Target Stock Prices

A target price for a stock is a figure published by a securities industry person, usually an analyst. The idea is that the target price is a prediction, a guess about where the stock is headed. Target prices usually are associated with a date by which the stock is expected to hit the target. With that explanation out of the way..

Why do people suddenly think that the term du jour "target price" has any meaning?? Consider the sources of these numbers. They're ALWAYS issued by someone who has a vested interest in the issue: It could be an analyst whose firm was the underwriter, it could be an analyst whose firm is brown-nosing the company, it could be a firm with a large position in the stock, it could be an individual trying to talk the stock up so he can get out even, or it could be the "pump" segment of a pump-and-dump operation. There is also a chance that the analyst has no agenda and honestly thinks the stock price is really going places. But in all too many cases it’s nothing more than wishful guesswork (unless they have a crystal ball that works), so the advice here: ignore target prices, especially ones for internet companies.

One-Line Wisdom

This is a collection of one-line pieces of investment wisdom, with brief explanations. Use and apply at your own risk or discretion. They are not in any particular order.

Hang up on cold calls.

While it is theoretically possible that someone is going to offer you the opportunity of a lifetime, it is more likely that it is some sort of scam. Even if it is legitimate, the caller cannot know your financial position, goals, risk tolerance, or any other parameters which should be considered when selecting investments. If you can't bear the thought of hanging up, ask for material to be sent by mail.

Don't invest in anything you don't understand.

There were horror stories of people who had lost fortunes by being short puts during the 87 crash. I imagine that they had no idea of the risks they were taking. Also, all the complaints about penny stocks, whether fraudulent or not, are partially a result of not understanding the risks and mechanisms.

If it sounds too good to be true, it probably is [too good to be true].

Also stated as ``There ain't no such thing as a free lunch (TANSTAAFL).'' Remember, every investment opportunity competes with every other investment opportunity. If one seems wildly better than the others, there are probably hidden risks or you don't understand something.

If your only tool is a hammer, every problem looks like a nail.

Someone (possibly a financial planner) with a very limited selection of products will naturally try to jam you into those which s/he sells. These may be less suitable than other products not carried.

Don't rush into an investment.

If someone tells you that the opportunity is closing, filling up fast, or in any other way suggests a time pressure, be very leery.

Very low priced stocks require special treatment.

Risks are substantial, bid/asked spreads are large, prices are volatile, and commissions are relatively high. You need a broker who knows how to purchase these stocks and dicker for a good price.

Using a Full-Service Broker

There are several reasons to choose a full-service broker over a discount or web broker. People use a full-service broker because they may not want to do their own research, because they are only interested in long-term investing, because they like to hear the broker's investment ideas, etc. But another important reason is that not everybody likes to trade. I may want retirement planning services from my broker. I may want to buy 3 or 4 mutual funds and have my broker worry about them. If my broker is a financial planner, perhaps I want tax or estate advice on certain investment options. Maybe I'm saving for my newborn child's education but I have no idea or desire to work out a plan to make sure the money is there when she or he needs it.

A huge reason to stick with a full-service broker is access to initial public offerings (IPOs). These are generally reserved for the very best clients, where best is defined as "someone who generates lots of revenue," so someone who trades just a few times a year doesn't have a chance. But if you can afford to trade frequently at the full-service commission rates, you may be favored with access to some great IPOs.

And the real big one for a lot of people is quite simply time. Full service brokerage clients also tend to be higher net worth individuals as well. If I'm a doctor or lawyer, I can probably make more money by focusing on my business than spending it researching stocks. For many people today, time is a more valuable commodity than money. In fact, it doesn't even have to do with how wealthy you are. Americans, in general, work some pretty insane hours. Spending time researching stocks or staying up on the market is quality time not spent with family, friends, or doing things that they enjoy. On the other hand some people enjoy the market and for those people there are discount brokers.

The one thing that sort of scares me about the difference between full service and discount brokers is that a pretty good chunk of discount brokerage firm clients are not that educated about investing. They look at a $20 commission (discount broker) and a $50 commission (full service broker) and they decide they can't afford to invest with a full service broker. Instead they plow their life savings into some wonder stock they heard about from a friend (hey, it's only a $20 commission, why not?) and lose a few hundred or thousand bucks when the investment goes south. Not that a broker is going to pick winners 100% of the time but at least the broker can guide or mentor a beginning investor until they learn enough to know what to look for and what not to look for in a stock. I look at the $30 difference in what the two types of brokerage firms charge as the rebate for education and doing my own research. If you're not going to educate yourself or do your own research, you don't deserve the rebate.

Errors in Investing

The Wall Street Journal of June 18, 1991 had an article on pages C1/C10 on Investment Errors and how to avoid them. As summarized from that article, the errors are:

• Not following an investment objective when you build a portfolio.
• Buying too many mutual funds.
• Not researching a one-product stock before you buy.
• Believing that you can pick market highs and lows (time the market).
• Taking profits early.
• Not cutting your losses.
• Buying the hottest {stock, mutual fund} from last year.

Here's a recent quote that underscores the last item. When asked "What's the biggest mistake individual investors make?" on Wall $treet Week, John Bogle, founder and senior chairman of Vanguard mutual funds, said "Extrapolating the trend" or buying the hot stock.

On a final note, get this quote on market timing:

In the 1980s if you were out of the market on the ten best trading days of the decade you missed one-third of the total return.

Trading - Bid, Ask, and Spread

If you want to buy or sell a stock or other security on the open market, you normally trade via agents on the market scene who specialize in that particular security. These people stand ready to sell you a security for some asking price (the "ask") if you would like to buy it. Or, if you own the security already and would like to sell it, they will buy the security from you for some offer price (the "bid"). The difference between the bid and ask is called the spread. Stocks that are heavily traded tend to have very narrow spreads (e.g., 1/8 of a point), but stocks that are lightly traded can have spreads that are significant, even as high as several dollars.
So why is there a spread? The short answer is "profit." The long answer goes to the heart of modern markets, namely the question of liquidity.
Liquidity basically means that someone is ready to buy or sell significant quantities of a security at any time. In the stock market, market makers or specialists (depending on the exchange) buy stocks from the public at the bid and sell stocks to the public at the ask (called "making a market in the stock"). At most times (unless the market is crashing, etc.) these people stand ready to make a market in most stocks and often in substantial quantities, thereby maintaining market liquidity.
Dealers make their living by taking a large part of the spread on each transaction - they normally are not long term investors. In fact, they work a lot like the local supermarket, raising and lowering prices on their inventory as the market moves, and making a few cents here and there. And while lettuce eventually spoils, holding a stock that is tailing off with no buyers is analogous.
Because dealers in a security get to keep much of the spread, they work fairly hard to keep the spread above zero. This is really quite fair: they provide a valuable service (making a market in the stock and keeping the markets liquid), so it's only reasonable for them to get paid for their services. Of course you may not always agree that the price charged (the spread) is appropriate!
Occasionally you may read that there is no bid-ask spread on the NYSE. This is nonsense. Stocks traded on the New York exchange have bid and ask prices just like any other market. However, the NYSE bars the publishing of bid and ask prices by any delayed quote service. Any decent real-time quote service will show the bid and ask prices for an issue traded on the NYSE.
Related topics that are covered in FAQ articles include price improvement (narrowing the spread as much as possible), stock crossing by discount brokers (narrowing the spread to zero by having buyer meet seller directly), and trading on the NASDAQ (in the past, that exchange's structure encouraged spreads that were significantly higher than on other exchanges).