I don't get how stocks work, help!?

Question

Last trade is basically the last recorded price of a single share, right? Let's pretend that last trade is about 50 bucks, and the EPS is $7.00 (considered a good return, isn't it?) If you buy 50 shares of this company you'll be in the hole $2500 dollars. Those 50 shares will be worth $350. Why would anyone do this? Isn't 50 shares considered conservative? Don't serious investors buy WAY more shares than that?Someone please help me with the basics of investing, it just doesn't make sense to me.

Answer 1

Buying stock is buying into a % of the company .

The traditional recommended stock price to earnings ratio is 20 .
So a company earning $7 should trade at $140 .
eg: IBM , earns about $7 & trades today at $118 with conservative growth . . .

http://finance.yahoo.com/q?s=ibm

If a company is however having declining revenues and high debt (this info in the key stats link)
A 20 P/E may be too pricy , eg ford / F

http://finance.yahoo.com/q?s=f

BUT , when a company is in its growth phase and has low or not debt , the P/E ratios are often higher
eg: RIMM

http://finance.yahoo.com/q?s=rimm

Many investors try to buy at least a 100 sh at a time but when you are getting started , you may set a dollar limit for yourself . I used to aim for $2K purchase at a time and many years ago bought just 20 shares of IBM .

Given the cost of trading , I think $2K is sort of a min start point to purchase an equity .

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Answer 2

First, instead of 50 shares, use 100. That is the common "block" of stock. When you read the price ticker scrolls and you see a company symbol and price, perhaps how much up or down, then a number like 1 or 3 or 10, this denotes how many blocks, 100 shares, traded for that report.

Second, the per share price is multiplied by the number of shares traded, 1, 3, or 10 blocks in the previous example would be 100, 300, or 1000 shares that you multiply time that price, whatever it may be.

Third, when you get to the EPS, you might include another common yardstick, P/E, or Price to Earnings ratio. That is what a lot more people trade on than EPS (although I rarely use one without knowing the other).

The market works from three general aspects: (1) what is everyone else doing?, (2) what is the company earning?, and (3) what is the company worth? There are traders who simply see that people are willing to pay extra right now for company XYZ, so the game of 'chicken' begins and you buy as long as people are buying and try to sell before the last one has bought when prices start to turn. Earnings and worth are irrelevant to those, demand rules the moment. But then there are those who see things that affect a company's earnings. You will constantly hear talk about something bad, or good, happened that would affect the company, so its price rises or falls based on an estimate of how that will affect earnings. Those earnings affects eventually register in the proverbial bottom line. That affects what a company's balance sheet says of its intrinsic worth. If it is growing then the future value of the company could be/should be greater, so the price gets bid up, or not if the prospects of this continuing look dismal. I just passed on a stock today, all excited because a perpetual loser showed a profit, a big profit, but it was from selling off a major line of its operations. It is no longer on my radar because what made it money isn't going to be there to make it more money (and management hasn't yet made clear what they will be doing with what they got for it). The same goes for some big oil company who takes its enormous profits from higher oil prices but acts like a kid in a candy store wondering what to do with the big bulge of coins in his pockets. So they buy back stock (a worthless thing, buying at high price in order push price up even further and keep part of what they would pay a dividend on) or pay down debt (a good thing) or pay a grand bonus to the top execs, etc. Little goes for new refineries or replacement technology or new drilling (which would lower the price of the oil and their profits).

There is more to determining value than what you've described. For that you've got to dig deeper. Still, some buy and sell stocks on even less than that. (just don't be one of them, okay?)

Answer 3

If you swap $2500 for 50 shares worth $50 each, you're not in the hole, you simply exchanged pieces of paper worth $2500 for pieces of paper worth $2500.

If the earnings per share are $7, then the new pieces of paper you own generate $350 per year in income. If you formerly had your money under your mattress, they earned nothing. If you formerly had your money in the bank, it probably earned about $100 per year in income.

Serious investors are people with serious amounts of money to invest. You're a small investor, with small amounts of money to invest.

Picking one stock is NOT conservative. It's like betting on a horse race. No matter how much the horse may be a favorite, it may pull a Barbaro and break a leg.

It costs a lot less to buy or sell "round lots" of stocks, which means multiples of 100 shares. You pay enough of a premium in buying and selling broken lots that you often lose money on an investment that would be profitable as a round lot.

You can solve both problems by investing in an index fund. Vanguard invented them. There are management fees of a fraction of a percent, and Vanguard has research that shows no "managed" fund employing stock-pickers can match the results of a computer automatically buying the entire market, or a selected part of the market.

Answer 4

Earnings Per Share is an indicator of how much the company is worth regards to their profit or loss as to how they do business. For the stock price of $50 bucks that means, if you buy 50shares that will cost you $2,500 to invest. Now if next days trading the stock rose to lets say $55, then you made 5 bucks so 5*50 = you have just made $250 from trading that stock.... I hope that helps ya..

Answer 5

Apple. they are intense precise now yet while a while-physique is previous january they seem to be a no-brainer. did you already know the iPhone replaced into the main important merchandising telephone interior the U. S. final month? That, and this is implications, isn't yet priced in.. and neither is Apple's marketshare being on the tipping element and approximately to explode. 185 now. 240+ by ability of Jan.. (and while you're fortunate you would be able to get a dip to purchase at a160 in the subsequent couple of weeks).

Answer 6

If you buy a car ($20,000.00 USD) and you use it as a Taxi then you will make $2,000.00 USD per quarter.

In this example your EPS is $2,000.00 and it will take 10 quarters to recover your original $20,000.00 USD investment.

However, it is likely you will use your car as a taxi for at least 20 years. (You will need to spend some money in repairs from time to time)

Some investments will recover your money in decades and others in years.

There is no way to recover your investment in a quarter.

If you want to recover your $50.00 in a quarter then the Stock Market is not for you.

Exxon Mobil is the most profitable company in the World and they cannot move their oil from the bottom of the sea to the gasoline station in less than a quarter.

If they cannot do it then nobody can.

Answer 7

try reading the following books first:

1)the intelligent investor
2)security analysis

they will tell you everything you need to know

Answer 8

just let me crwl in there and get that pencil