What Is The Meaning Of The Dow Jones Index

The investment rules begin with three safeguards (A, B and C) related to the selection of companies for buying. Importantly, all three safeguards have to be concurred with for share buying to commence. If they are in place, you should buy on the next day. There are two safeguards connected with the selling process (D and E), of which only one has to be complied with. These safeguards will be constantly referred to later. In order to imprint the significance of the safeguards into yaw memory

(A) Buy shares when the price makes a new high for 12 months o longer;

(B) Buy shares when profits are set to break previous records;

(C) Buy shares if the price earnings ratio is at least 25 per cent below the sector average;

(D) Sell shares if the price falls back 17.5 per cent or more from the peak price (a stop-loss);

(E) Sell shares if the price earnings ratio rises 25 per cent or more than the sector average.

If you are unsure of terms like price earnings ratio (PER), earnings per share (esp.), tax charge and rights issues turn where definitions of these items are interpreted. Now let us look at each safeguard in depth.

• Safeguard (A) — Buy shares when the price makes a new high for 12 months or longer.

When I was looking at recording those company shares achieving new price ‘highs’, I suggested you should be on the alert for companies where fresh highs of at least 12 months’ duration were attained. I now argue the case as to why the longer time span for the achievement of a high is preferable to a shorter period of, say, a few months. My justification begins with the following thoughts. This is fundamental in understanding what is the meaning of the Dow Jones index.

Why 12 months or longer? Tuition of the upward momentum for a share price of a particular company relies on institutions targeting the company as a kg-term investment and buying its shares. Shares in companies which have fallen on hard times, but where there may be a turnaround, are prime investment candidates sought by institutions.

A share price may take months to recover from a collapsed position. Once the bad news which precipitated the decline in the share price fades from the memory, the seeds of recovery can begin to germinate. A subsequent progressive rise of the share price, albeit in fits and starts, is evidence that increasingly positive opinions about the company’s prospects are beginning to hold sway. Significant share price gains sought by the private investor can only be satisfactorily constructed over months, if not years.

Lower profits of 30 per cent in the year ending 30 September 1989, compared with the previous year, marked the nadir for the company’s share price. Well over a year passed before the market was satisfied that a strong recovery was under way. The share price showed a willingness to rise in 1990, and then suffered a partial correction for several months before marching ahead strongly. Early in 1991 the new highs being achieved matched share price values stretching back to the early months of 1989.

The share price increase over time of a recovery situation is usually symptomatic of an accumulation of shares by institutions. For example, fund managers may be reacting to in-depth research on the company conducted by a stock broking analyst. On balance, fund managers are unlikely to ditch the shares in the short term once a buying program is under way. Buying from all corners of the investment field may continue because the shares are regarded as being fundamentally cheap.

But, in all probability, the main buying force will be an extended purchasing program, resembling, the one mentioned above, resulting from long-term commitments by institutions to raise their holdings. Therefore, following a fall, an upward trend for a share price gained over a period of many months begins to look sustainable and gathers further support for this very reason. This is key in knowing what is the meaning of the Dow Jones index.