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I N V E S T I N G B A S I C S Wednesday, November 8, 2000 benjamin.rogers@enron.com _________________________________________________________________ REGISTER TO BECOME A FOOL -- GET FREE STUFF! http://www.fool.com/m.asp?i=3D186698 _________________________________________________________________ Sponsored By: Scottrade Scottrade: $7 Trades, 120+ offices, personal brokers, FREE REAL TIME Quotes & charts. Check out our financial services: CDs, Bonds, Mutual Funds, no setup fees on IRAs. Apply now! http://www.lnksrv.com/m.asp?i=3D186699 ASK THE FOOL -- Q. I'm embarrassed to ask such a basic question, but here goes. What does it mean when I hear, "AT&T is up 2 1/2 today"? Is that dollars per share, or what? -- A. Don't be embarrassed. Most of us were never taught these things in school. Asking about them is the only way to learn. Prices of stocks are always in dollars per share. They're not always in whole numbers, though. The world of stock prices is full of fractions, all the way down to 64ths and occasionally even smaller ones. So if the film editing firm Splice Girls Inc. (ticker: SPLIC) is listed at 28, that means it last traded at $28 per share. Similarly, 15 17/32 means 15.53125 or $15.53 per share. Another way to think of it is to consider how much total market value the company has gained or lost with each price move. Find how many shares outstanding the company has. (Do this via online stock research tools, your newspaper or the firm's financial statements.) Multiply that number by the share price. If SPLIC has 200 million shares outstanding and drops by $2 per share, the company has lost $400 million in market value. -- Q. What are buy-side and sell-side analysts? -- A. Buy-side analysts work in-house for institutions such as mutual funds or pension funds. They study possible investments and recommend which securities the institutions should buy or sell. Sell-side analysts work for brokerages, trying to sell their ideas to institutions. If an institution likes a brokerage's research, it might do business (placing trades) through that brokerage. The research of sell-side analysts also makes its way to individual investors, through brokerages. Got some questions of your own for the Fool? Head to our Help area or post your question on the Ask a Foolish Question discussion board. http://www.fool.com/m.asp?i=3D186700 http://www.fool.com/m.asp?i=3D186701 _________________________________________________________________ INVESTING BASICS - THE EARNINGS YIELD One way to think about what you're paying for a company is to consider its price-to-earnings ratio, or "P/E." Another way is to calculate its inverse, which is its "earnings yield." Consider the example of Fryyndar and Ulf Scandinavian Pharmaceuticals (ticker: FANDU), whose motto is "Vars+god och sv,lj!" (That's Swedish for "Here, swallow this pill!") To calculate its P/E ratio, you simply divide the current stock price by the annual earnings per share (EPS). If its current annual EPS is $3 and the stock is trading for $111 per share, the P/E is $111 divided by $3, or 37. While 37 might seem steep, it's not meaningful until you compare it with the P/E ratios of industry peers and consider its growth prospects. A high P/E means the market is assuming rapid growth. (Is that assumption reasonable?) To calculate Fryyndar and Ulf's earnings yield, just reverse the P/E ratio, dividing the annual EPS by the current stock price. $3 divided by $111 equals 0.027, or 2.7 percent. Compared to risk-free Treasury bond rates of roughly 5 percent, this doesn't appear to be a bargain. But remember: Whereas bond rates are fixed, earnings typically grow. Imagine that FANDU is expected to increase earnings by 10 percent per year. If so, in 10 years EPS should grow to $7.78. Assuming we bought shares when they were at $111, the earnings yield for us has now become 7 percent, considerably better. ($7.78 divided by $111 is 0.07.) It can be instructive to see how long it takes for the growing earnings yield to pass the current 30-year bond rate, which is now about 5.5 percent. FANDU passes it in six years. If your desired rate of return on your invested dollars is 15 percent, it will take FANDU 18 years to reach that target -- if earnings actually grow at the estimated pace, that is. Perhaps you can find another investment that will get you there more quickly. With riskier companies, you might look for them to pass your target rate sooner rather than later. The earnings yield is just one of many investor tools. It can help you think more effectively about your expectations for investments. _________________________________________________________________ IN THE SPOTLIGHT -- Learn more about the earnings yield in this classic "Fool on the Hill" article. http://www.fool.com/m.asp?i=3D186702 -- Another "Fool on the Hill" article takes a close look at some myths surrounding Wall Street analysts. http://www.fool.com/m.asp?i=3D186703 -- And now that we've raised some questions about analysts, permit us to introduce you to our own. Frustrated with some of Wall Street's analysis, we've set up a modest research department of our own, offering a new kind of research on companies for investors. http://www.fool.com/m.asp?i=3D186704 _________________________________________________________________ A NOTE FROM THE AUTHOR=01( I hope you're finding this product useful. The content originally appeared as part of our nationally syndicated newspaper feature (which I also prepare). Consider giving your local editor a jingle and suggesting that they think about carrying the Fool. http://www.fool.com/m.asp?i=3D186705 Selena Maranjian http://www.fool.com/m.asp?i=3D186706 _________________________________________________________________ My Portfolio: http://www.fool.com/m.asp?i=3D186707 My Discussion Boards: http://www.fool.com/m.asp?i=3D186708 My Fool: http://www.fool.com/m.asp?i=3D186709 Fool.com Home: http://www.fool.com/m.asp?i=3D186710 My E-Mail Settings: http://www.fool.com/m.asp?i=3D186711 Sponsored By: Scottrade Scottrade: $7 Trades, 120+ offices, personal brokers, FREE REAL TIME Quotes & charts. Check out our financial services: CDs, Bonds, Mutual Funds, no setup fees on IRAs. Apply now! http://www.lnksrv.com/m.asp?i=3D186712 FREE FOR FOOLS! Investor's Business Daily will send you a free copy of 24 Essential Lessons for Investment Success when you sign up for a free trial subscription of their newspaper. http://www.lnksrv.com/m.asp?i=3D186713 FREE PREVIEW OF WIRELESS 201 Get a sneak peek at this best-selling report at Soapbox.com http://www.lnksrv.com/m.asp?i=3D186714 BECOME A FOOL! Get a FREE Investing Guide and more... http://www.fool.com/m.asp?i=3D186715 FOOL DIRECT E-MAIL SERVICES Need to change your address or unsubscribe? You can also temporarily suspend mail delivery. Click here: http://www.fool.com/community/freemail/freemaillogin.asp?email=3Dbenjamin.r= ogers @enron.com Have ideas about how we can improve the Fool Direct or new e-mail products you'd like to see? Try our discussion board: http://www.fool.com/m.asp?i=3D186716 ____________________________________________________ © Copyright 2000, The Motley Fool. All rights reserved. This material is for personal use only. Republication and redissemination, including posting to news groups, is expressly prohibited without the prior written consent of The Motley Fool. MsgId:=20 msg-32694-2000-11-08_14-59-37-5397712_5_Plain_MessageAddress.msg-15:08:23(1= 1-0 8-2000) X-Version: mailer-sender-master,v 1.84 X-Version: mailer-sender-daemon,v 1.84 Message-Recipient: benjamin.rogers@enron.com
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