Stock Investing 101 – Earnings Per Share

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Earnings Per Share

Earnings per share, or EPS, is the company’s profits attributable to each outstanding share of common stock. It is one of a number of indicators used in financial analysis to assess a company’s performance.

EPS is computed by taking the net income earned (less dividends on preferred stock) by the company during the quarter (or year) and divide that figure by the weighted average number of outstanding shares during that reporting term.

EPS is an important indicator of a company’s performance and is often used for stock valuation purposes. For example, it is used to calculate the price-to-earnings valuation ratio.

As can be seen in the formula shown above, lowering the number of shares outstanding will increase the earnings per share. As EPS impacts stock valuation heavily, companies sometimes buy back their own shares to up the EPS number so as to increase shareholder value.

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Investing For Beginners: How To Read A Stock Chart

Modified date: July 31, 2020

If you do decide to invest in individual stocks, we don’t suggest you allocate more than 10 percent of your portfolio to individual stock picking. This article focuses on how to evaluate individual companies.

If you’re an experienced investor and want to learn a key tool for picking individual stocks, read on.

If you’re new to investing (or even if you’re not) you’d probably agree that reading a stock chart isn’t all that exciting. But it’s a core skill you’ll need if you want to find viable investments for your portfolio.

Well, welcome to how to read a stock chart for beginners!

In the article, I’ll break down the essentials stock chart and explain the key things you need to focus on.

Pair this with some knowledge of value investing and you’ll be well on your way to picking stocks.

What is a stock chart?

My favorite website to look at basic stock information is Google Finance. I used to use Yahoo! Finance, but I think Google has a slicker interface.

Now let’s take a look at a typical stock chart. We’ll use Apple for this article.

If you don’t already know, the series of letters after the name of the company is the ticker symbol. It identifies the company on the stock exchange.

In this case, we’ll search AAPL, which is Apple’s ticker symbol. This is what we get:

Next, click the button to expand the chart to full screen and it’ll look like this:

I’ve also taken the liberty of filtering only to the last 10 years, which you can easily do by clicking the corresponding button (which I’ve highlighted for you).

So here we’re looking at the last 10 years of Apple’s stock. I bet you wish you would have gotten in in late 2008!

Now let’s dive into the different pieces and parts of the stock chart so you can begin to read one like a pro.

How to read a stock chart

1. Identify the trend line

This is that blue line you see every time you hear about a stock—it’s either going up or down right? While the trend line seems like common sense, there are a few things I want to call out so you can understand it in a little more detail.

First, know that stocks will take huge dives and also make huge climbs. If you’ve followed the advice I gave in the value investing piece, you’ll know that you have to keep your emotions in check to be a successful investor.

Don’t react to large drops or huge gains in a positive or negative way. You should be using this piece of the stock chart merely to see what’s going on.

In fact, the trend line should lead you to dig further. For instance Apple as a company really took off from 2009 to 2020.

But what happened from 2020 to 2020? The stock began to sink—at one time, shares were down more than 4o percent!

This is where your trend line comes in handy. News comes and goes, but when news coincides with a dramatic shift in the trend line, it’s something to pay attention to.

If you saw something like this happen, I’d urge you to find out what’s going on with the company. Most strong companies can rebound from hits like this, but not all can.

For those that don’t know, right around this time Apple experienced a few major shifts:

First, it’s longtime CEO, Steve Jobs, resigned (2020). Also, around 2020, Apple noted that their profit margins were significantly decreasing, despite a growing smartphone market. Finally, they were trying to expand the smartphone into developing countries, where they were just too expensive to compete.

These factors, combined with plenty of other variables, contributed to the stock price falling.

But new CEO Tim Cook made some strategic moves with the company to turn it around, and the rest of the trend line shows that.

The lesson here is to use your trend line as a first-glance, high-level indicator of something to look into.

2. Look for lines of support and resistance

The next thing you’ll want to look at are the lines of resistance and support.

These are levels at which the stock stays within, over a given period of time. A level of support is a price that a stock is unlikely to drop below, while a level of resistance is one that it’s unlikely to go above.

That is until some major change occurs, such as a reduced profit margin.

Think of these lines like bumpers at a bowling alley. When you’re bowling, the ball bounces back and forth between these inflated barriers.

A stock’s price does the same thing within these lines of support and resistance.

The goal here is to know when to buy and when to sell. Let’s take a look at Apple’s stock chart again to see an example:

These are subjective and interpreted differently by everyone, but the process is important. First know that everyone will draw lines of resistance and support differently, depending on their investment horizon (how long they plan to hold the stock).

So if you plan on holding it for a long time, you may not draw as many lines of support and resistance, because you don’t care as much about the ups and downs. But if you’re a short-term investor, you may draw more to analyze trends during a shorter period.

Let me break down the image above with each of the trend lines:

  • Line A is the very first line of support shown. Based on trends prior to this, I’d feel comfortable that the stock price won’t go below this point. I’d probably consider buying at this price or higher.
  • Line B is my first line of resistance. I see that the stock has peaked at that point for now and I wouldn’t expect it to go higher. I’d probably consider selling at this price or slightly lower.
  • As you can see with Line C, the stock has bottomed out again, thus creating a new line of support.
  • Line D shows the stock price has increased significantly and I’m comfortable establishing this as a new line of resistance.
  • You can see the trend continue with Lines E, F, G, and H, bringing new lines of support and resistance as time goes on.

If it seems complex, don’t fret. It is. And a lot of it is guesswork.

If I were to buy stock in Apple today, I’d make note of my most recent line of resistance (Line G) pricing out at just over $130 a share and my most recent line of support (Line H), which was pricing at around $90 a share.

Knowing this, I can safely assume that the stock price won’t drop below $90 and it shouldn’t go above $130, barring any major news or company changes.

At $113 per share currently, I feel that this is a good price point and would probably make a purchase. I might even wait to see if it drops below $110 to feel even better.

Knowing the lines of resistance can help you decide when to buy or sell a stock. Remember, though, that it’s subjective and it won’t give you a clear-cut road map on exactly what to do. You’ll have to use some of your own analysis and judgement.

3. Know when dividends and stock splits occur

At the bottom of the chart, you’ll see if and when the company issued a dividend, as well as if there was ever a stock split:

A dividend is when the company (the board of directors) decides to give a portion of its earnings back to its shareholders. If you own the stock, you get a small chunk of the profit.

Some companies issue dividends, some don’t. Just because a company does or doesn’t issue a dividend doesn’t mean it’s not worth investing in. There are plenty of other factors to consider.

Some companies just prefer to focus on growth, so they’ll reinvest their earnings as opposed to giving it back to the shareholders. Other companies (like Apple) can pay dividends without sacrificing growth.

As you can see by the image, Apple started issuing quarterly dividends to its shareholders midway through 2020.

You can also see that there was a stock split in 2020. A stock split is a strategic move done by the company’s board of directors to issue more shares of stock to the public.

In this case, Apple did a seven to one stock split (noted as 7:1), which means that for every share of AAPL you owned prior to the split, you’d now have seven. So if I owned 100 shares of APPL prior to the split, I’d now have 700.

The value of the company doesn’t change, but the share price might. Companies will often do this if the price isn’t in line with competitors or to attract smaller investors (if the share price decreases).

You can see the uptick in the trend line after the split occurred, too. Many times when a stock split happens, more people invest (since the share price is often lower) which increases demand and, in many cases, the overall share price.

4. Understand historic trading volumes

At the very bottom of the chart you can see many small, vertical lines. This is a trend of the volumes at which the stock is traded.

Volumes are good to know, but shouldn’t be your only determining factor when buying a stock. Usually trading volumes increase when there is major news (good or bad) about the company.

When volumes are increasing, it can also shift the price of the stock quickly. Let’s look at an example:

In Line A, you can see there was a high volume of trading activity that corresponded with a drop in the stock price. There may have been news that day that caused people to panic (aside from the entire economy crashing that year).

In Line B, you can see a slight uptick in trading volume that corresponds with an upward trend in the stock price.

Don’t always assume there will be a correlation between stock price and trading volume, but it’s good to know what the volumes have been in the past and what they are currently before making a decision.

With high volumes comes greater ease when buying or selling. If a lot of people are trading the stock that day, you should be able to buy or sell it quickly.

Summary

That’s the basics of how to read a stock chart. Once you’ve mastered these techniques, you should be able to analyze a stock’s historic activity at a high level.

Remember that past performance doesn’t correlate to future indications on price. Meaning that just because Apple hit $130 per share recently doesn’t mean it will again. There’s also nothing to say it won’t double in price. You just can’t know.

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How to Invest in Stocks – Stock Investing 101 – TheStreet

A Beginner’s Guide to Stock Investing

Common stock gives shareholders voting rights but no guarantee of dividend payments. Preferred stocks provides no voting rights but usually guarantees a dividend payment.

In the past, shareholders received a paper stock certificate — called a security — verifying the number of shares they owned. Today, share ownership is usually recorded electronically, and the shares are held in street name by your brokerage firm.

Investing in stocks can be tricky business. In fact, it’s best to treat all of your investment pursuits as a business. Heck, that’s what Benjamin Graham (Warren Buffett’s stock market mentor) recommended.

Before you buy your first stock, you should master the basics of stock investing. This won’t make you a great investor overnight, but only when you understand the fundamentals of investing can you learn how to invest in stocks with confidence .

If you found this content useful, please share it. This will help us create more educational guides for investors.

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