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Stocks Q&A: We Answer Your Questions by the Schwab Center for Financial Research March 10, 2009 Each month, we receive thousands of questions from Schwab clients. Here, we tackle the top questions on stocks, with answers and guidance that we believe will address some of your most pressing concerns. If you have a question that doesn't appear below, we have more Q&As on timely topics in the box at right. If you have a question that we haven't already addressed, you can submit it using the Editor Feedback form at right—we may include it when we add new questions and answers. To talk to a Schwab investment professional about your particular circumstances, please call 800-435-4000. On stocks
Clients often ask for our opinion on a particular stock, including Apple, Berkshire Hathaway, Ford, GM, Microsoft, IBM, Goldman Sachs, Caterpillar and many more. Our opinion on any single stock is represented by its Schwab Equity Rating. To see the current rating for a particular stock, clients can log in to Schwab.com, type in the stock's ticker symbol, click Go, and then click the Schwab's Viewpoint tab. One of the distinguishing characteristics of Schwab's equity research is that we don't "like" or "dislike" stocks, nor do we rate stocks based on a company's growth potential. What we do is provide our objective assessment of how a stock will perform relative to the broader stock market during the next 12 months. It's worth pointing out that Schwab Equity Ratings have been effective, on average, for shorter periods, as well. Return to top What about international stocks? To get our latest views on international equity markets, see Liz Ann Sonders' and David Kastner's "Schwab Market Perspective," which we update every two weeks. Return to top Do you believe small-caps or large-caps will lead the recovery? Historically, we've seen small-cap stocks lead the way following a market bottom, as some higher-beta small-caps (those with more risk attached to them) attract investors looking to make a splash after a downturn. However, this time may be different due to one of the causes of the drop—the credit crisis. Credit standards have tightened considerably, making it difficult for many businesses to get the money they need to expand, or even continue, their operations. As a result, coming out of this downturn, companies with large cash balances and at least some access to the credit markets—in other words, many large-cap companies—may do better than those without that kind of access, for example, small-caps. In some situations, we choose not to rate a stock. To learn more about these circumstances, read "Understanding Exceptions to Schwab Equity Ratings." Return to top In the case of bankruptcy, what is the order of disposition of assets? See "Anatomy of Bankruptcies: A Cautionary Tale" for full details. Return to top I've been thinking of moving to preferred stocks. How do they differ? Preferred stock is a hybrid between bonds and stock. Preferreds pay a fixed dividend, not interest, but in other ways they resemble bonds. They are considered "preferred" because their dividend distributions are paid before the dividends on common stock. That dividend can be deferred, however, if the company's earnings are insufficient, and the board agrees. In contrast, bondholders are guaranteed interest and return of principal, short of default, renegotiation or bankruptcy. As a result of the less-firm guarantee, preferreds generally receive higher payments than bonds. Preferreds, like bonds, often carry credit ratings, typically several steps below bonds from the same corporation. Like bonds, the price of preferreds vary in the secondary market depending on interest rate, as well as perception of credit risk. With lower prices, yields can increase—if the preferred issuer continues to pay. This is especially true now—preferred prices have been beaten down for many issuers, particularly those with more uncertain ability to pay. Prices may look attractive, but they often drop for good reasons (for example, the market may be less comfortable with the company's ability to generate earnings sufficient to pay bonds first, then preferred stock, while continuing to grow). A good indicator of market comfort, of course, is common stock price—if the price has dropped precipitously, there may be valid concerns. In other cases, the price of preferreds from healthier companies may have fallen with the rest of the market—the proverbial "throwing the baby out with the bathwater." It depends on your comfort with the health of the company overall. Check the current preferred "bond" rating, as well as the news and trends for common stock. Preferreds also tend to be purchased by corporations—unlike most securities, preferreds enjoy favorable corporate tax treatment not shared by individuals. As a result, demand for preferreds in general can vary depending on how much capital corporations have to invest in securities rather than their own stability or growth. Right now, availability of that capital is low, pushing down prices further. Many analysts don't see that trend reversing quickly. To learn more, see "The Power of Preferreds." And if you choose to invest in preferreds, choose carefully, diversify broadly (across companies and sectors), and balance them with other fixed-income investments. Return to top Should I be looking at green stocks going forward? When looking at "green" or environmentally friendly stocks, try to assess whether those stocks are good investments in the first place. It won't help your portfolio if a green investment turns out to be a bad investment. Use Schwab Equity Ratings to gauge our opinion of any stock considered green and limit your investments to those stocks rated A or B. Clients can see a stock's current rating by logging in to Schwab.com, typing in the stock's ticker symbol, clicking Go, and then clicking the Schwab's Viewpoint tab. Clients also have access to a wide selection of third-party research on Schwab.com. Return to top What causes the huge difference between a stock's closing price and the next day's opening price? The price of a stock reflects available information. The difference between the closing price and the next day's opening price occurs because new information has come to the market overnight and the opening price adjusts to reflect it. Such new information can include:
Why did the stock I was following recently drop so much in price? In general, an individual stock can have a large drop in price for two reasons.
Could you provide a year-to-date update on the performance of Schwab Equity Ratings? We provide extensive coverage on the performance of Schwab Equity Ratings. Visit our Schwab Equity Ratings performance page to learn more. Return to top Important Disclosures Schwab Equity Ratings are assigned to approximately 3,000 of the largest (by marketing capitalization) U.S. headquartered stocks using a scale of A, B, C, D and F. Schwab's outlook is that A-rated stocks, on average, will strongly outperform and F-rated stocks, on average, will strongly underperform the equities market over the next 12 months. Schwab Equity Ratings and the general buy/hold/sell guidance are not personal recommendations for any particular investor or client and do not take into account the financial, investment or other objectives or needs of, and may not be suitable for, any particular investor or client. International investments are subject to additional risks such as currency fluctuation, political instability and the potential for illiquid markets. Investing in emerging markets may accentuate these risks. Diversification strategies do not ensure a profit and do not protect against losses in declining markets. Periodic investment plans do not ensure a profit and do not protect against losses in declining markets. The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision. All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed. Examples provided are for illustrative purposes only and not intended to be reflective of results you can expect to achieve. This information is not intended to be a substitute for specific individualized tax, legal or investment planning advice. Where specific advice is necessary or appropriate, Schwab recommends consultation with a qualified tax advisor, CPA, financial planner or investment manager. The Schwab Center for Financial Research is a division of Charles Schwab & Co., Inc. (0309-7727) Return to Top |
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