Different Types of Stocks

There are two main types of stocks: common stock and preferred stock.

Common Stock
Common stock is, well, common. When people talk about stocks they are usually referring to this type. In fact, the majority of stock is issued is in this form. We basically went over features of common stock in the last section. Common shares represent ownership in a company and a claim (dividends) on a portion of profits. Investors get one vote per share to elect the board members, who oversee the major decisions made by management.

Over the long term, common stock, by means of capital growth, yields higher returns than almost every other investment. This higher return comes at a cost since common stocks entail the most risk. If a company goes bankrupt and liquidates, the common shareholders will not receive money until the creditors, bondholders and preferred shareholders are paid.

Preferred Stock
Preferred stock represents some degree of ownership in a company but usually doesn’t come with the same voting rights. (This may vary depending on the company.) With preferred shares, investors are usually guaranteed a fixed dividend forever. This is different than common stock, which has variable dividends that are never guaranteed. Another advantage is that in the event of liquidation, preferred shareholders are paid off before the common shareholder (but still after debt holders). Preferred stock may also be callable, meaning that the company has the option to purchase the shares from shareholders at anytime for any reason (usually for a premium).

Some people consider preferred stock to be more like debt than equity. A good way to think of these kinds of shares is to see them as being in between bonds and common shares.

Different Classes of Stock
Common and preferred are the two main forms of stock; however, it’s also possible for companies to customize different classes of stock in any way they want. The most common reason for this is the company wanting the voting power to remain with a certain group; therefore, different classes of shares are given different voting rights. For example, one class of shares would be held by a select group who are given ten votes per share while a second class would be issued to the majority of investors who are given one vote per share.

When there is more than one class of stock, the classes are traditionally designated as Class A and Class B. Berkshire Hathaway (ticker: BRK), has two classes of stock. The different forms are represented by placing the letter behind the ticker symbol in a form like this: “BRKa, BRKb” or “BRK.A, BRK.B”.

What is a Limit Order?

What Does Limit Order Mean?

An order placed with a brokerage to buy or sell a set number of shares at a specified price or better. Limit orders also allow an investor to limit the length of time an order can be outstanding before being canceled.

Depending on the direction of the position, limit orders are sometimes referred to more specifically as a buy limit order, or a sell limit order.

Limit orders typically cost more than market orders. Despite this, limit orders are beneficial because when the trade goes through, investors get the specified purchase or sell price. Limit orders are especially useful on a low-volume or highly volatile stock.

What Causes Stock Prices To Change?

Stock prices change every day as a result of market forces. By this we mean that share prices change because of supply and demand. If more people want to buy a stock (demand) than sell it (supply), then the price moves up. Conversely, if more people wanted to sell a stock than buy it, there would be greater supply than demand, and the price would fall.

Understanding supply and demand is easy. What is difficult to comprehend is what makes people like a particular stock and dislike another stock. This comes down to figuring out what news is positive for a company and what news is negative. There are many answers to this problem and just about any investor you ask has their own ideas and strategies.

That being said, the principal theory is that the price movement of a stock indicates what investors feel a company is worth. Don’t equate a company’s value with the stock price. The value of a company is its market capitalization, which is the stock price multiplied by the number of shares outstanding. For example, a company that trades at $100 per share and has 1 million shares outstanding has a lesser value than a company that trades at $50 that has 5 million shares outstanding ($100 x 1 million = $100 million while $50 x 5 million = $250 million). To further complicate things, the price of a stock doesn’t only reflect a company’s current value, it also reflects the growth that investors expect in the future.

The most important factor that affects the value of a company is its earnings. Earnings are the profit a company makes, and in the long run no company can survive without them. It makes sense when you think about it. If a company never makes money, it isn’t going to stay in business. Public companies are required to report their earnings four times a year (once each quarter). Wall Street watches with rabid attention at these times, which are referred to as earnings seasons. The reason behind this is that analysts base their future value of a company on their earnings projection. If a company’s results surprise (are better than expected), the price jumps up. If a company’s results disappoint (are worse than expected), then the price will fall.

Of course, it’s not just earnings that can change the sentiment towards a stock (which, in turn, changes its price). It would be a rather simple world if this were the case! During the dotcom bubble, for example, dozens of internet companies rose to have market capitalizations in the billions of dollars without ever making even the smallest profit. As we all know, these valuations did not hold, and most internet companies saw their values shrink to a fraction of their highs. Still, the fact that prices did move that much demonstrates that there are factors other than current earnings that influence stocks. Investors have developed literally hundreds of these variables, ratios and indicators. Some you may have already heard of, such as the price/earnings ratio, while others are extremely complicated and obscure with names like Chaikin oscillator or moving average convergence divergence.

So, why do stock prices change? The best answer is that nobody really knows for sure. Some believe that it isn’t possible to predict how stock prices will change, while others think that by drawing charts and looking at past price movements, you can determine when to buy and sell. The only thing we do know is that stocks are volatile and can change in price extremely rapidly.

The important things to grasp about this subject are the following:

1. At the most fundamental level, supply and demand in the market determines stock price.
2. Price times the number of shares outstanding (market capitalization) is the value of a company. Comparing just the share price of two companies is meaningless.
3. Theoretically, earnings are what affect investors’ valuation of a company, but there are other indicators that investors use to predict stock price. Remember, it is investors’ sentiments, attitudes and expectations that ultimately affect stock prices.
4. There are many theories that try to explain the way stock prices move the way they do. Unfortunately, there is no one theory that can explain everything.

India Hit by Record Low ‘Buys’ on Rate Outlook

Investment strategists are cutting recommendations on India at a record pace after the country’s stocks surpassed China as the most expensive major emerging market for the first time since 2006.

The Bombay Stock Exchange Sensitive Index is valued at 20 times estimated profits, higher than China for the first time since November 2006 and the second-most expensive among the 25 biggest markets after Japan, according to monthly data compiled by Bloomberg. Even after the Sensex sank 4 percent last week, the most in almost three months, its stocks trade within 6.1 percent of analysts’ average 12-month price estimates.

Rising valuations prompted analysts to cut “buy” ratings on Indian equities to a record low. Goldman Sachs Group Inc. said the Reserve Bank of India plans its first interest rate increase since 2006 this week to curb inflation. The last eight times wholesale price increases climbed above their long-term average, the Sensex posted average losses of 5.6 percent, Bloomberg data show.

“There are better opportunities in other emerging markets,” said Roger Groebli, the Singapore-based head of financial market analysis at LGT Capital Management, part of a group that oversees about $84 billion. India “will be an underperformer for the first quarter,” he said.

Growth Rebounds

The Sensex gauge fell 0.9 percent to 16,715.34 as of 10:04 a.m. in Mumbai. The gauge surged 117 percent from its March low to a high on Jan. 6 as growth in the fourth-largest emerging economy after China, Brazil and Russia accelerated. Gross domestic product grew 7.9 percent in the three months through September, from 5.8 percent at the beginning of 2009. India may expand 6.4 percent in 2010, according to the Washington-based International Monetary Fund.

The rally pushed the Sensex’s valuation above China’s Shanghai Composite Index, which trades for 18 times analysts’ earnings estimates. Chinese valuations are falling as faster growth adds pressure on policy makers to slow the rise in asset prices. The government reported last week that the economy expanded 10.7 percent in the fourth quarter, the fastest pace since 2007.

Brazil’s Bovespa trades at 13 times earnings estimates and Russia’s Micex is valued at 9.2 times. Japan’s Nikkei-225 Stock Average has a ratio of 40, compared with 14 for the Standard & Poor’s 500 Index, Bloomberg data show.

Tata Motors Ltd., maker of the world’s cheapest car, led the Sensex’s advance since March with a 470 percent gain. The Mumbai-based company is valued at 27 times analysts’ earnings estimates, compared with 23 times for Shanghai-based SAIC Motor Corp., China’s largest carmaker.

Analysts Cut Ratings

Surging equity valuations prompted India stock analysts to drop their “buy” ratings to 49 percent of total recommendations, the lowest level since Bloomberg began tracking the data in 1997 and down from 59 percent a year ago.

The rise in price-to-earnings ratios may prompt companies to sell shares in stock offerings. Indian firms have plans to raise as much as $30 billion while the government may sell about $10 billion of shares in state-controlled companies, according to Kotak Securities.

Indian stocks risk a “tactical correction” because investors have failed to price in the effect of rising interest rates and inflation, according to Goldman’s Hong Kong-based strategist Timothy Moe.

Inflation Surge

India’s wholesale-price index climbed 7.3 percent in December, the fastest pace in more than a year. Central bank Governor Duvvuri Subbarao probably will raise the key reverse repurchase rate by 25 basis points to 3.5 percent and the cash reserve ratio by 50 basis points to 5.5 percent at the next policy announcement on Jan. 29, Moe said in a Jan. 15 research report.

Eleven of 15 economists surveyed by Bloomberg predict policy makers will keep the reverse repurchase rate unchanged. Subbarao said last week he aims to support the nation’s economic recovery without “compromising” on price stability. A basis point is 0.01 percentage point.

Overseas investors sold a net $123.9 million of shares on Jan. 21 as the government said food inflation stayed above 15 percent for the ninth week. The report dragged down financial shares from Housing Development Finance Corp. to ICICI Bank Ltd., which are both based in Mumbai.

‘Go Too Far’

India’s market “hasn’t factored in the risk of tightening whereas China has already begun to,” said Shane Oliver, the Sydney-based head of investment strategy at AMP Capital Investors, which oversees about $90 billion globally. “The macro backdrop in India and the share-market valuations are less favorable.”

The Shanghai Composite has dropped 10 percent from its 2009 peak in August as the People’s Bank of China raised the proportion of deposits that banks must set aside as reserves and allowed three-month bill yields to rise. Policy makers are trying to reduce funds in the banking system after record loan growth spurred concern that bubbles will form in the equity and property markets.

Stocks plunged around the world Jan. 21 as concern grew China will do more to cool its economy after the fourth-quarter GDP report.

“What China is trying to do is take the foot off the accelerator,” said Oliver. “It’s already having a negative effect on the stock market because investors are concerned that they’ll go too far.”

2010 Retreat

The Shanghai Composite is down 5.2 percent this year, the biggest decline among benchmark indexes in the largest emerging- market economies, or BRICs. The Sensex and the Bovespa dropped about 4 percent. Only Russia’s Micex is up this year with a gain of 3 percent.

AMP cut holdings of Indian stocks to “underweight” relative to China and other emerging markets near the end of 2009, Oliver said. India is the only underweight holding for money managers among the BRIC markets, according to a Bank of America Corp. survey this month.

India’s higher valuations are justified because profits are poised to rise as the economy keeps expanding, said Ivan Leung of JPMorgan Private Bank. Ten of the 16 companies in the Sensex that have reported third-quarter results topped analysts’ estimates, Bloomberg data show.

India Delivers

“Earnings growth looks solid and economic growth, even post-tightening, still looks pretty good,” said Leung, the Hong Kong-based chief investment strategist at JPMorgan Private Bank. “India simply trades at a premium because it strongly delivers on that earnings growth.”

Indian companies may post compound annual profit growth of 22 percent over the fiscal years ending March 2011 and March 2012, JPMorgan Chase & Co.’s brokerage estimates.

Better-than projected profits have failed to stem declines in the Sensex. The gauge dropped 3.5 percent since Bangalore-based Infosys Technologies Ltd., India’s second- largest software exporter, kicked off the earnings season on Jan. 12 with results that topped analysts’ estimates.

ICICI, India’s second-largest bank, sank 2.9 percent on Jan. 21 even after reporting better-than-expected results. Wipro Ltd., India’s third-largest software exporter, lost 1.7 percent on Jan. 20 after beating analysts’ profit estimates.

The Sensex posted an average drop of 5.6 percent during periods when wholesale inflation climbed above its long-term average of 5.2 percent, Bloomberg data show. That compares with an average decline of 3.4 percent in rupee terms for the MSCI emerging index during the same periods.

“Inflation pressures are rising swiftly,” Goldman’s Moe wrote. “India seems most vulnerable.”

The difference between a Discount Broker and a Full Service Broker

Discount Broker

A stockbroker who carries out buy and sell orders at a reduced commission compared to a full-service broker, but provides no investment advice.

It used to be that only the wealthy could afford a broker and access to the stock market. The internet has brought an explosion of discount brokers which let you trade at a smaller fee. However, it is important to remember that discount brokers don’t provide personalized advice. Because of discount brokers, nearly anybody can afford to invest in the market.

For those who wish to do their own research or don’t want to invest a lot of money, a discount broker is an excellent way to invest.

Full Service Broker

A broker that provides a large variety of services to its clients, including research and advice, retirement planning, tax tips, and much more. Of course, this all comes at a price, as commissions at full-service brokerages are much higher than those at discount brokers.

Full-service brokers sometimes get a bad rap, but they can be extremely useful for their expertise. Remember, they do much more than just place trades; full-service brokers can provide expertise for people who don’t have the time to stay up-to-date on complicated issues such as tax or estate planning.

However, for those who just want to execute trades without the extra services, discount brokers are the way to go.

China Steps Up Defense Of Internet Controls

China widened its attack against U.S. criticisms of Internet censorship on Monday, raising the stakes in a dispute that has put Google in the middle of a political quarrel between the two global powers.

China has stepped up its defense of curbs on the Internet nearly two weeks after the world’s biggest search engine provider, Google Inc., said it wanted to stop censoring its Chinese Google.cn website and was alarmed by online hacking attacks from within China.

Google’s complaints received backing from the White House, but China countered with accusations that Washington was using the Internet to support subversion in Iran.

The dispute has stoked friction between Beijing and Washington, already wrestling over trade, U.S. weapons sales to Taiwan and human rights.

The rising heat over the Internet feud could narrow room for both sides to back down quietly while they seek to cooperate on broader financial and diplomatic worries.

“The more this case takes on high-level political import for the Chinese government, the more likely it is to stick to its guns,” said David Wolf, president of Wolf Group Asia, a Beijing-based company that advises investors on China’s media and telecommunications sectors.

“The Chinese government can’t be seen as backing down on such a fundamental issue,” said Wolf.

SHARP REBUKE

Secretary of State Hillary Clinton last week urged China and other authoritarian governments to pull down Internet censorship, drawing a sharp rebuke from Beijing.

After Google first made its criticisms, Beijing was tight-lipped. Now Chinese officials have decided to swing back at Washington.

In the latest jab, a spokesperson for China’s State Council Information Office said the nation “bans using the Internet to subvert state power and wreck national unity, to incite ethnic hatred and division, to promote cults and to distribute content that is pornographic, salacious, violent or terrorist.”

The comments from the unnamed spokesperson were issued on the central government’s website (www.gov.cn).

“China has an ample legal basis for punishing such harmful content, and there is no room for doubting this. This is completely different from so-called restriction of Internet freedom,” the spokesperson said.

The government comments were accompanied on Monday by scathing official newspaper commentaries aimed at Washington.

DALAI LAMA

“This year, we’re seeing problems over trade, the Dalai Lama, and U.S. weapons sales to Taiwan coming to the surface,” said Jin Canrong, a professor of international relations at Renmin University in Beijing.

“The politicization and ideological turn of the Google case could make it more difficult to work together. The basic need for cooperation, economically and diplomatically, hasn’t changed, but each of these issues could disrupt cooperation from day to day.”

President Barack Obama may meet the Dalai Lama, Tibet’s exiled Buddhist leader, in coming months. Beijing calls the Dalai Lama a dangerous separatist for seeking Tibetan self-rule, and is sure to be angry about such a meeting.

Washington has also unveiled arms sales to Taiwan, the self-ruled island Beijing regards as a renegade province.

The State Council Information Office is the cabinet arm of China’s propaganda apparatus, which is steered by the Communist Party, and is one of several agencies behind Internet policy.

The latest comments from China made no direct mention of Google or Clinton.

They appeared intended to amplify the government’s case that its Internet controls are for it to decide, and expressing non-violent views online can be a crime in China.

China has jailed dissidents and advocates of self-rule in Tibet who have used the Internet to challenge Communist Party policies and one-party rule.

Late last year the country’s most prominent dissident, Liu Xiaobo, was jailed for 11 years on charges of “inciting subversion,” largely through essays he published on overseas Internet sites.

On Sunday, the People’s Daily, the mouthpiece of the Communist Party, accused the United States of exploiting social media, such as Twitter and YouTube, to foment unrest in Iran.

On Monday, the paper said Washington was hypocritical about Internet controls, noting the U.S. has laws seeking to restrict images and words that can be seen by children.

“This ‘Internet freedom’ that is being promoted everywhere is nothing more than a foreign policy tool, a fantasy of freedom,” said a commentary in the paper.

Since Google said it could pull back from China over censorship and hacking, the company has stressed it wants talks with Beijing seeking ways to defuse its complaints.

But, especially in ideologically-sensitive sectors such as the Internet and media carefully watched by the Communist Party, foreign companies can find political uncertainties never far from the negotiating table.

“Google may look back and see it pursued an ill-advised course by bringing in the U.S. government in such high-profile way,” said Wolf, the industry consultant.

China has blocks YouTube, Twitter and Facebook, and imposes a “Great Firewall” of filtering to stop citizens seeing banned images and ideas on overseas websites.

On Monday, China’s Ministry of Industry and Information Technology, rejected suggestions the government was behind the sophisticated hacker attacks described by Google.

What is a P/E Ratio?

Chances are you’ve heard the term price / earnings ratio (P/E ratio) used before. When it comes to valuing stocks, the price/earnings ratio is one of the oldest and most frequently used metrics.
Although a simple indicator to calculate, the P/E is actually quite difficult to interpret. It can be extremely informative in some situations, while at other times it is next to meaningless. As a result, investors often misuse this term and place more value in the P/E than is warranted.

In this tutorial, we’ll introduce you to the P/E ratio and discuss how it can be used in security analysis and, perhaps more importantly, how it should not be used.

P/E is short for the ratio of a company’s share price to its per-share earnings. As the name implies, to calculate the P/E, you simply take the current stock price of a company and divide by its earnings per share (EPS):

P/E Ratio = Market Value per Share
Earnings per Share (EPS)

Most of the time, the P/E is calculated using EPS from the last four quarters. This is also known as the trailing P/E. However, occasionally the EPS figure comes from estimated earnings expected over the next four quarters. This is known as the leading or projected P/E. A third variation that is also sometimes seen uses the EPS of the past two quarters and estimates of the next two quarters.

There isn’t a huge difference between these variations. But it is important to realize that in the first calculation, you are using actual historical data. The other two calculations are based on analyst estimates that are not always perfect or precise.

Companies that aren’t profitable, and consequently have a negative EPS, pose a challenge when it comes to calculating their P/E. Opinions vary on how to deal with this. Some say there is a negative P/E, others give a P/E of 0, while most just say the P/E doesn’t exist.

Historically, the average P/E ratio in the market has been around 15-25. This fluctuates significantly depending on economic conditions. The P/E can also vary widely between different companies and industries.