Friday, June 23, 2006

What Is EPS ?

investments & trading

What is EPS? Comprehensive information by J. Foley

EPS is the abbreviated form of 'Earnings per Share'. Of course there are other terms clipped as EPS: 'Extended Portfolio System' is one, for example. Those are not our concern here. In issues concerning the stock market, the direct concern is earnings from stocks. We take up EPS as Earning per Share and try to understand what it is.

In this sense, EPS is clearly a measure of average earning from shares transacted. Here's a simple formula for calculating EPS: divide the earnings available to common shareholders with the weighted average number of common shares outstanding during the year. The resulting quotient is called basic (or simple) EPS.

Often EPS is taken to be the single most important factor in the financial statement. Conventionally it is known as the "bottom line" indicator of financial performance. Other commonly used ratios such as P/E and dividend payout are also calculated on the basis of EPS numbers.

Basic EPS is shown in the income statement of a company when it has no outstanding securities convertible into common stock. When outstanding convertible securities are there, more complex rules are followed, which try to make EPS reflect the potential of such securities to dilute potential earnings of common shareholders.

The kind of importance popularly attached to EPS by users of financial statements is perhaps due to the fact that they are disclosed in the financial statements of public companies, and are liable to be scrutinized by auditors.

But then EPS is tedious and cumbersome to creators and scrutinizers of financial statements. Complex provisions of APB 15 and a host of amending pronouncements make it further complicated. The burden is worsened by SEC stipulation that 10-K reports include a supplementary schedule explaining the computation of EPS whenever it is not apparent in the financial statements.

A serious problem with ongoing standards is that basic EPS is subject to replacement on the income statement by two hypothetical EPS numbers: primary EPS, and fully diluted EPS.

Primary EPS is computed assuming that common stock equivalents were converted to common stock on the first day of the reporting period. The fully diluted EPS is computed assuming that all dilative securities, including the common stock equivalents, were converted.

When fully diluted EPS is less than 97% of basic EPS, these two EPS are the only per-share disclosures required under current accounting standards.
Concerns about the usefulness of dual EPS reporting are not limited to the relative merits of historical and proforma disclosure. Some of the specific rules governing the computation of primary and fully diluted EPS have also been questioned. The test used to identify common stock equivalent securities is among the most controversial of those rules.

Changing prevailing market conditions in relation to terms of particular securities are not considered in the computational rules for EPS. It implies that the appeal of a conversion feature relative to other security characteristics will vary, in different circumstances.

But then the meaning of common stock equivalent status and primary EPS remain confusing and questionable. There are other sophisticated methods that are also questionable, such as Options, Warrants, and the Treasury Stock Method.

So EPS is a popular method of measuring how things are going in the stock market, but the dependability of the measure is not too high because of the complicated procedures and unrealistic assumptions used for its derivation.

There are more comprehensive statistics and formulae that make life in the stock market simpler: the track of P/E ratio for example. Hence though as a primary indicator of performance one can use EPS to get an initial impression, you shouldn't depend much on it for a deep understanding of what's happening in the stock market.

investments & trading
Article Written By J. Foley

Friday, June 09, 2006

Day Trading : Tools You'll Need

investments & trading

Day Trading : Tools you need by J. foley
Day trading previously had been only for the trading firms or the brokers who dealt in the physical market. But with the advent of the internet and a general advance of communication technology day trading has entered the homes of any interested individual who might have not visited the markets in person ever. But to be a successful day trader from your home you need to have the right gear. And by that we mean you need to have the proper hardware and software to build yourself a platform that could help you stay competitive against the market makers and other day traders. Following is a guide to the proper equipment you must have to do well.
When you are trading online all you need is a good computer. You need to have only the basic items of hardware installed. But don't compromise on what you get yourself. Remember that while trading you would have to deal with a lot of numbers and figures and so you would require your computer to handle the data well. Get yourself a decent processor (anything above 1GHz) and plenty of memory. A 100GB hard disk drive is suggested as you would need to stack a lot of information. Higher memory also means better speed. Get yourself at least 1024MB of RAM as it would be necessary when you are crunching those numbers. You will of course need a modem to stay connected and a high quality video card would help you get the live feeds better.  
As you would be dealing with a lot of data you should get yourself at least a 19" monitor. You can even go for split screen and use two monitors for a single screen shot.
Connection Speed
While you are day trading you are doing business real time. So you can't allow for any time lag. You would be placing your orders and quotes and you have to get them done on time or else you might miss out on good trading opportunities. So  a dial-up connection isn't the best choice you have. To be a serious day trader it is always advisable to get a cable or DSL connection. That way you will get real-time data in your hand and can trade effectively.
To make full use of the hardware you have got yourself you would also need the necessary software platforms to go with it. If you are in day trading you can go no where without the proper data in your hand. And even if you have the data you need to get the proper tools to store them well and have an easy access to them. The trading software platforms not only help you in getting the necessary data like the stock quotes, market indices, market stories and price alerts in real-time but they also store and present the data for you in an organized way so that it becomes much easier for you to make sense of it all when you read the spread sheets. You can buy these software platforms online or you can even get them from a few stores if you want to. You should however note that you may have to pay separately for access to the data that you need to download.

investments & trading
Article Written By J. Foley

Monday, June 05, 2006

Small Cap Stocks

investments & trading

Smallcap Stocks By J. Foley

Small-cap stocks do not involve large amounts of money, and can avoid very high risk at initial stages. Even if you lose, you lose a small amount. Hence starting with small caps is not a bad idea.

Small-cap stocks are stocks with a relatively small market capitalization. Classifications such as 'large cap' or 'small cap' are only approximations that change over time. In fact, the definition of 'small cap' can vary among brokerages, but generally it involves a company with a market capitalization of between $300 million and $2 billion.

Below this, companies having a market capitalization between $50 million and $300 million, are called 'micro cap' stocks.

Even these aren't the smallest breeds. Nano-cap stocks are even smaller, and involve small public companies having a market capitalization of below $50 million. You may start with these also. But they escape the state regulatory oversight and there is no point in sticking to them.

The methods of learning the stock market apply to wider situations when you come out to penny cap, mid cap and large cap stocks. With rational research, dependable brokerage and your own attentive analysis, it is actually beyond the small cap stocks that you start exploring long-drawn high-return potentials.

One of the biggest advantages of initially investing in small-cap stocks lies in the opportunity to beat institutional investors. The institutional investors are not allowed below a certain minimum value quite high in relation to small cap stocks. Hence it is possible to avoid quite a few legal constraints while keeping up watchful learning of the pitfalls.

Secondly, it is good to initially trade in these stocks because you may want to put in small money in expectation of relatively high returns. If this is the case, case you must get to know the companies they represent thoroughly, before you take a single step.

The stocks that are traded at extremely low prices, sometimes even for under $1, may be considered small caps by nonstarters. In that sense even penny stocks are small cap stocks. But actually the term officially refers to low-capitalization companies ranging over a specified capitalization value.

And you have to be on the alert, small cap or not. Though traded at very low prices, they can be quite risky. Brokers and analysts often have cautioned about sudden unprecedented rises in the prices of small-cap stocks in recent times.

Most brokers dealing in this category do not have strong financial credentials. There are informal brokers also who come to help you. You get them in the neighborhood of the trading spot. They often look for you. Careful! As you are a beginner, you may easily be cheated. As these brokers do not have to abide by any authority control, frauds are rampant.

However, wise financial investors avoid them and their wares, though it is fully possible to make a profit in this market.
Another source of the high risk of this market is the wildly fluctuating prices. Hence the first tip is: try not to go on investing in these stocks for too long.

investments & trading
Article Written By J. Foley