Anatomy of a Stock Quote

Technically speaking, a stock quote is just the price of a stock. So, if AT&T (ticker symbol T) is priced at $25.55 on 10:30 A.M. August 6th, 2009, $25.55 is the quote. You might think that something can have only one price at a time, and that's true for any completed transaction. However, before a price can be determined, the seller and buyer have to agree on a number. For stocks, the "ask price" is the amount the seller is willing to accept per share while the "bid price" is the amount the buyer wants to pay per share. These two prices become quite important when you're actually buying and selling stocks as you'll have to find a partner to either buy the stock you are selling or sell you the stock you want to buy. Normally, the quote you see is the going market price at that moment in time, but it is the actions of countless investors, each with their own bid and ask prices, that drive the market and determine the market prices.

It's important to remember bid and ask prices when you decide whether to use market or limit orders to buy or sell stock. If you use a market order, you're willing to let the market determine the price for you -- you're saying you'll still want to sell your stock quoted a minute ago at $25.55 for $25.10 if that's all an available buyer is willing to pay. You use a market order to make a trade at any price. On the other hand, you use a limit order when you're only willing to sell at no less than a particular price or buy at no more than a particular price. If you set a sell limit at $25.55, you know that your stock won't be sold at any price less than that. The downside of using limit orders is that your transaction will not go through if a willing buyer/seller cannot be found. In my view, however, being able to set your own price is priceless -- I only use limit orders and recommend you do so as well unless you're desperate to dump a really bad stock.

Did you notice I mentioned AT&T's ticker symbol in the first paragraph? While finance sites will understand what you mean whether you type in a ticker symbol (like T) or write out the name of a company (like AT&T), it's a good idea to learn the ticker symbols of the stocks you trade. They are simply short abbreviations for the name of a company, usually ranging from one to four letters (some stock exchanges use numbers for ticker symbols, but American stock exchanges prefer letters). Online and offline, people often talk about companies using their ticker symbol rather than their full name, and they are also used extensively in newspapers, financial publications, and on financial TV. You'll likely start using them yourself before long without even trying.

The daily range of a stock's price tells you what a stock's high and low price of a day is. The easiest comparison to make is with temperature. Every day, your local area experiences a high temperature and a low temperature. It's the same thing with stocks. At some point in the day, the buyers of a particular stock will be more eager than the sellers are to sell and the price will reach a high while at another point the sellers will be more eager to sell than the buyers are to buy and the price will reach a low.

Let's suppose that stock A has a Day Low price of 25.12 and a Day High price of 25.55. This tells us that the cheapest price you could pay for A during that day was $25.12 and the most you could have paid for it is $25.55. Depending on the stock and the level of market activity in a given day, these spreads could be significant or very small...don't feel overly distressed if you don't buy near the low of the day.

The opening (or open) price is the first price a stock trades at in a given trading day. The closing price is the final price a stock traded at in a given trading day. You might think that the opening price of a day would be equal to the closing price of the previous day, but this isn't necessarily the case. The market always sets the price, which is to say that thousands upon thousands of buyers and sellers always set the price, and those thousands of participants don't sleep just because the stock market is closed. After hours trading (which takes place after a stock market has officially closed a session but not yet opened a new session) is low volume, but continues to affect prices. The opening price is ultimately determined by all the pending buy and sell orders for a particular stock.

The most important lesson to be learned about opening and closing prices is that you should never take a particular price for granted. Stock prices are always changing, even while you sleep. It's a huge mistake to assume that yesterday's price will still be accurate tomorrow.

Traders are primarily concerned with where a stock is going, but the key to the future sometimes lies in the past. Valuing stocks accurately is a tricky thing, but because the 52 Week High and Low prices indicate a stock's behavior in the past they can give some insight into where a stock may be likely to go in the future. Essentially, the 52 Week High price is the highest price a stock has reached in the past year while the 52 Week Low price is the lowest price a stock has fallen to in the past year. Bear in mind these aren't closing prices, just prices the stock has traded at at some point in a trading session. It's absolutely possible that these prices will be "flukes" caused by irrational trading behavior or broader market reaction to financial news -- you should never assume absolutely that a stock is likely to reach its 52 Week High or Low prices again without something else to back that assumption up.

Volume essentially tells you how many shares of a particular company have been traded in the current or most recent trading session. For some stocks, this number will measure in the millions! Apart from satisfying your curiosity, volume has a couple of practical aspects. First, it tells you how actively a stock is traded. This matters because an actively traded stock has more buyers and more sellers -- thus, your trading of the stock will be incorporated with the actions of many other traders in determining the price. Not only are you unlikely to change the price unless you are trading many shares of an actively traded stock, but you are also more likely to be able to find another buyer or seller to partner with when you want to trade the stock. On the other hand, you are more likely to be able to affect the price of a less actively traded stock and may be less likely to be able to buy it or sell it at the price you want. An extreme example of a low volume stock would be a stock that trades on an OTC market rather than an established exchange -- although there are opportunities there, trading OTC stocks can be a challenge due to the smaller number of buyers and sellers. Secondly, volume can tell you the level of interest in a stock at the moment. If a stock has an unusually high volume, traders are clearly more interested in the stock than usual -- this could be a sign of either more buyers or more sellers coming in.

You might be wondering how you can tell whether a stock has unusually high (or low) volume. Luckily, there's a statistic called average volume which can give you the answer. When volume is greater than the average volume, interest in a stock is clearly greater than normal. One tricky aspect of average volume is that the time frame for computing the average isn't agreed upon -- it can be over a year or even as little as a couple weeks. The average volume picture you're getting could be a long-term or a very short-term view of a stock so always be cognizant of the time frame the average volume is computed on.

Market capitalization, often abbreviated market cap, is an easy to calculate measure of a company's size. It is equal to the number of shares multiplied by the market price of one share. Because market cap depends on price, it is subject to fluctuation and can be misleading. Nonetheless, large cap, midcap, and small cap stocks have entered the market lexicon to describe stocks with, respectively, large, medium, and small market capitalizations. It is often thought that large cap stocks are safer while small and midcap stocks offer greater opportunities for growth, but in general I don't think market cap is all that useful a metric. That feeling is reinforced by the fact that even experts can't agree on where the divisions of market capitalization begin or end.

Many companies pay regular dividends to holders of their stock. Think of it this way: owning a stock is like owning part of a company. If you own part of a company, shouldn't you be entitled to some of the profits? Dividends are your share of the company profits. Stocks, like bonds, CDs, and savings accounts, can have yields -- this is simply the amount of the dividend per share divided by the price you paid for a share of the stock. Yield is usually computed on an annual basis, which means you need to figure out what your dividend payments over the course of a year are. Some dividends are paid annually or semi-annually, but quarterly dividends are probably the most common. To take advantage of compounding, you'll need to reinvest your dividends into company stock; some companies offer Dividend Reinvestment Plans for this very reason which allow you to reinvest dividends without paying brokerage fees.

Dividend yields can be unreliable because they are based on two things subject to fluctuation: dividends paid and stock prices. The dividend yield that's available today may not be available tomorrow because as the price goes up the yield will go down and vice versa. Note, however, that your personal dividend yield on a stock does NOT change in relation to the stock price after you've made a buy -- you've locked in your yield by purchasing shares at a particular price. Dividend yield is also subject to change due to a change in dividend policy. When companies are struggling, they often cut dividends which will change (or eliminate) your dividend yield. That's why it's extremely dangerous to count on a dividend paid out by a company that is losing money. Sometimes the dividend is the first thing to go. On the other hand, a company that is doing well could decide to raise its dividend, which will raise your yield.

If you buy a stock that pays a dividend, the first thing on your mind might be, "When do I get paid?" Perhaps a better question is, "Will I get paid?" The answer depends on the ex-dvidend date. As long as you buy the stock at least two business days before the ex-dividend date, you will be entitled to receive the next dividend payment that is payable on the dividend date. However, if you don't "beat" the ex-dividend date, you won't be entitled to the next dividend payment. Instead, whoever SOLD you the stock will collect the dividend -- thus, you can sell a stock and still receive one more dividend payment if you time it just right. The buyer, of course, will collect the next dividend payment so long as he or she holds on to the stock until the next ex-dividend date.

Ex-dividend dates cause a great deal of confusion because you really need to own the stock BEFORE rather than on that date to collect a dividend. The date of record is easier to understand: as long as you own a stock on the date of record, you'll receive the dividend. Unfortunately, ex-dividend dates are more often listed than are dates of record.

Earnings per share (EPS) is a good measure that allows you to gauge how a company is doing. It is very easy to calculate: for most stocks, you simply need to divide the company's net earnings by the number of shares outstanding for the given period (often yearly). If the company pays dividends on preferred stock, the amount of preferred dividends should be subtracted from the net earnings before you divide by the number of shares outstanding.

There are a couple of things I look out for when studying earnings per share. First, if a company pays a dividend, I look at EPS to tell me if the company can make those payments. Some companies will be able to continue to make dividend payments even after suffering a losing quarter or year, but whenever the EPS is less than the dividend I get extremely worried. Ideally, I want EPS to be comfortably more than the dividend (though if it the gets too large and the company isn't growing significantly, I start thinking the company may be greedy and not really looking out for the interests of its shareholders). Secondly, earnings per share gives you an idea of how a company is growing. Earnings expansion is a very healthy sign -- you want to invest in companies whose EPS is growing.

Be on the lookout for factors that can distort the EPS picture. Windfall earnings or special one-time charges due to temporary tax breaks or lawsuits don't necessarily change the long-term earnings outlook. Changes in the number of shares (the denominator side of the EPS calculation), caused by a secondary issuing of stock or a stock buyback, will also change EPS.

The shares outstanding are all the shares of a company that have been issued and are currently trading. You have to know how many shares a company has to compute the earnings per share or market cap, among other calculations. In and of itself, however, shares outstanding is just a number. As a general rule, companies that are stingier about issuing more shares will have a higher stock price due to scarcity, but of course demand as well as supply greatly affects price.

The price to earnings (or P/E) ratio is a handy way to value a company. It is computed by dividing the current price of a stock by the company's current earnings per share. As you can see, P/E is constantly changing as the market price changes. It gives the investor an idea of how highly valued a stock is at a given time -- the higher the P/E ratio, the more valued the stock is by the market. P/E lets you compare apples to oranges; you can't compare AT&T and Berkshire Hathaway based solely on their stock prices alone because AT&T issues so much more stock than Berkshire, but you can compare their price to earnings ratio. P/E essentially makes it easy for you to look at stocks on a per share basis -- it's very handy for comparison purposes.

A stock with a high P/E ratio isn't necessary "better" than one that has a lower multiple (P/E is sometimes called the multiple because a stock's price equals its earnings per share times a given multiple...in other words, P = E * M). It is simply valued more highly by the market at the present time. In fact, investors often specifically seek out stocks with low multiples because they feel these stocks are likely to be undervalued by the market at the present time and will rise in price in the future. As I mentioned earlier with regards to earnings per share, you should be wary of factors that distort earnings with regards to P/E ratios as well. Additionally, you may find it more useful to compare P/E ratios between companies in the same sector because some sectors attract less investor interest than others, particularly low growth sectors. For instance, in 2009 technology stocks tend to be valued higher than fertilizer stocks so a fertilizer stock with a low P/E ratio isn't necessarily a must buy and a tech stock with a high P/E ratio is not necessarily one to stay away from.

Beta is a measure of a stock's volatility...essentially, it tells you to what extent a stock's price tends to change over a time. Stocks whose prices vary wildly have a beta greater than 1. Stocks that move perfectly with the market (represented by the S&P 500 or some other index) have a beta of exactly 1. Stocks whose prices vary less than the market have a beta less than 1. Unlike some of the other measures we've seen so far, beta is actually calculated using some sophisticated (tedious might be the better word, at least for some) mathematics -- regression analysis to be exact.

While beta is easy to understand in concept, it's rarely something I personally use to decide whether or not to actually buy a stock. If you want to avoid risk (and perhaps just reap a steady dividend income), looking for low beta stocks might be a good way to go, but you still need to take into account things like a company's business strategies and its debt level. It sometimes happens that a change in management will turn a conservative company into a risk taker -- because beta looks purely at the prices of the past, it won't warn you if a safe stock is becoming more risky. It also won't tell you if a high beta is indicative of a hot stock experiencing explosive growth or simply the result of a dangerous bubble. In a way, beta tends to raise more questions than it answers -- it's fine if you look at it as a prelude to further research, but it's definitely no substitute for research. Perhaps it is best used to narrow a large list of stocks down, depending on whether you're looking for more volatile or more steady stocks.

Retail or individual investors, like you or me, are important players in the stock market, but institutional investors such as mutual funds wield an enormous amount of influence. They have a tremendous amount of money at their disposal -- most of it belonging to other people -- and employ some of the brightest financial minds around to pick wise investments. You'll often find that institutions own most of a given company's stock; the precise percentage is usually noted under "Institution Owned" or some similar category.

Because institutional investors own so much, they greatly influence stock prices. One reason there tend to be quite defined trends in the stock market (bullish rallies, bearish downturns, etc) is that institutional investors often do think alike. Love them or hate them, the stock market is very much affected by the actions of these oversized investors. You'll make or lose money due to their actions -- there's no getting around it. However, it's often said that individual investors are more nimble and can be a bit more daring than the big boys who must play with other people's money. Sometimes a low percentage of institutional investors can be indicative of a stock that hasn't been discovered by the mainstream yet and could be headed for explosive growth. As with beta, institutional ownership doesn't give you enough information in and of itself to warrant a trade, but it can be another piece in the puzzle.