Browsed by
Category: Stocks

Forex or Stocks: Which Should You Be Trading?

Forex or Stocks: Which Should You Be Trading?

When you think of Forex, it is important not to confuse Forex trading with ‘playing the stock market.’ They are two very different things, and it is important to understand the difference. Let’s take a look at stocks and Forex.
Stocks

Stocks are traded on a stock market, such as the New York Stock Exchanges (NYSE) and the National Association of Securities Dealers Automated Quotation System (NASDAQ), and this has been so for as long as stock markets have existed. When you purchase stock, you are essentially purchasing a share, or shares, in the company that is selling the stock. Companies sell stock in order to raise money to grow the business. When you buy stock, you are investing in the business.

If the company that you’ve invested in does well, the value of your stock rises. If it doesn’t do well, the value drops, meaning that it will no longer be worth as much as you bought it for. Obviously, the entire successful notion of buying and selling stocks is to buy low, and to sell when the price is high. In many cases, this is the only way that you see a return on your investment, but many companies pay out dividends to their shareholders as well, where a percentage of the overall profit is paid out to investors, based on how much stock in the company the investor owns.

Stocks are traded through stock brokers. Stock brokers earn a commission on the stocks that they trade, which is paid by the investor. Stocks may be listed with one stock exchanges, or on several stock exchanges. Stocks can be either long term or short term investments, but ideally, they are long term investments. If you deal in stocks, you should have a diversified portfolio, covering several different industries, and including several ‘blue chip’ stocks, which have proven to remain steady over numerous years.

Short term stock trading is very risky. You may know the short term stock traders as ‘Day Traders.’ Day traders are short term stock traders who try to profit from the daily fluctuations in the stock market. They often buy and sell several different times during the day – buying low, and selling high.

Like Forex, some stocks can be bought on margin. This means that the trader borrowed the money to buy the stock. Margin rates typically run around 50%, meaning that the investor can borrow about half of the value of the stock.
Forex

Forex is the Foreign Exchange Market. While stocks may be bought for long or short term, trading currency is always short term trading, with investors buying and selling a currency within a 24 hour period. While Forex trades are made through brokers, they are essentially commission free, and the fees are based on a spread, which is the difference between the asking price of the currency and the selling price of the currency. You can visit ChangeCurrency.org and find our more about the ins and outs of how currency markets are set up, and how they work.

Forex is not a stock market, it is a financial market. In fact, it is the largest financial market in the entire world. While the Stock exchanges in the United States have transactions in the neighborhood of $100 billion per day, the Forex market has transactions in excess of $1.5 trillion dollars per day. While stock exchanges are located in specific places, such as New York, there is no specific place for the Forex. There are trading markets located around the world.

Another advantage of the Forex is that it is open twenty four hours per day, five days a week, whereas the stock markets are only open seven hours, five days a week. This makes Forex traders very happy, because they can buy and sell currencies whenever they feel that the time to buy or sell is right, instead of having to wait for the market to open.

The Forex is also a great deal more predictable than stocks, and it doesn’t take a great deal of money to get started with Forex trading. For instance, you can open a mini account for as little as $250!

Ways To Buy Stocks Without Brokers

Ways To Buy Stocks Without Brokers

The most common way to buy stocks is through a broker. Whether it is using a traditional firm or opening up an account with an online discount broker, most investors prefer to buy and sell stocks this way. Regardless the type (traditional, discount, or online), your stock broker will handle placing trades on your behalf and in return receive a commission.

Although using a broker is the most common method for investing, there are a few ways to buy stock without a broker. Two other options for purchasing investments include direct stock purchase plans and dividend reinvestment plans. Each of these methods has their advantages and disadvantages which are explained below.

1. Direct Stock Purchase Plans

Many established blue chip companies offer a direct stock purchase plan as an option to own shares of their company. A direct stock purchase plan allows investors to buy shares directly from the company. For example, Procter & Gamble (PG) and McDonald’s (MCD) offer these plans which can take many of the hassles out of investing.

Most of these plans require a minimum initial deposit in order to join. There are some companies that even allow the investor to setup an automatic withdrawal every month from a bank account to purchase additional shares. This can be a great way to accumulate shares without wasting any time placing orders and monitoring your brokerage account.

If you plan to invest through direct stock purchase plans, it is important to understand they do have a few disadvantages. Purchasing shares from these plans should only be used by long term investors. Day traders and other short term investors are better off using an online discount broker to save the pain of moving in and out of stocks.

Another disadvantage to these plans is that an investor may end up having accounts spread out across many different companies. The advantage of using a broker is that all of your investments are consolidated into a single account, unlike the direct plans which have multiple accounts.

Each direct stock purchase plan is different, so it is a good idea to read up on the details of what each company offers.

2. Dividend Reinvestment Plan (DRIP)

Not all companies offer direct stock purchase plans, but there still is another way to buy stock without a broker. A company that does not offer a purchase plan may still offer a dividend reinvestment plan (DRIP). Investors can setup a dividend reinvestment plan directly through a participating company without the need for any other account.

A DRIP is used to reinvest all dividends back into additional shares of the same stock instead of receiving a cash payment. Depending on the company, most DRIP programs are quick and easy to setup and can be done directly through a company’s website. Some companies may require you to own at least one full share of their stock to participate in the plan.

Similar to direct stock purchase plans, there are a few disadvantages to setting up DRIPs. Since you will need to setup the plan directly through the company, you will need to have separate accounts for each stock you invest in. This can end up creating more work when an investor tries to track all of their investments.

Another problem with setting up dividend reinvestment plans is the amount of shares you will end up owning. If you only start with one share, it will take a long time to build a decent size holding in the stock.

There are a couple easy ways to buy stocks without a broker that investors can use. A direct stock purchase plan can be setup with a company to invest in their shares. This is an easy way to avoid the hassles of managing an account.

Another option is to open a dividend reinvestment plan directly with a company. A DRIP as they are called will automatically reinvest any dividend payments received back into additional shares of the stock. Once an investor purchases the minimum number of shares required to start (usually one), a DRIP is very easy to manage.

Investors who are tired of dealing with stock brokers can leverage either of these options to buy stock. However, there are a few disadvantages to these plans that investors must consider. Often times, the convenience of having a broker is just easier than buying stock directly from a company.

Stocks With Free Cash Flow – What It Means

Stocks With Free Cash Flow – What It Means

An important financial calculation to consider when you buy stocks is free cash flow. Also known as FCF, it is the measure of operating cash flow less any capital expenditures from a company’s operations. It represents the cash that a company is able to create once all expenses have been paid to maintain its assets.

It is important to invest in companies that have the ability to generate free cash flow. A company that has no cash is not able to develop new products, acquire smaller companies, reduce debt, nor pay its shareholders dividends. For investors who invest in dividend paying stocks, free cash flow is an extremely important factor when selecting investments.

cash-flowAll of the side effects of having positive cash (i.e. reducing debt, paying dividends) help to improve shareholder value. More importantly for income investors, it allows dividend paying stocks the ability to increase their distributions each year. Companies like Procter & Gamble (PG), Johnson & Johnson (JNJ), and McDonald’s (MCD) have consistently maintained positive free cash flow in order to continue growing their businesses while increasing their distributions to shareholders each year.

How to Calculate FCF

Free cash flow can be calculated by subtracting all capital expenditures made by the company during a period of time from the operating cash flow. The following equation can be used to perform the calculation –

FCF = (Operating Cash Flow) – (Capital Expenditures)

Let’s take example stock X and calculate the company’s free cash flow. For the year, the company reported 16,072 million in operating cash flow and 3,067 million in capital expenditures. Based on these reported numbers, the company’s FCF would look like this –

FCF = (16,072 million) – (3,067 million)

That means X had a free cash flow of 13,005 million or 13 billion USD. That same year, the company had approximately 3,099 million outstanding shares, which means the company had ~$4.20 in FCF per share, as opposed to $4.11 in reported earnings per share.

Earnings or Free Cash Flow

Much of the focus on Wall Street surrounds earnings per share and price to earnings ratios. While these numbers are an important measure of a company’s success, they don’t really tell the whole story. Companies are able to massage their earnings based on accounting to make them appear more favorable to shareholders. On the other hand, a company’s free cash flow cannot be massaged or made to appear more favorable to investors.
Negative Free Cash Flow

It is not always necessarily a bad sign if a company has negative free cash flows from time to time. This could be a sign that a company is making a large investment to grow the organization. If a company is successful with these investments, eventually it will turn into higher cash flow in the future.

When you are reviewing a company’s FCF, make sure you understand where the numbers are coming from. In a given reporting period, a company may have negative free cash flows. If you are able to detect the reason behind this change, then you can decide if the negative cash flow will help or hurt the company in the future.

Earnings can often be misleading numbers when it comes to identifying quality investments in the stock market. Based on accounting practices, certain items can be hidden from earnings numbers to make them look more favorable to investors. An alternative to earnings is to look at free cash flow which is much harder to change the appearance. Cash is an important indicator of how well the company is operating and can help give an indication of future growth of the organization and the potential for future dividend hikes.

P/E Ratio and How You Can Calculate It

P/E Ratio and How You Can Calculate It

What does P/E ratio mean? The P/E ratio is short for price-to-earnings ratio and represents the valuation of a company’s current share price to its earnings per share. This financial ratio is one of the most widely used numbers to analyze stocks by analysts and investors in the market today.

Most of the time the earnings per share used to calculate the P/E ratio is the sum of the last four quarters reported by the company. By using past earnings number, the ratio is actually calculating the trailing P/E. Most financial websites and analyst use the trailing P/E ratio, but there are times when forward P/E numbers are calculated. The forward P/E numbers use estimates of earnings expected during the next four quarters.

Comparing Similar Stocks

One of the more popular uses of the P/E ratio is to compare similar stocks within the same sector. When the share price and earnings per share of two similar companies are very different, it can be hard to determine which one is the best stock to buy at the time. The price-to-earnings ratio can make it easier to compare two or more stocks from similar industries and sectors.

Let’s say we wanted to compare stock X against stock Y to see which offered the best value in the market. Both companies are blue chip stocks that pay dividends and are in the Consumer Goods sector. Currently the two companies have very different share prices and earnings per share, making it difficult to figure out which one is more attractive.

Stock X recently traded at $64.08 per share and last reported $3.67 in earnings per share. Y on the other hand recently traded at $30.85 per share with $2.40 in reported earnings per share. As you can tell, using the share price and earnings independently to compare the companies is impossible.

Trailing P/E for X & Y

X = 17.46 ($64.08 / $.367)
Y = 12.85 ($30.85 / $2.40)

Based on the calculations above, Stock Y is trading at a discount compared to Stock X.

The price-to-earnings ratio is also commonly referred to as price multiple as well as earnings multiple.

Disadvantages of P/E Ratios

There is no doubt that the P/E ratio can be a helpful tool used by investors to analyze stocks. However, there are some issues with relying strictly on this calculation.

pe-ratioOne problem is that earnings per share are used as the denominator in the price-to-earnings calculation. The problem with this is that companies can legally mask certain problems facing the business in their reported earnings. If earnings are inflated for a company, then the end result is a lower P/E and the appearance the stock is cheaper than it really is.

Another issue is that the trailing P/E is almost always used to analyze stocks. Since the earnings numbers are from the past, there is no guarantee they will be the same in the future. A company that appears to be undervalued may actually be overvalued if their earnings fall in the next 12 months.

Finally, some investors make the mistake of comparing stocks from completely different sectors and industries. For example, an investor should not compare the P/E ratio of Google (GOOG) against Kraft Foods (KFT). Google is considered a growth stock which means the P/E will be much higher or even non-existent if the company is not earning any money yet. Kraft Foods on the other hand is a blue chip dividend paying stock that has been around for a long time. The two companies are in very different places in the business life cycle.

And Finally..

The P/E ratio can be a useful tool for investors looking to evaluate similar companies from the same sector or industry. It represents the ratio of cost to own one share of stock versus the reported earnings per share. The trailing P/E is the most common calculation that is run but forward P/E is used from time to time.

Investors must recognize that price-to-earnings should be used in combination with other figures. Using this calculation on its own to evaluate stocks may not uncover potential problems in the company’s business.

An Unrealized Gain – What It Means For Your Stocks

An Unrealized Gain – What It Means For Your Stocks

An unrealized gain occurs when a stock increases after the investor buys it but has not sold it. The term unrealized refers to the fact the investor still owns the stock and has yet to sell it for a profit. Once the investor sells the asset, it becomes a realized gain, assuming it is worth more than the purchase price.

Let’s say you buy 25 shares of Procter & Gamble (PG) at $63 per share. Your total cost to invest in this dividend aristocrat would equal $1,575 plus any commissions or fees paid to your broker. If the stock price were to rise to $65 a month later, your total value of the investment would equal $1,625. If the investment is not sold, then the unrealized gain would be $50 ($1,625 – $1,575). Once the investment is sold at $65, then the $50 would become a realized gain.

stock-certAn actual investment gain is only realized when the stock is sold. It is important to understand the difference, especially for tax purposes. A capital gain on a stock is only taxed once the investor decides to sell the investment. So an investor who has a unrealized gain of $50 on the PG investment would not have to report this increase on their income taxes.

On the other hand, during bull markets investors tend to focus on how much their portfolio is worth. When stocks are gaining, it is easy to focus on the unrealized gains in their portfolio. It is critical to remember that no money has been gained or loss until the stock is sold.
Final Thoughts

Understanding the difference between realized and unrealized gains is important for investors who buy stocks. Just before the sub-prime crisis a few years ago, many investors felt on top of the world with their stock holdings. The economy was cruising along, as was the stock market. As the economy began to take a downturn, investors found out the hard way their profits were unrealized.

How to Calculate Earnings Per Share The Simple Way

How to Calculate Earnings Per Share The Simple Way

Want to learn how to calculate earnings per share. Most financial websites already calculate these numbers for investors, but it is still a good idea to learn where they actually come from. Every investor who buys stocks or sells them should at least have a general understanding of how to calculate earnings per share.

The earnings per share of a company are one of the most widely used financial figures used to analyze companies. It is even used as an input in other financial ratios including the P/E ratio, which helps to determine the proper valuation of a company.

What are Earnings Per Share?

calculateThe first thing we have to ask before calculating any numbers is what does the earnings per share of a corporation actually mean. You have probably heard the term mentioned on the news or read it online or in the business section of your newspaper. Earnings per share (EPS) represent a portion of a company’s profit that is allocated to a single share of common stock. Instead of using the total earnings reported by the company, the EPS is an easier way to represent how profitable a company actually is.

How to Calculate Earnings Per Share

In order to calculate the EPS of a corporation, you will need to find 2 input values to plug into the equation. The first is net income or profit reported by the company. Basically, the net income (NI) is the revenues generated by the company less any costs incurred by doing business, depreciation, taxes, interest, and any other expense.

If the net income number you find does not account for dividends paid on preferred stock, then you need to subtract this as well to get the numerator of your equation. Dividends paid on common stock shares should not be removed from the net income amount, only preferred share dividends.

The other input to the equation is the number of outstanding common shares of the company. It is important to note that the number of outstanding shares can change throughout a reporting period. Some EPS calculations use the average number of outstanding shares during the reporting period while others use the number of shares outstanding at the end of the reporting period. The number of shares can change as a result of stock buy backs, stock splits, and a number of other activities.

The equation below can be used to calculate a company’s EPS.

EPS = (Net Income) / (Outstanding Shares)

The equation above is a simple way to calculate EPS. There are many other versions of the equation that use different numbers than net income. For example, some calculate the earnings per share by using the income from continuing operations.
EPS Example

As an example, let’s calculate the earnings per share for a company, let’s say a popular blue chip dividend aristocrat. It has reported net income of $12,266 million or $12.2 billion. During the same period, the company ended the year with 2,789 million or 2.8 billion shares outstanding.

EPS = ($12,266) / (2,789)

Based on our equation, we were able to determine that the company posted EPS of $4.40.

Disadvantages of Using EPS

As you know by now, earnings per share can be calculated a number of different ways based on income numbers and outstanding shares. One of the disadvantages of this is that analysts and investors may use different numbers which can make things confusing. This can especially be misleading for inexperienced investors trying to analyze stock picks for the first time.

Another issue is with the number that is used for outstanding shares. We know that there are a couple different ways to calculate the number of shares available for a company. Normally, the results are not that much different, but it can get a little confusing.

Finally, company’s can masked certain underlying problems with their business through their earnings per share. There are plenty of legal accounting methods used by companies that can hide certain problems with the business. This can lead to misleading EPS numbers and directly impact a P/E value.
Final Thoughts

The earnings per share of a company are one of the most commonly used financial ratios to help investors analyze stocks. The EPS is also used to calculate other financial equations like the P/E ratio which is another important measure of a company’s value in the market. Investors must recognize that there are some disadvantages to using the EPS based on accounting standards and the methods used to calculate the numbers.

Overall, EPS is a helpful tool for investors to use when picking stocks for their portfolio. If used in combination with other ratios and numbers, it can help investors come to conclusions on whether to buy or sell a particular stock.