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Stock, Bonds, Stock, Bonds, Document Transcript

  • Stock, Bonds, & Mutual Funds II What is Market Capitalization all about? A Definition •A measure of a public company's size. Market capitalization is the total dollar value of all outstanding shares •It's calculated by multiplying the number of shares times the current market price. This term is often referred to as "market cap“ Some Key Points •Market capitalization is just a fancy name for a straightforward concept •Quite simply, it refers to the value of a company, that is, the market value of its outstanding shares •This figure is found by taking the stock price and multiplying it by the total number of shares outstanding Let’s do a computation •For example, if Cory's Tequila Corporation (CTC) was trading at $20 per share and had 1 million shares outstanding, then the market capitalization would be $20 million ($20 x 1 million shares). It's that simple •Or your company is called Tom Ford’s Cheap Stock (TFCS) and sells for $5 a share. How many shares would you have to have outstanding to be considered a nano cap? Size is Important •Mega Cap: Market cap of $200 billion and greater •Big/Large Cap: $10-$200 billion •Mid Cap: $2 billion to $10 billion •Small Cap: $300 million to $2 billion •Micro Cap: $50 million to $300 million •Nano Cap: Under $50 million Another way to look at it •Keep in mind that there is no authoritative set of guidelines for distinguishing small caps from large caps. •For example, the Investment Company Institute (an association of investment companies) provides the following classes: –Small Cap: Less than $1 billion –Mid Cap: $1 billion to $5 billion –Large Cap: Over $5 billion Mega Cap •This group includes companies that have a market cap of $200 billion and greater •They are the largest publicly traded companies and include names such as Microsoft, Exxon, Wal-Mart, and General Electric
  • • Not many companies will fit in this category, and those that do are typically the leaders of their industry. Big/Large Cap •These companies have a market cap between $10-$200 billion •Many well-known companies fall into this category, which includes names like Yahoo, IBM and Citigroup •Typically, large-cap stocks are considered to be relatively stable and secure •Both mega and large cap stocks are often referred to as blue chips. Mid Cap •Ranging from $2 billion to $10 billion, this group of companies is considered to be more volatile than the large and mega-cap companies •Growth stocks represent a significant portion of the mid caps •Some of the companies might not be industry leaders, but they are well on their way to becoming one. Small Cap •Typically new or relatively young companies, small caps have a market cap between $300 million to $2 billion •Although their track records won't be as lengthy as that of the mid to mega caps •Small caps do present the possibility of greater capital appreciation - but at the cost of greater risk Micro Cap •Mainly consisting of penny stocks, this category denotes market capitalizations between $50 million to $300 million fall into this category •The upward potential of these companies is similar to the downside potential •These stocks do not offer the safest investment, and a great deal of research should be done before entering into such a position Nano Cap •Companies having market caps below $50 million are nano caps •These companies are the most risky, and the potential for gain is often relatively small •These stocks typically trade on the pink sheets or OTCBB. Defensive Stocks Should you have some of these in your portfolio? Defensive Stocks •Mostly made up of the consumer non-cyclical group •Companies in the category are somewhat immune to the ups and downs of the economy •Examples might be companies that are involved in: –Tobacco –Soap –Drugs –Diapers –Food and beverages
  • •These companies make money in both good and bad times •Their products or services are necessary for our everyday living or habits Cyclical Stocks •Stocks within the automobile, housing and paper sectors can act this way •Such stocks mirror the economy •Many such investments: –will have large rewards in good times –can experience some rather dynamic behavior in tough times •However, when disposable income becomes scarce, expect hard times 7 Tests of Defensive Stocks: Benjamin Graham's Intelligent Investor •Adequate Size of the Enterprise –A smaller company is generally subject to wider fluctuations in earnings –$100 million of annual sales or be a public utility company should have no less than $50 million in total assets •Sufficiently Strong Financial Condition –Have a current ratio of at least two –Long-term debt should not exceed working capital –For public utilities the debt should not exceed twice the stock equity at book value –These act as a strong buffer against the possibility of bankruptcy or default. •Earnings Stability –No reported loss over the past ten years –Having at least some level of earnings indicates stability • Dividend Record –The company should have a history of paying dividends on its common stock for at least the past twenty years –This should provide some assurance that future dividends are likely to be paid •Earnings Growth –A company's profits keep pace with inflation –Net income should be increasing •Moderate P/E Ratio –The current price of the stock should not exceed 15 times its average earnings for the past three years –If greater, you may be overpaying •Moderate Ratio of Price to Assets –Current price should not be more than 1 1/2 times the book value last reported Some Defensive Stocks •The software business is less cyclical than most other technology fields –Adobe Systems (ADBE) –Informix (IFMX)
  • –Microsoft (MSFT) –Oracle (ORCL) –and Symantec (SYMC) •Some others –J.P. Morgan Chase & Co. (NYSE:JPM) –SINA Corp. (Nasdaq: SINA), a Chinese online media company –eBay Inc. (Nasdaq: EBAY) –Tyco International Ltd. (NYSE: TYC) Some Other Choices (but investigate) •Coca Cola •Proctor & Gamble •Exxon Mobile •General Electric •DuPont •Banking Conglomerates •Utilities •Blue Chip, Old Companies So You Want to Buy •Brokers are the people who handle customer orders to buy and sell securities •Don't forget that a broker is a salesperson •Minimum balances required to open an account range from thousands of dollars to nothing at all •All brokerages charge commissions to execute orders. This fee varies widely depending on the type of brokerage •Look out for hidden fees for transactions like the transfer of assets or inactivity •Full-service brokers offer much more, but they're expensive •Discount brokers don't offer the extras, but they're affordable •Online brokerages have changed the industry by lowering costs and blurring the line between discount and full-service •The type of brokerage you require depends on your investing style and the advice you need •It's possible to check the background of all brokers and firms •The type of account you need depends on the type of securities you want to hold •There are many ways to execute an equity order and this is a whole class in and of itself US Stock Exchanges •AMEX •New York Stock Exchange (NYSE) •NASDAQ •The Arizona Stock Exchange
  • •Chicago Stock Exchange •Chicago Board Options Exchange •Chicago Board of Trade •Chicago Mercantile Exchange •Kansas City Board of Trade •Minneapolis Grain Exchange •Pacific Stock Exchange •Philadelphia Stock Exchange Various Indexes • Dow Jones Industrial Average: 30 widely traded, blue chip companies traded on the New York Stock Exchange - This is a weighted index •S&P 500: 500 industrial, utility, transportation and financial stocks of the New York and American exchanges and the NASD Over the Counter Market. It represent about 80% of the value of the NYSE •NASDAQ COMPOSITE: This index covers all the roughly 3,500 stock traded over the counter •VALUE LINE COMPOSITE: It is an index of about 1,700 NYSE, Canadian, OTC, regional exchanges and NASDAQ stock that is un-weighted •RUSSELL 2000: this is a capitalization weighted index of the bottom 2,000 of the 3,000 of the largest capitalized U.S. securities •WILSHIRE 5000 EQUITY: This is the broadest based indicator. It's capitalization weighted index includes literally all the actively traded U.S. issues- NYSE, American exchanges plus NASDAQ. The Wilshire 5000 capitalization is about 81% NYSE, 2% AMEX, and 17% OTC