Stock (Equity) Fundamentals - Essential features of pricing, buying, venue - Gary R. Evans
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Orange Empire Railway
Museum: L.A. Railway
LARy-3001, entered
service in 1937,
dedicated by child film
star Shirley Temple.
Stock (Equity) Fundamentals
Essential features of pricing,
buying, venue
(c) 2018 Gary R. Evans. This slide set by Gary R. Evans is licensed under a Creative
Commons Attribution-NonCommercial-ShareAlike 4.0 Intertational License.
Stocks listed in the U.S.
8000
7000
5,248 stocks in the U.S. in Jan 2018
6000
5000
4000
3000
2000
1000
0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
NYSE 2468 2400 2366 2308 2293 2270 2280 2273 1963 2327 2317 2308 2339 2371 2466 2424 2307 2286 2291
NASDAQ 4726 4128 3649 3294 3229 3164 3133 3069 3023 2852 2778 2680 2577 2637 2782 2859 2897 2949 2957
Source: The World Federation of Exchanges 52,220 in the world!!
What is a market index? • An index is a weighted and summed list of stocks that is meant to indicate a measure of performance for a certain class of stocks. • Most stock indexes are weighted by market cap, shares outstanding times price (DJIA not). • Weights are adjusted for splits, mergers and acquisitions, and additions and deletions from the list. • Most indexes are now represented by ETPs. • The major indexes are represented by mutual funds.
The Major Stock Indexes
• Dow-Jones Industrial
Average
• NASDAQ Composite
(and 100)
• S&P 500
• Russell 2000 (small cap)
• Russell Midcap (800
smallest of top 1000)
• Russell 6000
• Various sector indexes
• Various global indexes
Source: bigcharts.com
The Wall Street Journal list of indexes:
WSJ: September 7, 2018
The Dow Jones Industrial Average AAPL Apple HD Home Depot NKE Nike AXP American Express IBM IBM PFE Pfizer BA Boeing INTC Intel PG Procter Gamble CAT Caterpillar JNJ Johnson & Johnson TRV The Travelers Cos. CSCO Cisco JPM JP Morgan Chase UNH UnitedHealth Group CVX Chevron Corporation KO Coca Cola UTX United Technolgies DWDP DowDuPont MCD McDonalds V Visa DIS Disney MMM 3M VZ Verizon WBA Walgreens Boots Al MRK Merck WMT Wal Mart GS Goldman Sachs MSFT Microsoft XOM Exxon Mobile Stocks that have been removed in recent years include General Electric (GE – replaced by WBA on June 20, 2018, was one of the original 1896 12 stocks in the index), Altria (MO), Honeywell (HON), AIG, Citigroup (C), and General Motors (GM), Kraft food (KFT), Bank of America (BA), Hewlett Packard (HP), Alcoa (AA), and AT&T (T). Stocks in this index are weighted by price (a stock with double the price will have double the weight).
19 strong years (the S&P 500)…
3,500
8/29/2018
2914.04
3,000
2,500
2,000 3/24/2000 10/9/2007 The
1524.46 1565.15 mortgage
The
meltdown The longest
1,500 dot.com
bull market in
crash
U.S. history
1,000
500 10/9/2002
3/9/2009
776.76
676.53
0
2,700
2,400
2,500
2,600
2,800
2,900
3,000
01/02/18
01/09/18
01/16/18
01/23/18
01/30/18
02/06/18
02/13/18
02/20/18
02/27/18
03/06/18
03/13/18
03/20/18
03/27/18
The S&P 500
04/03/18
04/10/18
04/17/18
04/24/18
05/01/18
05/08/18
05/15/18
05/22/18
05/29/18
06/05/18
06/12/18
06/19/18
06/26/18
07/03/18
07/10/18
07/17/18
07/24/18
2018: Started as a volatile year, with
07/31/18
... as of August 31.
corrections but strength at the end …
08/07/18
08/14/18
08/21/18
08/28/18
Relative Index Performance
DJIA vs. Russell 2000, 2018
DJIA is
green HLC
DJIA is 30 large cap industrials whereas Russell 2000 is small caps only (the smallest
2000 of the largest 3000). Over this time period the small caps are clearly more volatile.
Source: bigcharts.com
Basic information about your stock ...
60
58
INTC This is a candlestick
chart ... read in the
56 chapter about how it
works.
54
52
50
48
46
Go to yahoo
44 or google to
42
see what is
there ...
40
1/2/2018 2/2/2018 3/2/2018 4/2/2018 5/2/2018 6/2/2018 7/2/2018 8/2/2018 9/2/2018DWBH ! ... and our Python models grab a lot more data
Sector and industry-based performance ...
Sector and industry-based
listings can show you that
there is considerable
variance from one sector
or industry to another.
9/7/2018It starts with the IPO ... (see the reading) The stock is released to the public for the first time on the day of the Initial Public Offering (IPO). Thereafter the stock is traded in a the secondary market. That is the stock market.
Tesla Motors (TSLA) Price History Since the IPO
450
400
350
300
250
200
I would sell the TSLA right now. I admire Musk and his wonderful car - would love to own one
150 (wife says no) but financially it is a pure subsidy play. Depending upon whose numbers you
believe, somewhere between $20K and $35K of actual price of each Tesla is subsidized by clean
air credits, which means that their profits are 100%+ subsidy, and that sort of thing can disappear
100 in a single evening. Don't get me wrong, I approve of Tesla and the subsidy, but it makes for very
tenuous business. (Email to Chris Streiter May 9, 2013)
50
0IPO Glory Days
... prior to the 2000 dot.com crash
The 10 Most Successful First-day IPOs
(as measured by percentage gains in the first day)
Company IPO Date IPO Price $ 1st day close Gain %
TheGlobe.com November 13, 1998 9 63.50 606
Braodcast.com July 17, 1998 18 62.75 249
EarthWeb November 11, 1998 14 48.69 248
Secure Computing November 17, 1995 16 48.25 202
EBay September 24, 1998 18 47.38 163
Yahoo April 12, 1996 13 33.00 154
Rambus May 13, 1997 12 30.25 152
Boston Chicken November 8, 1993 20 48.50 143
Planning Sciences April 30, 1996 10 24.13 141
Home Shopping Net May 13, 1986 18 42.63 137
Source: Los Angeles Times , November 14, 1998. Original data source was Securities Data.IPOs have failed to outperform the market ...
... compared to the S&P 500.
Source:... and the IPO market has cooled off some .. Source: Renaissance Capital
slide from last year ..
A good 2016 IPO: Twilio ultimately a sad story
Twilio's initial public offering
marks the first U.S. venture-
backed tech IPO of 2016. It
entered the market on a day
filled with uncertainty as the
world awaits the outcome of
the U.K.'s referendum on its
European Union membership.
The San Francisco-based
Twilio has grown quickly by
selling software that helps
companies communicate with
customers using voice, video
and messaging in an
anonymized manner. Uber,
OpenTable, and Nordstrom are
some of the company's clients.
The company hits the public
market having yet to turn a
profit. In 2015, the company's
revenue almost doubled to
$166.9 million, but it still
posted a net loss of $35.5
From CNBC, June 23, 2016 million.An then TWLO screws up …
100
90
Hey, what do you say we do
80 a secondary public offering, ... in 2018
70
not so much to raise more Twilio is
money but so we can sell forgiven after
60
our stock!! very strong
50
earnings
40
growth, and the
30 stock has a
banner year. A
20
10
IPO lot of Mudders
work for
0
TWLO.
On October 10, 2016, Twilio announced that they were going to do a secondary public offering and sell $400
million more in class A common stock. However, this was not to benefit the company. This was to allow
inside shareholders of the company that had just IPOed in the previous June to dump their shares on the
market. Even by the cynical ethically-empty standards of Wall Street, this was seen as excessive and brazen
and the stock was deservedly pounded to a pulp. Your teacher had just repurchased TWLO in order to write
covered calls and suffered a huge loss. After a year passed, TWLO recovered. But these short stories remind
us that these markets can be hazardous for retail investors, especially if not diversified.An IPO that we will watch ... Kodiak Sciences KOD
The Kodiak S1 ... https://www.sec.gov/Archives/edgar/data/1468748/000119312518269221/d516071ds1.htm
The fake red herring ...
This companies stock opened at 22.21, not 17!
This red herring practice allows a company to
announce their opening price the day before the
IPO, which allows a large final block of stocks to
be sold to favored inside investors at the price.
Then the stock actually opens the next day to the
public at a higher price. In the case of SNAP, this
was $22.21. So SNAP was not up 8.2358, it was
not up at all!
Also SNAP set a new unhealthy precedent in that
these were all non-voting shares! See the book for
comment.
Greed, greed, greed everywhere you look! Has it
30
paid off???
25
22.21 20
15
10
9.93
5
0The private securities markets ... See chapter 1: they are called secondary private markets there.
Alphabet Class A (GOOGL) and
Class C (GOOG) stock (and B)
Source: bigcharts.marketwatch.com
Source: bigcharts.com
The issue: should you buy
Class A shares get one vote, class C shares get only stocks with voting
no votes, and class B shares get 10 votes. rights??SNAP - the stock with NO voting rights!
30
25
20
15
10
Source: bigcharts.com
5
0
... compared to the S&P 500 since SNAP's inception. But
on the other hand SNAP is not going to be in the S&P 500,
is it?BABA and the VIE ... Should you buy Alibaba, Chinese stocks, or any other Variable Interest Entity (VIE)? The VIE is popular for Chinese tech firms that want to list in the United States, including Alibaba (BABA). But you are not buying common stock when you buy a VIE: In the VIE structure, American stockholders don’t own the Chinese company. They just own a company that has some contracts that are supposed to mimic what it would look like to own the Chinese company. You’re not buying stock in Alibaba when you buy Alibaba on the NYSE. You’re buying a holding company called Alibaba Holdings registered in the Cayman Islands with a claim on some of Alibaba’s profits but no actual ownership stake. You don’t own shares in the real Alibaba and you don’t get a vote in how Alibaba is run, although you do get to share in Alibaba’s profits. The danger some observers have noted is that those contractual claims on Alibaba’s profits are only enforceable in a Chinese court (because the contract is between the Chinese subsidiary of the Cayman Islands-based holding company and the Chinese incarnation of Alibaba). Will those contracts between the Cayman Islands Alibaba and the Chinese Alibaba be upheld in court? Many experts in Chinese law doubt it. John Ford, "No One Who Bought AlibabaStock Actually Owns Alibaba," The Diplomat, September 24, 2014
American Depositary Receipts (ADRs) [From the book]: Generally, a given amount of shares denominated in the home currency are deposited in a financial institution and an identical amount of shares are then issued to the U.S. markets denominated in Dollars. For example, if a million shares of Yen-denominated Sony stock are deposited as an ADR, then a million shares of Sony stock can be issued through the New York Stock Exchange to be sold in Dollars. Thereafter these are traded just like stocks that had IPOed in the U.S. market, with no restrictions. Some of these stocks, such as oil giant BP plc (which used to stand for British Petroleum) often pay dividends both at home and in Dollars in the United States.
Stock splits and
reverse splits
(Image from CNNMoney)
A board of directors can choose, with shareholder approval, to
split a stock 2-for-1 or 3-for-1 or some other proportion to reduce
the price back to a range that may be more attractive to investors.
The amount owned and dividends and other rights are adjusted
proportionately.
Going the other direction, companies can also engineer reverse
stock splits!The Cabot Oil & Gas (COG) 2-for-1 split
90.00 (Aug 15, 2013) Use “stock split calendar” in
Google to find these ...
80.00
70.00
60.00
50.00
40.00
30.00
20.00 In historical data series, the “adjusted” data will always
account for the split (red line) so older data do not actually
10.00 reflect the price that the stock was trading at.
0.00
8/1/2013 8/6/2013 8/11/2013 8/16/2013 8/21/2013 8/26/2013 8/31/2013
Actual Market Price Adjusted quoted priceThe 2014 Apple (AAPL) 7-1 stock split
700 105
100
600
95
500
90
April 23rd announcement
400 85
of stock split.
300 80
75
200
70
100
65
0 60
1/2/2014 2/2/2014 3/2/2014 4/2/2014 5/2/2014 6/2/2014 7/2/2014 8/2/2014
Adjusted Price Unadjusted price Note: These labels are
backwards here and in the
text.The effect upon the stock price of Citigroup (C) of the 1-for-10 reverse
stock split of May 9, 2011. Prices shown are the actual market prices
quoted.
60
The stock market crash
50 nearly destroys C, sending
the stock plunging to only $
1 per share in early 2009,
then stabilizing at around
$3 to $4 per share until the
40 reverse split. During this
period C was a heavily
traded speculator's stock.
30
The effect of the 1-for-10
20 split, May 9, 2011, upon the
price of the stock is very
obvious. For awhile the
stock languished even with
10 this asjustment, then C
rallied with the general
market and financial
services rally in 2013.
0
1/3/2006 1/3/2007 1/3/2008 1/3/2009 1/3/2010 1/3/2011 1/3/2012 1/3/20132018: (Helios and Matheson Analytics Inc. ..
parent of MoviePass) reverse stock split 1/250
Source: LA Times Aug 1, 2018
Source: finance.yahoo.com
If on July 24, 2018, you owned 100 shares of HMNY, the next day you only owned 0.4 shares,
because of a 1/250 stock split. On Friday, September 7, 2018 that stock would be worth 0.0235
X 0.04, or $0.0094. In this case, the effort to keep the stock listed will likely fail.Short Selling
When you short-sell a stock
you reverse the normal order of
1. Sell here the transaction: (1) you sell the
stock first, then (2) buy it back
2. Buy here
later.
Normally you do this because
you think the price of the stock
will fall.
How is this possible? Technically when you make this transaction you borrow
the stock in-kind and offer collateral in cash and you promise to pay the stock
back in-kind and have the collateral returned. You borrow it (indirectly usually)
from a party who is long in the stock for the long term (like a pension fund) and
is willing to loan it to you, using your collateral to earn a small return.
You pay interest on this short loan and the interest rate is variable depending
upon the stock, and may be higher than market if it is hard to borrow the stock.Ameritrade short-selling process
2. Close the transaction with this later.
1. Initiate with this now.Securities Lending and Short Selling
Stock loan
Custodian Bank
Broker: Securities Lending
You
TDAmeritrade, Program
(seller)
IB etc.
Cash Collateral
Securities Lender:
Stock Cash Pension, Mutual,
Hedge Fund. etc.
Buyer The original securities lenders will be typically large
institutional investors like pension funds or mutual funds
who plan to hold the stock in question for a very long
time, like an S&P500 Index mutual fund. Therefore they are willing to lend that stock
through an intermediary (the broker) so long as cash collateral is provided. They then
take that cash collateral and invest it in a low-yield safe investment to enhance yield.
Often (typically) there is a custodian bank offering a securities lending program,
lending the securities and finding investments, for the securities lender.Short data (free):
1. Short interest: Total # shares short
2. Days to cover (days short): note the
volatility
SI / Avg daily volume (3 mos.)
3. Shorts as % of total outstandingShort data: The Wall Street Journal
Note your sorting
options: Very useful
Note that index ETFs can be shorted!
The SPY short was the third largest for that day! What might that imply (and
remember, shorts have to be covered)?Order routing
Your limit or
market order
Broker
(TDAmeritrade)
(or) Order-flow Market Maker
(GSCO - Goldman Sachs)
Exchange
(NYSE Arca)
Quotation Service Clearing HouseBrokers
• Discount/online
– Low transactions costs, instant execution
– ETrade, Ameritrade, Scottrade, TradeKing
• Traditional full-service
– "Private clients" charge 1% or so of assets
– Useful for very large accounts and clueless investors
– Track record rather motley in 2000 crash.
• Specialized online
– Allow exotic online interfaces for day-trades, options
trading, programmed trading strategies
• Small-market traditional rip-off brokers
– for ignorant peopleAssignment: Peruse TDAmeritrade, Interactive brokers, E-Trade and Robin Hood 1. Fees for trading 2. Trading platforms 3. Requirements to open an account
The primary role of the broker ... executing your buy and sell orders ... from Chapter 2 ...
TDAmeritrade Online Trading Screen
Enter
these
Could also be a market
order, price box disappearsBest Bid / Best Ask
• Best Bid
– Of the limit orders submitted to buy stock, this
is (supposed to be) the highest. This is relevant
to you if you are trying to sell the stock with a
market order.
• Best Ask
– Of the limit orders submitted to sell stock, this
is (supposed to be) the lowest. This is relevant
to you if you are trying to buy the stock with a
market order.National (Protected) Best Bid and Offer [ask] (PBBO) Market and limit orders can be routed by many brokers through many market makers and other major transactors to any one of three primary exchanges in the United States. So how does a single Level II queue and, more important, how does a single Best Bid and Best Ask price emerge from this? Since 1978 an organization called the Securities Industry Automation Corporation (SIAC) has executed a protocol called the Consolidated Quote Plan resulting in the Consolidated Quotation System (CQS). As part of this service CQS identifies the “Best Bid and Offer” (highest bid and lowest ask), which is disseminated by SIAC to subscribing market participants (including your broker) through the CQS Multicast Line. This. PBBO (protected) quote (formally NBBO) is what you see on an online trading site when you ask for a quote. This is also called a Level 1 quote. Normally this system insures that no matter what exchange or network your broker trades through, you will get best bid or best ask on market orders to sell or buy
Types of orders
• Market order
– An order for the broker to buy a stock at the best
possible price.
• Limit order
– An order to buy a stock only if the price falls
below some specified price.
– Example: Buy FEYE at $14.32 or below.
• Stop loss order
– (For a stock already owned) Sell at market if the price
falls below $14.08.
• Stop Limit Order
– Combination of a limit order and a stop order: place a
limit order at X if the stock falls below X (or Y).The distinction between a limit and market order ... Figure 2 – TDAmeritrade Ticket to Buy 100 shares of INTC with a Market Order (Top) and a Limit Order (Bottom)
NASDAQ Level II / DOM Quotations
A limit order to buy (sell) will be DOM: Depth of Market - other terms
also now used.
placed in the bid (ask) queue
A market order to buy will
wherever it belongs.
(normally) be executed at
Best Ask (the top of the
ask queue).
Level II
Cisco (CSCO)
Vol MPID BID ASK MPID Vol
4 BATS 31.44 31.47 ARCX 1
32 NSDQ 31.43 31.48 PHLX 6 Market Participant
10 ARCX 31.29 31.50 BATS 17 IDs (MPID)
18 CINN 31.27 31.61 NSDQ 12
126 GSCO 31.26 31.64 GSCO 9
Best Buy and Best Ask are
shown in yellow.
(highest on top) (lowest on top)Typical Level II screen (IB) showing Bid/Ask queue for tsla with Best Bid (277.13) and Best Ask (277.46) at top. Bid queue represents limit orders to buy, Ask, to sell. The Bid queue declines and Ask queue rises. (Sept. 10, 2018) Limit orders make up the queues – you are being shown the best order for each exchange or market maker.
This is the INTC “deep book” limit order book for 9/10/18 (same image as Ch 2 except longer and more recent)
Your teacher’s Interactive Broker
limit order book viewer and book
trader (now also called the Deep
Book) for ARCA (NYSE) and
NASDAQ on 9/10/2018, 8:32 AM
PDT for INTC.
Limit orders to buy Unlike Level II, this is a list of all
are on this side. limit orders. This costs about $25 per
month.
Blue is the last price.
When this is “Armed,” (see the box
far upper left – this example is not
armed) then touching any price will
send a limit order at share default
size (100 in this case) to the market.
Limit orders to sell
are on this side.Here is Clovis Oncology (CLVS),
which is far less liquid than INTC.
Here are some good exam questions:
(1) What is Best Buy?
(2) What is Best Ask?
(3) What is the last trade price?
(4) If you submitted a market order to
buy, what price would you pay?
(5) If you submitted a limit order to buy
for 34.95, what would happen?
(6) If you were doing spread arbitrage
(see the chapter reading) and wanted
to have Best Bid and Best Ask at the
same time, how could you do it?More on Limit vs. Market Orders A market order to buy (sell) in an ordinary stock transaction will normally result in the immediate purchase of your stock at Best Ask (Bid). In an orderly market for a liquid stock where there is only a penny spread between bid and ask a market order is suitable. However, in a market for a less liquid stock there is often a wider spread between bid and ask. A limit order priced between bid and ask, or at least no higher than best ask when buying or no lower than best bid when selling, may be more suitable than a market order. In a high-volume volume volatile market when the bid/ask queue is racing, you must use a limit order or you might end up getting a price you really don't want! When trading first day IPOs, options, futures and other derivatives, again you must use limit orders and get very good at doing that. Rule of thumb: if trading practice using limit orders even in a stable market when market orders will suffice.
Illiquid Stocks and Big Spreads
(and why you must use limit orders sometimes)
Use a
limit
order
here!!
NATH is still a relatively illiquid stock (on 2018 average daily volume was
14.0K shares – INTC had 24,752.7K!) so there is a big spread between Bid
(86.15) and Ask (88.60) and sometimes the spread is a lot wider than this.
This is one of the effects of lack of liquidity (relative trading volume).Your first bit of trading advice:
Use limit orders nearly always,
not market orders. You can
choose one of three strategies:
(1) submit a limit order to buy
at best bid (278.21), for
automatic purchase, or
(2) submit a limit order
278.10 between Bid and Ask, or
(3) submit a limit order on
down the queue to get a
277.05
better price than market,
with no guarantee of
exercise.
Make sure you watch the
videos.You can also read
