Investment Club PowerPoint 3

Some important things we should all know….

Conceptual Understanding of…

4. Stochastics

5. Earnings per Share ratio

6. Beta

4. Stochastics Indicator

• Compares a security's closing price to its price range over a given time period.

• Theory: in an upward-trending market, prices tend to close near their high, and during a downward-trending market, prices tend to close near their low.

•There are two main stochastic oscillators that we will look at: Fast and Slow. The Fast Stochastic (%Kfast and %Dfast) is calculated by the above equation; and the Slow Stochastic is calculated by applying the 3-day moving average to the Fast Stochastic

• Wait for a divergence to develop from overbought or oversold levels. Once the oscillator reaches overbought levels, wait for a negative divergence to develop and then a cross below 80. This usually requires a double dip below 80 and the second dip results in the sell signal.

• For a buy signal, wait for a positive divergence to develop after the indicator moves below 20. This will usually require a trader to disregard the first break above 20. After the positive divergence forms, the second break above 20

confirms the divergence and a buy signal is given.

5. Earnings per Share ratio

The portion of a company's profit allocated to each outstanding share of common stock. EPS serves as an indicator of a company's profitability. Earnings per share is generally considered to be the single most important variable in determining a share's price.

5. Beta

Measure of the volatility of a security or a portfolio in comparison to the market as a whole. A beta of 1 indicates that the security's price mimic the the market. A beta less than 1 means that the volatility of the security is a fraction of that of the market, and a beta greater than 1 indicates that the security's price will be more volatile compared to the market.