March 5, 2010
Newspapers, business news shows, and the Internet are all helpful resources that can help you gather data on publicly-traded companies. Another important source is research reports written by analysts who make a living following various companies and reporting on their financial activities. However, if you're not familiar with these reports, they may seem to be written in another language.
A few of the terms you'll come across are defined below.
Market Capitalization (or "Market Cap") The total market value of the company, this figure is calculated by multiplying the stock price by the number of shares outstanding. It is often used to segment stocks when building or diversifying a portfolio. Generally speaking, companies with a market capitalization greater than $10 billion are often referred to as "large cap." Companies in the $2 billion to $10 billion range are considered "mid-cap," and those with capitalization of less than $2 billion are known as "small-cap."
Float - The total number of shares available for trading divided by the total shares outstanding lets you know what percentage of a company's stock is not held by insiders. The stock price of shares with a low float may be more volatile, particularly when stocks have few shares outstanding or are thinly traded, and they also may be subject to sharp price swings if large trades hit the market.
Earnings per share (EPS) - Taking the annual net income and dividing by the average common shares outstanding gives you the earnings per share. EPS should also be considered together with the stocks price, or compared with prior years' EPS and future EPS to estimate what the rate of earnings growth might be going forward. EPS are normally reported on a diluted basis, which takes into consideration potential ownership claims such as bonds that are convertible into stock.
Price / Earnings ratio (P/E) - The stock's market price divided by its EPS, this ratio is one of the most widely known measures. The P/E ratio shows how much you have to pay for $1 in earnings. A P/E multiple alone doesn't have much meaning; it needs to be compared with something, such as the P/E of the broad market, the P/E of competitors or the company's own P/E from prior years.
Dividend Yield - This is an important figure for investors who want or need current income, and is found by dividing the annual dividend by the current stock price. Investors with current income as an objective can compare the dividend yield and the prospects of future dividend increases with the income returns available from alternative investments.
(This article contains the current opinions of the author but not necessarily those of Brighton Securities Corp. The author's opinions are subject to change without notice. This blog post is for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. References to specific securities and their issuers are for illustrative purposes only and are not intended and should not be interpreted as recommendations to purchase or sell such securities).