Stock Investor FAQ

What is the "Closing Tick?"
What is "after hours trading?"
What happens when a stock goes "ex-dividend" -- and if a stock is sold just before that happens, who gets the dividend?
What stocks are included in the various indexes, and do the indexes move in tandem because of overlapping stocks?
How is money distributed from a stock trade?
How can a stock price end unchanged at the end of a day after several million shares are traded?
When is a company in its "quiet period"?
What stocks are in the Dow Jones Industrial Average?
Deciphering corporate earnings reports.
What are American Depository Receipts?
What are Spyders?

What Is The "Closing Tick?"
The "closing tick" shows the trend of the market at a given time; for instance, at the closing bell.  If the tick were at +147 at the closing bell, it would indicate that 147 more stocks ended the day at a higher price from their last previous trade than those ending at the lower price.  If it were the other way around, the tick would be a -147.  As examples, an extremely strong upward trend would be a +800; a -800 would denote a nasty selloff.

What is "after hours trading?"
"After-hours trading" is trading that occurs after the close of regular markets, and it is usually driven by news and events like positive or negative earnings reports that are released after the regular markets' close. These trades are usually executed through electronic systems such as Instinet, ITG Posit or AutEx. Although after-hours quotes are difficult to obtain, one source is the Livechart at Quote.com. Depending on how many shares are traded and the price variations from the previous day's close, after-hours trading can impact the following day's market opening in a particular stock.

What happens when a stock goes "ex-dividend" -- and if a stock is sold, who gets the dividend?
When a stock goes ex-dividend, the company's dividend* for that quarter will be paid to the stock's owner on the previous day.  Hence, whoever buys the stock on the ex-dividend day will NOT get the last quarter's cash dividend.   The key is who owned the stock on the day prior to the ex-dividend date, also known as the date of record.  (And because stock trades generally take three days to settle, the seller of a stock that is sold within three business days before the date of record may still collect that quarter's dividend.)

What stocks are included in the various indexes, and do the indexes move in tandem because of overlapping stocks?
Various indexes consist of the stocks of companies that are similar in either their line of business (e.g. the Dow Transport Index has firms involved in transportation), or in the size of their capitalization.  Some of the popular indexes DO move in tandem, because they contain some of the same stocks.   General Electric, for example, is in both the Dow Jones Industrial Average* and the Standard and Poor's 500 Index.*

How is money distributed from a stock trade?
The money paid to purchase a stock goes to the seller, less the commission charged by the broker who arranged the sale and some small fees to the stock exchange where the sale took place and to the U.S. Securities and Exchange Commission.  The company whose stock was involved does not share in any of the proceeds of a stock trade.  (Companies only benefit from the proceeds of an Initial Public Offering* or a similar offering of their stock.)

How can a stock price end unchanged at the end of a day after several million shares are traded?
A stock that closed one day can open at a higher or lower price the next day and trade much higher or lower during the trading session.  But if it comes back to the same price it was at the end of the previous session, it is then UNCHANGED on that day's close.

When is a company in its "quiet period"?
A company enters its "quiet period" after it files its S-I registration statement with the Securities and Exchange Commission. It does not come out of its quiet period until 25 days after its stock has started trading. The quiet period is designed to prevent companies from overtly publicizing their initial public offerings. According to Rule 174 of the 1933 Securities Act, companies are prohibited from making any statements not included in their prospectuses, for a period of 25 days after they have started trading on one of the three major U.S. exchanges.

What stocks are in the Dow Jones Industrial Average?
As of February 2008, the 30 stocks currently in the
Dow Jones Industrial Average* are:

Alcoa (Symbol: AA)
American International Group (Symbol: AIG)
American Express (Symbol: AXP)
Boeing (Symbol: BA)
Bank Of America (Symbol: BAC)
Citigroup (Symbol: C)
Caterpillar (Symbol: CAT)
Chevron (Symbol: CVX)
Du Pont (Symbol: DD)
Walt Disney (Symbol: DIS)
General Electric (Symbol: GE)
General Motors (Symbol: GM)
Home Depot (Symbol: HD)
Hewlett-Packard (Symbol: HPQ)
International Business Machine (Symbol: IBM)
Intel (Symbol: INTC)
Johnson & Johnson (Symbol: JNJ)
JP Morgan Chase (Symbol: JPM)
Coca Cola (Symbol: KO)
McDonalds (Symbol: MCD)
3M (Symbol: MMM)
Merck (Symbol: MRK)
Microsoft (Symbol: MSFT)
Pfizer (Symbol: PFE)
Procter Gamble (Symbol: PG)
AT&T (Symbol: T)
United Technology (Symbol: UTX)
Verizon (Symbol: VZ)
Wal-Mart (Symbol: WMT)
Exxon Mobil (Symbol: XOM)

Deciphering Corporate Earnings Reports
Companies are required to provide a detailed accounting of how their earnings may be diluted by stock options and other incentive plans.

The transition may cause a little bit of confusion for investors but actually it is an example of the United States having the best accounting and the best disclosure of any major market in the world.

Starting with the latest results, companies must now report two different types of earnings per share figures. The first is called the basic number and it is essentially the same as the old simple earnings standard. The reason it was called simple is that it was calculated using a fairly easy formula. Net income minus preferred dividends divided by the average number of shares outstanding. But those results did not factor in employee stock options and other securities which can raise the number of shares outstanding and eventually reduce earnings per share. So now companies must also report a diluted earnings per share number. It's roughly the same as the old fully diluted earnings numbers. It factors in certain options, warrants and other securities convertible to common stock.

The Street is always looking forward in terms of valuing stocks. And if these things are likely to be converted into common stock down the road then they would like to look at it now on the basis of including those shares.

The changes wipe out the old primary earnings per share standard which included options and convertible stock but not certain convertible debt or preferred securities. Experts say investors should rely on the diluted figure for valuation purposes.

Investors should look at the diluted earnings which is the new standard. And that will be a better picture for investors looking forward because they will sometimes be sharing the future profit pool if people have options.

What are American Depository Receipts?
Investing overseas used to mean putting cash on a steamship and waiting weeks to have your shares sent back. The same with dividends. Foreign shares had to be presented at company offices to get dividends. More delays. In 1927 J.P. Morgan and Company found a way around this. It bought shares of foreign companies and held them in vaults overseas. U.S. investors who wanted to buy those shares were given receipts representing the shares. The receipts then were traded in dollars just like shares in U.S. companies and dividends were paid in dollars. So was born the American Depository Receipt. The ADR. And trading in ADRs has grown huge. Eric Frank who runs the ADR program at J.P. Morgan says this reflects the increased emphasis on foreign investment.

Total U.S. holdings of foreign equities have grown at a rate of about 25 percent compounded growth over the last 5 years. And the ADR is mirroring that for the domestic portfolio and anything that you will read today recommends from a diversification standpoint, anywhere from 10 to 20 percent of your assets in foreign securities.

That explains the popularity of the most popular ADRs like Telefonos de Mexico (TFONY), Royal Dutch Petroleum (RD) and British Petroleum (BP). Privatization is also a reason. Deutsche Telekom (DT) sold more than $1 billion on ADRs to U.S. investors in its initial public offering last year. All this is good news for the 3 huge banks that do the processing and hold the original shares: Morgan, Bank of New York and Citicorp. But there is a cost to investors. James Libera, President of Washington International Investors, says sophisticated investors like managers of country funds preferred to buy ordinary share in foreign markets.

There is simply another middle man that one has to pay to get the benefits of ADRs and sometimes that middle man can be fairly expensive.

Like dividends. Critics say depositories may take anywhere from 1 to 25 percent out of a dividend before passing it on to ADR holders. In fact the New York Stock Exchange forbids depositories to impose dividend fees on ADRs listed on the big board. So Bank of New York and Citicorp deduct fees from dividends for ADRs traded on NASDAQ or elsewhere. Morgan pays investors 100 percent of their dividends down to the 5th decimal point with no fee. As for trading, Frank says the banks usually don’t make money there either.

Most of the trading, the activity near your market, takes place between the buy and sell from an existing pool of ADRs and the depository is not involved in that process and therefore there are no fees.

Its only when the depository acting for brokers has to buy more shares overseas in order to issue more ADRs or sell shares overseas to cancel ADRs, that they impose a charge. That’s paid by brokerage firms that probably bundle the cost into the commission they charge investors. ADR buyers are not just individuals. They include many large institutional investors like mutual funds because after all ADRs do offer convenience, price is quoted in dollars and dividends paid in dollars and you usually wind up paying at least something for convenience.

What are Spyders?
Spyders are actually short for Standard & Poor's Depositary Receipts. Similar to index mutual funds, Sypders are a basket of stocks designed to track the Standard & Poor's 500 benchmark. To put it simply, what this means is that the Spyder incorporates all 500 shares of the stocks that are in the S&P Index, in their proper proportionate share, and then traded as a single share of stock.

But unlike mutual funds, Spyders can be bought and sold throughout the trading day. In addition, quarterly dividends paid by S&P 500 companies, are passed through to the investor, minus a .185 percent expense fee. That's about the same expense ratio Vanguard charges for its Standard & Poor's 500 Index Fund. One of the major appeals for retail investors is tax benefits.

Now, when a person redeems a traditional mutual fund, they redeem for cash. That means often that the fund will have to sell shares that, in fact, have capital gains attached to them. Those capital gains then are distributed to the remaining shareholders. With a Spyder, one just buys and sells it on the Exchange. The redemption for cash doesn't occur.

Spyders are popular among mutual fund managers as a way to hedge their portfolios. Particularly if their funds are prohibited from investing in futures and options. But for small investors, Spyders can only be bought through a broker. In addition, dividends cannot be automatically reinvested. Though investors can elect to do so at the end of the quarter. Others worry the liquidity of the product may encourage some investors to make brash decisions.

They have important disadvantages. One, when you are likely to sell during the day. When the market has really taken a hit, you can get out of a Spyder, but at a discount to what they're really worth.