Valuation means assigning a ‘’proper'’ value, or price, to a stock. The quote marks around ‘’proper'’ remind us that while the word implies that there is a single ‘’correct'’ price, in fact the concept is theoretical. Valuation is nevertheless an important guide to what price at which to buy or sell a stock. If you pay too much for a stock—more than it is ‘’worth'’—your returns will suffer forever after.

Many large-scale institutional investors—mutual funds, brokerages, hedge funds—have developed complex mathematical models for determining a stock’s ‘’proper'’ price. The individual investor needs to go a different route.

Fortunately, a second method exists which is just as good, easy to understand, and readily available. This second method uses what are called valuation ratios.

Valuation ratios divide the stock’s current price (P) by quantifiable aspects of its business: its earnings, its revenue, its book value, and so on. Each ratio is then compared to historical norms to tell whether the stock is fairly priced at its current price P.

Here are some common valuation ratios that the Sensible Stock Investor uses:

–P/E, or price-to-earnings ratio. This compares the stock’s price to the company’s reported earnings. This is the famous ‘’multiple'’ that one often hears about.

– P/S, or price-to-sales ratio, which compares the stock’s price to the company’s revenue.

– P/B, or price-to-book ratio, which compares the stock’s price to the company’s book value (as computed by accepted accounting principles).

– PEG, which is the P/E ratio divided by the earnings growth rate of the company.

– P/CF, or price-to-cashflow, which compares the stock’s price to its annual flow of cash.

Happily, all of these valuation ratios, plus others, are available for free on virtually all financial Web sites. They are usually current to the very day. If you know the historical benchmarks, it is easy to interpret each ratio as indicating whether, like Goldilocks’ porridge, a stock’s price is too hot, too cold, or just about right.

If you would like to learn about a comprehensive stock investment approach that that uses the same strategies reflected in this article, please consider purchasing Sensible Stock Investing: How to Pick, Value, and Manage Stocks. To learn more about this investment system designed for the individual investor, visit http://www.SensibleStocks.com for more information, or to purchase the book.

Stock price volatility is one of the most important aspects of studying the market. This article focuses on looking back through years of market data to determine if there are any general trends in daily price volatility. It’s a commonly held belief that the open and close of trading are the most volatile times of the day. We will determine if that is true and if so how much of an impact it has.

Looking for extremes

The first part of the analysis was to see if the hour of the day had an impact on the likelihood of a stock to hit an extreme. In this case we decided to look for price minimums. We measured the occurrences of a symbol having it’s daily price minimum within the specified hours of the day on several randomly selected days. The count of occurrences is not necessarily important, but the scale of them is.

Results:

• 9-10am: 6900 minimums
• 10-11am: 6700 minimums
• 11am-12pm: 4900 minimums
• 12-1pm: 3600 minimums
• 1-2pm: 3650 minimums
• 2-3pm: 4900 minimums
• 3-4pm: 6200 minimums

If we try to picture the above data as a line graph it would look like bowl: high at the extremes and low in the middle.

The results are intuitive but the degree of difference is somewhat surprising. It was not surprising that the open and close are the most volatile, but the observation that the first hour of trading had twice as many price minimums as the middle of the day was. But, does this data really reveal a trend? The next logical question is whether there is a difference in behaviour here for stocks that are increasing or decreasing for the day.

Division by price direction

Now let’s separate the data by the price direction.

Increasing for the day:

• 9-10am: 3400 minimums
• 10-11am: 3700 minimums
• 11am-12pm: 2800 minimums
• 12-1pm: 2200 minimums
• 1-2pm: 2100 minimums
• 2-3pm: 2100 minimums
• 3-4pm: 2300 minimums

Decreasing for the day:

• 9-10am: 2300 minimums
• 10-11am: 3100 minimums
• 11am-12pm: 1900 minimums
• 12-1pm: 1500 minimums
• 1-2pm: 1700 minimums
• 2-3pm: 4250 minimums
• 3-4pm: 3450 minimums

The above data actually has some interesting implications. For a stock that is heading down on a given day the normal expectation would be for its price minimum to occur later in the day, but here we have that dip in the middle of the day again. The behaviour of the stocks heading up is not surprising although intuitively the line should be heading further down at the end of the day.

What are the implications?

Overall there is definitely a correlation between hour of the day and prices changes/volatility, but one that makes sense. If you are trying to dump a stock you may have a slightly better chance of not hitting the daily minimum by trading in the middle of the day, over the long run.

Neil Thier - http://www.marketfilters.com

Neil is a founding member of MarketFilters.com, an innovative technical analysis tool. We offer easy and powerful scanning and filtering of stocks, back-testing, watch lists, and other tools.

Most investors today want to invest sensibly, but many are not sure how to get started. Well, the first stage is to identify excellent companies as possible candidates for your investment dollar. One way to do this is to use a point-based scoring system, such as the trademarked Easy-Rate system presented in the new book, ‘’Sensible Stock Investing.'’ This approach enables the individual investor, in a reasonable time, to score companies and rank them against each other.

There are three categories in which a company can score points:

–The company’s Story.

–The company’s Financial Picture.

–Bonus Points.

The company’s Story is a few sentences about what it does and how it makes money. Famed investor Peter Lynch said that before buying a stock, he liked to create a two-minute monologue about the company: what’s good about it, what’s necessary for it to succeed, what pitfalls it faces. Lynch said, ‘’Once you’re able to tell the story of a stock…so that even a child could understand it, then you have a proper grasp of the situation.'’ The book Sensible Stock Investing shows you how to construct the story and how to score it. A handy questionnaire helps you to focus on the important facts. Answer those questions, and you’ll have the company’s Story down cold.

The importance of the company’s Financial Picture should be obvious. The time-pressed individual investor needs to home in on the most important data and ignore the ‘’noise.'’ Financial information is abundant and free these days. The danger is getting lost in the deluge instead of extracting meaning from just the right elements. Sensible Stock Investing shows you how to score the five most important financial factors in a company’s record, plus how to rate its dividend policy. The book also provides a formatted way to record this information to make scoring the company easy. Even if you know nothing about finance and accounting, filling out the form is straightforward and fun. Sometimes your eyes will pop out as the financial picture takes shape–because not all highly touted companies are as sound as you might think, while others that you hardly ever hear of have beautiful businesses that are virtual cash-generating machines. In scoring the financials, you will literally see the companies separate from each other. The truly excellent ones rise up to the top of the rankings, and the bad ones sink like stones. Every time.

Bonus Points are awarded for third-party opinions, such as Wall Street’s analyst ratings. They do not comprise a high percentage of the company’s total score, but they can be useful and should not be ignored.

In a nutshell, that is how excellent companies worthy of your consideration are identified. Scoring a company takes about an hour the first time you do it, while periodically updating the score takes maybe 10-15 minutes. Updating should be done every few months. This is time well spent for the huge leg up it gives you on investors who do not do this most basic of homework.

If you would like to learn about a comprehensive stock investment approach that that uses the same strategies reflected in this article, please consider purchasing the new book, ‘’Sensible Stock Investing: How to Pick, Value, and Manage Stocks.'’ For more information or to purchase the book, visit our website at www.SensibleStocks.com

Have you checked your volume lately?

We all know what volume is right? Well, a basic definition for those of you that don’t actually know what volume is in the stock market.

-Volume is defined as the amount of shares traded.

You can easily look up the volume of shares traded on any stock on virtually any stock market quote site, or even your own broker’s website. Usually you can check the volume for at least that day, more common though you can chart volume going back 10 years or more if needed.

Now, for the smart/wealthy stock trader, volume is a BIG deal.

I know for my trading, volume is very critical.

But what kind of volume am I looking for?

Well, first and foremost, I will look at the “heavy hitters”, the stocks that are showing high volume/much higher than the average volume especially. Ideally if I can get it, I want recent big volume, and a good move in the direction I want to trade (short/long).

I will also take a good solid average volume (1,000,000+ shares/day), and take a better look at the price action, etc.

The point is, I want good volume, period.

Unless I have found remarkable information about a stock trading less than 100,000 shares/day on average, I would NEVER even consider looking at a stock with such low volume. No volume, means no one is buying. It’s rarely a wrong move to avoid very low volume stocks.

Obviously, less volume also means less liquidity on the stock. This means, you are less likely to get the price you want on a lower volume stock which could blow your trade completely.

For a past example of what kind of volume I am looking for, I want you to look up the symbol CWTR (Coldwater Creek, Inc.) This is a Nasdaq traded stock that I initially pin pointed on August 10, 2006. You notice the price move was +1.91, with almost 2 millions shares traded that day. It had been trading just over, or just under the 1 million shares/day mark for the past while, but it especially looked interesting that day, with the volume higher, and the price moving up so well. Certainly got my attention.

Then on August 23, and 24 2006, you see the volume spike on both days to well over 9 million shares per day! Add that with a nice Gap to the upside and this volume strategy works out better than expected.

Although you get that huge spike on those 2 days, overall the trade had been working out very good anyway. Just because the volume was better than normal, and the price action confirmed where the stock was heading.

Jessi Johnson www.freestocktradingsecrets.com

Jessi Johnson is the author of the Secrets of Millionaire Stock Traders, a free program which you can gain access to by visiting http://www.freestocktradingsecrets.com

There are many people have been making millions for years. Many people believe that it is due to the fact that they are lucky. However, the main point is everyone can make money, it simply depends on how hard you want to try and by which means to do so. Investing in stock has been the trends for years, and people are making a lot and also losing lots. Therefore, in order to make a profit, you need to have good decision making and know what you are doing. Do not follow the peers or you are bound to crash.

Actually, investing in stocks is no longer a big mystery anymore. The knowledge is everywhere and all you need to do is to obtain it. Similar to many things in our life, stock investing is of no exception, there are many different ways to work with. You simply need to find the ways which suit you the most and you can be lucky enough to get some great ones.

There are a several reasons why many investors fail in investing stock. One of the most common one is that the investor did not really want to invest in the first place. They always hear people say huge amount of money can be made in the stock market, and they did not want miss the gold mine. So the investor jumps in with little knowledge immediately and expect to get some great return. Many individuals also do not have sense to cut their losses. They rather choose to sell too early and try to get out as they lost alot of money and can’t afford to lose anymore. Most are not willing to pay for advice for a specialist, they believe that they will win the game. In fact, it is a very big mistake as they do not know what to invest, so they simply choose something they like and pray to god. They do not have a good investment plan. They just plan on buying a stock and making money, but no plan on the fluctuations and natural swing.

Therefore, when it comes to stock investing, remember to take your time. It is important to prepare for suffering from lose anytime. You have to control yourself well enough so that you are not that eager to invest in any stock if you not sure enough. If it is constantly rising in price and you are afraid to miss any chance, do not be panic, there will be alot more stocks and chances for you to make profit in the future.

For more important information about the stock market visit Detroitstock.com where you will find helpful advice and tips on stock trading strategies, bond trading, options trading and investing in penny stocks that you can research online at http://www.detroitstock.com.

Although divergence trading is not a new stock trading method it nevertheless is a powerful one. Through divergence trading you can take advantage of market trend reversals and uncover profit opportunities.

By locating trend reversals that other traders miss you can position yourself to benefit from hidden trading movements. This can be accomplished whether the market is bearish or bullish. Just by simply knowing which direction the market is going through divergent tracking you can realize considerable profits.

The divergence trading formula is an uncomplicated and straightforward method composed of simple indicators and simple rules that multiplies the power of trend reversal. The method consists of 3 elements: exponential moving average, simple moving average envelopes and stochastics. By monitoring these three indicators you can spot divergent trends that will forecast price changes you can exploit.

Also divergence trading is compatible with the more commonly used trend-following method. By coupling divergence trading with trend-following trading you can profit from both sides of any transaction and not leave any money on the table. And the best thing is that divergence trading can be applied to any trading market whether it be Forex, day trading, options, futures, etc. Divergence trading is multidimensional and can show you where to enter a trade, when to stop a trade and where to take profits.

So if you are a newbie stock trader or a seasoned veteran it will pay to learn how divergence trading can diminish your stock trading risks and make your trades more profitable. Add divergence trading to your stock trading toolkit and watch your trading profits grow.

George Stark is an experienced business writer who holds an MBA degree. For more information on divergence stock trading visit http://www.stocktradingclearinghouse.com/divergence-trading.html

When it comes to giving people the hope of becoming a millionaire overnight, the stock market excels. Every day we see evidence of stocks that have flown upwards as if they had wings, providing investors with a windfall of profits. It’s inevitable that catching one of those stocks just before it takes off is an exciting possibility, inspiring the beginning trader to take the plunge. When you trade options, the stakes are raised, making those massive profits even more attainable, but the basics that underlie successful trading in the stock market are the same as those for trading options.

Once you start to look at trading stocks, you find yourself plunged into a confusing nightmare where hundreds if not thousands of people are pushing "their" system that is supposedly infallible. For a beginner, it’s easy to get drawn into the complex net, believing that there must be a simple solution that will hand you the keys to stock market success. These keys will see you finding winner after winner, and making your fortune.

The reality, however, is that there are no keys that will find a winner every time. After all, if that was possible, how could anyone ever lose any money in the market? And if nobody loses, then how can someone else gain? The whole stock market would collapse.

Having said that, there are a number of very successful trading systems that work well over the long term. It’s important to realize that a winning system is one that consistently delivers profit over a longer time frame - and part of the equation is that a percentage of trades will be losers. Once you learn to look at the bigger picture, rather than focusing on the individual trades, you’ll be a lot more successful in the market.

There are a couple of approaches to the market that are popular across many systems. One is to take small losses when they happen, and let your winners run. So you might take six little losses, which are more than compensated for by one huge gain. This type of approach takes a lot of confidence and self-discipline, as it’s very easy to give up if those six little losses all happen in a row, without a winner in sight.

Another approach is to take your profits after a certain percentage of gain, and occasionally put up with a medium sized loss. This system is nice if you like to see profits, because you don’t run the risk of a stock that’s risen suddenly dropping again and wiping out your profit - you took your profit early. However you also run the risk that the stock will continue to fly upwards and you miss out on that profit. This system can be risky, because you need a number of small profitable trades to cover one of the losses.

If you can’t make up your mind which approach suits you, why not try more than one? You can always split your capital over a couple of portfolios, and use a different strategy for each portfolio. This can be time consuming, but at least you can then make a logical comparison of the choices and decide which one has worked best for you.

It’s also important not to abandon your system the second you see a trade making a loss. Far too many traders think that they’re only successful if every trade is a winner, which is ridiculous. Then the trader switches to another system, messes around with that for a while, sees a loss, and switches again. You need to find a system that gives you a good overall return, and stick to it. The more you chop and change, the higher your chances of losing more.

Most of the success that comes with trading comes from one source - and it’s not the perfect trading system. It’s all about you. Trading is more about psychology than watching the charts. You need to have the right character to be a successful trader. Self discipline, confidence, the ability to see the bigger picture, accepting losses as part of the game, controlling your fear and greed - all of these elements work together to make you a successful trader.

If you can identify a system that delivers a consistent profit, and have the discipline to stick with it even when an individual trade loses, then your chances of success are high. And remember - it’s always good to start with pretend trades to get the hang on things, before you commit your life savings to the market.

If you want to read more about trading options, click over to David’s site at http://www.tradingoptionsplus.com

Supporting the popular catch praise, “We love to make you smile”, investors of McDonald’s (MCD) may have different reactions to the drop that I foresee for this equity. With added competitors such as Jack in the Box, Burger King, and a broader enemy in the new fashion of going on diets, McDonald’s slowly will be feeling the pressures which it has repressed up to now.

Opening as an IPO in the late 1960s, McDonald’s has been known to be an incredibly valuable investment for those that caught into the craze early. Supporting a yield of nearly 1000% in its lifetime, McDonald’s, due to its large capitalization status and handsome dividends of 0.67, may seem like a stock continuing to be a safe long term investor. While there is a good sense that such a sentiment may be true, in reality with all the pressures McDonald’s has recently faced, continuing this ongoing upward trend, especially during times of economic downturn, will be an improbable task.

Typically McDonald’s does not figure to be known as a cyclical stock. Up until 2000, McDonald’s has avoided such tendencies to rise or fall during times of inflation or high unemployment, and with the exception of only a few fluctuations, McDonald’s has always had a strong and steady growth. However, these ideals seemed to change following the turning of the millennium as McDonald’s fell rapidly to a low of 15 points: an almost 75% downturn. Considering that this was the exact period where an economic downturn actively disrupted the market, I see the possibility of a close association between the price of McDonald’s and the current state of the US economy. Investors may make the argument that McDonald’s has a large percentage of revenues coming from foreign nations, but the truth remains with the fact that if the US economy suffers, the rest of the world tends to as well.

The reasoning for asserting such a sentiment about McDonald’s can be traced to the idea of consumer spending. Typically when Americans make more money when the economy is growing at a fast place, they tend to eat out more than they would if the economy was bad. The association, supported by unemployment and relative income levels, makes sense in the case of McDonald’s as any backdrop in potential customers may harm future guidance reports and overall earnings. McDonald’s, typically beating or matching expectations in terms of revenue or EPS, may find itself faltering over the next few quarters especially if the inevitable recession is a hard-landing. Both operating margins and revenue margins have slipped over the past few quarters, especially when compared to last year, and if it was not for a strengthening in investment activities, results from McDonald’s may have turned even worse.

While certain brokers tend to think of McDonald’s as a buy due to its large cap status at a point were these equities are favorably sought of, I tend to go against the norm in this case, believing that McDonald’s has entered a point of diminishing returns or diseconomies of scale which will have negative effects during the next few earnings’ results. While McDonald’s may rebound after this recession (pending how long), with increased competition from newcomers such as Chipotle and others, I would become a little hesitant of buying any shares for McDonald’s, especially during the next few months as an overbought stock.

Dennis Biray presents advice on all kinds of topics ranging from finance and investing to fitness to sports. For more information email him at dbiray@gmail.com, or to view other articles written by him visit http://www.biraynetworks.co.nr

As the Dow flirts with a new high (and the financial media tests everyone’s patience), it’s worth remembering how far the average investor has fallen and why. In this article, I discuss how far the fall has been.

As for why: investing is about the price paid and the value received. If valuation seems a dry topic in the abstract, it’s worth remembering the real world cost of ignorance.

Not surprisingly, I quote from Graham: (I’ve bolded two phrases of immeasurable importance):

“…the influence of what we call analytical factors over the market price is both partial and indirect – partial, because it frequently competes with purely speculative factors which influence the price in the opposite direction; and indirect, because it acts through the intermediary of people’s sentiments and decisions. In other words, the market is not a weighing machine, on which the value of each issue is recorded by an exact and impersonal mechanism, in accordance with its specific qualities. Rather should we say that the market is a voting machine, whereon countless individuals register choices which are the product partly of reason and partly of emotion.”

The view of the market to the average investor isn’t really comparable to the view of the market to the average dollar. Individuals don’t have their assets distributed evenly across the equity issues available in the major public markets. A lot of individuals who have held every share they had six year ago are nowhere near where the Dow is today, because they own the wrong Dow stocks and they own very poor performing non-Dow stocks.

Here are two lists.

List A:

Eastman Kodak (EK)

General Motors (GM)

Intel (INTC)

Microsoft (MSFT)

Home Depot (HD)

List B:

Altria (MO)

Caterpillar (CAT)

United Technologies (UTX)

Boeing (BA)

Exxon Mobil (XOM)

Which did more people own in 2000, List A or List B? Which do more people own today? And, in 2000, which list did people think would perform better?

List A is the worst performing stocks since the last high; List B is the best performing stocks.

Other notable issues include Disney (DIS), McDonald’s (MCD), and Coca-Cola (KO). These are the kinds of stocks people would love to buy and hold forever. They are sentimental favorites. They are also below where they were trading at the last high – although, they are about in the middle of the pack for the Dow stocks.

So, I’d have to say the Dow doesn’t really measure the performance of individual investors’ accounts at all. There’s a selection bias for individuals that isn’t reflected in the DJIA. Obviously, there are also some popular stocks that aren’t part of the Dow.

Recently, internet stocks are the best example. Generally, they’ve performed miserably.

To reinforce the point, let’s consider two indexes and two stocks.

The Indexes: Dow, NASDAQ

The Stocks: Cisco (CSCO), Berkshire Hathaway (BRK.B)

I choose Cisco and Berkshire, because they have roughly the same market cap today and both are really, really big companies that aren’t in the Dow.

My point: the market looks a lot different if you planned to buy and hold Berkshire, Cisco, the NASDAQ, or the Dow at the last high for the Dow.

Unfortunately, when I think back about the people I know who had previously had no interest in the market and then started buying in 1998 and 1999, they didn’t mention Berkshire. They did mention Cisco. They didn’t mention the Dow. They did mention the NASDAQ.

While this unscientific study of mine is necessarily arbitrary and backward looking, I should point out that I refrained from mentioning stocks where the business itself turned out to be an utter failure. I picked a stock (Cisco) where if you bought all your shares in January 1997 or January 1998, you’re about even with where you’d be if you’d bought shares in Berkshire in January ‘97 or ‘98 – (in both cases, you’re whipping the indexes).

Copyright 2006 Geoff Gannon

Geoff Gannon writes a daily value investing blog and produces a weekly (half hour) value investing podcast at: http://www.gannononinvesting.com

Recently reporting their quarterly earnings, many investors look for a fair sized rally for this shoe making king. However, with the upcoming recession and implications that it might have on Nike (NKE) shares, I would be hesitant to purchase any more shares at such a high price during such a volatile period.

It’s true that Nike did something positive in their report a few days ago which propelled the stock by four percent the next day. However, this was also the first time in three quarters that Nike reported an EPS lower than expectations. While the surprise was low, Nike typically reports earnings well above analyst estimates, illustrating the potential decline of Nikes’ profits during the next possible few years. Already experiencing some negative margins from quarter to quarter, with yearly margins only mediocre at best, Nike looks to be an upsetting stock for investors in the months to come. Reaching a near record high this year, I can vouch that Nike is an overbought equity waiting to be shorted.

The reasoning for such an assertion can be based on the premise of what type of company Nike is. Selling sport shoes and other clothing products at an above market price may not be complacent with consumers with the upcoming economic downturn. As inflation worries have propelled the Federal Reserve to increase interest rates, a negative effect will occur for companies such as a decrease in purchases. Consequently, companies will have to compensate for the lack of sales by firing employees. This results in lower domestic income for Americans, creating even more negative effects for the economy. Because consumers will not spend at their previous rate, profits will fall for companies that sell products at high prices (like Nike) and will transcend the bad news to shareholders of their stock. As Nike perfectly fits this description, expect some announcements in the future, especially if there is a hard landing, of a lowering of guidance.

Historically speaking, when the recession of 2001 through 2003 took place, shares of Nike dropped dramatically to near 33% which is a big downfall for a large capitalization corporation. When the economy got back to a more prosperous state, shares of Nike rose because of increases in margins and earnings, placing Nike almost 100% ahead relative to the end of 2003. Will Nike follow a similar pattern when the next recession occurs? The topic is debatable, but Nike does seem to follow a relatively cyclical pattern determined by the economy and its fundamentals.

It is true that Nike has an excellent PE ratio of nearly 17 and a good dividend payout of 1.24 cents per share, but with the negativity of the economy conspicuously hurting the fundamentals of Nike, and a technical pattern similar to that of a cyclical stock, I would be very wary of buying any shares of Nike at the current time. If you were lucky and have shares of Nike that you purchased earlier, I would advise selling these shares, collecting your capital gains, and buying shares of Nike back when the economy goes through this recession.

Dennis Biray presents advice on all kinds of topics ranging from finance and investing to fitness to sports. For more information email him at dbiray@gmail.com, or to view other articles written by him visit http://www.biraynetworks.co.nr