BUY when the fundamentals and the price both make senseSELL to collect profit or cut a loss before it growsHOLD when the long-term case hasn't changedSECTOR a group of stocks, often across one industryNET INCOME total earnings after all expenses and taxesANNUAL REPORT a company's yearly account of performance and plansSESSION 12 Buy, Sell, or Hold?
Owning a stock isn't a one-time decision. Every quarter, every news cycle, and every earnings report is a fresh chance to ask whether the case for owning it still holds up. This session builds the habit of checking.
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Background
Reading the Company Behind the Ticker
An annual report tells you what a company does, how it performed financially, and what it's planning next. Any company with more than $10 million in assets and more than 500 shareholders is required to file annual and other periodic reports with the Securities and Exchange Commission.
Annual reports are usually free to access. Try nyse.com, nasdaq.com, or a company's own site, most have an "Investor Relations" link in the footer that leads straight to the report. For example, Target's annual report is reachable from the "Investors" link at the bottom of target.com.
Comparing a company to others in the same industry, "sector analysis," is just as important as reading its own report in isolation. A company can look great on its own numbers and still be the weakest performer in its group, or look weak on its own numbers and still be outperforming a struggling sector.
Key Terms
Vocabulary
Tap a card to flip it and reveal the definition.
Cyclical Stocks
Stocks of companies whose performance tends to mirror the economy. They turn up when the economy grows and fall when it falters. Automobiles and housing are classic examples.
Industry
A group of companies producing similar products or services.
Net Income
Total earnings after all expenses and taxes have been paid.
Profit
What remains after subtracting a company's costs from its revenue. Profit is the reward for successfully producing what people want at a price they're willing to pay.
Revenue
The money collected for providing a product or service, before any costs are subtracted.
Sector
A group of stocks, often spanning one industry. A single stock's performance can be measured against the performance of its whole sector. Pharmaceutical companies, for example, sit in the health care sector.
What You'll Be Able To Do
Objectives
Draw conclusions on whether to buy, hold, or sell, based on group and individual research.
Compare and contrast companies using stock market statistical data.
Math: analyze basic financial data.
Technology: use the internet to obtain annual reports and research companies across the same industry.
Warm-Up
Making Portfolio Investment Decisions
Before the activity, sort out why an investor takes each of the three actions:
Buy
To position for future profit
To save toward long-term goals like retirement
Sell
To lock in profits already earned
To protect against further loss while the price is dropping
Hold
Historical trends suggest the greatest returns come from staying invested over the long term
Discuss: how do you know the "right" action to take? What separates an educated investment decision from a guess?
Activity Sheet 1
Comparing Companies across the Same Industry
XYZ and EFG are both internet companies and direct competitors. Compare their three-year financials below, then answer the questions.
XYZ
2001
2002
2003
Revenue
1,625,097
3,574,517
3,756,668
Net Income
237,879
839,553
1,213,022
52-Week High / Low39.78 / 30.30
Cost Per Share38.49
EFG
2001
2002
2003
Revenue
1,465,934
3,189,223
4,219,468
Net Income
105,648
399,119
1,093,189
52-Week High / Low379.17 / 161.31
Cost Per Share395.12
Q1
Comparing the two internet companies, what do you notice about each? Which appears to be doing better? If you owned neither, which would you buy, and why?
DiscussionXYZ's stock is far cheaper per share than EFG's. XYZ's revenue growth stalled between 2002 and 2003 (3,574,517 → 3,756,668, a small step), while EFG's revenue kept climbing at a faster clip (3,189,223 → 4,219,468). EFG is also now generating a larger net income than XYZ. On growth and profitability, EFG looks like the stronger company; a buyer with no existing position would lean toward EFG, with the trade-off being a much higher entry price per share.
Q2
You own 100 shares in XYZ. Based on the data above, would you buy more, sell, or hold XYZ? Why or why not?
Sell / RotateDiscussionA case can be made for selling XYZ and shifting into EFG, since EFG is showing stronger revenue growth and greater profitability. The trade-off is real: EFG costs roughly 10 times as much per share, so the same dollar amount buys far fewer shares. That cost gap is the main argument for holding XYZ instead of switching.
Q3
Based on the information provided, if you did not already own EFG, would you buy it? Why or why not?
BuyDiscussionThe growth and profitability trend favors EFG, so a buy case is reasonable, with the same caveat as above: at roughly ten times the price of XYZ, EFG takes a much larger dollar commitment to build an equivalent position.
Q4
You own 50 shares in EFG, bought in 2002 at $10.54. Would you buy more, sell, or hold? Explain.
Sell (some) or HoldDiscussionThose 50 shares were bought at $10.54 and are now worth roughly $375 to $395 each, an enormous gain. One reasonable path is to sell some shares to lock in profit and reinvest the proceeds elsewhere for diversification. Another reasonable path is to hold, since the company's revenue and net income are still both climbing. Either is defensible; this is a personal risk-tolerance call once a gain is this large.
Math Behind the Market · Thinking Algebraically
Calculating Dividends
The dividend formula: d = (p · i) ÷ (n · s), where d is the dividend paid per share each time, p is the proportion of net income dedicated to dividends, i is annual net income, n is the number of payments per year, and s is shares outstanding.
Q1
A company dedicates 15% of its $31.2 million annual income to quarterly dividends for 7,850,000 outstanding shares. How much is each dividend payment per share?
Verified(0.15 × 31,200,000) ÷ (4 × 7,850,000) = 4,680,000 ÷ 31,400,000 = $0.149 per share. Matches the source answer key.
Q2
A company allocates 11% of its $1.56 billion annual net income to dividends, paid in three equal installments across 800,000,000 outstanding shares. How much is each dividend payment per share?
Corrected(0.11 × 1,560,000,000) ÷ (3 × 800,000,000) = 171,600,000 ÷ 2,400,000,000 = $0.0715 per share. The source answer key states $0.215, which doesn't reproduce from the given formula and figures.
Q3
A company awarded $0.274 dividends twice during the year, with 44,000,000 shares outstanding. If net income was $2.78 billion, what proportion of income went to dividends?
Verified(0.274 × 2 × 44,000,000) ÷ 2,780,000,000 = 24,112,000 ÷ 2,780,000,000 = 0.867% of income. Matches the source answer key.
Q4
A company awarded $0.327 quarterly dividends, using 16% of its $695,000,850 net income. How many shares outstanding did it have?
A company has $45,922,000 of net income and wants to give three equal annual dividends of $0.31 to each of its 4,650,000 shares. What percentage of income does that require?
Verified(0.31 × 3 × 4,650,000) ÷ 45,922,000 = 4,324,500 ÷ 45,922,000 = 9.42% of income. Matches the source answer key.
Q6
A stock pays a $0.68 annual dividend for each of its 120 million shares. That total represents 8% of annual net income. What was the annual net income?
Verified(0.68 × 120,000,000) ÷ 0.08 = 81,600,000 ÷ 0.08 = $1,020,000,000 annual net income. Matches the source answer key.
Math Behind the Market · Interpreting Statistics I
Using Data to Decide whether to Buy, Sell, or Hold
Five statistics that describe a company or a stock's performance. Tap each to reveal what it tells you.
1
1-Day Price Change %
From sourceHow much a stock's price has changed in a 24-hour period: (yesterday's close − today's close) ÷ yesterday's close × 100. Example: TASER Intl. (TASR) closed at $16.41, then $16.16 the next day. (16.41 − 16.16) ÷ 16.41 = 0.01523, × 100 = 1.52%. The source answer key's intermediate figure (0.152346) is off by a decimal place, but its final 1.52% is correct.
2
Market Cap
CorrectedThe total dollar value of all of a company's outstanding shares: shares outstanding × price per share. Example: 25,000,000 shares × $35.75 = $893,750,000. The source answer key shows this as "893,375.000," which is both mis-formatted and a digit transposition of the correct product.
Large cap: $10 billion+ · Mid cap: $2–10 billion · Small cap: under $2 billion.
3
P/E Ratio
From sourceA valuation ratio: current share price ÷ earnings per share (EPS). Example: trading at $43, EPS of $1.95: 43 ÷ 1.95 = 22.05. A higher P/E generally signals investors expect stronger future earnings growth, but it's most meaningful compared against other companies in the same industry.
4
Dividend Yield %
From sourceHow much a company pays out in dividends each year relative to its share price: annual dividend per share ÷ price per share. Example: $1.01 ÷ $42.95 = 0.0235, × 100 = 2.35%.
5
Earnings Per Share (EPS)
From sourceThe portion of a company's profit allocated to each outstanding share: (net income − preferred dividends) ÷ average outstanding shares. Example: (25,000,000 − 1,000,000) ÷ 15,000,000 = 1.6. EPS is a key input to the P/E ratio.
Math Behind the Market · Interpreting Statistics II
Rate the Stock: Sector, Industry, and Competitor
As a junior analyst, compare each company's statistics to its sector and industry, then reach a preliminary Buy, Sell, or Hold call.
1-Day Chg %
Market Cap
P/E
Div. Yield %
LT Debt/Equity
Sector
-1.76
4421.1B
14.62
2.22
0.71
Industry
-1.49
92.8B
13.00
2.62
0.72
Company A
-2.73
24.6B
16.12
0.80
0.29
Company B
-3.18
17.8B
21.63
0.60
0.20
A
What preliminary rating would you give Company A?
HoldDiscussionCompany A dropped more than the sector or industry that day, and its P/E (16.12) runs above both benchmarks, meaning it's priced for more growth than its peers. Its dividend yield (0.80%) trails the sector and industry, but its debt-to-equity (0.29) is far more conservative than either. Nothing here is a strong sell signal or a compelling new-buy signal; a Hold rating, watching the next earnings report, is a reasonable preliminary call.
B
What preliminary rating would you give Company B?
Hold / WatchDiscussionCompany B had the steepest one-day decline of the four rows (-3.18%) and the highest P/E (21.63), the most expensive of the group relative to earnings. Its dividend yield is the lowest (0.60%), though it also carries the lowest debt-to-equity (0.20), the most conservative balance sheet in the comparison. The combination of a rich P/E and a sharp same-day drop is a caution flag worth investigating further before adding to a position; existing holders have less reason to panic given the low leverage. A Hold, leaning cautious, is defensible here.
Math Behind the Market · Communicating Quantitative Information
Convincing Others: Lending and Leasing, Inc.
One company, one full year of data. The task: write a persuasive memo using only the pieces of data below that best support your position, then convince a group.
~$29
~$33
~$19
~$17
~$23
~$19
Early Q1
Q1 peak
Q1 crash
Q2 low
Q3 rally
Q4 close
Stock Price History
Beta
0.79
52-Week Change
-12.56%
S&P 500 52-Week Change
8.52%
52-Week High (20-Mar)
52.09
52-Week Low (01-Aug)
30.94
50-Day Moving Average
43.29
Share Statistics
Average Volume (3-month)
3,085,410
Average Volume (10-day)
3,556,510
Shares Outstanding
516.40M
Float
515.88M
% Held by Insiders
0.07%
% Held by Institutions
86.30%
Shares Short
3.26M
Short Ratio
1.1
The company missed its fourth-quarter earnings mark. Its P/E is 15.91 against an industry P/E of 14.26. Its market cap is $106.3 billion against an industry average of $230.4 billion. It was founded 55 years ago and has been publicly traded for the last 13.
Sell
Write a persuasive memo convincing a teammate it's time to sell.
SellThe stock price has been declining for the past year. Lending and Leasing missed its fourth-quarter earnings mark. Its P/E is higher than the industry's, and its market cap is less than half the industry average. Over the past 52 weeks the stock returned -12.56% while the S&P 500 returned 8.52%, badly lagging the broader market.
Buy
Write a persuasive memo convincing a teammate it's time to buy more.
BuyLending and Leasing is set to take off. It's small relative to others in its industry, and the price looks undervalued, buy low, sell high. 86.30% of the stock is held by large institutions, a vote of confidence from professional investors. The company has been operating for 55 years and looks poised for a strong run.
Hold
Write a persuasive memo convincing a teammate it's time to neither buy nor sell.
HoldMissing the fourth-quarter mark means the company will be under real pressure to perform next quarter, this is a moment to watch closely, not react. Selling now would lock in a heavy loss. The better move is to hold the position and dig into the company's next earnings report before deciding either way.
Math Behind the Market · Tackling Complex Problems
How Dividends Affect Buy, Sell, or Hold
A company deciding how much to pay in dividends considers its net income, reinvests a portion back into the business, and pays the rest out to shareholders.
Q1
Company A had $35.8 million net income and reinvested 80% of it, splitting the rest into four equal quarterly dividends across 9.23 million shares. How much is each dividend worth?
Verified35,800,000 × 0.20 ÷ 9,230,000 ÷ 4 = $0.194 per quarter. Matches the source answer key.
Q2
Company B reinvested 85% of its $1.3 billion net income, paying the rest across roughly 482 million shares in equal quarterly dividends. How much is each dividend worth?
Verified1,300,000,000 × 0.15 ÷ 482,000,000 ÷ 4 = $0.101 per quarter. Matches the source answer key.
Q3
Company C paid $0.272 dividends per share each quarter across 8,250,000 shares, totaling 12% of net income for the year. How much did the company reinvest?
VerifiedAnnual dividends paid: 0.272 × 8,250,000 × 4 = $8,976,000. That equals 12% of net income, so net income = 8,976,000 ÷ 0.12 = $74,800,000. Reinvested = 74,800,000 − 8,976,000 = $65,824,000. Matches the source answer key.
Q4
Company D paid $0.184 quarterly dividends across 67,342,000 shares. Total net income for the year was $1.14 billion. What proportion of net income went to dividends?
VerifiedAnnual dividends paid: 0.184 × 67,342,000 × 4 = $49,563,712. 49,563,712 ÷ 1,140,000,000 = 4.35% of net income. Matches the source answer key.
Q5
Using Companies A through D above: (a) which paid out the most money in total dividends? (b) which paid the highest dividend per share? (c) which two paid the highest dividends per share?
CorrectedThe source answer key names two companies, "Industrial-Strength Industries Inc." and "Mega Media," that don't appear anywhere in this problem set; those names don't match Companies A–D. Recalculating directly from A–D:
Total annual dividends: A = $7,160,000 · B = $195,000,000 · C = $8,976,000 · D = $49,563,712. (a)Company B paid the most in total dividends, by a wide margin. Annual dividend per share (quarterly rate × 4): A = $0.776 · B = $0.404 · C = $1.088 · D = $0.736. (b)Company C paid the highest dividend per share, at $1.088 annually, this figure matches the "$1.088" cited in the source key, suggesting Company C is what the key's "Mega Media" refers to. (c) The two highest per-share are Company C ($1.088) and Company A ($0.776), matching the source key's stated answer of "Company A & Company C."