income) Per Share

5 Why is a Stocks Price/Value* what it is? Efficient Market Hypothesis says Stock Prices Reflect All Publically-Available Information In theory (?), Stock Prices are Never Under- or Over-Valued – Cant Beat the Market Markets get Beat all the Time: Isnt it all about Interpreting Information? How does Information effect a Firm, its Industry and the Economy? * * PRICE = What Market (Seller) Thinks its Worth VALUE = What YOU (Buyer) Think its Worth

6 RISKS of If, When and How Much Cash will be Received affect Value Expected Rate of Return reflects Risk Aversion – Low Risk/Low Rate versus High Risk/High Rate Whats an Asset (Stock) Worth? Future Cash to be Received while Owning Asset Stockholders own Company - Future Cash = Net Income

7 3.Net Income (EPS) Expected Rate of Return Expected Rate of Return = Value 1. Forecast Future Net Income 2.Develop Expected Rate of Return (Risk Measure)

8 Risk-Free Rate of Return (2 Yr. Treasury) + Systematic Risk (Inflation – CPI Change) + Equity Risk Premium (Firm Specific Risk) Total = Rate that Compensates for All Ownership Risks If Expected Rate of Return measures Risk, How to Calculate it?

9 Compare Your Value of Stock with Markets Price If Market Price less* than Value, Consider Purchase * How much Less? Factor in Margin-of-Safety (Contingency)

10 Life should NOT be a Journey to the Grave where You Arrive Safely in One Pretty, Well-Preserved Piece… Bill McKenna, Professional Motorcycle Racer (Cycle Magazine, February 1982) GERONIMO!!! Instead, Dont You want to Skid Broadside over the Finish Line, Thoroughly Used Up, Worn Out, Leaking Oil, Shouting as Loud as you can…


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