What is a stock?

When a company becomes a corporation, it split itself up into little parts. Each one is called a share.  When a company becomes publicly traded, we call them stocks. So, when you buy a stock, you now own one share in the company.

Here’s an example. The Cookie Company (TCC) decides on 100 million shares. Initially, some are given to owners, investors, employees, etc. The rest can be set aside for when TCC needs more money. Usually to grow, maintain or expand into new areas.

If TCC wants to sell cookies around the world, they can decide to go public. They find an underwriter (bank, broker, etc.) who helps them decide on a price and amount. So, TCC sets aside 10% of their shares (10 million) and wants $10.00 per share. Then the underwriters find a store to sell these shares. We call these a “stock market” like NY Stock Exchange, Nasdaq, London Stock Exchange, etc.

Now, everyone involved drums up interested in the new Initial Public Offering (IPO). Once they find enough buyers, or owners willing to sell, at 10.00. The sale is ready to start.

This means the company now has 100 million dollars and only relinquished 10% of the company to the public. When the big IPO day arrives, the new investors can sell their shares at $10.00 each when the market opens. Now, the law of supply and demand takes over. First, the supply is limited because there are only so many shares available.

If demand is strong the price goes up. The company is happy because their stock price going up makes them look popular and successful. If everyone goes, “Nah, I’m not interested”, the price goes down.  At this point the company (and stock price) is depressed. A falling initial share price means investors aren’t interested which makes the business look unpopular.

However, this may be short-lived. Because stock prices always go up and down depending on what people are willing to pay or sell their shares for.

How do I make money on stocks?

1. You buy the stock at a low price and sell if the price goes higher. Thus, the idea – Buy Low, Sell High.

So, I buy 100 shares of TCC at $20 = $2,000.  Sell 100 shares of TCC at $40 = 4,000. I make $2,000. At the time of writing, most brokerages do not have a commission on buying or selling. So your profit is pure.

2. The stock pays a dividend.

A dividend is a set amount that the company pays to shareholders. Each company determines what amount they pay (usually done as a percentage of their earnings), and when they pay it.  Most stocks pay dividends every quarter; some pay twice a year, and some pay special dividends every so often (kind of like getting a bonus from your employer).

What is the stock market?

A stock market (also called a stock exchange) is the generic name given for the place you go to buy stocks, bonds, mutual funds etc. 

Imagine it as kind of like a large stock mall, with a bunch of stores inside that carry different kinds of stocks.  Each small store is called an exchange or index, and they basically handle certain types of stocks.  When a company is “listed”, it means that stock can be bought and sold only at a certain exchange.  So, if a company is listed on the Hong Kong, Korean, Japan or London exchange you have to have access to those markets in those countries (often traded using the local currencies). US Markets include:

• The Dow is basically the largest 30 companies in the U.S. 
• The Nasdaq is basically where technology shares are listed. 
• The S&P is basically a group of 500 larger companies. 
• The Russell 2000 is basically a group of small-cap stocks.
• The OTC (over the counter) exchange is where various investments are traded including international corporations or very small companies. They are riskier and we call these Pink Sheet because they used to use pink paper to write down these riskier trades on

How do I buy Stocks?

 1. When buying stocks here are the basics you will see:

• Share Price = the price the stock is currently trading at.
• Bid Price = what people are willing to buy per share at a particular time.
• Ask Price = what people are willing to sell their shares at.

These give a basic idea of what value investors perceive the stock to be worth.

2. To buy stocks you must choose:

• Action = Buy or Sell
  
• Ticker Symbol = Special symbol for a company – Apple is AAPL, Microsoft = MSFT, ATT = T
  
• Quantity = How many shares you want to buy. You can place multiple orders for the same stock at different amounts and prices.
  
• Order Type and Price: A, B, or C
• A. Market purchase = An order to buy a certain amount at the going rate anytime the market is open. Basically, you get what you get regardless. You may get a $9:50 stock at $9 or $10. It’s pretty much guaranteed but depends on how fast the order is triggered.
• B. Limit purchase = An order to buy a certain amount at a certain price by a certain date. Unlike a market order, you may or may not get any stock at all. There’s no guarantee the order will trigger at your desired price.
• C. Stop-Market or Stop Limit:  If you want to be more specific, you can tell it at what price to trigger a trade and at what price above or below you want to pay. This increases the chance of getting stuck within a particular range.
  
• Time in Force A, B, C, and D
• A. GTC = Good-Till-Canceled, this means your bid is open typically for 90 days.
• B. Day = The order disappears at end of the day.
• C. GTD = Good-Till-Date, this lets you choose the date you want to cancel an order.
• E. Extended hours = a special ability to trade stocks before and after the market closes (not all brokers do this).
  
• Special Instructions
• AON = Buy or sell your total quantity or nothing at all. That’s because partial orders sometimes happen. Say you want 100 but only got 25. But the order may stay open.
• FOK = Fill or Kill. If it doesn’t fill, then the order disappears.

Isn’t buying stocks the same as gambling?

First, any time you invest money you are taking a gamble. Second, most definitions of gambling refer to the act of betting money on some intangible asset (like a poker game, athletic event, slot machine, or raffle). This means you don’t really own anything, but hopefully, you will, if you win the bet. Sometimes it’s built on some skill, sometimes pure luck.

In the purest form, buying stocks is a gamble. However, unlike other forms of gambling, you actually own a portion of a tangible asset like a company, or basket of companies (like a mutual fund).

Most gambling it’s an all-or-nothing deal.  With stocks, you can buy and sell at regular intervals. If you don’t like where the stock is going you can pull out and sell, without losing all your initial investment. Also, if you own a dividend-paying stock, you get your money back regularly. Even while you wait for the stock price to go back up.

I hear that whether you choose a stock, or just throw a dart, either provide the same odds?

This was talked about frequently back in the late 1990’s and late 2010’s during the stock market boom. We call these Bull Markets because stocks start to feed off each other. Everything goes up regardless. However, to increase your performance over time one must research the companies. To make sure they are stable, profitable and have good prospects for the future. Bull markets only last so long.

Why are stocks so volatile?

There are many answers to this depending on who you talk to.  However, the answer lies in the ability of large investment firms to use computerized electronically generated trading machines to make decisions on what is bought and sold, often within seconds.

The other lies in the use of the internet and other media outlets to distribute information on a massive basis. This amount of information can have a positive or negative effect on movement throughout the day.  We also live in an interconnected world. Today, markets are tied to one another since many companies serve the entire globe.  This means if something goes wrong in one country it can affect companies around the world. 

This is a concern and can be intimidating to the average investor.  But don’t let these complexities stop you from investing in companies you believe in. Learn to tune out all the constant drum beat from the news, experts, and stock analysts.  Remember these analysts might have an invested interest in whether the stock goes up and down. There’s still a lot of pump and dump schemes out there. Buying what you know means you’ll better understand why the stock or company is behaving the way it does.

What do I look for in a good company?

1. Does the company have potential to make money in the future? 
Remember all stocks are traded on the outlook of the future.  That is why a company can come out with a great earnings statement and make a trillion dollars, but still has a falling stock price. This is because the price is not about how good they have done in the past, but how good they may do in the future.

2. Price does matter. 
What determines if a stock is “expensive” is not the price of the stock, but how the price of the stock is compared to the amount of money they make.  Therefore, we have terms like PE (price to earnings) PEG (price to earnings to growth), Yield (amount of the dividend divided by earnings), and other metrics used to determine the value of a stock. Just remember that a company needs to make money while having the ability to keep making money.

3. How well does the company manage its income, cash flow, balance sheet and its ability to do better than its competitors?

Here’s a few questions to ask before you buy.

• Does it keep spending more money than it makes? (increasing loss and debt)
• Does it use more money to make things, than it sells them? (no or negative profit margins)  
• Does it have high short-term and long-term debt and little cash? (can’t pay off debts)
• Loses more money than it makes over the years. (no cash flow)
• Is it always a step behind their competitors? (No competitive edge)
• Is the share price/value of the company lower than the industry average. (poor performer)

Sometimes, you can have a great company with a bad stock. And a bad company but a good stock.

4.  How good is the management? 

Remember, even a good management team can perform well in a bad market or industry. Yet a poorly run company with a bad management team can bring down even what once was an exceptional company. You can look at GE as a prime example. Some signs of good management:

• Constant revisions of earnings towards the high side.
• Consistently hitting or exceeding earnings estimates.
• Making products people like – consistently.
• Little signs of investigations or lawsuits.
• Not many products recalled.
• Debt loads below the industry average.
• Not having an image of poor or problematic products.
• You can do your own research by looking at the history behind the leaders and board members of the company.

5. Try to buy what you know.
It’s easier to research and understand a company you are familiar with. You are more likely to be confident in buying that stock than in something you know little about.

Learn to tune out all the constant drum beat from the news, experts, and stock analysts.  Remember these analysts might have an invested interest in whether the stock goes up and down. There’s still a lot of pump and dump schemes out there. Buying what you know means you’ll better understand why the stock or company is behaving the way it does.

6. Try to stay diversified. 
Yes, you can make lots of money doing or buying just one thing.  However, once you have made money, it’s usually safer to spread that money out in various areas.  Like they say, do not put all your eggs in one basket. Even if it’s a big basket.

Try to buy stocks in different industries, stocks that pay dividends, trade in different markets even internationally, and look at buying some index, electronically traded funds, bonds, precious metals, or mutual funds.

I heard the term Buy and Hold is Dead, what does this mean?

Buy and hold is basically an investment style. It means if you buy a stock you like to hold onto it for a long time. Typically, at least 5 years. People sell stocks when they become afraid, need the money, or the reason they bought it has changed. Also, taxes play a role.

Long-Term Capital Gains = holding more than 1 year and taxed at lower rates.

Short-Term Capital gains = holding less than a year and taxed at your income tax level.

In today’s competitive market, it is important to keep your eyes open. We might want to sell a stock if various fundamentals change.  Some stocks like technology and biotechnology (smaller drug stocks), can move up, and go down quickly. While dividend-paying stocks may move slowly and bring gains by reinvesting dividends over time.

Some stocks never reach their highs again. Some get bought out by another company. Some even go bankrupt. Buy and hold is not dead or alive, its just a style of investing. If you like to trade in and out, then that’s your preference. Some like to hold onto things. Just ask Warren Buffett.

What is day trading and is it a good idea.

Day trading is when people buy and sell stocks on a regular basis, and only hold them for a short period.  There are pros and cons of day trading, However, if you are going to become a day trader, quit your job and go for it full time.  If you don’t, it’s like swimming with sharks, but using the doggy stroke. Basically, a good day trader has a style of investing, is disciplined, not swayed by emotions, and has an ability to judge price, time and trends. And the means to get in and out quickly.

Why should I buy stocks?

Spending all the money you earn is a bad idea. At some time, you will not have the ability to earn money by working. But unspent money loses value every year because inflation makes the price of things go up over time.

In the end, the best way to make a living is make your money work for you. One way is to buy things that have the potential to go higher after you buy it. 

Since stocks are easy to buy and sell, and you own a piece of a real company, they make good investments. Great stocks go up over time and many dividend-paying stocks are paying more than bonds. However, unlike a bond, there is the potential to lose all your money in the market.

The stock market, over time, has proven to be a consistent way to increase one’s wealth. So, don’t let fear stop you from investing at least some of your money in a stock.

What is a yield?

Yield is the amount of money stock or bond pays you on a regular basis. In the US, a stock will pay a fixed amount usually every quarter. If you divide it by the share price, we call it a yield. There are various ways to determine yield, but typically:
If the Dividend is $1 and the stock is $10. The yield is 10%. 1 divided by 10 = .10
A bond has various ways of determining yield, effective interest rate, and how much you make. These include face value, discount rate, par value, coupon payments, etc. More on this in another post.

What are some good resources for investors?

Here are a few:

• Print/Internet News: Financial Times, Investor’s Business Daily, and The Wall Street Journal
• On-line sites for managing stocks: Yahoo Finance, The Street, Bloomberg, Zack’s, Seeking Alpha, Investopedia, and The Motley Fool. 
• Good news channels: CNBC, WSJ, and Bloomberg. 
• Online Brokers: TD Ameritrade, OptionsXpress, Merrill Lync, E-Trade, Charles Schwab, Robin Hood. 
• Brokerage Firms: Goldman Sachs, Paine Webber, and Morgan Stanley.