Análisis de fatiga mediante elementos finitos

Before you begin trading, it’s important to understand a few things about a stock’s price. While we typically refer to a stock as having a single price— which is quoted in stock tables published in newspapers and Web sites throughout the country—there are actually a couple of different prices asso- ciated with a stock. At any given moment there is abid priceand anask price for the same shares.

The bid price is the price that abuyerstates that he or she is willing to pay an existing shareholder for their stock. The ask price, on the other hand, is the price that current shareholders state that they are willing to sell their shares for. So, for instance, when you go to a financial Web site and look up a company’s stock price, you might see something like the variations in Figure 5-12.

You’ll notice that the last transaction for Apple shares was made at a price of $30.03. But the current bid price for Apple stock is $30.15 a share. This means that investors are offering $30.15 to buy shares of the computer maker’s stock. Meanwhile, there are existing Apple shareholders out there willing to sell their shares for $30.04, the ask price.

Now to some, this doesn’t seem to make sense: Why would an investor be willing to buy a stock for $30.15 when someone out there is willing to sell shares for a much cheaper price? The answer requires some basic knowledge of the way stock trading works.

In the stock market, buyers must match up with sellers. But often there’s a middleman known as amarket makerwho stands in between the two of you, in order to facilitate trading and liquidity. These market makers are institu- tions whose job it is, when there is an imbalance of buyers and sellers in the marketplace, to step in and buy the shares no one wants or sell the shares everyone wants. Without these players, the stock market could not operate efficiently, since people might not be able to enter or exit the equity markets with ease (this explains why the stock market is far more liquid than the real estate market, where a buyer might have to wait months for a seller to be located).

The term ‘‘market maker’’ typically refers to those institutions that play this role on the Nasdaq national market, which is run by the National Association of Securities Dealers, or NASD. On the New York Stock Exchange, this market-making function is carried out by people referred to as specialists. Different companies stake out roles as market makers or specialists in dif- ferent stocks or industries.

In the example in Figure 5-12, the ask price is $30.04. This means someone out there wants to sell their shares for that price. It also means that market makers could step in and buy that stock for $30.04. Since the bid price is $30.15,

Fig. 5-12. Stock Quote.

Apple Computer (NASDAQ National Market) Ticker: AAPL

LAST PRICE: $30.03 CHANGE0.11

OPEN: $3.27

HIGH: $30.50

LOW: $30.03

BID: $30.15

that same market maker can turn around and sell the stock just purchased for $30.04 to a new buyer for $30.15. The difference between the bid and the ask price is known as thebid-ask spread, which the market maker gets to pocket. When you make a stock transaction, this spread is considered a hidden cost, which you pay in addition to the stock commission you are assessed.

Other prices to note include the closing price, which was the last price the stock traded for in the prior day’s session; the open price, which is the price the stock started trading at during the current trading session; thehigh price, which simply refers to the highest trading price of the day; and the low price, or the lowest price at which a transaction was made during that day’s session. Finally, another key price to consider is the52-week range of prices, which should give investors some context for the confidence—or lack of confidence—that investors have shown a stock in recent months.

Final Thoughts

As you can see, the equity markets present investors with enormous oppor- tunities. But the greater the opportunities, the larger the risks. We’ve outlined several of those concerns in this chapter, ranging from market risks to stock- specific risks to inflation risk.

It’s important to recognize all of these challenges that face you as an equity investor. At the same time, the stock market offers investors an enormous number of choices. Should you go with large stocks or small stocks? Value- oriented stocks or growth stocks? Foreign stocks or domestic stocks? The answer is: You probably want a mix of these types of equities. We’ll get into greater detail on selecting stocks later, in Part Three.

Quiz for Chapter 5

1. Historically, stocks have generated average annual returns of 10.4 percent, which is around twice the annual returns for bonds. This means that. . . a. You can earn twice the amount of money, long-term, in stocks as you

can in bonds.

b. You can earn twice the rate of inflation over the long term by investing in stocks.

c. Stocks represent the best asset to beat the long-term ravages of inflation.

2. The total returns generated by stocks tend to outpace bond returns because. . .

a. Stocks enjoy attractive dividend yields.

b. Stock price appreciation is correlated with long-term earnings growth, and companies in the S&P 500 have grown their earnings around 7 percent a year.

c. Stocks are riskier than bonds, and higher risks always guarantee higher returns.

3. Investors can reduce market risk by. . .

a. Investing in more than 50 stocks at one time

b. Moving money out of stocks from time to time, as volatility rises c. Diversifying when they invest their money and diversifying which

types of markets they invest in

4. Dollar cost averaging is a strategy that. . . a. Maximizes your returns in a rising market b. Minimizes your returns in a falling market c. Minimizes your risks in a falling market 5. What is the risk of not being in the stock market?

a. Losing your money in other markets, such as the bond or real estate markets.

b. Investing only in bonds and cash and thus losing the battle against inflation.

c. There is no risk in not being in the stock market. 6. Stocks are good hedge against inflation because. . .

a. Inflation is the enemy of bonds, so anything that hurts the relative performance of bonds helps stocks.

b. Their average dividend yield has historically outpaced the rate of inflation.

c. On a total return basis, they have consistently managed to stay ahead of the 3 percent average rate of inflation.

7. Small stocks have historically outpaced large stocks. This means. . . a. You should put your core assets mostly in small stocks, since they have

proven to be a better investment over time than large blue chip stocks. b. You should put your core assets in large stocks, because the higher

returns that small-cap stocks produce means they are also riskier than large caps.

c. You don’t need to invest in both large and small stocks simulta- neously.

8. Since there is a relationship between stock price appreciation and earnings. . .

a. Over the long term, you’re better off investing only in growth stocks, because they earn more in profits.

b. You’re better off investing only in domestic stocks, since the United States dominates Europe and Asia when it comes to earnings growth rates.

c. You should not expect to earn much more than 10 or 11 percent a year on average in stocks.

9. When the equity risk premium is rising and investors are changing their strategies in a classic ‘‘flight to quality,’’ where would you expect money to flow in the equity markets?

a. From value stocks to growth because growth stocks are producing better profits and sales

b. Into growth stocks, large stocks, and developed markets overseas c. Into value stocks, U.S. stocks, and large-cap stocks

10. One common—and recommended—strategy to minimizing losses in a falling market is to. . .

a. Place a market order to sell most of your equity holdings. b. Place stop-loss orders on existing holdings.

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