Paul asks…
Someone explain to me how investing in stocks and bonds work?
What is the difference between stocks and bonds? how does one make profit from investing? in simple terms please…
And i get the concept of buy low and sell high, but why would anyone ever buy an expensive stock?
financi4 answers:
A bond is basically a loan. You earn money from a bond by receiving interest payments. Additionally, a bond has value because people will buy the bond so that they can get those interest payments. The value of a bond changes depending on the difference between current interest rates and the interest rate of the bond. So, in addition to getting interest payments, you can make money by selling the bond for more than you paid for it.
A stock represents ownership of a portion of a company. If you own 1% of the shares in a company, you own 1% of the company. The value of a company goes up and down, and so does the value of your share of the company. You make money for stocks by buying the stock in a company when its value is low, and selling it when its value is high. In addition, many companies pay owners a portion of its profits. This is called the “dividend”. So, in addition to making money by selling the stock, you also make money from the dividends.
People will buy an “expensive” stock if they think that it will get even more expensive in the future.
Thomas asks…
What is a good place for a beginner to learn about investing in stocks?
I would like to start investing, but I have know absolutely nothing about it. Is there a site that I can learn about it? Are there any sites that can arrange stocks by their market price, gains/losses, etc.? Again, I have no clue about it, including how to go about discovering stocks, and how to research them.
financi4 answers:
Hi,
If I were young, I would be investing in small cap growth mutual funds or stocks. Go here for excellent low cost advice (http://www.aaii.com/aaiiportfolios/commentaries/stockportfolio/200701comment.cfm).
Don’t be alarmed at the low cost – it has some of the best financial advice on the Web.
You have lots of time before retirement which means the magic of compound interest will just keep building and building. It really works and if you keep investing every year, in 10 or 15 years you will be surprised at how it mounts up. In 30 years you could be a millionaire which probably won’t amount to much in 30 year owing the the ravages of inflation.
And that’s the primary reason to keep investing in small cap growth stocks – they will flog inflation to death.
When investing in mutual funds, select the no-load funds only. Do not invest in mutual funds with a “load”, an up front commission that you have to pay before when they sell you the mutual fund. Some charge as much as 10% which is a rrip-off. Many studies have shown that the no-load funds do as well as the load funds and sometimes a lot better.
Look at the AAI Shadow Stock Portfolio. I would try and emulate that portfolio if you want to invest in stocks. It was up 25% as of November 2006. The Vanguard Index fund is only up 14%.
AAII has some of the best financial advisers and the cost is very low. They have excellent guides and advice.
You may need a broker so go to e-Trade or Scottsdale who have low commission rates.
Do your own due diligence. Your own ideas are the best. Do not depend on someone else to select investments for you. Learn about investing so you don’t have to ask what stocks to invest in.
Be self reliant.
Remember what Emerson said: A foolish consistency is the hobgoblin of little minds, adored by little statesmen and philosophers and divines. With consistency a great soul has simply nothing to do.
Find stocks that have steadily rising net profits (earnings), low debt, and good P/Es, lots of cash, companies buying back their stock..
What interests you? Find stocks that pique your interest and passion.
You need fast growing good stocks with good earnings and in good sectors. You need to learn more about the stock market before you even think about investing in it.
The stocks world is divided into 12 sectors such as energy which chevron belongs to. It is next to last in the sectors list today.
Technology is numero uno, but things can change in a new york minute, but within the sector, the fastest growing are computer services, not Microsoft. Then, Electronic Instruments and controls. Next is computer storage devices.
The next hot sector is Healthcare, but heed the warning below. Go here for sectors: (http://clearstation.etrade.com/cgi-bin/Itechnicals?Event=srp&Section=redge&Refer=/redge.html)
The best software is Vector Vest if you can afford it. It has sector investing.
Here is a free Web site for charting stocks: (http://www.incrediblecharts.com/).
First of all, stay away from “professional brokers” and tips coming to you via e-mail or friends and acquaintances. And tips at Yahoo! Answers. And e-mail tips. Do your own due diligence – don’t rely on someone else. Read Emerson’s essay “Self Reliance.
Hey! They will say anything to get you to buy their junk. If it’s too good to be true, it is.
Remember this, they are just sales people trying to sell you what their firm is pushing. They are not security analysts or financial planners, not even financial advisers. Trust me, I know from experience that they cannot be trusted especially with a million dollars. You risk losing it all. A million dollar account is known as a “whale” and they would love to get their greedy little paws on it and suck it dry. They just want to make commissions on what they buy and sell for the suckers, err…clients..
Risk avoidance is the name of the game.
Remember, the harder I work, the luckier I get.
Penny stocks are highly speculative. I would avoid the ones under a dollar a share. For example, Best Buy started at less than $5. So there are some good companies, but it takes a lot of digging to find the good ones. You are looking for companies with good earnings, little debt, low capitalization, and good P/Es. For stocks under $5, very few will meet these requirements.
Stay away from the pharms unless they have patented drugs – do not invest in generic pharms, no growth there.
Check out which business sectors are the most popular and invest in the companies in those sectors. The number one, two and three are: technology, health care, and cyclicals (retail). These change periodically so keep current.
Go here for a list of growth stocks: http://www.thestreet.com/_googlen/newsanalysis/ratings/10345212.html?cm_ven=GOOGLEN&cm_cat=FREE&cm_ite=NA
There are these lists all over the Web – you pays your money and takes your chances.
Watch CNBC, but don’t pay too much attention to the talking heads, except for Jim Cramer, the wild man – but he tries to teach you how to invest and has some great advice.
Get Jim Cramer’s Real Money: Sane Investing in an Insane World by James J. Cramer
Listen to Jim Cramer on CNBC.com
Go to Clearstation for quotes and tutorials on investing at (http://clearstation.etrade.com/). Sign up is free. Look up a few stocks. Do their tutorials. Check out the sectors.
Get this book: Value Investing: From Graham to Buffett and Beyond (Wiley Finance) by Bruce C. N. Greenwald, Judd Kahn, Paul D. Sonkin, and Michael van Biema.
Another good book: The Motley Fool Investment Guide for Teens: 8 Steps to Having More Money Than Your Parents Ever Dreamed Of (Motley Fool) by David Gardner, Tom Gardner, and Selena Maranjian
Jim Cramer’s Mad Money: Watch TV, Get Rich by James J. Cramer and Cliff Mason
I Want to Make Money in the Stock Market: Learn to Begin Investing Without Losing Your Life Savings! By Chris M. Hart
Sensible Stock Investing: How to Pick, Value, and Manage Stocks by David P. Van Knapp
Stock Investing For Dummies (For Dummies (Business & Personal Finance)) by Paul Mladjenovic
All About Stock Market Strategies : The Easy Way To Get Started by David Brown and Kassandra Bentley
The Motley Fool Investment Guide and their Web site (http://www.fool.com/).
The Little Black Book of Microcap Investing: Beat the Market with NASDAQ/AMEX Microcap Stocks, OTCBB Penny Stocks, and Pink Sheet Stocks by Dan Holtzclaw
How To Make Money In Stocks: A Winning System in Good Times or Bad, 3rd Edition by William J. O’Neil
Trading for a Living: Psychology, Trading Tactics, Money Management by Alexander Elder
Big Trends in Trading: Strategies to Master Major Market Moves (A Marketplace Book) by Price Headley
Extraordinary Popular Delusions & the Madness of Crowds (Paperback)
by Charles Mackay (Author), Andrew Tobias (Foreword) This book talks about the Tulip craze in Holland where people would mortgage their homes to buy Tulip bulbs. Same thing happened in 2001 – 2002 with the Internet bubble that brought the stock market to its knees. The dot com companies were the Tulip bulbs.
Buy Investors Business Daily. It has lots of tutorials and I like it better than the stodgy Wall St Journal.
Money Game by Adam Smith
Common Stocks and Uncommon Profits and Other Writings (Wiley Investment Classics) (Hardcover)
by Philip A. Fisher. Recommended by Warren Buffet who took $100,000 and grew it to $34 billion!
Value Investing with the Masters by Kirk Kazanjian
Valuegrowth Investing by Glen Arnold
The 5 Keys to Value Investing by J. Dennis Jean-Jacques
The Intelligent Investor Rev Ed. (Collins Business Essentials) by Benjamin Graham. Warren Buffet was his student at Columbia.
The Money Masters by John Train
The Bogleheads’ Guide to Investing by Taylor Larimore
Common Sense on Mutual Funds: New Imperatives for the Intelligent Investor by John C. Bogle
Why Smart People Make Big Money Mistakes And How To Correct Them: Lessons From The New Science Of Behavioral Economics by Gary Belsky
Rule #1: The Simple Strategy for Successful Investing in Only 15 Minutes a Week! By Phil Town . See his Web site at (http://www.ruleoneinvestor.com/). Free sign-up. I got the book at the library.
Listen. You don’t have to spend a lot of money on these books – most can be found at your library and those that your library doesn’t have they can usually get from other libraries in your state.
Most of these books talk about stock and mutual fund investing, but for a good introduction to other forms of investing Gerald Appel has a great book called Opportunity Investing – How to Profit When Stock Advance, Stocks decline, Inflation Run Rampant, Prices fall, Oil Prices Hit the Roof and Every Time In Between.
First, Break All the Rules: What the World’s Greatest Managers Do Differently by Marcus Buckingham and Curt Coffman Not a book on investing, but it’s a nice segue into the next book.
Now, Discover Your Strengths by Marcus Buckingham and Donald O. Clifton
Go Put Your Strengths to Work: 6 Powerful Steps to Achieve Outstanding Performance by Marcus Buckingham
Finding your strengths is important when investing. These books teach you to build on your strengths, what you a good at. Everyone is good or passionate about something. Why not get better at what you are good at?
Another good book is: Opportunity Investing: How To Profit When Stocks Advance, Stocks Decline, Inflation Runs Rampant, Prices Fall, Oil Prices Hit the Roof, … And Every Time in Between (Hardcover)
by Gerald Appel
Most mutual funds do not even keep up the the return on the S&P. That’s like 99% of them.
Vanguard Index funds are a no brainer.
A CD is better than a savings account. They range from six months to several years. You cannot touch your money tho until the time limit is up.
Check out this Web site on Direct Investment Plans where you can buy shares directly from companies: (http://www.fool.com/School/DRIPs.htm). Usually no fees and you can buy one share at a time.
Bonds are probably the safest. But they are not for the young. You might try a bond fund. They might return 5 or 6 percent. At 5% a million would return $50,000 a year – not a bad income. Remember, you have to pay taxes on the $50,000.
There are also municipal bonds and the income from them is taxfree especially if you buy them in a state that offers them, but they only pay about 3%, but it’s mostly taxfree.
Look into Fidelity sector funds. Buy the top three, then in six months look how they are doing and if not so hot, select the next three that are best. Do this for a few years and you will make lots of money.
Kindest Personal Regards,
Walt Brown
Site Build It Certified Webmaster
capecod1@capecod-beaches.com
P.S. This is a life-long learning process. Reading these books and applying the rules to analyzing stocks that may be good It takes time. Be patient and keep reading and listening. Don’t be a sucker and follow someone elses advice. Be your own man or woman. Depend on no one except yourself. You can only get smarter and stronger that way.
P.P.S. Internet has lots of good stuff, for example (http://stockcharts.com/school/doku.php?id=chart_school:technical_indicators:moving_average_conve
Stockcharts.com is very good and their discussion of MACD is one of the best, barring its originator, Gerald Apple, but now we are getting into Technical Analysis and that is not for beginners. But it is an important factor in finding good stocks that are going up and growing. Remember, tiny acorns grow into mighty oaks.
Joseph asks…
What to consider when investing in stocks?
I am interested in making some money while investing in some stocks, I want to know what are the risks and other problems or issues I should consider before investing my money, I know the risk if I could easily lose my investment really quick, what else.
financi4 answers:
Investing is one way that can make your money grow. However, there are many things that need to be known before investing. The basics are not hard and can be learned by anyone. The earlier you learn it the better.
Before investing there are a few factors that you must take into into consideration. You need to know the basics first. Many people make the mistake of jumping into the market without doing any research. After learning, the beginner can start investing without any uncertainty.
Robert asks…
Is investing in stocks considered a business?
I’m applying for a government agency’s program which helps graduating students to put up their business after graduation. I can’t think of any business applicable to me. I can’t cook so well. I can’t do wedding, birthday invitation cards.
I just thought of investing in stocks and managing it properly afterward. I just research – read newspapers, surf the net and everything.
Do you think the agency will approve my application?
Are there any alternatives/suggestions for a small business that can be put up worth 50, 000 pesos only?
Thank you.
financi4 answers:
Investing in stocks can be considered a business. Some will point out the benefit of doing it under an entity such as a C corp. Expect to take about 4 years to learn to do it profitably.
Even though you can’t cook its pretty easy to learn basic cooking. A taco stand or hot dog stand should be easy enough to run.
Good luck
Steven asks…
Does investing in stocks have a positive or negative effect on the economy?
Supposedly, investing large amounts of money in post-IPO stocks simply locks that money away, and pulls it out of circulation. Is that true, and what effect does this have on the economy as a whole? (Is a lot of people with a lot of wealth sitting on their money, with it invested in stocks and only growing value for said people, a good thing or a bad thing?)
financi4 answers:
Buying post IPO stock does not change the amount of money in the economy because what you pay someone else gets so the net effect is zero. Saving in economics is refraining from consumption and if consumption plus expenditures on new investments falls the economy slows but if everything is consumed the economy can not grow.
Note: Most of the variation over the business cycle is due to the change in expenditures by business ( investment). People try to keep their consumption at a constant level, and more or less do unless they lose their jobs.
Charles asks…
what is the best way to invest money apart from investing in stocks in India?
I am an NRI living in Dubai. After all my expenses I am able to save around Rs.50000 per month. I would like to know what are the safe and best options of investing this money apart from stocks. Though I think stocks or shares will give good returns there is an element of risk.
Is it wise to invest in ULIPs or Life insurance policies?? please help
financi4 answers:
Life insurance policies are not investments. Please do not treat them as such.
Risk is always there whenever and wherever you invest. Even if you invest in bank fixed deposits – there is inherent risk of bank default.
If you do not wish to invest in stocks but wish to reap benefits of stock investing- invest systematically in units of good mutual fund schemes. Read and understand before you invest in any scheme.
Investing in real estate is a good option but unfortunately it is not available on monthly basis ( unless you take a housing loan or so). Secondly liquidity is almost non-existent in real estate investments. They are basically long term ones.
An interesting option could be investing in “business” with people you know well. It requires monitoring and constant interaction. But whenever you retire from your current profession and if your business is stabilised by then, then you have readymade activity after your retirement.
Mark asks…
What would you consider to be a good profit percentage from investing in stocks?
I’ve been investing in stocks for almost half a year now, and on average I’ve been making about 4-5% profit on each stock that I’ve bought and sold. Would you consider this to be a decent profit range? I know different people will make different amounts, but does this seem reasonable for a first-timer?
financi4 answers:
Obviously the return will vary with the economy and the more, the better. It’s often said that Warren Buffet’s returns in Berkshire Hathaway is about 28% per annum so there’s no doubt that such a return is very good. However, the most likely indicator of what you will achieve over the next year is often estimated by comparing the total market value with the last estimate of the GDP. The ratio would now indicate that a 3.4% return over the next year would be reasonable.
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