In the stock market there are many, many words for you to learn. So many that you can not simply learn them all in a day! I want to do a weekly post, called “Words of the Week” to teach you just that. This week we are going to cover some terms that you will use often in your investing career.
IPO stands for initial public offering, this is the first time a stock is made available to the public. IPO’s help smaller, private companies get the funding they need for expansion and growth. When trying to get a IPO the company will work with someone called a “Underwriter” what underwriters do is simply works with the company to determine the fine details for the IPO such as:
- What type of shares the company wants to issue
- How many shares the company wants to issue
- The best price to offer the stock at
- Best time of year to go public
And thats just a few things.
After working with the underwriter the company will file registration documents with the SEC, they will have to include:
- Financial statements
- Information on employees/management of the company
- How many employees are going to own shares of the company
- Must provide a plan on what they intend to do with the money made from the IPO
After they submit registration documents with proper information to the SEC they will enter what is called a “cooling off period”
Once the SEC signs off on everything the company will receive a “final prospectus” which includes the date that the IPO will be live on the stock exchange. At the time of IPO that is the only time a company has a fixed share price, any other time the price is determined on how much someone is willing to pay.
Par value, Book value, and Market value are important terms that you will come across and also will need to know if you are serious and gonna be investing for a long time.
Par value is the dollar amount that is listed on the actual stock certificate, this value is often very small and in some cases a companies par value is $0. Par value is in place just incase the stocks price falls to absolutely nothing, if this happens you are entitled to the par value of each share you own.
If you have a par value of $0.10 per share and you own 100,000 shares, if the company falls and loses everything and drops to $0 you would still be entitled to $10,000
$0.10 X 100,000 Shares = $10,000
Some companies will issue stocks with 0 par value just incase they drop they will not have to pay shareholders the par value of the stocks.
The book value of a company is the value of a company based on its “books” or financial statements. It is how much the company is worth after all their liabilities have been dealt with. In order to calculate the book value, you must subtract the companies liabilities from its assets, or in simpler terms, subtract what the company owns (assets) and subtract what the company owes (liabilities) take that number and divide it by the number of shares outstanding. for example stock ABC has $100 million in assets and $25 million in liabilities so you subtract $25 million from $100 million and get $75 million take $75 million and divide it by number of shares outstanding, lets say thats 500 million shares. $75 million divided by 500 million = 0.15 Many big investors believe that anything below a 1 book value is a undervalued stock, on the other hand other think that anything below 3 book value is a undervalued stock. You can chose either one they both work.
Book value is a very important piece of information it gives you a accurate value of a company based on their balance sheet, many investors use the book value to determine the worth of a company.
Market value is probably the most important and most used of the values I showed you today. Market value is the actual price you have to pay to buy shares of stock, the price depends on how well the market as a whole reacts to the stock. Bigger name brands will add more value just for the fact that they are a larger more well known name, same thing goes with upper management (CEO, CFO, COO, etc..) companies with well known management can also boost stock price up because investors will have more or less confidence about what is going on in a company if they have good respectable management.
Market value of a company changes constantly and can also change RAPIDLY.
If company ABC has 1 Million shares outstanding and the stock price is at $10, the market value would be $10 Million
Total returns just tells you how much the stock has made you and how well it is performing. One thing you must remember is that Gains and Losses in the stock market come from more than just the stock price changing, it also comes from dividends paid from the company. Knowing the total return on each stock is important because you can compare your investments against each other to determine which ones are worth adding to.
To calculate your total returns you, Add the change in stock price (subtract if the stock price has decreased) to the dividends you have earned from the stock over the past 12 months. take the answer of that and divide it by the stock price from the beginning of the time period.
Knowing the total return of each particular stock is important because it help you determine if you should hold onto or close that particular position.
For example, lets say the price starts the year at $10 and ends the year at $15 you also made $1 per share in dividend.
- Price change: $5 per share
- Dividend: $1 per share
- $5+$1=$6 per share
- $6/$10(starting price) = 0.6 (60% return)
And for a decline, we are using the same scenario as above except the price starts at $10 and decreases to $5 by the end of the year.
- Price change: -$5
- Dividend: $1
- -$5+$1 = -$4 per share
- -$4/$10 = -$0.4 (-40% return)
You can use all 3 of these values to help you decide the value of a stock, use them to your advantage.
Don’t be selfish, SHARE this with your friend and spread the wisdom. The stock market is for everyone!