Your Questions About Investing In Stocks

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Mark asks…

I want to start investing in stocks how does it work and what should i do?

I have a few thousand dollars and i want to be sure im investing smart and safe, what is the best way to start and continue a successful path to investing.

Justin answers:

First ask why you are investing. Different people have different goals. Is it for more income? For retirement? For someone’s education? Plus how old are you and how long do you want to invest? How much risk are you willing to assume?
These are all very critical questions and they will determine what kind of investments are right for you. Don’t believe anyone who has a “one size fits all” kind of investment. For stocks typically you are talking about at least a 5 year investment period. If less, consider getting into bonds or a bond fund instead. Many people choose an appropriate mix of the two. Stocks are like owning a slice of a company. Bonds are lending your money to a company or government for a return. Over time, stocks perform better, but they are more volatile.

If you want to get into the market but don’t know what stock to pick, consider an index fund. Instead of throwing all your eggs into one basket (one company), index funds can invest you in dozens, hundreds, or thousands of companies all at once and so there is less risk. This protects you if any one company or industry runs into trouble. For bonds, the returns are less, but more solid. Contrary to the above, 95% of investors don’t lose money. And you don’t have to be a genius to gain capital appreciation. Just choose something wise and not reckless. With time you will probably do well.

If you are thinking of retirement, consider a Roth IRA. Your money grows tax free, and when you retire you can withdraw it tax free as well.
Start with some basic books to teach you the fundamentals. Two excellent reads are The Complete Idiot’s Guide to Investing, and Investing for Dummies. You can probably find them in your local library. Before doing anything, make sure you have enough in savings in case things go south for at least 6 months. And get rid of bad debt like credit card debt first.
You need to learn also some important concepts in investing, such as dollar-cost averaging and compound interest – two of your best friends to make money for the future.
Then choose a company to invest through. Some of the best are Vanguard, T. Rowe Price, Fidelity, and Schwab. Avoid the big banks like the plague. Don’t let them rip you off with loads (sales charges) and fees. Check how much the company charges you as an expense ratio. A good one might charge you 0.2-0.8 %. If they charge more than 1% than go somewhere else. And if they charge any kind of 12b-1 fee, hold on to your wallet and RUN.
For more information, try looking at
https://personal.vanguard.com/us/funds/vanguard/all?sort=name&sortorder=asc
and play with it, comparing funds with more or less risk.

Do some reading online such as
http://www.vanguard.com/us/insights
for some important investment truths.

Michael asks…

Can you explain dividends in terms of investing in stocks?

I dont understand what a dividend is and I have heard the terms doubledividends how does it work according to investing in stocks and what is dividends?

Justin answers:

Dividends are payments made by a corporation to its shareholder members.
It is the portion of corporate profits paid out to stockholders.
When a corporation earns a profit or surplus,
that money can be put to two uses: it can either be re-invested in the business (called retained earnings), or it can be distributed to shareholders.
There are two ways to distribute cash to shareholders: share repurchases or dividends.
Many corporations retain a portion of their earnings and pay the remainder as a dividend.
For a joint stock company, a dividend is allocated as a fixed amount per share. Therefore, a shareholder receives a dividend in proportion to their shareholding. For the joint stock company, paying dividends is not an expense; rather,
it is the division of after tax profits among shareholders.
Retained earnings (profits that have not been distributed as dividends) are shown in the shareholder equity section in the company’s balance sheet – the same as its issued share capital.
Public companies usually pay dividends on a fixed schedule,
but may declare a dividend at any time, sometimes called a special dividend to distinguish it from the fixed schedule dividends.

Steven asks…

I want to start investing into stocks but don’t know where to start?

I want to know how you actually make money off this kinda thing. I’m hoping that there’s a way to get a monthly income from investments? Please fill me in on the info

Also don’t say “You should learn more about stocks before you start getting into it” like some other answerers have said before because that’s the whole point on why I’m asking these questions!

Justin answers:

Hi,

I think that as a First Time Investor into equity markets, you can take small steps first. In initial stages you can go for buying mutual funds of any reputed company. When you start doing well, further you can go for buying some stocks of reputed companies. Their market reputation can be found out through business channels on TV and also on business sites over the Internet. Other investments like initial public offers or investment in car parking business can be looked upon only after some years of active experience in equity markets. These are just some tips from my side but final decision should be yours. All the Best.

Richard asks…

I’m 13 and I want to start investing in stocks to earn some money. What are some good starting stocks?

I can spend around $100 but I want to be able to earn it back plus more. I want to go to Europe but I have to raise the money. I just want some lower priced stocks. If I make money in time. I will be able to spend some more.

Justin 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.

Joseph asks…

What approach does a person take to begin investing in stocks?

I have been looking to do this sort of thing for a while now, thru those individual investing firms like Ameritrade, E-trade, Fidelity. But, I did not want to get over my head. I have some retirement with Fedilty, but I want to see how I can do it on my own with out lossing…

Justin answers:

Keep it simple and follow some easy rules.

Actually, since so few investors are following these rules, I call them “Secrets”:

Secret #1: Buy when the stock is moving up –
Don’t hold a stock when it’s moving sideways or going down.

I can hear you saying “I know THAT! Everybody knows that.”

Great, so if everybody knows that, why are only 5% of investors actually doing it?

The most popular stock trading strategy is to buy and hold a stock for a looooong time and strongly believe (or hope) that in the long run the stock market will go up. That’s what I call the “Showtime Rotisserie Strategy” ¬- Just set it and forget it.

Let’s take a look at an actual example: DELL Computer Corporation. Pull up a chart of DELL and try to follow me here. As you can see, the price of the stock was around $30 in the beginning of 2006. It went down as low as $20 and is currently trading at $23.78.

So let’s take a look at the performance of the “Showtime Rotisserie Strategy” assuming a $10,000 account:

Bought 333 shares of DELL in January 2006 for $10,000.00
Current value of 333 shares of DELL at $23.78$ 7,918.74
Loss$ 2,081.26

That’s a loss of almost 21% (!!!).

Yet most financial advisors will support this belief by telling you that this is great strategy. They add some fancy words and call it “dollar cost averaging”.

Note:
”Dollar Cost Averaging (DCA) is an investing technique…. According to this technique, shares are purchased in a specific amount on a specified periodic basis (often monthly), regardless of current performance.” (Source: Wikipedia)

“Regardless of the current performance” – That’s interesting, isn’t it?

Let’s take a look at our example:
Let’s assume that now instead of investing $10,000 in the beginning of January 2006, you are investing $2,500 each quarter. Here’s the breakdown:

Bought 84 shares @ $29.75 on March 31st 2006 for$2,499.00
Bought 102 shares @ $24.46 on June 30th, 2006 for $2,494.92
Bought 109 shares @ $22.84 on September 30th, 2006 for $2,489.56
Bought 97 shares @ $25.71 on December 31st, 2006 for $2,493.87
Total Investment$9,977.35
Current Value of 392 shares @ $23.78$9,321.76
Loss$ 655.69

Wow, that’s much better, isn’t it? Now you “only” lost 6.5%!

Now let’s take a look at the chart again and apply our “secret:”
Buy when the stock is moving up –
Don’t hold a stock when it’s moving sideways or going down.

As you can see, we don’t want to own the stock for most of the year. With our trading strategy, we would have bought it in the beginning of October and just held it until end of December:

Bought 430 shares @ $23.25 on October 6th, 2006 for$ 9,997.50
Sold 430 shares @ $25.04 on Dec 29th, 2006 for$10,767.20
Profit$ 769.70

Let’s compare:
“Showtime Rotisserie Strategy”$ 2,081.26 Loss
Dollar Cost Averaging$ 655.69 Loss
Our “Secret” Strategy$ 769.70 Profit

As you can see, it is common sense to buy a stock only when it is going up, but only 5% of investors are actually doing it.

Why?

Bear with me, I’ll explain it to you in a couple of minutes.

But first let’s talk about

Secret #2: ALWAYS know when you exit–
Know when to exit with a loss, and when to exit with a profit

That’s where the rubber hits the road. Let me tell you this important concept:

Paper Profits are worth NOTHING!

What does that mean? – It means that your profits only become profits when you actually SELL the stock and put the profits into your bank account. As long as you still hold your stocks, these profits are “unrealized profits” and can disappear within a few days.

Here’s an example:

Let’s say you were smart and applied secret #1 to GM (General Motors). You invested $10,000 in GM in May 2006 and bought 383 shares at $26.09.

In November 2006 you were a very happy camper: GM went up and your shares are now worth $13,489.26! You knew (even without your calculator) that you just made around 35% on your initial investment of $10,000. You want to reward yourself and ordered this nice 60” Flat screen that they had on sale during the Thanksgiving weekend.

But then it happened: Bad news hit the wire and within 2 weeks GM shares fell 16%. Suddenly your initial $10,000 investment was only worth $11,352, and instead of the 60” Flat screen you now had only money for the 42” version.

Bottom-line:

ALWAYS know when to exit! Paper profits are just that: Profit of Paper.

You should NOT expect to make 50% on a single trade. Here’s the secret that professional traders use: They realize small profits, and they do it frequently.

How do you make 25% profits per year? –
You make five times 5%!

So here’s the “secret” to trading riches:
1.Buy a stock
2.Hold it for a short period
3.Realize 5% profits
4.Do it again!

Ok, now you understood the concept of taking profits.

What about losses?

Same here: Get out quickly!

Don’t wait until the stock goes down 10%… 20%…..30%…. 40%.
Get out when the stock goes down (Remember Secret #1) and wait until it goes up again.

Many investors like to apply a so-called “stop loss.” This stop loss can be expressed in dollar or as a percentage of the current price. As soon as the stock hits this stop, they sell.

As a rule of thumb you should use a stop loss of 2-5%, depending on your risk tolerance and trading aggressiveness. But isn’t it better to get out with a small loss of 5% than seeing your portfolio shrink by 20%…. 30%…. 40% (as in the example of DELL above)?

You bet it is!

Therefore ALWAYS know when to exit!

Secret #3: Pick the “right” stock
Aaaaahhhh, here we go!

Did you ever experience the following situation:
You picked a stock (e.g. INTC – Intel Corporation) and then the stock did not really move. And even worse: At the same time another stock that you wanted to buy (but didn’t) is shooting up like crazy.

Here’s an example:

Take a look at INTC (Intel) and at IBM. While INTC (“your” stock) is just hovering around 21, IBM really took off.
Now, here’s the problem:

Currently there are more than 10,000 stocks traded on US exchanges. So how can you pick the “right” stock; the one that’s going up?

For this task you have to apply some “filters”:
1.Only invest in stocks that are traded on a regular exchange (no “pink sheets”).
2.You should only invest in stocks that traded with at least 15,000,000 shares per week to avoid a manipulated market.
3.Don’t invest in “Penny Stocks” (less than $1.00 per share), unless you like gambling.
4.Make sure that the stock that you want to invest is in a nice up move (remember Secret #1).

Yes, I can hear you saying “That sound easy, but I know that it isn’t.”

Well, you think that it is difficult because most probably you used the wrong strategies. Or maybe you didn’t use any strategies at all, because you liked the idea of the “Showtime Rotisserie Strategy” – Just set it and forget it 🙂

Always keep these simple “secrets” in mind when you want to start trading, and don’t let “the other folks” confuse you.

Hope that helps.

Donald asks…

Is now a good time to start investing in stocks?

Buy low, sell high right? Well, stocks are doing horrible right now, so should I take the plunge and buy up stocks when it’s cheap like this? Is this a right move during recession?

Justin answers:

Yes absolutely – but unless you have much time to learn and research about individual stocks I would not recommend you dabble with single stocks.
It is very difficult and time consuming to find a good individual company, know how long to hold it, and know the right moment to sell it. Most people mess this up royally – and I am including myself in that equation. In fact it’s been shown that most mutual fund managers can’t really time the market that well either, and they are the “professionals” who do it all of the time.

But I would recommend you consider an index fund (from vanguard for example) in a roth ira tax sheltered account.
An index fund is basically investing in a whole sector of like stocks, instead of a single one.. And it is largely managed by a computer instead of a person so the fees are very low.
Over time index funds generally beat mutual funds in returns.. They have less returns each year but much more steady returns that add up over time.

And yes.. This is the time to buy as you will get the shares dirt cheap. When other people are running scared is when you should invest as much as you can- then keep investing each month to take advantage of “dollar cost averaging”.

Paul asks…

basic understanding of how stocks and investing works?

how does one benefit from investing? ok say i invest $3000 in proctor and gamble. ok what next? do i get a check every month or something? no need to go into detail i know there are books and stuff i can read but before i seek those books i just want to know the main benefit in investing? also is investing and stocks the same thing?

Justin answers:

For an individual putting money into single stocks is gambling not investing.
It is very hard for an average investor to make money buying individual stocks.
I recommend no load mutual funds.

If you want to invest successfully you are going to need to take two actions. Start as soon as possible and invest wisely. Forty years of investing $100 dollars will net you $326 if you invest it at 3% or $37,872 if invested at 16% which some mutual funds have done. The difference is investing wisely!

John asks…

How can I get started in investing in stocks?

I ant to get started in buying stocks. How can I get started?

Justin answers:

This is a great site to perpare you to start investing and working with stocks, TopDogTrading.com. They blog about trips and tricks about stocks, day trading, market cycles, etc. They even have course disks you can buy to build you foundation before you jump right into it.

Http://www.topdogtrading.com/
http://www.topdogtrading.com/?page_id=145

Hope this helps and best of luck!

William asks…

What companies should I invest stock in?

We’re doing a project in math class where we have to pick 5 companies to theoretically invest stock in. We only have $10000 dollars to spend. Which companies should I pick and how many shares should I buy? We’re just pretending but it’s an actual project we have to do.
I’m in 8th grade and know nothing about anything. I don’t pay attention to brands or anything.

Justin answers:

An ETF called USO (United states oil)
An ETF called SPY ( The S&P index)
Boeing BA
Exxon Mobile XOM
You pick a item you know about. How about what product do you use & like or what product does your mom & dad use a lot?
Normally we try to buy even lots of 100, that’s how stocks are generally sold. With only 10K & 5 stocks it’s hard to buy quality in even lots
USO 34.06 X 50 = 1,703 U
SPY 146.92 X 25 (odd lot) = 3,673
BA 75.42 X 25 ” = 1,885
XOM 89.71 X 25 ” = 2,242
that only leaves you with $497 for the stock you pick
Adjust the amount of shares as needed maybe USO @ 25 instead of 50.
Explain that 5 stocks times 10K doesn’t go too far. Look for quotes @ yahoo finance http://finance.yahoo.com/
Look on the top left for “get quotes”

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