Friday, December 14, 2012

5 Measures of Equities Performance

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Types of Equities
The simplest form of equity is known as common stock. Common stocks are pure ownership interests in the issuing entity. Preferred stock owners often have less control over the operation of a business than the common stock owners, but they stand first in priority to receive any income that is paid out

Most commonly for equities, convertibility permits a preferred shareholder to convert preferred shares into common shares.
Therefore, a convertible preferred shareholder might convert to common shares if he or she believes the company will do very well in the future and the common share price will rise to reflect the economic performance.

Equities Measures
1) EARNINGS PER SHARE
Earnings per share (EPS) is a measure of how profitable a company is. When we divide the total number of shares outstanding into the total reported profit of a company, the measure relates the profitability of the company to its shareholders

Earnings per share is perhaps most effectively used by comparing two different companies or by comparing a company to a group of companies such as those in the same industry.

2) PRICE/EARNINGS RATIO
The price/earnings ratio (P/E ratio) is the earnings per share divided by the market price of the security. The P/E ratio is the price of the security as a multiple of earnings. Securities analysis often suggests that securities in quickly growing companies trade at high multiples of earnings, whereas slower-growing companies trade at lower multiples. A frequent use of the P/E ratio is to compare similar securities. Analysts look for securities that have P/E ratios dramatically higher or lower than comparable companies to identify "overpriced" securities (higher P/E ratio than comparable securities), suggesting the price is likely to come down, or "underpriced" securities (lower P/E ratio than comparable securities), suggesting the price will likely rise.

3) DIVIDENDS PER SHARE
The amount of cash payable as a dividend to each shareholder is a simple measure of investment income. Dividends are often paid quarterly, and dividend per share is usually computed on an annual basis

4) DIVIDEND YIELD
Dividend yield for an equity security relates dividends paid to the price of the security at the moment of the calculation. Dividend yield is computed by dividing the dividend per share by the market price. The yield is a simple measure of how much return a security provides based on the market price at the moment of calculation. Like earnings per share, the yield is most often used to compare different securities. Dividend yield is directly comparable to yield on fixed-income instruments (see later description) and thus provides a way to compare otherwise dissimilar instruments.

5) ALPHA AND BETA

It is the result of computing a regression of the returns on a security or portfolio against the market. This analysis attempts to measure whether the security or portfolio is more or less volatile than the market. The two measures are the output of the regression, and both are typically presented together. In principle, a and ß could be applied to other securities such as debt; however, computing the measures requires an active market with a viable history of reported prices. Some investors compute these measures, and this information exists only in the equities markets.

The slope of the regression line ß is considered the measure of volatility. If ß is greater than 1.0, the theory states the security changes more than the market, and if ß is less than 1.0, the security or portfolio changes less than the market. A value of ß = 1.0 implies that the security or portfolio moves as the market moves.

a is the intercept of the regression line with the y-axis. In this case, a measures the return on the security or portfolio when the return on the portfolio is zero. As we have noted, one investment strategy focuses on trying to find securities where the a is positive.

Equities
?    are easy to understand;
?    are priced low compared to fixed-income instruments;
?    are subject to price volatility unique to each individual issuing entity;
?    trade actively in liquid markets with many participants and a wide range of transaction sizes; and
?    offer a broad range of income, growth, and risk characteristics.

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