Stock Market Terms - EPS and P/E ratio
Filed Under Stock Market Basics, stock market for beginners, stock market terms | 2 Comments
Stock Market for beginners throws up a large number of terms which you need to know about to make an intelligent and informed decision or atleast be knowledgeable enough to understnad when you hear the stock market news or stock market experts talk about a particular stock .
The most bandied about terms are Earnins per share popularly called EPS and the price to earnings ratio called P/E ratio.
Earnings per share - The earnings per share is the amount of profit that belongs to each share out of the company’s total profit. As an example let us assume a company XYZ has earned the total amount of $2000 and the total outstanding shares of the company are 2000, the basic EPS would be $1.
Now you would ask why this is important , I will explain that a little later but first we need to know the term Price to Earnings Ratio called P/E ratio.
P/E ratio - A valuation of the company’s current share price compared to its earnings per share. That would mean P/E ratio = Share price/EPS , applying it to our example let us say the share price of our stock is 10 currently then the P/E ratio for the XYZ stock would be = 10/1 i.e 10.
As far as the market is concerned the EPS is generally taken from the last four quarters (trailing P/E) or the sometimes taken from the projected EPS (forward P/E). A third type is the sum of the last two quarters and the expected eranings from the next two quarters.
It is also known as the “price multiple” or the “earnings multiple”.
As a beginners what do you read into the P/E ratio, in general the higher P/E ratio means that the investors are expecting better earnings in the future. The most valuable information that you can draw from the P/E ratio is comparing the ratio of two companies which are in the same industry ,to the market in general or to its own hostoricl P/E ratio.
The most popular term that the stock market for beginners throws about is the multiple because it shows how much the investors are willing to pay for a particular stock for per dollar of earnings. If a company is currently trading at a multiple of 20 that means that an investor is willing pay dollar $20 for one dollar of earning.
Stock market for beginners offers immense earning potential but be warned it is not for the faint hearted and needs patience and diligence to earn the money through the stock market investing.
Brokerage Accounts - Cash,Margin or Discretionary
Filed Under Brokerage Accounts, Stock Market Basics, stock market for beginners | Leave a Comment
A full service broker or a discount broker is likely to offer three types of accounts which are namely Cash Acoount, Margin Account and Discretionary Account
Understanding each type of account is beneficial for the purpose of the kind of trading you wish to engage in and the also the amount of risk you are willing to take.
Cash Account - Stock Market for beginners means using cash upfront to buy certain stocks and then sell them at a profit. For this simple type of transaction the most simple type of account that is offered by the brokerages is the cash account.
Most online and discount brokers will ask you to deposit enough money to cover your trades and that is a mandatory requirment for almost all of them. They put this money into a interest bearing account and will transfer the money to the brokerage account once you put in a trade order to buy. Same goes for the sell , that is, when you sell the stock, the cash gets deposited your brokerage account and is available for the next purchase.
A full service broker will however allow to have a leverage of three days after you put in a buy trade to pay the amount of the purchase. This is mostly based on the kind of credit worthiness the full service broker thinks you have. Three days is based on the amount of days that a trade takes to settle and the date on which the trade settles is known as settlement date (will be discussed in later posts).
Margin Accounts - A lot people will advise that the stock market for beginners means risk and then a lot of rewards but you can use your own discretion in terms of what kind of risk you wish to take and what type of rewards you would like . Margin account is based on the concept of higher risk taking and obviously higher rewards. Margin account for a behinner would mean that you can get upto 50% of the value of the trade from your broker as funding. As an example let us say you are purchasing 10 shares of X stock at $100 each, that means you would be required to have $1000 in your account or if you have amargin account you only pay $500 and the rest of the money is paid by the broker.
Now how the reward is higher in this case is that suppose that stock went upto $150 then you would have earned a total of $500 as a profit. Now since you only paid $500 in the beginning because you had a margin account your return on investment is 100% whereas if you would have had a cash account you would have paid $1000 and your return on investment would have been 50%.
Now you would argue where is the risk and the risk is in the fact that when the stock falls then the broker can issue a margin call which means two things either you can deposit cash into the account to raise the value of the money borrowed or you can sell the stock to pay off the broker.
Discretionary account - This gives the broker to sell or buy the stock without notifying you. Now as a beginner do not ever go for this king of account since that means you are trusting your broker a lot and it is like giving him a blank check.
As a stock market beginner think well what options do you have and use the safest route to get your feet wet in the market before trying the riskier option.
Trading Stocks - How & Where to Buy or Sell?
Filed Under Discount/Online Broker, Full Service Broker, Stock Market Basics | Leave a Comment
For trading in stocks and to buy say 100 shares of IBM , there are a few basic steps that you as a stock market beginner will have to perform. First of all, I will explain you how many types of Brokers are there and then what types of accounts you can open.
There are two types of broker set up accounts you can choose from namely full service broker and discount/online brokers.
Full Service brokers generally will ask to you meet them in their office or service centres or their investor relationship manager will come to your house and will get all the details from you in terms of how much you earn , to how much liquid mony you have, to howm much risk you can bear. He will be asking all those questions because he wants to know you well and then based on your risk taking ability and the kind of returns you are envisaging from stock market he will give you recommendations of stocks.
This type of service is very personal and the inverstor realtionship manager will deal with on a one on one basis and whenver he thinks there is a good stock available to buy he will advice you acordingly and you may accept or reject his advice to buy or even sell a particular stock. The full service brokers charge commission which is considerably higher than the discount brokers. A lot of people think that this money is well spent and are willing to pay that much to get advice from knowledgable and expert sources.
Discount/Online brokers are those who as the name suggests charge less brokerage or commission and mostly setup online so that there is no human interface when you buy or sell shares. That means that when opening an account in a discount brokerage they do not ask anything about your financial situation but will allow you to trade usually if you have $1000 in the account. These brokerges do not give you advice whatsoever on what to buy or sell and it is up to the individual to make his informed decision for what he wants to buy or sell. For that what sources you can go to I will deal with later and how to read the stock market recommendations is a separate topic in itself.
As a stock market for beginners advice I will suggest open an account with a discount broker and test the waters as it costs less , yes the downside is that you will not get advice and you will be on your own but do not worry there are hundreds of sources online where you can get recommndations.
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