THE ANNUAL DISCOUNT BROKERAGE SURVEY

Welcome to the 2011 survey of discount brokerage firms.  Information on self-styled discount brokers has been compiled for almost four years; it’s now time to publish.  This introduction contains a description of the methodology used to grade firms.  A table in the third post shows the results.  Towards the end there are posts where each broker is described in some detail using a standard format.  The third article focuses on a breakdown of the format used to describe each individual broker.

The approach, in summary, is as follows: brokers were analyzed on commission rates, additional fees and overall service.  A total of sixty-four brokerage websites were included in this survey.  If there are more out there that were missed, please let me know.  Each broker was assigned a letter grade, A through F.

fEarnings per Share 

In the next few articles, the term "earnings" and "earnings per share" will be used very frequently.  In fact, in the analyses that follow, earnings will be paramount; they'll be used in some shape or form pretty continuously.  The main focus will be on earnings per share.  We're focused on buying shares of common stock, so normalizing the earnings to the number of shares makes sense. 

So before discussing Earnings per Share or EPS, the term should be defined. EPS (Earnings per Share) is Net Income (after dividends have been paid on preferred shares) divided by the number of shares outstanding.  Since the number of outstanding shares fluctuates a lot, the "profit" is actually dividend by the average number of outstanding shares.  Each of those two new terms needs to be discussed.

Introduction

In the article entitled The Dividend Discount Model interest rates were examined together with a short introduction to discounting a stream of cash flows and determining a value for an investment opportunity.  This value depended on the rate of return required by a willing buyer.  In this blog, the goal is to turn this effort on its head and learn how to figure out an interest rate if we only know the stream of cash flows and the future value.  The effort borrows from areas with which most people are already familiar: a savings account.  It shows how the mechancis of calculating interest payments in such an account can be adapted to figuring out how well a portfolio is performing.  The method that Quicken and other similar packages and sites uses will be demonstrated and shown to be equivalent to an Excel function called XIRR.  The limitations of this approach will be touched on.  Be forewarned: this article is long!