Cheat Sheet
High-Powered Investing All-in-One For Dummies
To make smart high-powered investment decisions, study leading financial reports, understand key financial ratios, use online resources for financial and investing information, and identify the Greek letters used in mathematics to describe investing data.
Key Financial Ratios in High-Powered Investing
Financial ratios are valuable investment tools for providing an investor a sharper picture of a company he wants to understand. Ratios are divided into four categories — liquidity ratios, operating ratios, solvency ratios, and valuation ratios — as shown in the following table.
| Ratio | Formula | Use |
|---|---|---|
| Liquidity Ratios | ||
| Current ratio | Total current assets ÷ total current liabilities | Gives some indication whether a company has enough financial cushion to meet its near-term obligations. |
| Quick ratio | (Current assets less inventory) ÷ current liabilities | Same as current ratio, without including inventory in the calculation. Provides another sign of a company’s strength or weakness. |
| Operating Ratios | ||
| Return on equity (ROE) | Net earnings ÷ owners’ equity | Measures how well the company is managing its resources. |
| Return on assets (ROA) | Net earnings ÷ total assets | Reflects the relationship between a company’s profit and the assets used to generate it. |
| Solvency Ratios | ||
| Debt to equity | Total debt ÷ owners’ equity | Indicates how dependent a company is on debt. |
| Debt to assets (or “debt ratio”) | Total debt ÷ total assets | The higher the ratio, the more financial risk the company has assumed. |
| Valuation Ratios | ||
| Price-to-earnings (P/E) | Stock price per share ÷ net earnings per share | Clues you in to how much you are paying for the company’s earnings. |
| Price-to-book (P/B) | Stock price (total market cap) ÷ book value | Compares the company’s market value to its accounting (or book) value. |
Essential Economic Reports to Study for High-Powered Investing
If you’re thinking seriously about investing your money, then do some serious research. You should read the following economic reports regularly so you can keep track of changes in the economic landscape.
The monthly non-farm payroll report (NFP), which assesses the overall labor market
The consumer price index (CPI), which measures the cost of goods and services at the retail level
The producer price index (PPI), which measures prices at the wholesale level
The Institute for Supply Management (ISM) and regional purchasing managers’ reports, which indicate current business conditions and future outlooks
The Beige Book from the Federal Reserve, which compiles regional economic assessments from the Fed’s 12 district banks
Existing-home sales and housing starts
The index of leading economic indicators (LEI), which is considered a gauge of the economy’s direction over the next six to nine months
Gross domestic product, which measures total economic activity
Understanding Greek Letters in Investment Equations
Modern finance is marked by mathematical explanations for the world. You’ll be ahead of the game if you know the Greek letters used to describe different sources of risk and return in investing:
Alpha (Α, α): Investment return that’s different than you’d expect, given an investment’s beta, which is its exposure to market risk and return. Alpha (which can be positive or negative) describes an intangible value that accounts for the extra return generated (or lost) for the amount of risk taken. Some researchers aren’t sure that alpha exists at all.
Beta (Β, β): The market beta is 1, so an investment with a beta of more than 1 is more volatile than the market as a whole. You’d expect the investment to return more than the market in an up year and less than the market in a down year.
Delta (Δ, δ): The percentage change in an investment. Delta often describes how much an option changes in price when its underlying security changes in price.
Gamma (Γ, γ): The rate of change in delta. Gamma is exposure to any change in price, positive or negative.
Sigma (Σ, σ): Standard deviation, or the likelihood that any one number in a series — like a series of investment returns — will be different from the return that you expect. The higher the standard deviation, the greater the investment risk
Online Resources for High-Powered Investing
The Internet is a valuable resource for investors looking for financial information. Here are some Web sites to add to your “favorites” so you have financial and investing news at your fingertips:
finance.yahoo.com: Navigate your heart away . . . tons of information on financial markets.
www.bankrate.com: Compare rates on all sorts of fixed-income investments.
www.bloomberg.com: Rather hardcore financial data.
www.cnnfn.com: Get your daily fix of everything money related.
www.dinkytown.com: Calculators of all sorts.
www.moneychimp.com: For the more advanced investor.
www.morningstar.com: Exclusive ratings of funds, and more.
www.riskgrades.com: A novel way of looking at investment risk and return.
www.sensible-investor.com: A huge gateway to other financial Web sites.
