Category: Glossary


Common Stock Vs Preferred Stock

Filed Under: Glossary by Bill — 1 Comment
March 8, 2009

Recently the US government converted its preferred shares which it acquired as part of the TARP fund (which was to pay a 5% dividend for the first 5 years and 9% dividend after the initial 5 years) to common stock.  If Citigroup held the shares for 10 years it would have paid out 17.5 billion in dividend payments.  However, before the first dividend payment they paid $3.25 per share for a common stock conversion.  This share dilution dropped the value of common stock below $1 before setting just over $1 by the end of this week (03-06-09).  C stock will have to rise by 18.64% per year for 10 years to break even with the preferred stock deal.  My hunch is this wasn’t a good investment for the share holders or the US citizens (tax payers.)

So you might be asking just what is the difference between preferred stock and common stock?

Common Stock

Common stock is the baseline proof of ownership in a  corporation.  When you are a common stock shareholder you have a right to vote, assets in a liquidation, and dividend payments as approved by the shareholders.  You also have the right (preemptive rights) to purchase new shares that are being released before the public in order to maintain your percent ownership.

Preferred Stock

Preferred stock is another form of ownership in the company.  The payout terms are prearranged – fixed dividend schedule etc.  Another perk is that you get paid before common stock holders in both dividend and asset liquidation.  This includes previously missed dividend payments.  You must be caught up in your agreed payments before the the common stock holders get any dividend payments.  The disadvantage is no voting right and virtually no capital appreciation over the long run.

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Stock Market ETF (Exchange Traded Fund)

Filed Under: Glossary by Bill — 3 Comments
December 28, 2008

A stock market ETF is are index funds or trusts that are listed on the stock exchange and can be traded just like any other stock.  They are setup by large investors who take blocks of the holdings investments and divides them into single shares.  These shares can be bought and sold intraday, bought on margin, sold short, have options contracts created on them, or held for the long term.  Unlike many mutual funds they don’t have front end loads, but stock broker commissions still apply.

What makes a stock market ETF different than a hedge fund is they must disclose every day their holdings.  Therefore you’re not investing in the management team of the firm, but the holdings of the index.  In most cases these holdings are not changing much and are predefined like the DOW stocks or the S&P 500. 

Exchange Traded Funds can also be found holding buckets of bonds, commodities, and currencies.

Why buy the stock market ETF versus just buying individual companies?  Sometimes you may have a better understanding of a sector or general market, but not necessarily know which company is going to be the winner in that sector.; or you just like the diversification with the added trading cost.  Own 100 different shares in 1 trade.  Also, most ETF’s have lower cost because they require less marketing and more tax efficiency since they are not “trading stocks”, but maintaining a bucket of stocks.

ETF’s are another great tool in the investor’s workshop.

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Market Cap Stock

Filed Under: Glossary by Bill — 1 Comment
December 13, 2008

The market cap of a stock is simply the multiplication of the number of outstanding shares by the price per share.  The market cap is essentially the cost of the whole corporation if you were to try and buy every share (without the price changing.)  It’s good to note the market cap of a company when looking at factors like earnings and debt or when comparing one stock in a sector to another.  Making a ratio out of the earnings and debt to the whole market cap puts those large numbers in perspective. 

Also, the market cap compared to a competitor may help judge if a buy out is a potential because of the market cap is lower than the cash flow of the larger foe.

An interesting aside – GM is asking for 4 billion dollars to survive the month of December from Congress.  However, the whole market cap for GM is only 2.5 billion compared to Ford’s 7 billion.  Would you loan a company nearly twice what their worth when you could just buy the stock?  Market caps are worth keeping an eye on.

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Trading Bollinger Bands

Filed Under: Glossary, Technical Analysis by Bill — 1 Comment
December 10, 2008

Bollinger Bands, invented by John Bollinger, are a simple moving average (often 20 period moving average) with a plus 2 standard deviation (the standard deviation is calculated using the same prices as the moving average) and a -2 standard deviation.

Standard Deviation Calculation

Some general notes and uses about trading bollinger bands:

  • Bollinger Bands use of 20 period moving average and +/- 2 standard deviation should be adjusted and/or optimized for the style of trading or investing you are doing.
  • Just because 2 standard deviation is generally assumed to mean 95% of the time a stock will fall between these two areas.  Remember this assumes a normal curve and a sufficient sample size, neither of which you have with this tool.  Don’t factor a 95% success rate with this tool.
  • The price tends to rise on the upper bollinger band and falls down the lower band.
  • If the price closes outside of the band this is generally a sign of a price continuation not a reversal.  Volume indicators is a good tool to verify with this.
  • Remember Bollinger Bands factor volatility and trend, so if you use confirmation signals it needs to not be correlated with either volatility (like a market volatility index (VIX)) nor trend.

Remember you have to learn to make the tools work in your strategy to make money, not make the tool your strategy.

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