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Q: The Dow was recently at 25,600. What, exactly, does that number represent? — M.M., Decatur, Illinois
A: “The Dow” refers to the Dow Jones Industrial Average (DJIA), a U.S. stock market index established in 1896. It’s an average of the stock prices of 30 companies that include Apple, Boeing, Coca-Cola, The Home Depot, McDonald’s, Nike, Procter & Gamble, Walmart and Visa. It doesn’t look like an average, though, when it’s 25,600 and many of the stocks sport prices below $100.
It makes sense, though, because the shares, on average, actually would trade at lofty levels — if they had never been split, issued dividends or undergone major changes such as spin-offs or mergers during their time in the index.
Therefore, in order to account for all those changes, the stock prices of the 30 component stocks are added together and then divided by the “divisor” (which is adjusted frequently and was recently 0.14748071991788). To understand how each stock affects the average, know that if, say, Visa stock rises by $10, you can just divide 10 by the divisor and learn that the DJIA will rise by about 67.81 points (10 divided by 0.14748071991788 equals 67.805).
Q: What are “orphan drugs” in the pharmaceutical world? — T.B., Hattiesburg, Mississippi
A. The U.S. Food & Drug Administration has an Orphan Drug Designation program, offering incentives for companies to develop drugs to treat, diagnose or prevent “rare diseases/disorders that affect fewer than 200,000 people in the U.S., or that affect more than 200,000 persons but are not expected to recover the costs of developing and marketing a treatment drug.” Since many of these drugs end up with steep prices, they can make a lot of money for biotech and pharmaceutical companies.
When to Sell
When the price of a particular stock suddenly drops sharply, many shareholders rush to sell it. Many sell their stocks when the market suddenly heads south, too. Those can be costly mistakes, though.
Don’t sell just because a stock or the market is falling, or you’ve heard some rumors, or someone tells you to sell. Here are good reasons to consider selling:
¯ If you can’t remember why you bought the stock.
¯ If you can’t explain exactly how the company makes money.
¯ If you hold too many or too few stocks. Portfolios should be diversified, but not too diversified. Aiming for around eight to 15 companies is good for most people.
¯ If the reason you bought shares is no longer valid. For example, maybe the company is suddenly facing strong competition.
¯ If the stock seems significantly overvalued. Consider the tax consequences, though. If you expect it to keep growing over the long run, hanging on can be best.
¯ If you find a much more attractive investment. If your calculations suggest that a holding is now fairly valued and stock in another great company appears to be very undervalued, you could gain more in the other stock. (Again, consider tax effects, though.)
¯ If there are red flags such as shrinking profit margins or steep debt. Short-term problems can be OK, but look out for long-term ones.
¯ If you’ll need that money within five (or even 10) years, it should be in a less volatile place than stocks. Consider a money market account or a CD.
¯ If you’re only hanging on for emotional reasons.
Focusing only on whether to buy a certain stock and not giving much thought to when you should sell it is a costly blunder. If you leave your dollars in a poor investment, they can’t grow for you in a great one.
I bought shares of Novo Nordisk for around $44.50 per share, and now, about a week later, shares have fallen below $41. From my reading, I gather that they may continue to drop and not recover for years. Should I sell and take a big loss or hold on? — R.W., online
The Fool responds: You’re being very impatient. Stocks move up and down throughout each day and week and year. Over the long run, the stocks of healthy and growing companies should increase in value, making shareholders wealthier. But even great companies’ stocks have languished for months or even years — and terrific investments can fall in value for a while, too. A week is way too short a time in which to expect to reap a profit.
Many fortunes have been made by investing in great companies and then hanging onto the shares for many years — as long as the companies remained strong and with bright futures. If you don’t have the confidence to remain invested in individual companies, consider just socking money away in a low-fee broad-market index fund, such as one that tracks the S&P 500.
Novo Nordisk was recently trading around $47.50 per share. It’s facing pricing pressures for its diabetes drugs and investor opinions about it are mixed. Its future has promise, though, and The Motley Fool has recommended it.
EDITOR’S NOTE: The Motley Fool is an investment column created by brothers David and Tom Gardner and distributed by Andrews McMeel Syndication.