First off this week is
, who writes: "I for one would find it very useful if you added a section in
Basics which describes each of the different ratings given by investment analysts. I have no idea, for instance, what the difference is between 'accumulate' and 'buy.' How else would one accumulate stock other than to buy it? That's just one example of the confusion generated by these ratings."
Suggestion noted, Chris. We'll have something in the glossary soon. In the meantime, here's a primer on analysts' ratings.
Let's start with your specific question: What's the difference between "accumulate" and "buy" ratings? That depends on who's doing the rating. One reason ratings often are so hard to decipher is that different brokerage houses use different terms. For example, while
has three ratings -- "outperform," "market perform" and "underperform" --
BT Alex. Brown
uses a subtler scale of five, like the academic grading system we all recall so fondly. What
calls a "strong buy" is on the "priority list" at
; each is the highest rating those firms give. (
has a decent
schematic of the various ratings systems brokerages use.)
If you want to compare one brokerage's "buy" with another's "accumulate," you'll first have to compare the terms and scales each uses. They may be the same rating. On the other hand, if you're talking about a single firm's ratings, just compare its positions on whatever scale the brokerage uses. To extend the academic metaphor, on a scale of five, you can think of a "buy" as an "A" and an "accumulate" as a "B." While both recommend increasing your position in a stock (like you say, you've got to buy a stock to accumulate it), the "buy" suggests the more aggressive acquisition strategy of the two.
You should take these ratings with a generous helping of salt. Rating securities is not a dispassionate affair -- think
. Never forget that brokerages compete for the underwriting business of the companies they rate, so they try not to alienate possible future clients.
As in graduate school, there's a lot of grade inflation going on: "Buys" proliferate so much that they've taken on an almost neutral status, to the point where "holds" or "market performs" should raise red flags, especially when coming from a company's own underwriter. After all, why hold onto a stock that's merely keeping up with the broader market, when there are so many "buys" right there for the taking? And a "sell" rating? Time to duck and cover.
here to practice rating a few 1980s "Hair Metal" bands.
, who wants to know how a stock like
can trade on both the
New York Stock Exchange
and foreign exchanges: It all happens through American Depository Receipts, or ADRs. Developed as a way to facilitate the trading of foreign stocks in the U.S., ADRs are issued by foreign branches of U.S. commercial banks, which hold the underlying shares in trust. Although they trade on American exchanges, it's important to realize that ADRs aren't exactly stock: Rather, they're receipts for stock that these banks hold as custodians. In fact, these custodian banks are actually the registered owners of this stock.
You don't need ADRs to trade foreign stocks. You can always go directly to the foreign exchanges. But ADRs simplify matters quite a bit for U.S. investors. They're quoted in dollars, using a divisor to bring the stock's price in line with U.S. issues. The custodian banks also take care of the issue of foreign taxes, withholding them from issued dividends, changing the remainder to dollars and distributing that sum to American ADR holders.
In the meantime, foreign companies get access to American capital without having to go through the same registration process the
Securities and Exchange Commission
requires of companies that directly issue new stock in the U.S.
, who wants to know how he can monitor the components of the
American Stock Exchange
fund: For those who don't know what a SPDR (pronounced "spider") is, much less an Amex tech sector SPDR, check out
article. For everyone else, including David, you can find this kind of detailed information on
sector SPDR funds at the
Amex Web site.
A little crow to eat from
last weekend's column: Kudos to
, who noted the inaccuracy of my statement that a 1/16 spread would give a market maker "a profit of 6.25 cents on the dollar."
D'oh! That should be 6.25 cents per
. And touche to
, who pointed me toward recent research contesting the notion that the Dvorak keyboard is more efficient than the Qwerty arrangement. Thanks a
, Peter. Where am I supposed to get another analogy for marginal costs? Well, there's always
Memo: Have a dumb question relating to finance? Great. Have a problem with something I've written? That's fine. Send it to
MonEmailbag@thestreet.com, and I'll do my best to answer every Saturday. Include your full name, and please, no questions seeking personal financial advice or regarding personal brokerage disputes. And this reminder: Because of the volume of mail, personal replies can't be guaranteed.