Your Questions About Investing For Dummies

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Chris asks…

Investing or gambling?

I am reading a book called ‘Investing for Dummies‘. Its about investments and the stock markets and it is very interesting, but what Im seeing and reading, seems to me to be that the stock market and investments around that, are just like gambling. There is no guarantee that you get your money back.

So what IS the difference between ‘investments’ and ‘gambling’?

financi4 answers:

In layman terms — delayed gratification.

People who gamble are doing it for entertainment, are willing to accept a complete loss (i.e. They expect to lose since the house has an edge), and most importantly, they want the thrill of immediate gratification akin to a high.

In contrast, investment is for a purpose, be it for retirement at the end of a career, or to save up for the down payment of a new car or house. There is a proven investment process called value investing espoused by Ben Graham that has created enormous wealth for its practitioners. While the stock market has built disadvantages such as a bid-ask spread and leakages such as commissions, numerous investors have nonetheless created wealth. Lastly, returns from investing activities accretely slowly but due to the 8th wonder of the word (compound interest), the dividends can be massive in the long run.

I hope this helps you to get a better grasp of investing as opposed to gambling.

Robert asks…

Can someone suggest a book that will teach me what company I should buy stock from?

I’m looking for a book (not Stock Investing for Dummies, because I already have it), that will teach me how and why I should buy stock. When to invest and so on. I basically am looking to invest in the stock market, and want to know how I can find the companies that I should invest in. THANKS!

financi4 answers:

For awhile I read a lot of such books and found most didn’t cut it. I simply taught myself a good deal–from reading those books, magazines (like Forbes, Money, Fortune, Smart Money, Fast Company, etc.), listening to shows such as the Saturday morning Fox block–The Cost of Freedom–which is 4 half-hour shows back-to-back. (BTW, my favourite for investment advice is Wayne Rogers. Seriously.) I also just did it. Turns out I had a knack for it, but it involves a lot of work.

Anyway, I still read some books, and I liked Mary Buffet’s The New Buffettology. In an interview I saw with Warren Buffett (and I prefer results to degrees, so I am happy with his results), he said he doesn’t read any of the books about him. However, as that’s a former daughter-in-law I think she had the inside track.
BTW, Buffett puts some interesting stuff on his site:
http://www.berkshirehathaway.com/
You will do worse than to read that.

You also need to understand, especially now as things are particularly wild, that you do NOT invest money you can not afford to lose. You don’t go in with a negative attitude, but no one has any business borrowing money to invest in the market. If you’re that good at it, you’ll run up value from savvy trades and dividends; if you’re not that good, you’re going to default.

I highly recommend Scottrade when you decide you’re ready to open an account. I think people should be able to manage their own affairs. I’ve known too many people who handed their money to “experts” who messed up. The experts were paid, the person whose money was lost was SOL. Personally I get better returns on my investments than most of the fund managers I hear about, but not as good as Buffett 🙁 And NO I am not soliciting to do any advising for free or for a fee because I’m not appropriately licensed for that. I manage my father’s pittance and get him more in dividends per month than his pension. I advise my brother and recouped the quarter-million plus his “experts” lost for him. My main income is dividend income. I could do more if I’d get more sophisticated and do options and such but I don’t have the energy for that (I’m ill. I use my time as best I can and sometimes I do something completely different–like these answers–to try to distract myself from pain OR to not get into a rut on my financial thinking. THIS is a “break” activity for me.)

You should be sure to understand things like basics:
difference between market and limit orders

stop-losses

what an ETF is

Personally I don’t like mutual funds–had a couple in the early days, but I do better on my own.

You need to decide how much risk and volatility you can handle.

You need to decide if you’re going to value DIVIDENDS or not. I do. Not only is that my main source of income, BUT it is harder to cook the books and pay regular dividends. Capital appreciation of dividend paying stock does NOT suffer either. I see NO downside to dividends.

You also have to decide if you’re an investor or a trader. Traders can literally sit there for hours buying and selling to catch a profit. I did a little of that for my father as he started with an investment of $2K. I don’t waste my time and energy on that now. I am an investor–in it for the long-term (which also tends to be good for tax purposes as well. And I don’t give tax advice other than to say to FILE and if you need help, hire a pro.)

Stock market investing is interesting and can make you rich or poor–it will take time to learn what you NEED to give yourself a decent chance of making this an investment instead of a gamble.

Steven asks…

What are the best ways to learn about the stock market?

Should I buy “Stock Investing for Dummies“?

What do you think of E*Trade?

I was told “don’t worry, you have a broker” (I’m with Wells Fargo, so I guess I have a broker, do I?).

But I’d like to educate myself so I know what’s happening and hopefully develop an interest to the matter.

Thank you for any answer.

financi4 answers:

If you’re a rookie in investing or stocks, go to

www.finance.yahoo.com.

Open up a portfolio without using real money. You can give yourself as much or as little money to try out the market. The stocks you want to focus on is consumer staples, consumer discretionary, and healthcare. These are DEFENSIVE stocks that will survive through good and bad times. Most of my positions are in these stocks. Some names include 3M, Procter & Gamble, Kimberly Clark, Exxon Mobil, Walmart, Costco. Everybody’s got to eat and wipe their butts regardless of the state of economy. Many of these companies survived through the Great Depression.

That’s the benefits. You can sleep at night knowing your money is doing well. There are NO guarantees that you won’t lose money. It’s just that these stocks are the best. They pay good dividends too.

Then once you’re comfortable and test the waters of the market, you can finally put some real money in. Go to Scottrade.com. They’re excellent for beginners.

If you’re new to stocks, DON’T DAY TRADE. You’ll a rookie in a world of professionals. I tried day-trading with Citigroup and AIG when they were a little bit over $1. I had some luck at first, making about $30 a day but I was way over my head. My luck didn’t last long and I had to rethink my strategy.

Day trading involves A LOT of commissions to the broker. With all the commissions deducted from each trade, you’ll be lucky if you only lose half your money.

I would just day trade using Yahoo! Finance. Open a stimulation account, give yourself $100 worth of fake money and play it in the stimulation format. You’ll see what I mean by losing money every easily.

Good luck.

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