FOOLISH FOUR PORTFOLIO
What is a "closing price" anyway? There's no easy answer, but, for sure, it isn't the one that streams across the New York Stock Exchange ticker just after 4:00 p.m. Also, we've been taught to invest in what we know. If you work in a specific sector, you may be in an excellent position to pluck gems from the pack. Until you understand how to pick individual stocks, however, you may be best sticking with a sector Index Fund.
By Barbara Eisner Bayer (TMF Venus) and Ann Coleman (TMF AnnC)
December 26, 2000
["Ask a Fool" is a fun way to address the general investing questions our Foolish Four readers have always come to this area for. We'd love for you to submit questions for the column (click the bylines for email), but if you want an actual answer anytime soon, we suggest you pop over to the Ask a Foolish Question discussion board and post there as well. Although we are soliciting questions of general interest to answer here, we can't answer them via email. That's private investing advice, a big no-no.]
Q: My father is always complaining about how the stock values that he sees on the NYSE tape running after the market close change between one pass and the next but, also and most annoyingly to him, the values change between what he writes down at market close and the next morning's paper.
Can you address the issue here and explain "after-hours trading"? Who does this? Where? I understand that a given stock may be available on more than one market and info. often comes out after the stock's primary market closes, but could you please give me a decent way to address his complaints?
A: The problem probably isn't related to after-hours trades. It really depends on what the newspaper is reporting. If they say they are reporting the "closing price" on the New York Stock Exchange, after-hours trades would not be part of the picture. But I can see how your father could be annoyed when the price doesn't match what he wrote down.
Your father may understand this, but for the benefit of others reading, let's first establish that there's no set price for a share of stock in the sense that we normally think of prices. When prices change, no one is marking the price up and down like on those WalMart (NYSE: WMT) commercials. Stock markets are ongoing auctions. Tickers report the last price that someone paid for the stock. Therefore, the "price" can literally change with every trade. To complicate matters further, the quote in the paper may not be the "last trade" -- it may be the last price bid.
What exactly do we mean by the "bid"? The "bid" is the highest price that anyone is offering to pay for the stock. Then you have the "ask," which is the lowest price at which anyone has specified that they are willing to sell. These terms refer to limit orders (an order to buy or sell at a specific price). If you put in an order to buy without specifying a price, you are buying "at the market," and the price for you is the "ask" because that's the best price at which anyone is willing to sell to you. If you are selling at the market, you will receive the "bid" price because that's the best price anyone is offering for your stock. Sounds complicated, I know, but believe me, that's the greatly simplified version.
Depending on whether the last trade was a market order to sell, a market order to buy (or some variation), the last trade on the NYSE could have been at the bid or the ask or somewhere in between. The real question is: What is being reported by the paper -- the bid, the ask, or the last trade? For that you have to ask the paper. The ticker reports each trade, but the newspaper may be reporting the last price bid which could be higher or lower than the last trade. That's one source of confusion and we haven't even touched on after-hours trading yet.
Next, we have the problem of when the actual close is. If your dad is writing down the last trade he see after 4 p.m., I'm not surprised that it doesn't match the next day's paper even if the paper is reporting the last trade. The market may close at 4 p.m., but it takes a while for all trades that took place before 4 to actually be recorded and reported. On active days, we often see changes to our real money portfolios coming in as late as 5:30 p.m., and when the market is very active it can be considerably later than that. (Naturally, that gives our writers fits!)
With all of that going on, it's no wonder that the price your Dad writes down when the market "closes" doesn't match the next day's price in the paper. And we still haven't gotten to after-hours trading. These days the market never sleeps. Large U.S. stocks may trade on exchanges around the world, and the Instinet allows "institutions" like pension plans or brokerage houses to trade stocks among themselves 24 hours a day. Sometimes, particularly when a stock gets hit with big news after the market closes or early in the morning, you will see these after-hours prices reported, but they probably are not what your dad is seeing in the paper unless the paper specifies that the price occurred in after-hours trading.
Q: I'm a registered nurse and a beginning investor and I would like to invest in the healthcare industry. What are some good stocks? Should I go to an investment company or try my hand at online investing?
A: �The key word in your email is not "nurse," it's "beginner." We would like you to become an experienced investor, and the best way to do that is to take it slow. Jumping into individual stocks before you know what you are doing is more likely to turn you into a former investor, someone who is convinced that investing is dangerous. It really isn't, but you need to do some prep work first.
As superstar investor Peter Lynch often preached, invest in what you know. You know medical companies. You work with them every day and you are in a unique situation to spot great new medical products. The next step is learning about company valuation. A great company with a great product may be a great bargain, or it may already be priced so high that it will never be able to make enough money to justify that price.
You have to know the difference. That's why you need to learn How to Value Stocks. Start with that link, then check out some investing books like One Up on Wall Street and Beating the Street by Peter Lynch, and the new revised edition of The Motley Fool Investment Guide.
In the meantime, if you want to get your feet wet and participate in the growth of the health care industry, you can try an index fund linked to the industry. Check out iShares or the Dow Jones US Healthcare Sector Index Fund (AMEX: IYH) as a way to invest in your industry while you learn more about picking individual stocks.
Yes, it's a lot of work to pick good health care stocks. But honestly, if you have to ask us, "What are some good stocks?", you really need to start with the basics. Read, read, read, and you will start to see good investment possibilities at work every day. Then read, read, read some more and the best ones will become obvious. Until they do, those index funds are the place to be.
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