Posts tagged 'stock'
Why invest in stocks and not just bonds? Stocks allow you to invest in companies that can create a lot of value more quickly than bonds. If you pick the right stock, you can make a heck of a lot of money. Of course, if you pick the wrong stock, you can lose a heck of a lot of money. That’s why it’s never a good idea to put all your money into one company.
Now that you know the difference between debt (bonds) and equity (stocks), how do you choose a stock to buy? Where do you begin? One begins by starting to pay attention to the stock market. As you have seen, the stock market is just like any other market, except that stocks are bought and sold as opposed to something else. How do you pay attention? And what will the market teach you if you do? What does “pay attention” even mean? The stock market reacts to the world at large and the daily news. The market rises and falls (increases and decreases) depending on lots of different things including how the economy is going, whether people are optimistic or pessimistic about the direction of the world, whether wars are being fought, how much the United States pays for oil and even how much people are shopping.
You can start to watch what happens to stocks in general by looking up the Dow Jones Industrial Average. The Dow Jones Industrial Average tracks the stocks of 30 different companies every day. When you hear people discuss the stock market on television, the radio or on the Internet, they typically say things like “The market dropped 100 points today”. Or, “The market rose 30 points today”. When the term “the market” is used, typically they are referring to the Dow Jones Industrial Average. The performance of the thirty stocks the Dow Jones tracks (how well or poorly they are doing) is considered a bellwether of how the financial markets are doing as a whole.
How do you find out what the Dow Jones Industrial Average is doing? Just like a bond, you can look it up in the newspaper or on the Internet. In fact, you can start to follow the stock market in general and the stocks of individual companies in particular by utilizing the finance section of your home page. For example, if you use Yahoo or Google as your home page, you can add content that shows you information on the stock market. You can even add individual stocks to track and follow. How? Every stock has a trading or ticker symbol, a three or four letter call sign that it is known by on the stock market. The Dow Jones Industrial Average symbol is DJI. You can find stock symbols by Googling “what is the stock symbol for [fill in the name of the company]”. For example, to find the stock symbol for Saks, you would Google “What is the stock symbol for Saks?” The answer: SKS.
As you start to pay attention to the market in general, you should begin to focus on a few companies you know a lot about. For example, if you love your iPhone, start to watch Apple’s stock (symbol: AAPL). If you wouldn’t head to the gym in anything but your Nike’s, start to look at Nike’s stock (symbol: NKE). If you love shopping at the Gap, look at Gap’s stock (symbol: GPS). What are you watching for? Here are a few things: How does the stock price change in relation to the news about the company? How does the stock’s price change in relation to any announcements the company makes? How does the stock’s price change in relation to general news about the economy? For example, some stocks are more susceptible to the world around them than others. For example, when the economy is down, people tend to shop less and for less expensive items. Neiman Marcus and Saks do worse in this type of environment than Target or the Gap.
So you don’t fall off your heels, know that despite all of the risks, as a group, stocks have the highest long-term returns of any investment type. Even though stock markets go up and down and, at times, have even crashed, so far, the market has always rebounded and gone on to new heights. If you look at the all your investment choices, on average, stocks have outperformed bonds in a total return (after inflation). A little height can go a long way!
September 6th, 2009
Let’s review the differences between owning debt (a bond) and owning equity (a stock). When you own debt (you buy a bond), you are guaranteed the return of your money (the principal) plus the interest payments associated with that bond. When you own equity (you buy a share of stock) you are not guaranteed either the return of your money or any interest payments (dividends). Remember: the lower the risk, the lower the return; the higher the risk, the higher the return. That’s why you can make more money from owning stock if the company is successful than you can from owning a bond. Stocks are riskier. However, it is also because of this risk that you can lose money—a lot more money—from owning stocks than you can from owning bonds. In fact, if a company in which you have purchased stock goes bankrupt, shareholders do not get any of their money back until bond holders are paid back. Stockholders are paid back last. By then, there is usually very little, if anything left over to pay back the shareholders. In other words, stockholders are out of luck. Their money is history.
August 28th, 2009
When you a buy stock you are buying a piece of ownership in a company. What does it mean to be a partial owner? What, besides getting the right to brag to your friends that you own a piece of a company, do you have—or get, depending on your attitude—to do?
Well since you are a shareholder, you own a right to everything the company owns. The more shares of stock you own, the more of the company you own. You actually own a slice of all the company’s assets. An asset is anything the company owns that has commercial value. Think of an asset this way: Your personal assets include anything you own which you can sell on eBay. A company’s assets include things like desks, chairs, computers, contracts for business, sometimes the building they are in. Obviously, some things a company owns have more value than others.
As a shareholder (a person who owns stock), you also have the right to your share—hence the name—of the company’s earnings (the money the company makes, its profits), as well as the right to vote at the company’s annual meeting on the board of directors. Once a year, companies hold meetings to review their performance over the previous year, discuss the upcoming year and to elect the people who run the company. One share of stock equals one vote. What you don’t have is the right to run the company, at least day-to-day. Instead, you get to help decide—along with all of the other shareholders—who will run it on a daily basis.
The importance of stock ownership is that you own a portion of the company’s assets and are entitled to a share of the company’s profit, the money left over after the company subtracts all of its bills (its debt) from all of the money it took in. As you learned in previous blogs, bonds pay interest in the form of a coupon. Well, when companies do well they pay a version of interest in the form of dividends, that is, they pay their shareholders some of the profits, usually on a regular basis. Sometimes dividends are paid quarterly; other times, annually. Unlike coupon payments on bonds, dividend payments are not a given. If the company is doing well, the management of the company may decide to pay a dividend. But, they do not have to do so. They can do well and decide not to pay a dividend. If they do pay a dividend, they also get to decide how they are going to pay it. Dividends are most often paid in two ways: Cash or in additional shares of stock.
Fashionista Fact:
In the 16th century, Catherine de Medici was engaged to the powerful Duke of Orleans, who later became the King of France. She was petite (not quite five feet) and felt insecure compared to the Duke’s taller and favorite mistress, Diane de Poitiers (who wouldn’t? Diane was considered exceptionally beautiful). So for her wedding, she asked the shoe maker to add two inches to her shoes which gave her both height and a captivating walk. Needless to say, the shoes were a huge success. Given her status as the Queen of France, high heels quickly became associated with privilege and power. Needless to say, her risk paid dividends (not punny – sorry!).
August 25th, 2009
Just as you need different shoes for different outfits, you need to invest your money in different ways for different reasons. As you have seen, when you put your money in the bank, whether you put it in a checking or savings account, you are keeping it as cash. But, as you have also seen, your money can work harder for you. You could buy US treasuries or corporate bonds. Buying treasuries and bonds is riskier than leaving your money in cash. However, thanks to their higher interest rates and coupon payments, your money is still relatively safe and earns you a better return than you would get from a checking or savings account.
There is yet another kind of investment that is riskier than either cash or bonds but which can earn a higher return. The name for this type of investment is a stock. Buying a stock is buying ownership in an individual company (business); how much ownership depends on how much stock you buy.
For example, if a stock is selling for 110 dollars per share and you ask your stockbroker to purchase 110 dollars worth, you now own one share of the company. If the company has one hundred thousand total shares outstanding, you just bought .00001 percent of the company. If you want to buy stock in shoes, for example, you could purchase stock in Crocs, Heelys, and Nike. Or, perhaps you prefer to own a piece of a shoe store such as Shoe Carnival. When you buy a share of stock, you are buying a small piece of everything the company owns and owes. (You are literally buying a piece of a company.) Ownership in a company, and therefore stocks, are also referred to as equity. Equity means ownership and you now have equity in the company. Remember, bonds are debt—they are a loan to a government or company. With stock, you can not only own a piece of these companies, but you can show your brand loyalty by wearing them.
If a company does well, your stock goes up and you share in their good fortune. Unfortunately, if a company does poorly, your stock goes down and you share in their misfortune. There are few limits on how well or how poorly a company might do. As a result, there are few limits on how well or poorly a share of stock might do and therefore how much money you might make or lose.
This is an important point: Remember, bonds pay a fixed interest rate. You basically know what return you are going to get when you buy a bond. While it is true that interest rates rise and fall and that bond prices rise and fall accordingly, bond prices are not nearly as volatile as stocks are. They do not rise and fall nearly as much as much as shares of stock in a company can.
There are lots of reasons companies do well and lots of reasons they do poorly. Let’s use the company Apple Computers as an example. In 2003, Apple introduced the iPod which was a smashing success. In 2007, they introduced the iPhone which was also a smashing success—two very popular products in a row. People bought lots of both. As a result, between 2003 and the end of 2007, the price of Apple’s stock increased approximately 700%! (It depends on which exact days in those two years you use to figure it out.) So, one dollar invested in Apple stock in 2003 would be return seven dollars in 2007. (The more money you invested, the more money you could make: 1,000 dollars invested in Apple stock in 2003 would return 7,000 dollars in 2007). Cha Ching. Apple made good products, sold a lot of them, and their stock increased. But then, Steve Jobs, Apples’ founder and CEO, became ill and took a leave of absence. The company’s future was in doubt and its stock went down. So a company’s stock can go up or down for a variety of reasons.
Sometimes companies come out with un-popular products and their stock goes down. For example, in 2006, Revlon developed a line of cosmetics called Vital Radiance, was aimed at women over 50 and did not sell well, at all. Revlon continued to launch other new products some of which also did not do so well. If you had purchased one share of Revlon stock in the middle of 2006, at the end of 2008, just two and half years later, you would have lost approximately 44 percent of your money. One dollar invested in Revlon stock in 2006 would have returned only fifty six cents in 2008. (The more money invested, the more money you would have lost: 1,000 dollars invested in Revlon in 2006 would return 560 dollars in 2008). Cha No-Ching.
So, companies that issue stocks can earn and lose money for lots of reasons. As their fortunes go, so does their stock price. And, by owning their stock, you make or lose money right along with them. It is because of this relatively un-limitless ability of companies to earn or lose money that stocks are considered less safe than bonds.
August 21st, 2009
There are as many different investing philosophies as there are fashions trends (According to Vogue.com Spring ’09 promises us: Nudes, metals, sky high stilettos, tribal, harem pants, and God forbid, jumpsuits.) The investing beginner should ignore this and choose with an eye towards the future, not just what is in style today. Day-to-day, stocks and stock markets, mutual and index funds will go up and down, sometimes a lot. If you did your homework before investing and kept current on your investments, you shouldn’t get overly excited either way.
There is a school of thought in investing that following crowd behavior – trends – creates opportunities. For example, if everyone believes denim jackets are back this season (Jcrew.com) and you spot the trend ahead of other people – you realize denim is going to be so this season before everyone else – you can profit by buying ahead of the crowd. You make money as denim prices increase.
However, there is also an investing school of thought who believes in eschewing trends: If denim is in, they ignore it and invest something else – such as leather. They believe that since everyone will be buying denim, and no one will be buying leather, denim will be over-priced and leather will be under-priced. When leather comes back into style, you profit because you bought leather when it was cheap and out of fashion.
Who is right? Both. However, unless you are a seasoned investor, remember, “Fashions fade, style is eternal.” Yves Saint Laurent
January 13th, 2009
Buying stock is buying ownership in an individual company; how much ownership depends on how much stock you buy. When you buy a share of stock, you are buying a small piece of everything the company owns and owes. So, for example, if a stock is selling for 110 dollars per share and you ask your stockbroker to purchase one hundred and 10 dollars worth, you now own one share of the company. If the company has one hundred thousand shares total shares outstanding, you just bought .00001 percent of the company.
Stocks are traded on a stock market. You buy stocks with the help of a stockbroker who is sort of like a personal shopper for stocks. There are well over 2,500 different companies whose stocks are traded on the New York Stock Exchange (NYSE) alone. Companies earn money and lose money. As their fortunes go, so does their stock. By owning their stock, you can make or lose money right along with them. Examples of the different kinds of familiar retail stocks you could own are: Abercrombie & Fitch, Saks, Nike, Polo and Ralph Lauren. Not only can you own a piece of these companies but you can show your brand loyalty by wearing them.
Think of a stock market as resembling a department store where you can buy all sorts of designer clothes, cosmetics, shoes and bags in one place. In the stock market, you can buy stocks and bonds and other financial instruments instead. In the United States, there are two main markets: The New York Stock Exchange (NYSE) and the National Association of Securities Dealers Automated Quotations (NASDAQ). Internationally, there are lots of others, like the London Stock Exchange and the Hong Kong Stock Exchange. You can shop at these markets just like you can at any other market, as long as you use your broker or have an investment account which will let you purchase directly.
Each market (or exchange) lists all of the stocks and other financial instruments it sells. You can browse all the offerings, narrow down your selections and hone in on your purchases. You can even try on, before you buy, by selecting a stock to watch. Don’t spend any money until after you have watched it for a while and also learned something about the company. See how much it fluctuates, the price of stocks constantly changes and you have to be sure that the stock you are watching is a value at the price at which you decide to buy it at. If the shoes were a steal at 125 dollars, would you still think they were worth buying at 200 dollars?
I do not recommend owning individual stocks unless you really know what you are doing and can afford to lose some money. The stock market, particularly now, can be a raucous place. When you are starting out, it is much better to own a professionally managed mutual fund or, even better, an exchange traded fund, which uses a different kind of shopping approach than that of buying stocks.
January 12th, 2009