Investing 101

Why focus on learning the lingo of investing? Even if you decide to choose a professional investment manager, it is important that you understand what that person is telling you. Remember Gwen? She trusted her money to a stockbroker whose advice cost her half her life savings. Don’t let that happen to you.

Before we start describing the types of investments you can purchase or make, let’s go through some definitions.

Stock or “securities”: A security is something that you buy by investing your money where you expect to make money solely from the efforts of others. Basically, you are putting up the money and someone else is putting the money to work so that you can make interest or dividends on your money investment. Generally, securities can be equity securities (common stock), bonds (also called debentures) and convertible bonds (equity securities that are convertible into fixed-rate bonds).

Equity Securities. If the security is an “equity” security, you are putting up the cash to obtain a piece of a company. You used to be able to obtain share certificates or pieces of paper representing your shares in a company. These days with high speed computer trading, you will not receive a share certificate but a confirmation from a stockbroker or the company that you own the company shares.

Your cash will be put to work by the company for various purposes. When you buy a share of a company, you hope to get dividends and you also hope your shares will increase in value so that you can sell them, if you have to, and realize profits. However, if management is not up to the task, you could lose all the money you put up to purchase the equity security. If management is good, you can increase the value of your security and see dividends.

Companies declare dividends when they know what their earnings will be and since earnings vary, so will dividends. They can go up, down or be nonexistent. To find out the dividend yield of a company equity security, that is, the dollar amount of the dividend per share divided by the price per share, look in the local paper. If a company’s stock is selling at $20 per share and the dividend is $1 per share, the dividend yield is 5% (1 divided by 20). So, if you invest $10,000 in an equity security with a dividend yield of 5%, you can expect to receive $500 in dividends the first year. When you research a company, see if it has a reliable record of paying dividends. Most company websites and annual reports have this information.

Securities have market value. You buy the security at a price and if you want to sell the security, you may sell it at a higher price (at least we hope so). Where do you go to learn the market value of your equity security? Usually online or in large newspapers. Your security is most often “traded” on an exchange, which is simply a marketplace for trading securities. The most popular are the New York Stock Exchange (NYSE), the American Stock Exchange (AME) and NASDAQ, the National Association of Securities Dealers Automated Quotation System.

Each exchange works a bit differently, but basically all exchanges publish prices for securities, and these are the result of what people trading the securities have decided to pay for them. So, for example, if you decide to buy a share in a company, like Walt Disney, that company is “traded” on the NYSE. It is traded under a symbol, DIS. Every day that the NYSE is open, a price is published for that stock online and in major newspapers.
How do you read the prices for stock? Below is the way the price is quoted for stock. Either online or in most major newspapers, you will find guidance on how to read the stock quotation. The following is a hypothetical report on a company trading under the symbol “XYZ” on the New York Stock Exchange:

High Low Stock Div. P/E Last Chg.
34.80 15.50 XYZ .21 dd 22.14 +.36

For XYZ stock, this quote reflects the price of the stock on the NYSE as of the close of the market on a specific date. You can see the highest price of the stock over the prior 52 weeks was $34.80 per share; the lowest price was $15.50 per share. This stock pays an annual dividend of $ .21 per share. The P/E is the price to earnings ratio. This is the closing price of a stock divided by the company’s earnings per share for the latest 12-month period. In the case of XYZ, the symbol “dd” is explained online or in the newspaper as a “loss in the last 12 months.” For other stock quotes, if the P/E is high, many investment analysts say the stock is too expensive, so P/E becomes a tool to estimate whether the stock value is appropriate for a purchase or sale.

The “Last” price means XYZ was priced at $22.14 at the close of the market on the day before the price is quoted. For that day, the price of XYZ was up by $.36 per share.
There is a lot to learn from reading financial tables and summaries. Try it. It becomes fun!

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About the Author: Lyn Striegel is an attorney in private practice in Chesapeake Beach and Annapolis. Lyn has over thirty years experience in the fields of estate and financial planning and is the author of “Live Secure: Estate and Financial Planning for Women and the Men Who Love Them (2011 ed.).” Nothing in this article constitutes specific legal or financial advice and readers are advised to consult their own counsel.