Stop thinking you can’t understand stocks. Learn to read stocks like a pro and jump into the driver’s seat. All the information you need is at your fingertips. Don’t be overwhelmed. We understand, it’s a lot to take in. But if you know what to look for it can be simple.
- Most private stocks set limits on transferability - you probably can’t trade them.
- Public stocks come with different voting powers and preferences.
- Stock quotes, and related statistics, are determined by the trading prices on stock exchanges.
Learn how to read stocks like a pro. In this article we’ll begin by checking out corporate bylaws. The bylaws are where a company defines the qualitative details of its stock like voting power, transferability, and preferences. Next, we’ll dig into the stock’s statistical performance on the market.
Successful investors don’t buy stocks recklessly. They learn to read stocks like books and make calculated decisions. Let’s get you up to speed.
Stock Power: Voting, Transfers, and Preferences
Corporations define their own rules for how they operate. They put the rules in a book and the corporation’s board of directors approve or amend them. A corporation's approved rule book is called its bylaws.
Most states require corporations to have bylaws. Even if bylaws are not required, it’s a smart idea to put them in place to set clear boundaries and limit power. The bylaws serve as an internal conduct manual for the corporation.
Bylaws are the first place to learn about a stock. Bylaws typically include an entire section devoted to stock. They usually specify:
- The rules for issuing stock
- The rules for transferring stock
- Powers and limitation of individual shareholders
- Descriptions of different classes of stock
Let’s go through some of the sections most relevant for evaluating stock as an investor, or potential investor.
Shareholders don’t control much of a company, except for one extraordinary decision: electing the board of directors. Usually once a year, shareholders come together to vote for the board and other super important company issues.
But not all stocks have the same voting power. Some stocks don’t get to vote at all! Others have 5X the voting power of ordinary shares.
Read a corporation’s bylaws to determine the voting rights of the stock you’re interested in.
Trading or Selling
Public stock is called “public” because it can be freely public traded or transferred. But what about private stock?
First, private stock can rarely be traded without breaking the law. The US Securities and Exchange Commission (SEC) heavily limits the trading of private stock. In most instances, it can’t be traded.
But there’s an even bigger problem with trading private stock. The majority of companies prohibit the trading of their private stock while the company is private. The bylaws of private companies usually probit “assigning” or “transferring” (trading) their stock to anyone. Private companies do this for a number of reasons, but the most important is to prevent strangers from gaining control of the company.
For example, if a person who owns 51% of a company trades their stock to a stranger, their company is put in jeopardy. The stranger now has enough voting power to elect a board member and thwart company decisions.
Stock is either common or preferred. Preferred stock has various “preferences” over common stock. These preferences can include:
- Liquidation preferences - the first right to the money left over from selling the company’s property if the company closes.
- Dividend rights - a right to an increased proportion of the company’s profits.
- Conversion rights - the right to convert the preferred stock into a (usually higher) quantity of common stock.
- Voting rights - preferred stock usually has no voting power but in some cases it can have increased voting power per share as compared to other classes of shares.
Stock can also come in different classes. For example, Google stock comes in Class A (stock ticker “GOOGL”), and Class B (stock ticker “GOOGL”). Different classes of stock usually also have different rights.
How to Read a Stock: Quotes & Statistics
A stock quote is the price a stock most recently traded for on an exchange. Each time a stock is traded, the stock quote is updated.
In stock market tracking systems like Yahoo Finance, stock quotes are usually displayed alongside other relevant performance stats.
Stock Symbol (Ticker Symbol)
A stock symbol is a group of letters representing a stock listed on an exchange or otherwise traded publicly.
Shares outstanding is simply the total amount of stock a company has issued.
Market Capitalization (Market Cap)
A company’s market cap is the total value of all of its stock. To get the market cap of a company at any point in time you multiply the stock quote (the price the stock is trading at) by the shares outstanding (the total amount of stock the company has issued). For example, if a company has 1 million shares outstanding and a stock quote of $1,000, the company’s market cap is $1B (1 million shares X $1,000). Companies are categorized by their market caps:
- Mega cap: $200 billion +
- Large cap: $10 billion to $200 billion
- Mid cap: $2 billion to $10 billion
- Small cap: $300 million to $2 billion
- Micro cap: $50 million to $300 million
- Nano cap: less than $50 million
Opening Trade Price
The opening trade price is the first price a stock trades for on a particular day. It’s a daily stat.
The latest price is the last price a stock sold for right before the exchange closed for the day. It’s a daily stat.
A price range is the difference between the highest and lowest price a stock sold for during a certain period.
The most common price ranges investors look at are the day and 52-week ranges.
The volume of a stock is the total number of trades within a time period.
The earnings are the net profit of a corporation during a specific period, usually measured quarterly (three calendar months) or yearly. Earnings are not a stock statistic, they’re a company stat. But earnings are used to calculate other stock stats.
Earnings have a huge effect on the price of stock because they’re a clear indicator of a company’s health. If a company has huge earnings, it’s profiting and demonstrating future potential.
Earnings Per Share (EPS)
EPS is a ratio that compares a corporation's earnings to its shares outstanding. For example, if a company has $100M in earnings and 20 million shares issued, its EPS is $5 ($100M / 20 million shares).
Price-to-Earnings Ratio (P/E)
The price to earnings ratio is simply the quoted price of a stock compared to its EPS. P/E is often used to compare companies across similar industries. Companies with high P/E are generally considered overvalued and vice-versa. This makes logical sense because the value of a stock should correlate to the profitability of the company.
A dividend is a payment a company makes to its shareholders. Dividends come in two forms: cash (cash dividends) and stock (stock dividends). Dividends are given from the profits of the company for the particular time period.
Companies offer dividends to entice, reward, and retain investors. Most public companies distribute dividends but many modern tech companies (like Google and Amazon) never distribute dividends.
The dividend yield is a comparison of a stock’s annual dividend to its current price. The dividend yield is given as a percentage. For example, if a stock is priced at $80 per share and gave an annual dividend of $4, the dividend yield is 5% ($4 / $80).
The beta is a comparison of an individual stock’s returns to the returns of the financial market as a whole. Beta is more difficult to calculate than the other ratios. To calculate a stock’s beta, you need to do a regression analysis (advanced statistics).
Go Analyze a Stock
Apply what you learned to improve your understanding. Go research a stock and see what conclusions you can draw about the company based on the stock’s performance. Practice makes perfect.
Tom is a contributor to WealthFit. His goal is to provide a high-level glimpse into the many and varied areas of learning that WealthFit covers.