Series: General Concepts

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Reading the Stock Market Page Terms of Use:

Let’s say we are going to invest in "The Widget Company." Widget has been owned privately by the Widget family, although they have offered stock options to their employees for years. Now management wants to expand the Widget business, and so they need to raise additional money called venture capital.

Venture capital is money for new equipment, research and so forth. Rather than take out a loan or issue bonds (known as debt financing), a company can issue stock (known as equity financing).

Widget decides to issue stock since this won’t require that they pay back the money or make interest payments over time as with a loan. Widget is going to "go public" in an Initial Public Offering (IPO) which means that shares in the company will be offered to the public for the first time on the New York Stock Exchange.

Widget is a micro cap company, compared to small cap, med cap and large cap corporations. A company’s capitalization is its existing shares times their price.

Large cap companies like General Motors and McDonalds have capitalization of over $5 billion, med caps are between $1 and $5 billion, and so forth.

Stocks of small cap companies tend to be riskier than large caps, but let’s keep in mind that all companies start off small. Even Microsoft started off in Bill Gates’ garage.

Blue chip stocks are ones in large cap companies. They have been around a long time and have good track records. They are the safest and usually most expensive stocks. New micro cap companies like Widget are the riskiest. They are often the cheapest and called penny stocks.

Widget will offer 100,000 shares in their IPO. If we buy 10,000 shares, we will own 1/10th of the company. Then we will be entitled to 1/10th of its profits. But since Widget is a growth stock, profits will be reinvested into the company rather than put out as dividends to stockholders.

Widget has a ticker symbol on the stock exchange. A ticker symbol is its nickname. Kmart is KM and Disney is DIS. Widget is WGT.

When the price of Widget stock goes up, we can sell our shares and make a profit. We can monitor the price of Widget stock by looking at its listing in our newspaper’s financial pages, on TV or on the Internet.

Series: General Concepts

Page 2 of 2

Reading the Stock Market Page Terms of Use:

The price of a stock varies according to supply and demand, and can change even by the hour. Day Traders are investors who buy and sell stock very quickly, sometimes holding stocks for only a day.

Stock tables or quotes found in the paper, on TV or on the Internet aren’t that hard to read once you know what each column represents. Typical listings look like this:

52 wk Yld Vol Net

Hi Lo Stock Div % P/E 100s Hi Lo Close Chg

12 6¼ WGT 50 4000 9 9 + ¼

43 38 BlCp 2.0 5.0 8 203 40 40 40

The first “Hi" listed is the high est price Widget stock reached in the past year. “Lo” is the lowest price. Widget pays no “DIV” or dividends so there's no percent yield. Widget’s P/E of 50 represents its stock price divided by earnings from the last year.


The “VOL” is the volume or number of Widget shares traded per day listed in the hundreds (add “00” to the end of the number shown), and it’s very high. During this day, the price of Widget stock changed by the hour – the high price was 9 and the low was 8.75. It closed at 9 and therefore is up by ¼.

If the closing price is up or down more than 5% from the previous day’s close, then the entire listing for that stock will be shown in bold.

Price/Earnings Ratio(P/E) shows the relationship between a stock’s price and a company’s earnings. You divide the price per share by the earnings per

share. A high P/E like 50 may mean the stock is growing fast and earnings projections are high. The P/E is often used to compare similar companies in the same industry.

Percent Yield (Yld/%) is the percent of the stock’s price paid as a dividend. A high yield like 10% can make a stock more attractive. A stock’s P/E and Percent Yield give you a clue to how well the stock is performing, but investors look at many other factors too.

Let’s compare Widget with a blue chip (BlCp) stock shown on the second line. BlCp’s price is high but stable, not only on this day but throughout the last year. It’s not trading at a high volume, but it’s paying consistent dividends to its stockholders.

There are rumors that BlCp stock will split. A stock split means the price of the stock will be cut in half. You will own twice as many shares at half the price. For example, if you own 200 shares at $40, after the split, you’ll own 400 shares at $20.

If BlCp splits, it will probably attract more investors because it will become more affordable, and investors will take a new look at it.

There are many stock market games on the Internet where you can pretend to invest $100,000 in the market and track your success. To try one, click here.

For more on what you should know before investing, click here.

See what you learned.

Check out "Stocks: Owning a Piece of the Action"