question about stock terms

[MaxPowers]

Im movies and stuff, they say "the stock went up 5 points." what is a point? percentage or dollar? When talking stocks to someone, you would talk in terms of percentages right? I think it is retarded to say "my stock went up 50c today!" when no one knows anything about the stock. My friend does that all the time and I try to correct him to use percentages, but he thinks he is right.

[disneysteve]

A point is a dollar. So if your stock went up 1 point, it is now priced at $1 more than it was.

You make a good point, though, that it is more important to know what percentage that represents. A $1 increase on a $10/share stock is much different than a $1 increase on a $90/share stock.

[shultice24]

Originally Posted by disneysteve

...it is more important to know what percentage that represents. .

I think it's a fairly common mistake in the investing world to pay too much attention to what the actual price of the stock is. Ford at $10 a share would probably be overvalued right now, whereas Apple at $150 would be a steal.

I've observed this some in my portfolio class at school- people referring to a stock as "cheap" simply because the share price is lower, and assuming it inherently has more potential because of that.

[Broken Arrow]

Originally Posted by shultice24

I think it's a fairly common mistake in the investing world to pay too much attention to what the actual price of the stock is. Ford at $10 a share would probably be overvalued right now, whereas Apple at $150 would be a steal.

Yes indeed, it's very common fallacy. Truth is though, even the P/E ratio seems over-used at times (although I do accept the P/E, rather than price alone, as the correct common denominator).

To elaborate, since you've mentioned it, even AAPL is rather pricey at P/E 32, whereas F isn't even listed right now. Based only on this, one could argue that AAPL is indeed over-valued whereas F is under-valued.

But of course, we both agree that AAPL may be a better buy regardless. The point here though, is that simply looking at the P/E would not allows us to draw such a conclusion. More fundamental analysis would be required, because in this case, both the price and the P/E tells us that F is the better buy.

[disneysteve]

Many small investors make this mistake. When they want to buy stock, they look for a low priced one so they can buy more shares. It doesn't matter if you buy 10 shares of a $100/share stock or 100 shares of a $10/share stock. Either way, you've invested $1,000. Either way, if the stock gains 10%, you make $100.

Part of this mentality dates back to the way commissions used to be structured. An "odd lot" of less than 100 shares often carried a higher commission than an "even lot" of 100 shares or some multiple of 100. Today, though, with the discount brokers, it doesn't matter if you buy 1 share, 10 shares, 100 shares or 237 shares, you pay the same commission.

[Broken Arrow]

Oh yes, that's right. Lots used to carry different costs.

[gambler2075]

Originally Posted by Broken Arrow

Yes indeed, it's very common fallacy. Truth is though, even the P/E ratio seems over-used at times (although I do accept the P/E, rather than price alone, as the correct common denominator).

To elaborate, since you've mentioned it, even AAPL is rather pricey at P/E 32, whereas F isn't even listed right now. Based only on this, one could argue that AAPL is indeed over-valued whereas F is under-valued.

But of course, we both agree that AAPL may be a better buy regardless. The point here though, is that simply looking at the P/E would not allows us to draw such a conclusion. More fundamental analysis would be required, because in this case, both the price and the P/E tells us that F is the better buy.

The problem with the P/E ratio is that small changes in the 'E' part of it can make huge changes in the overall ratio. With some tech stocks, for example, when they were making large profits in 2007-2008, their P/E ratio was fairly small. The problem is that when they started getting around to break/even on the quarterly profits, their 'E' fluctuated around that 0.00$ earning per quarter. And remember that only slight changes in revenue could make large changes in the final 'E'

As an example... If SIMO had revenue of 10M$ per quarter, but the cost of that revenue was 9.9M$ then the 'E' would be 0.1M$

Now if their revenue increased to 10.5M$ but the cost of that revenue was still 9.9M$ then the 'E' would be 0.6M$

As you can see, the P/E ratio would then change by a factor of 6, which is ridiculously variable.

Be careful with P/E ratios...
g