Your Questions About Purpose Of Investing In Shares

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Robert asks…

What do you call a company that own/run or invest in different companies?

Let’s say I started this company, whose main purpose is to invest and/or own other companies. For instance, BG enterprise is the company and let’s say it owns a “main-stream” blog, real estate company, and a flea market, what would BG enterprise be considered as? Could it be considered a venture capital firm, an investment firm, or what? Remember the main purpose of bg enterprise would be to own or invest in other companies..

Justin answers:

A great example of a company like this is Berkshire Hathaway; they either own or invest in a wide range of companies including Florsheims, Coca Cola, various Newspapers, GEICO, other insurance firms, etc… The main purpose of the company is to purchase (buy entire company) or invest (primarily by buying shares) in undervalued companies.

Berkshire Hathaway is usually described as a “Diversified Company” or ocassionally as a “Conglomerate”.

Mark asks…

What are the technical factors to consider in buying long term shares?

I want to buy shares on the ASX to hold indefinitely, to collect dividends.
What are the technical considerations?
Like profit trend vs expenses, etc.
Where do you get the data from?
Feel free to link me to information.

Justin answers:

Charting has its limits….just as fundamentals have limits.

Indefinite…is a very long time period….too long for prediction. A year ago you might have thought nothing about going all-in on Apple and today you would have lost at least 40% with the chance of more losses.

Your purpose for the long term “infinite” hold is undefined. Do you need a money generating dividend company?? With growth prospects?? Or is growth your main objective???

Myself, I have held stocks for 10 years…or 3 months…it all depended on how they performed. I don’t start out saying that I will hold a stock for 10 years…it just happens that way.

I set mini-goals…steps on a stairwell as it were. As long as goals are met and passed I will continue to hold…once I have a certain growth return I will monitor more closely if there are failures but if there is compensation through dividends I may continue to hold looking for a return to growth as long as it maintains a certain price.

This takes skills though…I did not learn them overnight…it took years of study…but it has paid off for me now.

What are those steps…they are intervals between resistance and support. Let us us an example of a solid stock (you don’t choose weak stocks for infinite holds :)….Coca Cola [KO}

http://stockcharts.com/def/servlet/SC.pnf?chart=KO,PGUADANCBO[PA][D][F1!3!0.4!!2!20]&pref=G

I will only use this chart to illustrate the point….In practice I would use up to 4 other charts for evaluation of a stock’s potential along the way…but we are limited here.

Let us say we survived the 2008-2009 crash and were looking for solid companies to invest in…this is always fertile ground to find bargains

I would have purchased this stock in May 2009 (the red 5 means May) when it crossed the resistance at $20.80….NOTE (Since there has been a stock split for Coke last year these are adjusted prices not what they would have been back then…but my approach is still valid)

the first goal would have been the resistance at $21.60 – $22.00….it flew through that resistance the same month….I am happy…not the goal is revised Support = $22.00 -21.60 and resistance is $24.00….it looks good at first but the price falters in mid-July….it falls back to $21.60 (my support before it rallies again….(as long as it is within that resistance support window I don’t care…I do nothing)…I am rewarded for my patience as it passes $24 in late Sept…Next resistance is $24.80 then $26.80…it passes both but runs out of gas falling back….At 26.80 I have a $6 gain or about 20%…I have collected dividends as well…at a 20% gain I would be forgiving (in casino terms: I am playing with house money) I might sell when it fell back to below $24.80….or not…it would depend on my analysis of fundamentals and other charts.

But you get the idea how a short term hold stretches into a long term play ….

Evaluating the action between supports/resistances…it is like climbing stairs to me…and that is my approach to a long term hold….after awhile through the collection of dividends + growth you will become more and more forgiving….unless it pulls an APPLE move and plunges fast…then you collect the profits and look for the NEXT SOLID COMPANY

Hope this helps

David asks…

How is foreign investment by an individual treated for US federal tax purposes?

As a non-US citizen, I want to invest $50,000 in a US company (LLC, taxed as a partnership). I am a member of the LLC. We can treat my investment as a loan or as an adjustment to my basis. I am brining the $50,000 from a foreign account.

Would that $50,000 be treated as personal income when I transfer it into the US? Or, would I only be taxed on any gains (interest if treated as a loan, or capital gains otherwise)? I’m assuming that the $50,000, when returned, would be returned to my foreign account. If returned in USD, and kept in the US, I imagine I would treat it *at that time* as personal income. Right?

Justin answers:

The treatment of the money you are bringing to the LLC will depend on the organization, they may accept it as your share of the company, or you can negotiate with them for this to be a loan and with a written note to memorialize the contract, including the interest and payments
in fact unless they closed the company the loan is the only way you will get your investment back
depending on the formation of this company, you will be sharing the profits in some way or other, on which you will owe US taxes on this income

Charles asks…

Can a social enterprise operate as a Company limited by shares? and distribute profits to shareholders?

What defines a social enterprise? It is merely the purpose/ principal activities of the company? Is there a legal requirement to reinvest profits into the company?

Justin answers:

A social enterprise is an organisation which invests its profits for the benefit of the community. There is no such legal structure as a social enterprise. It would either be a company limited by guarantee or a Community Interest Company, neither of whch has shares and neither of which can distribute its profits in any way.

George asks…

Is there as added benefit to owning a certain amount of a dividend paying company?

I am not sure how exactly to ask this. Is there an added benefit to owning enough shares of a dividend paying company so that each quarter I get enough that another share or more can be reinvested? Therefore every quarter I have one or more additional shares and therefore am guaranteed to always make more in dividends. I can’t figure out the math. FYI I currently receive about 36.00 in dividends from GE quarterly and can therefore reinvest around 2 shares a quarter.

Justin answers:

There is really no cumulative benefit to owning a certain amount of stock in a company.

You will always receive the same dividend per share. Dividends are a part of the return on your investment as a stockholder. You can use this cash for any purpose that you desire, including purchasing more shares. Please keep in mind that the more money that you have invested in a single stock, the more of a hit that you will take if that particular stock should tank.

If you are interested in reinvesting your dividends, then look into a dividend reinvestment plan (DIP). Some brokerages and most employee stock plans will offer a DIP where you will not be charged a commission on each purchase. While this would save you money on brokerage fees, you will loose the flexibility to use your dividends for any other purpose, such as purchasing shares of a different company or paying for dinner out.

As J mentioned, doing so in a tax deferred account will defer the payment of taxes on the dividends, whether you reinvest or not. Discuss the strategic use of any tax deferred investment strategy with your tax profession as the benefits and drawbacks vary dependent upon your specific situation.

On a personal note, I do own shares of the same company (GE) and consider it to be one of the top blue ribbon US public companies, and it has, in my opinion, a very low risk profile.

Michael asks…

How do we know what are the prices for options?

I’m learning investing, and just read up on Options. How do you know what much does an Options contract cost? I mean, for stocks, there are charts and lists showing the current prices for various stocks. Are there similar lists for options contracts? If so, how can I access them?

Justin answers:

I am assuming you are talking about options on stocks or stock indexes. (For options on futures you need to go to the futures exchange where the futures are traded.)

You can get quotes for options from many places, including (as onther answers have indicated) Yahoo. Unfortunately Yahoo tends to have more mistakes in their quotes than other sources so I would recommend you use another source such as

http://www.cboe.com/DelayedQuote/QuoteTable.aspx

In looking up options quotes there are many places that allow you to either look up mulitple options on a single underlying underlying stock, known as an option chain, or look up the quote for a single option.

To look up an option chain you use the stock symbol of the underlying stock. To look an individual option you use the symbol for the option. Unfortunately, different sites have different requirements for how to enter the option symbol.

I will digress for a moment to say how an option symbol is constructed. It has a root which is three characters or less (often equivalent to the stock symbol if the stock symbol is three characters or less) followed by a two letter suffix that identifies the specific option. The first letter of the suffix indicates if the option is a call or a put and the expiration month. The second letter of the suffix indicates the strike price. See

http://www.cboe.com/TradTool/strikepricecode2.aspx and
http://www.cboe.com/TradTool/strikepricecode3.aspx

Among the requirements for entering an option symbol I have seen are:

The symbol preceeded by a period
The symbol preceeded by a “Q”
The symbol
The symbol followed by a “.X”
The symbol with a space between the root and suffix
The symbol with an equal sign between the root and suffix.

For demonstration purposes I will use a Hovnanian (HOV) June $7.50 put option, symbol HOVRU

To get a quote on that option in Yahoo you would enter “HOVRU.X”.

The get a quote on that option at the CBOE you would enter “HOV RU”

To graph that option at bigcharts you would enter “HOV=RU”

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There are a few things you need to understand when looking at an option quote. The first is that a lot of options are thinly traded so the “last” quote may be days or even months old, making it totally useless. Always look at the bid and ask quotes. The ask quote is the price you will pay to buy one contract with a market order. The bid quote is the price you will receive if you sell one contract with a market order.

Another thing you need to realize is that a contract normally represents 100 shares and the quote is normally given as a per share price. That means a quote of $1.05 would mean $105.00 per contract.

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As for charting past trading prices of an option I only know one free site that provides that service at the moment. That site is

http://bigcharts.marketwatch.com/

There may be others.

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Finally, there is one more thing I will mention. I earlier mentioned that an option symbol starts with a root, I should mention that there are times there may be multiple roots for options on the same underlying stock. There are three reasons for this.

(1) The stock may have LEAPS options. LEAPS options are long-term options that may expire more than two years after they come out. To distinguish LEAPS from other options, they are given different root symbols.

(2) The stock may have so many (over 26) strike prices that a continuation root symbol is required to accomidate all the strike prices.

(3) There may be adjusted options for a stock due to a split, merger, spin-off or extraordinary dividend.

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Please excuse me if I have repeated a lot of information you already know. I just believe it is safer not to make the assumption about what others know.

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