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Investing Basics - October 15th, 2004
http://www.investopedia.com
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Table of Contents:
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1. Term of the Week: Ratings Service
2. Feature Article: Analyst Recommendations: Do Sell Ratings Exist?
3. Q&A: What happens to the stock price of two companies involved
in an acquisition?
4. Q&A: What does it mean when a stock trades on the Pink Sheets
or OTCBB?
5. Test Your Financial Knowledge
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Term of the Week: Ratings Service
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A company, such as Moody's or Standard & Poor's, that rates
various debt and preferred stock issues for safety of payment
of principal, interest or dividends.
Investopedia Says:
Ratings range from AAA or Aaa (the highest) to C or D, which
represents a company that has already defaulted.
For related terms and articles, go to:
http://www.investopedia.com/terms/r/ratingsservice.asp
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Feature Article: Analyst Recommendations: Do Sell Ratings Exist?
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Ever tried to decipher an equity research report? If so, you are
likely familiar with the ratings that analysts use (such as buy,
hold, accumulate, outperform/underperform, neutral,
overweight, etc) to sum up their opinion on a stock. What do
all these terms actually mean? Most investors just want to
know whether a stock is "good" or not, but how can an
investment decision be reached when you practically need a
dictionary to sort through the jargon?
Read this article at:
http://www.investopedia.com/articles/01/013101.asp
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What happens to the stock price of two companies involved in
an acquisition?
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When a firm acquires another entity, there usually is a
predictable short-term effect on the stock price of both
companies. In general, the acquiring company's stock will fall
while the target company's stock will rise. (Remember, we are
generalizing here--there can be exceptions to this rule of thumb.)
The reason the target company's stock usually goes up is that
the acquiring company typically has to pay a premium for the
acquisition: unless the acquiring company offers more per share
than the current price of the target company's stock, there is
little incentive for the current owners of the target to sell
their shares to the takeover company.
The acquiring company's stock usually goes down for a number of
reasons. First, as we mentioned above, the acquiring company must
pay more than the target company is currently worth to make the
deal go through. Beyond that, there are often a number of uncertainties
involved with acquisitions. Here are some of the problems the takeover
company could face during an acquisition:
A turbulent integration process: problems associated with integrating
different workplace cultures.
Lost productivity because of management power struggles.
Additional debt or expenses that must be incurred to make the purchase.
Accounting issues that weaken the takeover company's financial position,
including restructuring charges and goodwill.
We should emphasize that what we've discussed here does not touch on the
long-term value of the acquiring company's stock. If an acquisition goes
smoothly, it will obviously be good for the acquiring company in the
long run.
To learn more, check out our tutorial on mergers and acquisitions:
http://www.investopedia.com/university/mergers/default.asp
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What does it mean when a stock trades on the Pink Sheets or OTCBB?
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The stocks of well-known companies such as General Electric and
Microsoft trade on premiere exchanges such as the New York Stock
Exchange and Nasdaq. But companies like GE and Microsoft must be
listed--that is, accepted for trading purposes by a recognized
and regulated exchange--prior to actually trading on an exchange.
When a company isn't listed, it often will trade on the Pink Sheets
or the Over the Counter Bulletin Board (OTCBB).
A stock that doesn't trade on a major exchange is said to trade
over-the-counter (OTC). This means that the stock is dealt between
individuals connected by telephone and computer networks.
Companies will typically be listed on the OTCBB for one of two reasons:
(1) The company has been delisted from a major exchange. When a
company is facing tough times and is unable to meet the requirements
for continued listing on exchanges such as Nasdaq or the NYSE, it will
be delisted.
This usually happens to companies that are under financial strain
and near bankruptcy. Even when listed on the OTCBB, companies are
still required to maintain SEC filings and minimum requirements
set by the OTCBB; however, these requirements are considerably easier
to meet than those set by the national exchanges. If a company
undergoes bankruptcy proceedings or misses certain SEC filings,
an additional letter will be added to the company's ticker symbol
to notify investors of this problem. (For more on why additional
letters may be added to companies' ticker symbols, check out this Ask
Us).
(2) The company may be listed on the OTCBB because it is unable to
meet the initial listing requirements of the Nasdaq or NYSE. In
such a case, a company may choose to test the waters of the OTCBB,
using it as a stepping stone before leaping into the larger
exchanges and markets.
The Pink Sheets are different from the OTCBB. Companies on the
Pink Sheets are not required to meet minimum requirements or
file with the SEC. So-named because they were actually printed
on pink paper, the Pink Sheets started out as a daily quote service
provided by the National Quotation Bureau. Typically, companies
are on the Pink Sheets because either they are too small to be
listed on a national exchange or they do not wish to make their
budgets and accounting statements public. To avoid having to
file with the SEC, some large foreign companies such as
Nestle S.A. have penetrated the American securities markets
through the Pink Sheets. Companies listed on the Pink Sheets
are difficult to analyze because it is tough to obtain accurate
information about them. The companies on the Pink Sheets are
usually penny stocks and are often targets of price manipulation.
They should only be purchased with extreme caution.
To learn more about penny stocks (often associated with the
over-the-counter market) check out: "The Lowdown on Penny Stocks"
http://www.investopedia.com/articles/03/050803.asp
and "Catching a Lift on the Penny Express"
http://www.investopedia.com/articles/trading/04/072804.asp
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Test Your Financial Knowledge
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Q. In the context of the stock market, what is a Spider?
a) Stocks trading under $5 per share
b) Low volatility stocks that seem to "crawl" along
c) An exchange traded fund for the S&P 500
d) A high risk investment strategy
e) None of the Above
To answer this question, please visit the homepage:
http://www.investopedia.com/
Have a great week!
The Investopedia Staff
http://www.investopedia.com
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