Education

What is a Stock?

Large companies that have lots of investors often issue “stocks” or “shares” to the investors as a way of showing ownership. If you bought 100 shares of a company you might get a stock certificate like the one below indicating your ownership. If you decided you no longer wanted to own those shares you could try to sell them to another investor that might want to own part of that company. This is the essence of the stock market–it is where investors invest in new companies, or they buy and sell (or exchange) shares if they can agree on a fair price.

Definition

Stock is defined as a share of ownership of a company; if you own a company’s stock, you actually own a percentage of the company itself (including its assets, like chairs, vehicles, and buildings) and a percentage of its profits. For example, if a company issued 1,000 shares and you owned 100 shares, that does not mean that you can go to the company headquarters and take 1/10 of the furniture. It means that if the company was profitable and they made $100,000 and decided to pay it out to the shareholders, you would get 1/10 of $100,000 which is $10,000. People invest in companies that they think will be profitable with the hope that the company will start paying out its profits to its shareholders. Likewise, if the company was not profitable and decided to close, then the company might just sell all of its furniture for $1000 and you would only get $100 back.

What does owning a Stock actually do for me?

Since you own part of the company, you are now involved in some of its management decisions, and you are entitled to some of the company’s profits. Shareholders often get to vote to choose the Board of Directors, to pick independent accountants, to approve any major change in the company like merging with another company. What exactly you are entitled to depends on the amount of stock that you own. Take the company Apple, for example.

Apple has approximately 5.575 BILLION shares outstanding, so if you owned 100 shares of Apple, you would own 0.00000179% of the company. That seems like a tiny amount, but keep in mind that Apple makes $50 BILLION a year so if they paid out all of their earnings one year, you would get $896!

If you decide that you no longer want to own your Apple shares, you can always sell your shares on one of the stock exchanges.

Want to learn more?

Explore, Trading Styles, Order Types and Options

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Trading Styles

Unit investment trusts offer a simple, convenient and affordable way to develop a well-diversified portfolio.

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Order Types

Exchange-traded products are similar to mutual funds in that they’re made up of a basket of securities.

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Options

An option is a contract that gives the buyer the right, but not the obligation, to buy or sell an underlying asset at a specific price on or before a certain date

Different Types Of Stocks

There is more than one kind of stock or ownership that companies sell. While almost all stock traded on the stock exchanges is “Common Stock”, some companies have issued “Preferred Stock”.

Common Stock

Common stock is the kind most investors buy. Common stock generally gives one vote at shareholder meetings for every share owned.

Common stock holders may also be entitled to receive distributions of the companies provides, called “dividend payments.” For larger, more stable companies, a portion of corporate profits is usually paid back to shareholders 4 times a year as a dividend. Companies that are still growing usually pay no or very little dividends; but well established companies like utilities generally pay higher dividends.

Preferred Stock

Preferred stock generally does not have voting rights, and you generally will not find them trading on an exchange. However, preferred stock shares have the benefit of “preference” for dividend payments; if a company decides it is going to pay dividends, preferred stock holders may get a bigger share, and be paid before common stock holders. Preferred stock holders are also entitled to be paid first if a company goes bankrupt and all the assets are sold off.

Difference between Stock and Bonds

When you buy a stock, you are buying a piece of ownership of a company. A bond, however, is more like a loan or debt; a bond is a promise that a company makes to pay you back the amount you lent them plus interest. Hence, if you own a bond, you are only lending a company money, but if you own a stock, you own part of the company itself.

Where do Stocks come from?

New stock in a company can come from two places, which are New Issues and Stock Dividends or Splits

New Issues / Initial Public Offering

A new issue of stock is when a private company decides to Go Public, and issues shares of stock for anyone to buy. This is often called an Initial Public Offering, or IPO, and when large private companies go public, it can be a very exciting event with huge fluctuations in the stock’s price in the first weeks while the market decides on a fair price for the shares. Private companies “Go Public” and issue stock primarily to raise money: as they sell the shares in the company, the original owners allow the public to vote on some management decisions in exchange for the cash raised in the stock sale to re-invest and help the company grow.

Stock Dividends or Splits

Companies may also to issue new shares of stock after the IPO. This can be done by giving all current shareholders additional shares in proportion to how many shares they currently have; for example they can say that for every 10 shares you own now, they are issuing you one extra share.This would be a 10% stock dividend, and the market price for the stocks would drop by 10% (although all shareholders still have the same ‘value’).If the stock dividend is large enough (usually about 20%), it is instead called a “Stock Split”. There are many reasons why companies would want to have a stock dividend or split, but they usually happen for one of two reasons:

The reasoning behind stock splits

Companies may split their stock to attract attention to the company through the hype that can come from a stock dividend. However, the simple act of there being more shares in circulation may encourage people to buy and sell more, since each individual share takes up a smaller percentage of a portfolio

Lower The Price

Some large companies like to have their stock price stay in a certain range. One reason for this is that the more expensive a stock, the fewer people who can afford to buy it (or buy an additional share), so splitting stocks can help it become more affordable, and increase the total value of all stocks in the long run.

Ticker Symbol

A Ticker Symbol is a unique one to five letter code used by the stock exchanges to identify a company. It is called a ticker symbol because the stock quotes used to be printed on a ticker tape machine

For example, here are some popular and interesting ticker symbols:

  • WMT is the symbol for WalMart,
  • AAPL is the symbol for Apple, Inc.,
  • LUV is the symbol for SouthWest Airlines,
  • BUD is the symbol for Anheuser-Busch,
  • HOG is the symbol for Harley Davidson,
  • F is the symbol for Ford.

Other Ticker Symbol Information

Sometimes you might see a “.A” or “.B” after a ticker symbol–this usually indicates a class A or class B type of shares. Sometimes you might see a ticker ending with a “Q”—this means the company has filed for bankruptcy. Sometimes you might see a “Z” added to the ticker–this means that there is a special situation occurring with the stock.

Definition of Quote

A stock quote represents the last price at which a seller and a buyer of a stock agreed on a price to make the trade. Because stock prices are determined by a continuous auction process between buyers and sellers, stock prices change frequently as the buyers and sellers change. Prices also change as new information about that company, that industry, or the economy becomes public; this new information then changes buyers and sellers expectations of the stock’s future performance.

Usually when you get a stock quote, you see lots of other information about that company and that stock price. The most important thing to note is the time-stamp that shows you how old the stock quote is. The other important pieces of information a stock quote shows is the day’s high, low and volume, and sometimes the 52-week high and low.

Pricing Increments

Stock prices used to be quoted in fractions like “$116 and a half”, or “53 and 3/4” with the lowest increment of an 1/8th of a dollar (which is 12.5 cents). But now most exchanges only use decimals and allow stock prices to be quoted in pennies (and sometimes 1/10 of a penny). Stock quotes can either be in real-time or with a specified delay (like a 15-minute delay).

Stock Quote Components

Columns 1 & 2: 52-Week High and Low – These are the high and low prices a stock was traded over the prior 52 weeks (one year period).

Column 3: Company Name & Type of Stock – This column provides the name of the stock’s company. If the name does not have special symbols or letters, it is common stock. Different special symbols imply different classes of shares. For example, “pf” would mean that the shares are a preferred stock.

Column 4: Ticker Symbol – A stock symbol or ticker symbol is an abbreviation used to uniquely identify publicly traded shares of a specific company’s stock on a particular stock market/exchange. A stock symbol may consist of letters, numbers or a combination of both.

Column 5: Dividend Per Share – This indicates the amount of money that a company pays per share. If it is blank, the company does not pay dividends to its stock holders.

Column 6: Dividend Yield – The percentage return to the stock owners in dividend per year. You can calculate it by dividing the annual dividends per share by the price per share.

Column 7: Price/Earnings Ratio – You can calculate this by dividing the stock price by current earnings per share from the last year. This is also called a P/E Ratio.

Column 8: Trading Volume – This is the total number of shares traded for a specific day, listed in hundreds. Of course you can figure the actual number traded by adding “00” to the end of the number.

Column 9 & 10: Day High and Low – This shows the daily highest price and lowest price that someone paid for the stock.

Column 11: Close – The close is the last trading price when the market closes. If the entire listing is BOLDED, then the price is UP or DOWN more than 5% from the prior day’s closing price.

Column 12: Net Change – This is the change in value for the stock price since the previous day’s closing price. When you hear that a stock is “up for the day,” it means that the price increased for the day.

Bid Price and Ask Price

Bid Price

When you are selling your shares of a security, the bid price is what the buyer is willing to pay for your shares. This Bid Price offers you an exact price of how much you can sell your shares for. The Last Price offers you a look at what price the last trades were made; which is not sufficient to give you a price a buyer is willing to pay. Bid Price and Last Price are often different. On the other side of the market, even though you are willing to offer a seller a bid price, he/she will only sell at the Ask Price. The Ask Price is the price at which a seller is willing to let go of her shares. More specifically, this is the price you will buy your stocks at. Finally, the Bid Size comes hand-in-hand with the Bid Price. This is the amount of shares a buyer is willing to pay for a specific amount of shares. This gives the seller a better view on where they stand.

Example: $23.53 x 1,000 is an example of a bid. This means that an investor is asking to purchase 1,000 shares at the price of $23.53. The transaction will be completed if a seller is willing to sell that security at that price. Another example would be a Market bid for 1,000 shares. That means that the investor is willing to take 1,000 shares at the current market price.

Ask Price

The ask or offer price is the lowest price that a seller is willing to accept for a stock or other security. The ask size will specify the number of shares the seller is willing to sell at that ask price. This is also sometimes called “the ask” or “ask price” or “offer price”.

Example: When you get a quote on a stock or security you will often see the Last Trade Price and the current Bid/Ask prices. For example, Google might have a Last of $700.75 and be Bid $700.50 and Ask $701.00. A quote screen might also show the bid/ask size and show $700.50 x 1,000 and $701.00 x 500. This would mean that you could immediately buy 500 shares at $701 or sell 1,000 shares at $700.50. The ask price is the complement of the bid price. The bid is the highest price a buyer is willing to pay for a stock or security. The ask will always be higher than the bid.

P/E Ratios

Definition

P/E Ratio. It sounds good and makes novice investors feel like they have a grasp of the situation but how valuable is the Earnings Price Ratio? Surprisingly, the price to earnings ratio is a useful tool but certainly not the holy grail of investing as it is sometimes made out to be. For those novice investors, the P/E Ratio provides a numeric representation of the value between the stock price and earnings. To derive the P/E Ratio you divide the share price by the company’s EPS or Earnings Per Share. The formula looks like this: P/E = Stock Price/ EPS

  • Market sentiment: An overly optimistic P/E Ratio can indicate the market expects big things from this company. Temper optimism with reality.
  • Cover priced or over-bought. A high P/E Ratio can indicate a given stock is priced to high and ready for a correction. Be sure to compare against industry norms.
  • Lack of confidence. A low P/E Ratio may indicate a lack of confidence in the future of the company.
  • Sleeper. A low P/E Ratio might be a sleeper just waited to be discovered.

For example, if a company is currently trading at $43 a share and earnings over the last 12 months were $1.95 per share, the P/E ratio for the stock would be 22.05 ($43/$1.95).

  • Coca-Cola and Pepsi operate in the same industry and produce goods that are very similar in nature.
  • Coca Cola’s (KO:NYSE) stock price (Price per Share): $66
  • Coca-Cola’s Earnings-per share (EPS): $5.26
  • Coca-Cola’s P/E Ratio: $66 / $5.26 = 12.55
  • Pepsi’s (PEP:NYSE) stock price (Price per Share): $69
  • Pepsi’s Earnings-per share (EPS): $3.73
  • Pepsi’s P/E Ratio: $69 / $3.73 = 18.50

From our calculations, we can see that Pepsi has a higher P/E Ratio than Coca-Cola.

This could be perceived a couple of different ways:

  • Coca-Cola is under-valued and should be bought.
  • Pepsi is over-valued and should be sold or shorted.
  • Investors do not perceive Coca-Cola as doing as well as Pepsi presently.
  • Pepsi is launching a new product that Coca-Cola is not.
  • The truth is normally some combination of these perceptions.

How to use the P/E Ratio

The P/E Ratio by itself is just a number. Just because it is high or low does not lend much intuition by itself. But, when we compare P/E ratios between companies and industries, we really start getting the picture for the particular company we are analyzing.

It does not make much sense to compare P/E Ratios of companies across different industries, as each industry has its own unique way of conducting business.

It’s like comparing a doctor with an engineer to see which one is more valuable. Hence, if comparing P/E ratios, you should compare between companies in the same or similar industries. You may also compare the P/E ratio of a company to the P/E Ratio of the entire industry that it operates in to analyze whether the stock is over or under-valued.

How to interpret the P/E Ratio

High P/E Ratio may mean

  • Market sentiment: An overly optimistic P/E Ratio can indicate the market expects big things from this company. The company has high growth possibilities.
  • Lifecycle: The company could be entering into the Growth or Shake-Out stage of its lifecycle.
  • Industry: Specific Industries have a certain level for the P/E Ratios. For example most technology companies have high P/E Ratios.
  • Cover priced or over-bought: A high P/E Ratio can indicate a given stock is priced to high and ready for a correction. This means that it might be over-valued. Be sure to compare against industry norms.

Low P/E Ratio may mean

  • Lack of confidence: A low P/E Ratio may indicate a lack of confidence in the future of the company.
  • Lifecycle: The company could be in the Mature or Decline stage of its lifecycle.
  • Industry: Specific Industries have a certain level for the P/E Ratios. For example most utility companies have low P/E Ratios.
  • Sleeper: A low P/E Ratio might be a sleeper just waiting to be discovered. This means that it might be undervalued, and a perfect time to start buying the shares.

Important Note

The Earnings-Per-Share in the P/E Ratio formula is a number that comes from the accounting books of the company. Hence, it is possible to manipulate the EPS and hence the P/E Ratio in order to trick investors into perceiving the stock differently. It is important to independently verify that the company’s’ financial statements are sound and true.

Conclusion

A PE Ratio is an important valuation tool that can give key insights into whether a stock may be over or under-valued. Also sometimes known as “price multiple” or “earnings multiple.”

Dividend and Dividend Yield

Dividend

Definition: Payments made to shareholders by corporations. When a company earns profit, the company can use the money to either re-invest in the business (called retained earnings) or to give shareholders as dividends or share repurchase. Many corporations keep a portion of their profit and pay the remainder as a dividend.

Explanation: Corporations can pay dividends in the form of cash, stock or property. Most large profitable companies offer dividends to their stockholders. Their share prices might not move much, but the dividend they pay make up for this. Higher-growth companies typically don’t offer dividends because their profits are reinvested to help continue their higher than average growth.

Dividend Yield

Definition: A ratio showing how much a company pays in dividends each year relative to its share price. Assuming that the stock price does not change, the dividend yield is the only return on the stock holder’s investment.

Dividend Yield = Annual Dividends Per Share / Price Per Share

Example: Dividend yield is a way to measure how much “bang for your buck” you are getting from your investment through dividends.

To better explain dividend yield, lets explore an example. If two companies pay the same annual dividends of $1 per share per year, but XYZ company’s stock sells at $20 while ABC company’s stock sells at $40, then XYZ has a dividend yield of 5% while ABC is only yielding 2.5%. Assuming that all other factors are the same, an investor that is looking to add to his or her income would likely prefer XYZ’s stock over that of ABC’s stock.

IPO

Definition: IPO, the initial sale of stock by a private company to the public which turns it into a public company. IPOs are typically offered by smaller, younger companies who are seeking to expand through the infusion of capital from the IPO. It can also be done by large privately owned companies looking to become publicly traded. Most IPOs use the services of an underwriting firm, which helps it determine the type of security to issue (common or preferred). The underwriting firm also helps select the price and timing for the IPO.

More Detail IPO: The initial day of trading as well as the near term can see huge swings in price. For small private investors, this makes IPOs tough to predict and highly risky for small investors. Most companies with an IPOs are going through a transitory growth period, which adds to the uncertainty regarding their future values.

Stock Charts

Definition: With stock charts, you can view as much as 20 years of data or as little as a few minutes with a variety of line styles, color pallets and comparison features such as technical indicators.

More Detail: Many web sites that offer stock charts offer advanced features. Some of these features offer the ability to plot price, earnings, splits and dividend data against a price trend. There are many types of technical analysis tools to analyze stock price with stock charts. Some of the more popular technical analysis tools include: MACD, moving averages, average true range, Bollinger Bands, Stochastics and pivot points. The most popular chart patterns for spotting uptrends include: cup with handle, head and shoulders, and double bottoms/tops.

Forex

The foreign exchange market (forex or FX for short) is one of the most exciting, fast-paced markets around. Until recently, forex trading in the currency market had been the domain of large financial institutions, corporations, central banks, hedge funds and extremely wealthy individuals. The emergence of the internet has changed all of this, and now it is possible for average investors to buy and sell currencies easily with the click of a mouse through online brokerage accounts.

Daily currency fluctuations are usually very small. Most currency pairs move less than one cent per day, representing a less than 1% change in the value of the currency. This makes foreign exchange one of the least volatile financial markets around. Therefore, many currency speculators rely on the availability of enormous leverage to increase the value of potential movements. In the retail forex market, leverage can be as much as 250:1. Higher leverage can be extremely risky, but because of round-the-clock trading and deep liquidity, foreign exchange brokers have been able to make high leverage an industry standard in order to make the movements meaningful for currency traders.

Extreme liquidity and the availability of high leverage have helped to spur the market’s rapid growth and made it the ideal place for many traders. Positions can be opened and closed within minutes or can be held for months. Currency prices are based on objective considerations of supply and demand and cannot be manipulated easily because the size of the market does not allow even the largest players, such as central banks, to move prices at will.

The forex market provides plenty of opportunity for investors. However, in order to be successful, a currency trader has to understand the basics behind currency movements.

The goal of this forex tutorial is to provide a foundation for investors or traders who are new to the foreign currency markets. We’ll cover the basics of exchange rates, the market’s history and the key concepts you need to understand in order to be able to participate in this market. We’ll also venture into how to start trading foreign currencies and the different types of strategies that can be employed.

ETFs

An ETF, or exchange-traded fund, is a marketable security that tracks an index, a commodity, bonds, or a basket of assets like an index fund. Unlike mutual funds, an ETF trades like a common stock on a stock exchange. ETFs experience price changes throughout the day as they are bought and sold. ETFs typically have higher daily liquidity and lower fees than mutual fund shares, making them an attractive alternative for individual investors.

Because it trades like a stock, an ETF does not have its net asset value (NAV) calculated once at the end of every day like a mutual fund does.

Exchange-Traded Fund (ETF)’ – An ETF is a type of fund that owns the underlying assets (shares of stock, bonds, oil futures, gold bars, foreign currency, etc.) and divides ownership of those assets into shares. The actual investment vehicle structure (such as a corporation or investment trust) will vary by country, and within one country there can be multiple structures that co-exist. Shareholders do not directly own or have any direct claim to the underlying investments in the fund; rather they indirectly own these assets.

ETF shareholders are entitled to a proportion of the profits, such as earned interest or dividends paid, and they may get a residual value in case the fund is liquidated. The ownership of the fund can easily be bought, sold or transferred in much the same was as shares of stock, since ETF shares are traded on public stock exchanges.

ETF Creation and Redemption

The supply of ETF shares are regulated through a mechanism known as creation and redemption. The process of creation/redemption involves a few large specialized investors, known as authorized participants (APs). APs are large financial institutions with a high degree of buying power, such as market makers that may be banks or investment companies. Only APs can create or redeem units of an ETF. When creation takes place, an AP assembles the required portfolio of underlying assets and turns that basket over to the fund in exchange for newly created ETF shares. Similarly, for redemptions, APs return ETF shares to the fund and receive the basket consisting of the underlying portfolio. Each day, the fund’s underlying holdings are disclosed to the public.

ETFs and Traders

Arbitrage. Since both the ETF and the basket of underlying assets are tradeable throughout the day, traders take advantage of momentary arbitrage opportunities, which keeps the ETF price close it its fair value. If a trader can buy the ETF for effectively less than the underlying securities, they will buy the ETF shares and sell the underlying portfolio, locking in the differential.

Leveraged ETFs. Some ETFs utilize gearing, or leverage, through the use of derivative products to create inverse or leveraged ETFs. Inverse ETFs track the opposite return of that of the underlying assets — for example the inverse gold ETF would gain 1% for every 1% drop in the price of the metal. Leveraged ETFs seek to gain a multiple return of that of the underlying. A 2x gold ETF would gain 2% for every 1% gain in the price of the metal. There can also be leveraged inverse ETFs such as negative 2x or 3x return profiles.

Advantages of ETFs

By owning an ETF, investors get the diversification of an index fund as well as the ability to sell short, buy on margin and purchase as little as one share (there are no minimum deposit requirements). Another advantage is that the expense ratios for most ETFs are lower than those of the average mutual fund. When buying and selling ETFs, you have to pay the same commission to your broker that you’d pay on any regular order.

There exists potential for favorable taxation on cash flows generated by the ETF, since capital gains from sales inside the fund are not passed through to shareholders as they commonly are with mutual funds.

Examples of Widely Traded ETFs

  • One of the most widely known and traded ETFs tracks the S&P 500 Index, and is called the Spider (SPDR), and trades under the ticker SPY.
  • The IWM trackes the Russell 2000 Index.
  • The QQQ tracks the Nasdaq 100, and the DIA tracks the Dow Jones Industrial Average.
  • Sector ETFs exist which track individual industries such as oil companies (OIH), energy companies (XLE), financial companies (XLF), REITs (IYR), the biotech sector (BBH), and so on.
  • Commodity ETFs exist to track commodity prices including crude oil (USO), gold (GLD), silver (SLV), and natural gas (UNG) among others.
  • ETFs that track foreign stock market indices exist for most developed and many emerging markets, as well as other ETFs which track currency movements worldwide.

Terms To Know

Bond: Promissory notes issued by a corporation or government to its lenders, usually with a specified amount of interest for a specified length of time. This is seen as a loan from the bond holder to the corporation. The value of Bonds traded are greater than the value of stocks traded.

Asset: An asset is anything that has monetary value and can be sold. Assets can be anything from a pencil (though it is not worth much) to a skyscraper to things like Stocks and ETFs. There can also be intangible.

S&P 500: The S&P 500, or the Standard & Poor’s 500, is a stock market index based on the common stock prices of 500 top publicly traded American companies, as determined by S&P. It differs from other stock market indices like the Dow Jones Industrial Average and the Nasdaq Composite because it tracks a different number of stocks and weights the stocks differently. It is one of the most commonly followed indices and many consider it the best representation of the market and a bellwether for the U.S. economy.

Various Risks of Investing: Your ideal investment or investment portfolio gives you the most opportunity for the risk you can bear. In this sense, it is important to understand the risk inherent in an investment before you look for the opportunity.

Compound Interest: Had the American Indians sold their beads and trinkets they received from selling Manhattan Island, invested their $16 and received 8% compounded annual interest, not only would they have enough money to buy back all of Manhattan, they would still have several hundred million dollars left over. That is the power of compound interest over time.

Mutual Funds: A mutual fund is a form of professionally executed investment tool that merges money from numerous investors to buy securities.

Exchange Traded Fund (ETF): A stock like security that follows an index, a commodity or a basket of assets like an indexed mutual fund. Securities like ETFs trades like a stock. ETFs prices change throughout the day, like a stock, as they are bought and sold.

Balance Sheet: A summary of the financial balances of a sole proprietorship, a business partnership, a corporation or other business organization, such as an LLC or an LLP. Assets, liabilities and ownership equity are listed as of a specific date, such as the end of its financial year.

P/E Ratios: The price to earnings ratio is a useful tool but certainly not the holy grail of investing as it is sometimes made out to be.

Mutual Funds: A mutual fund is a form of professionally executed investment tool that merges money from numerous investors to buy securities.

Exchange Traded Fund (ETF): A stock like security that follows an index, a commodity or a basket of assets like an indexed mutual fund. Securities like ETFs trades like a stock. ETFs prices change throughout the day, like a stock, as they are bought and sold.

DOW Stocks

MMM: 3M
AXP: American Express
AAPL: Apple
BA: Boeing
CAT: Caterpillar
CVX: Chevron
CSCO: Cisco
KO: Coca Cola
DIS: Disney
DD: E I du Pont Nemours and Co
XOM: Exxon Mobil
GE: General Electric
GS: Goldman Sachs
HD: Home Depot
IBM: IBM
INTC: Intel
JNJ: Johnson & Johnson
JPM: JPMorgan Chase
MCD: McDonalds
MRK: Merck
MSFT: Microsoft
NKE: Nike
PFE: Pfizer
PG: Proctor & Gamble
TRV: Travelers Companies Inc
UTX: United Technologies
UNH: UnitedHealth
VZ: Verizon
V: Visa
WMT: Walmart