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0-952500Stocks Basics: Introduction (a tutorial)Wouldn't you love to be a business owner without ever having to show up at work? Imagine if you could sit back, watch your company grow, and collect the dividend (you’ll find out what a “dividend” is later) checks as the money rolls in! This situation might sound like a pipe dream, but it's closer to reality than you might think. As you've probably guessed, we're talking about owning stocks. This category of financial instruments is, without a doubt, one of the greatest tools ever invented for building wealth. Stocks are a part, if not the cornerstone, of nearly any investment portfolio. When you start on your road to financial freedom, you need to have a solid understanding of stocks and how they trade on the stock market. Over the last few decades, the average person's interest in the stock market has grown exponentially. What was once a toy of the rich has now turned into the vehicle of choice for growing wealth. This demand coupled with advances in trading technology has opened up the markets so that nowadays nearly anybody, including young people, can own stocks. 5019675208407000Despite their popularity, however, most people don't fully understand stocks. Much is learned from casual conversations with others who also don't know much about what they're talking about. Chances are you've already heard people say things like, "Bob's cousin made a killing in Company X, and now he's got another hot tip..." or "Watch out with stocks--you can lose your shirt in a matter of days!" So much of this misinformation is based on a get-rich-quick mentality, which was especially prevalent during the amazing dotcom market in the late '90s. People thought that stocks were the magic answer to instant wealth with no risk. The ensuing dotcom crash proved that this is not the case (read about this later). Stocks can (and do) create massive amounts of wealth, but they aren't without risks. The only solution to this is education. The key to protecting yourself in the stock market is to understand where you are putting your money. It is for this reason that this tutorial exists: to provide students the foundation needed to understand investment decisions so that you may be able to make them yourself one day. This tutorial starts by explaining what a stock is and the different types of stock, and then how they are traded, what causes prices to change, how you can buy stocks, different types of investing and much more. Stocks Basics: Different Types of StocksThere are two main types of stocks: common stock and preferred stock. Common Stock Common stock is, well, common. When people talk about stocks they are usually referring to this type. In fact, the majority of stock is issued is in this form. Common shares represent ownership in a company (however small that may be) and a claim (dividends) on a portion of profits. Investors get one vote per share to elect the board members, who oversee the major decisions made by management. 453390075692000Over the long term, common stock, by means of capital growth, yields higher returns than almost every other type of investment. This higher return comes at a cost since common stocks entail the most risk. If a company goes bankrupt and liquidates (sells off its assets), the common shareholders will not receive money until the creditors, bondholders and preferred shareholders are paid. Preferred Stock Preferred stock represents some degree of ownership in a company but usually doesn't come with the same voting rights. (This may vary depending on the company.) With preferred shares, investors are usually guaranteed a fixed dividend forever. This is different than common stock, which has variable dividends that are never guaranteed. Another advantage is that in the event of liquidation, preferred shareholders are paid off before the common shareholder (but still after debt holders). Preferred stock may also be callable, meaning that the company has the option to purchase the shares from shareholders at any time for any reason (usually for a premium). -22860071247000Some people consider preferred stock to be more like debt than equity. A good way to think of these kinds of shares is to see them as being in between bonds and common shares (you will learn more about these later). Debt vs. Equity Bonds are debt, whereas stocks are equity. This is the important distinction between the two securities. By purchasing equity (stock) an investor becomes an owner in a corporation. Ownership comes with voting rights and the right to share in any future profits. By purchasing debt (bonds) an investor becomes a creditor to the corporation (or government). The primary advantage of being a creditor is that you have a higher claim on assets than shareholders do: that is, in the case of bankruptcy (it is relatively rare that a publically traded company in one of the large exchanges goes bankrupt), a bondholder will get paid before a shareholder. However, the bondholder does not share in the profits if a company does well - he or she is entitled only to the principal plus interest.Different Classes of Stock Common and preferred are the two main forms of stock; however, it's also possible for companies to customize different classes of stock in any way they want. The most common reason for this is the company wanting the voting power to remain with a certain group (example: family members that may want control over direction of the company); therefore, different classes of shares are given different voting rights. For example, one class of shares would be held by a select group who are given ten votes per share while a second class would be issued to the majority of investors who are given one vote per share. When there is more than one class of stock, the classes are traditionally designated as Class A and Class B. Berkshire Hathaway (ticker: BRK), has two classes of stock. The different forms are represented by placing the letter behind the ticker symbol in a form like this: "BRKa, BRKb" or "BRK.A, BRK.B".Stock Tutorial Questions1. What is the one factor that has prompted a lot more people to invest in stocks and why (hint: it has to do with ease of investing)?2. Describe equity in your own words.3. If a company liquidates, list all the groups that get paid before the common shareholder.4. Why do you think a company would want to keep voting power within a certain group (e.g. family)?5. What is an advantage of owning a preferred stock and what is a disadvantage of ownership?Stocks Basics: How Stocks TradeMost stocks are traded on exchanges, which are places where buyers and sellers meet and decide on a price. Some exchanges are physical locations where transactions are carried out on a trading floor. You've probably seen pictures of a trading floor, in which traders are wildly throwing their arms up, waving, yelling, and signaling to each other. The other type of exchange is virtual, composed of a network of computers where trades are made electronically. 474345078105000The purpose of a stock market is to facilitate the exchange of securities between buyers and sellers, reducing the risks of investing. Just imagine how difficult it would be to sell shares if you had to call around the neighborhood trying to find a buyer. Really, a stock market is nothing more than a super-sophisticated farmers' market linking buyers and sellers. Before we go on, we should distinguish between the primary market and the secondary market. The primary market is where securities are created (by means of an Initial Public Offering (or as it’s commonly known: IPO) while, in the secondary market, investors trade previously-issued securities without the involvement of the issuing-companies. The secondary market is what people are referring to when they talk about the stock market. It is important to understand that the trading of a company's stock does not directly involve that company. -952519113500The New York Stock Exchange The most prestigious exchange in the world is the New York Stock Exchange (NYSE). The "Big Board" was founded over 200 years ago in 1792 with the signing of the Buttonwood Agreement by 24 New York City stockbrokers and merchants. Currently the NYSE, with stocks like General Electric, McDonald's, Citigroup, Coca-Cola, Gillette and Wal-Mart, is the market of choice for the largest companies in America. 428625029273500The trading floor of the NYSE The NYSE is the first type of exchange (as we referred to above), where much of the trading is done face-to-face on a trading floor. This is also referred to as a listed exchange. Orders come in through brokerage firms (e.g. TD Waterhouse, BMO Investor-Line, RBC Direct Investing, Scotia iTrade as well as Virtual Broker) that are members of the exchange and flow down to floor brokers who go to a specific spot on the floor where the stock trades. At this location, known as the trading post, there is a specific person known as the specialist whose job is to match buyers and sellers. Prices are determined using an auction method: the current price is the highest amount any buyer is willing to pay and the lowest price at which someone is willing to sell. Once a trade has been made, the details are sent back to the brokerage firm, who then notifies the investor who placed the order. Although there is human contact in this process, don't think that the NYSE is still in the Stone Age: computers play a huge role in the process. 190501905000The Nasdaq The second type of exchange is the virtual sort called an over-the-counter (OTC) market, of which the Nasdaq is the most popular. These markets have no central location or floor brokers whatsoever. Trading is done through a computer and telecommunications network of dealers. It used to be that the largest companies were listed only on the NYSE while all other second tier stocks traded on the other exchanges. The tech boom of the late '90s changed all this; now the Nasdaq is home to several big technology companies such as Microsoft, Cisco, Intel, Dell and Oracle. This has resulted in the Nasdaq becoming a serious competitor to the NYSE. 448627530416500The Nasdaq Market Site in Times Square On the Nasdaq, brokerages act as market makers for various stocks. A market maker provides continuous bid and ask prices within a prescribed percentage spread for shares for which they are designated to make a market. They may match up buyers and sellers directly but usually they will maintain an inventory of shares to meet demands of investors. Other Exchanges The third largest exchange in the U.S. is the American Stock Exchange (AMEX). The AMEX used to be an alternative to the NYSE, but that role has since been filled by the Nasdaq. In fact, the National Association of Securities Dealers (NASD), which is the parent of Nasdaq, bought the AMEX in 1998. Almost all trading now on the AMEX is in small-cap stocks and derivatives. There are many stock exchanges located in just about every country around the world. North American markets are undoubtedly the largest, but they still represent only a fraction of total investment around the globe. The two other main financial hubs are London, home of the London Stock Exchange, and Hong Kong, home of the Hong Kong Stock Exchange. Another place worth mentioning is the over-the-counter bulletin board (OTCBB). The Nasdaq is an over-the-counter market, but the term commonly refers to small public companies that don't meet the listing requirements of any of the regulated markets, including the Nasdaq. The OTCBB is home to penny stocks because there is little to no regulation. This makes investing in an OTCBB stock very risky.Toronto Stock Exchange (often abbreviated as TSX)-762003048000The TSX is one of the largest stock exchanges in the world and the biggest in Canada. As of February 2015, it has the greatest number of security listings of any exchange in North America and has the second-most listings worldwide. It is also the eighth largest exchange in the world in terms of market capitalization. Based in Toronto, it is owned by and operated as a subsidiary of the TMX Group for the trading of senior equities. A broad range of businesses from Canada and abroad are represented on the exchange. In addition to conventional securities, the exchange lists various exchange-traded funds (ETF’s), split share corporations, income trusts and investment funds. More mining and oil and gas companies are listed on Toronto Stock Exchange than any other stock exchange in the world.Stocks Basics Questions1. What are the two types of exchanges that exist?2. What is the difference between the primary market and the secondary market?3. Define what an IPO is in your own words.4. Define what the Auction Method is and how it works.5. Why is the Over-the-Counter-Bulletin-Board so risky? List two reasons.491490012827000What are penny stocks?Successful companies aren't born, they're made and they have to work their way from humble beginnings and through the ranks just like everyone else. Unfortunately, some investors believe that finding the next "big thing" means scouring through penny stocks in the hope of finding the next Microsoft or Wal-Mart. Unfortunately, this strategy will prove to be unsuccessful in most cases. Read on to find out why pinning your hopes on penny stocks could leave you penniless.-7366026416000Penny Stocks 101259778519685DEFINITION of 'Pink Sheets'A daily publication with bid and ask prices of over-the-counter (OTC) stocks, including the market makers who trade them. Unlike companies on a stock exchange, companies quoted on the pink sheets system do not need to meet minimum requirements or file with the SEC. Pink sheets also refers to OTC trading. The pink sheets got their name because they were actually printed on pink paper. You can tell whether a company trades on the pink sheets because the stock symbol will end in ".PK". 400000DEFINITION of 'Pink Sheets'A daily publication with bid and ask prices of over-the-counter (OTC) stocks, including the market makers who trade them. Unlike companies on a stock exchange, companies quoted on the pink sheets system do not need to meet minimum requirements or file with the SEC. Pink sheets also refers to OTC trading. The pink sheets got their name because they were actually printed on pink paper. You can tell whether a company trades on the pink sheets because the stock symbol will end in ".PK". The terms "penny stocks" and "micro-cap stocks" can be used interchangeably. Technically, micro-cap stocks are classified as such based on their market capitalizations, while penny stocks are looked at in terms of their price. Definitions vary, but in general, a stock with a market capitalization between $50 and $300 million is a micro cap. Less than $50 million is a nano-cap. According to the Securities & Exchange Commission (SEC), any stock under $5 is a penny stock. Again, definitions can vary; some set the cut-off point at $3, while others consider only those stocks trading at less than $1 to be a penny stock. Other people consider any stock that is trading on the pink sheets (see definition) or over-the-counter bulletin board (OTCBB) to be a penny stock.The main thing you have to know about penny/micro stocks is that they are much riskier than regular stocks. What makes penny stocks risky? Four major factors make these securities riskier than blue chip stocks. 1. Lack of Information Available to the PublicThe key to any successful investment strategy is acquiring enough tangible information to make informed decisions. For micro-cap stocks, information is much more difficult to find. Companies listed on the pink sheets are not required to file with the Securities and Exchange Commission (SEC) and are thus not as publicly scrutinized or regulated as the stocks represented on the New York Stock Exchange and the Nasdaq. Furthermore, much of the information available about micro-cap stocks is not from credible sources. 2. No Minimum StandardsStocks on the OTCBB and pink sheets do not have to fulfill minimum standard requirements to remain on the exchange. Sometimes, this is why the stock is on one of these exchanges. Once a company can no longer maintain its position on one of the major exchanges, the company moves to one of these smaller exchanges. While the OTCBB does require companies to file timely documents with the SEC, the pink sheets have no such requirement. Minimum standards act as a safety cushion for some investors and as a benchmark for some companies. 3. Lack of HistoryMany of the companies considered to be micro-cap stocks are either newly formed or approaching bankruptcy. These companies will generally have poor track records or none at all. As you can imagine, this lack of historical information makes it difficult to determine a stock's potential. 4. LiquidityWhen stocks don't have much liquidity, two problems arise: first, there is the possibility that you won't be able to sell the stock. If there is a low level of liquidity, it may be hard to find a buyer for a particular stock, and you may be required to lower your price until it is considered attractive to another buyer. Second, low liquidity levels provide opportunities for some traders to manipulate stock prices, which is done in many different ways - the easiest is to buy large amounts of stock, hype it up and then sell it after other investors find it attractive (also known as pump and dump). 435292512636500What are blue chip stocks? A nationally recognized, well-established and financially sound company. Blue chips generally sell high-quality, widely accepted products and services. Blue chip companies are known to weather downturns and operate profitably in the face of adverse economic conditions, which help to contribute to their long record of stable and reliable growth.The name "blue chip" came about because in the game of poker the blue chips have the highest value. Blue chip stocks are seen as a less volatile investment than owning shares in companies without blue chip status because blue chips have an institutional status in the economy. Investors may buy blue chip companies to provide steady growth in their portfolios. The stock price of a blue chip usually closely follows the S&P 500 (the Standard and Poors 500 is a collection of the 500 largest companies in the US defined by market capitalization).Penny Stocks Tutorial Questions1. What is a micro-cap stock? 2. What makes blue chip stocks a more attractive investment vehicle than penny stocks?3. What are two problems that arise when a stock doesn’t have very much liquidity?4. List three major problems with investing in penny stocks?5. Explain how some unscrupulous investors can manipulate a stock price and how somebody can safeguard themselves from making an investment in a stock that has been manipulated.Stocks Basics: What Causes Stock Prices To Change?Stock prices change every day as a result of market forces. By this we mean that share prices change because of supply and demand. If more people want to buy a stock (demand) than sell it (supply), then the price moves up. Conversely, if more people wanted to sell a stock than buy it, there would be greater supply than demand, and the price would fall. Understanding supply and demand is easy. What is difficult to comprehend is what makes people like a particular stock and dislike another stock. This comes down to figuring out what news is positive for a company and what news is negative. There are many answers to this problem and just about any investor you ask has their own ideas and strategies. 41910004572000That being said, the principal theory is that the price movement of a stock indicates what investors feel a company is worth. Don't equate a company's value with the stock price. The value of a company is its market capitalization, which is the stock price multiplied by the number of shares outstanding. For example, a company that trades at $100 per share and has 1 million shares outstanding has a lesser value than a company that trades at $50 that has 5 million shares outstanding ($100 x 1 million = $100 million while $50 x 5 million = $250 million). To further complicate things, the price of a stock doesn't only reflect a company's current value, it also reflects the growth that investors expect in the future. -95250143510000The most important factor that affects the value of a company is its earnings. Earnings are the profit a company makes, and in the long run no company can survive without them. It makes sense when you think about it. If a company never makes money, it isn't going to stay in business. Public companies are required to report their earnings four times a year (once each quarter). Wall Street watches with rabid attention at these times, which are referred to as earnings seasons. The reason behind this is that analysts base their future value of a company on their earnings projection. If a company's results surprise (are better than expected), the price jumps up. If a company's results disappoint (are worse than expected), then the price will fall. Of course, it's not just earnings that can change the sentiment towards a stock (which, in turn, changes its price). It would be a rather simple world if this were the case! During the dotcom bubble, for example, dozens of internet companies rose to have market capitalizations in the billions of dollars without ever making even the smallest profit. As we all know, these valuations did not hold, and most internet companies saw their values shrink to a fraction of their highs. Still, the fact that prices did move that much demonstrates that there are factors other than current earnings that influence stocks. Investors have developed literally hundreds of these variables, ratios and indicators. Some you may have already heard of, such as the price/earnings ratio, while others are extremely complicated and obscure with names like Chaikin oscillator or moving average convergence divergence. So, why do stock prices change? The best answer is that nobody really knows for sure. Some believe that it isn't possible to predict how stock prices will change, while others think that by drawing charts and looking at past price movements, you can determine when to buy and sell. The only thing we do know is that stocks are volatile and can change in price extremely rapidly. The important things to grasp about this subject are the following: 1. At the most fundamental level, supply and demand in the market determines stock price. 2. Price times the number of shares outstanding (market capitalization) is the value of a company. Comparing just the share price of two companies is meaningless. 3. Theoretically, earnings are what affect investors' valuation of a company, but there are other indicators that investors use to predict stock price. Remember, it is investors' sentiments, attitudes and expectations that ultimately affect stock prices. It’s just like if you are trying to sell a used skateboard: you may feel it’s one of a kind and worth hundreds of dollars but the people that are interested in it don’t want to give you more than $20 for it. The value of your skateboard is very likely around the $20 mark.4. There are many theories that try to explain the way stock prices move the way they do. Unfortunately, there is no one theory that can explain everything.Stocks Basics: Buying Stocks441007559118500You've now learned what a stock is and a little bit about the principles behind the stock market, but how do you actually go about buying stocks? Thankfully, you don't have to go down into the trading pit yelling and screaming your order. There are two main ways to purchase stock: 1. Using a Brokerage The most common method to buy stocks is to use a brokerage. Brokerages come in two different flavors. Full-service brokerages offer you (supposedly) expert advice and can manage your account; they also charge a lot. Discount brokerages offer little in the way of personal attention but are much cheaper. At one time, only the wealthy could afford a broker since only the expensive, full-service brokers were available. With the internet came the explosion of online discount brokers. Thanks to them, nearly anybody can now afford to invest in the market. 2. DRIPs & DIPs Dividend reinvestment plans (DRIPs) and Direct Investment Plans (DIPs) are plans by which individual companies, for a minimal cost, allow shareholders to purchase stock directly from the company. Drips are a great way to invest small amounts of money at regular intervals.What are other ways you can invest in the stock market?Mutual fundsAn investment vehicle that is made up of a pool of funds collected from many investors for the purpose of investing in securities such as stocks, bonds, money market instruments and similar assets. Mutual funds are operated by money managers, who invest the fund's capital and attempt to produce capital gains and income for the fund's investors. A mutual fund's portfolio is structured and maintained to match the investment objectives stated in its prospectus.One of the main advantages of mutual funds is that they give small investors access to professionally managed, diversified portfolios of equities, bonds and other securities, which would be quite difficult (if not impossible) to create with a small amount of capital. Each shareholder participates proportionally in the gain or loss of the fund. Mutual fund units, or shares, are issued and can typically be purchased or redeemed as needed at the fund's current net asset value (NAV) per share, which is sometimes expressed as NAVPS.One disadvantage of mutual funds is that it can be difficult for fund managers to outperform the market and also that a lot of funds have higher management expense ratios (MER’s) which is the Index fundsA type of mutual fund with a portfolio constructed to match or track the components of a market index, such as the Standard & Poor's 500 Index (S&P 500). An index mutual fund is said to provide broad market exposure, low operating expenses and low portfolio turnover."Indexing" is a passive form of fund management that has been successful in outperforming most actively managed mutual funds. While the most popular index funds track the S&P 500, a number of other indexes, including the Russell 2000 (small companies), the DJ Wilshire 5000 (total stock market), the MSCI EAFE (foreign stocks in Europe, Australasia, Far East) and the Barclays Capital Aggregate Bond Index (total bond market) are widely used for index funds.Investing in an index fund is a form of passive investing. The primary advantage to such a strategy is the lower management expense ratio on an index fund. Also, a majority of mutual funds fail to beat broad indexes, such as the S&P 500 and have higher costs.Exchange Traded fundsAn ETF, or exchange traded fund, is a marketable security that tracks an index, a commodity, bonds, or a basket of assets like an index fund. Unlike mutual funds, an ETF trades like a common stock on a stock exchange. ETFs experience price changes throughout the day as they are bought and sold. ETFs typically have higher daily liquidity and lower fees than mutual fund shares, making them an attractive alternative for individual investors. Because it trades like a stock, an ETF does not have its net asset value (NAV) calculated once at the end of every day like a mutual fund does.An ETF is a type of fund which owns the underlying assets (shares of stock, bonds, oil futures, gold bars, foreign currency, etc.) and divides ownership of those assets into shares. The actual investment vehicle structure (such as a corporation or investment trust) will vary by country, and within one country there can be multiple structures that co-exist. Shareholders do not directly own or have any direct claim to the underlying investments in the fund; rather they indirectly own these assets.ETF shareholders are entitled to a proportion of the profits, such as earned interest or dividends paid, and they may get a residual value in case the fund is liquidated. The ownership of the fund can easily be bought, sold or transferred in much the same was as shares of stock, since ETF shares are traded on public stock exchanges.By owning an ETF, investors get the diversification of an index fund as well as the ability to sell short, buy on margin and purchase as little as one share (there are no minimum deposit requirements). Another advantage is that the expense ratios for most ETFs are lower than those of the average mutual fund. When buying and selling ETFs, you have to pay the same commission to your broker that you'd pay on any regular order.Stocks Basics: How to Read a Stock Table/QuoteAny financial paper or website has stock quotes that will look something like the image below: -762009271000Columns 1 & 2: 52-Week High and Low - These are the highest and lowest prices at which a stock has traded over the previous 52 weeks (one year). This typically does not include the previous day's trading. Column 3: Company Name & Type of Stock - This column lists the name of the company. If there are no special symbols or letters following the name, it is common stock. Different symbols imply different classes of shares. For example, "pf" means the shares are preferred stock. Column 4: Ticker Symbol - This is the unique alphabetic name which identifies the stock. If you watch financial TV, you have seen the ticker tape move across the screen, quoting the latest prices alongside this symbol. If you are looking for stock quotes online, you always search for a company by the ticker symbol. If you don't know what a particular company's ticker is you can search for it at: . Column 5: Dividend Per Share - This indicates the annual dividend payment per share. If this space is blank, the company does not currently pay out dividends (please refer to the dividend tutorial). Column 6: Dividend Yield - The percentage return on the dividend. Calculated as annual dividends per share divided by price per share. Column 7: Price/Earnings Ratio - This is calculated by dividing the current stock price by earnings per share from the last four quarters. For more detail on how to interpret this, see the P/E Ratio tutorial below. Column 8: Trading Volume - This figure shows the total number of shares traded for the day, listed in hundreds. To get the actual number traded, add "00" to the end of the number listed. 1905055245000Column 9 & 10: Day High and Low - This indicates the price range at which the stock has traded at throughout the day. In other words, these are the maximum and the minimum prices that people have paid for the stock. Column 11: Close - The close is the last trading price recorded when the market closed on the day. If the closing price is up or down more than 5% than the previous day's close, the entire listing for that stock is bold-faced. Keep in mind, you are not guaranteed to get this price if you buy the stock the next day because the price is constantly changing (even after the exchange is closed for the day). The close is merely an indicator of past performance and except in extreme circumstances serves as a ballpark of what you should expect to pay. Column 12: Net Change - This is the dollar value change in the stock price from the previous day's closing price. When you hear about a stock being "up for the day," it means the net change was positive. Dividends Tutorial: IntroductionA dividend is a distribution of a portion of a company's earnings to a class of its shareholders. Dividends can be in the form of cash, stock, and less commonly, property. Most stable companies offer dividends to shareholders. Often the stock prices of these financially secure companies do not move much, and dividends are offered as a way to entice, reward and retain investors. Investing in dividend-paying stocks can be an effective method of building long-term wealth. This guide with introduce dividend terminology and explore the basics of dividends - from how dividends work, to researching, reinvestment and taxes.Introduction to Dividends: Terms to Know and other BasicsCash DividendCash payments made to stockholders, paid on a per share basis, quoted as a dollar amount or as a percentage of the current market value. Cash dividends are typically paid out of the company's current earnings or accumulated profits. Date of RecordThe date the company uses to determine its shareholders or "holders of record."Declaration DateThe date a company's Board of Directors announces an upcoming dividend. DividendA distribution of a portion of a company's earnings paid to its eligible shareholders. Dividends can be in the form of cash, stock and property. 363855020002500Dividend Coverage RatioThe ratio between a company's earnings and its net dividend to shareholders. This ratio helps investors measure if a company's earnings are sufficient to cover its dividend obligations. Dividend coverage is calculated by dividing earnings per share by the dividend per share. Dividend Reinvestment Plan (DRIP)A plan offered by certain dividend-paying corporations that allows you to automatically reinvest cash dividends by purchasing additional shares of stock on the dividend payment date.Dividend YieldA financial ratio that illustrates how much a company pays out in dividends each year relative to its share price. It is calculated by dividing the annual dividend per share by the current price of the stock.Ex-Dividend DateThe date on or after which a stock is traded without a previously declared dividend.One-time DividendA special dividend paid in addition to regular cash dividends. Payment DateThe date a declared dividend is scheduled to be paid. ShareholderAny person, company or institution that owns at least one share in a company. Also called a stockholder.Stock DividendStock dividends are dividends in the form of additional shares of stock instead of cash.Dividend BasicsCompanies that earn a profit can:?Reinvest the profits through expansion, debt reduction and/or share repurchases; or?Pay a portion of the profits to shareholders; or?Both reinvest and payout to shareholders. 952588582500When a company pays a portion of its profits to shareholders, it does so through the payment of dividends. A dividend is a payment made to eligible shareholders, paid on a quarterly or yearly basis that represents a portion of the company's profits. Companies in the United States typically pay quarterly dividends, while non-U.S. companies generally pay annual or semi-annual dividends. Not all companies pay dividends to shareholders, and companies that do pay may increase, decrease or eliminate future dividend payments, depending on the performance of the business. For example, a company may decrease its dividend to free up cash to acquire another company. Most companies, however, try to maintain or increase dividends to keep shareholders happy and avoid drawing negative publicity. Dividends are normally quoted on a per share basis, meaning that the dividend each shareholder receives is based on the number of shares that he or she owns. For example, if you own 100 shares of stock in company XYZ and the company decides to pay an annual dividend of $5 per share, your dividend would be $500 (100 shares x $5 per share). Dividends can also be quoted in terms of a percent of the current market price; for example, the company may announce a 2.5% dividend. The dividend will be equal to 2.5% of the current stock price. Each eligible shareholder's dividend will be that figure multiplied by the number of shares currently held by the shareholder. For example, assume stock XYZ is currently trading at $50 per share and the company offers a 5% dividend. The dividend would be $2.50 per share (.05 dividend x $50 share price). A stock's dividend yield is the expected yearly dividend divided by the current stock price:Figure 1: How to calculate a stock\'s dividend yield. For example, assume stock XYZ is trading at $50 per share and the company offers an annual dividend of $5 per share. The dividend yield would be 10% ($5 dividend ÷ $50 share price). Note that if the stock is trading at a higher price, say $100, the dividend yield decreases ($5 dividend ÷ $100 share price = 5% dividend yield). Conversely, if the stock is trading at a lower price, such as $25, the dividend yield increases ($5 dividend ÷ $25 share price = 20% dividend yield). [Please note, these figures are for illustrative purposes only; a 20% dividend yield would be uncommon (and cause for further research).]402907550482500It is easy to become enamored with companies offering high dividends; however, keep in mind that these impressive figures might not represent a stable investment. High dividend yields are frequently indicators of low future growth prospects. A very high dividend yield might be a flag that the company is facing financial difficulty and that the market expects it to be accompanied by cuts to future dividends. Stocks with a low dividend yield, on the other hand, often indicate an expectation of high future growth. The historical average dividend yield for dividend-paying S&P 500 stocks has been between 2 and 5%. Cash Dividends, Stock Dividends and One-Time DividendsCash dividends are what we normally think about when referring to dividends. These are cash payments made to stockholders, paid on a per share basis, quoted as a dollar amount (such as $5 per share) or as a percentage of the current market value (for example, a 2.5% dividend). Cash dividends are typically paid out of the company's current earnings or accumulated profits. Often, investors are able to reinvest the dividends to purchase additional shares of stock.Stock dividends are in the form of additional shares of stock instead of cash. The number of additional shares you receive depends on the number of shares you currently own. For example, a company may issue a stock dividend equal to five shares of stock for every 100 owned by each shareholder. If you have 500 shares, you would receive 25 shares. The price of the stock will likely respond to the dividend so that shareholders' post-dividend wealth remains the same. The stock dividend increases the number of shares each stockholder owns but does not necessarily have an immediate effect on the overall value of each stockholder's shares. A company may also pay a special one-time dividend in addition to its regular cash dividends. A company may pay a one-time dividend for a variety of reasons, such as a sudden increase in cash resulting from the sale of a business or substantial litigation winnings. During the last quarter of 2012, with the "fiscal cliff" approaching in the U.S., many companies issued one-time dividends in anticipation of the higher dividend tax rates presumed to go into effect starting Jan. 1, 2013.P/E Ratio Tutorial: IntroductionChances are you've heard the term price/earnings ratio (P/E ratio) used before. When it comes to valuing stocks, the price/earnings ratio is one of the oldest and most frequently used metrics. Although a simple indicator to calculate, the P/E is actually quite difficult to interpret. It can be extremely informative in some situations, while at other times it is next to meaningless. As a result, investors often misuse this term and place more value in the P/E than is warranted. In this tutorial, we'll introduce you to the P/E ratio and discuss how it can be used in security analysis and, perhaps more importantly, how it should not be used. P/E Ratio: What Is It?P/E is short for the ratio of a company's share price to its per-share earnings. As the name implies, to calculate the P/E, you simply take the current stock price of a company and divide by its earnings per share (EPS): P/E Ratio = Market Value per Share Earnings per Share (EPS) Most of the time, the P/E is calculated using EPS from the last four quarters. This is also known as the trailing P/E. However, occasionally the EPS figure comes from estimated earnings expected over the next four quarters. This is known as the leading or projected P/E. A third variation that is also sometimes seen uses the EPS of the past two quarters and estimates of the next two quarters. There isn't a huge difference between these variations. But it is important to realize that in the first calculation, you are using actual historical data. The other two calculations are based on analyst estimates that are not always perfect or precise. Companies that aren't profitable, and consequently have a negative EPS, pose a challenge when it comes to calculating their P/E. Opinions vary on how to deal with this. Some say there is a negative P/E, others give a P/E of 0, while most just say the P/E doesn't exist. Historically, the average P/E ratio in the market has been around 15-25. This fluctuates significantly depending on economic conditions. The P/E can also vary widely between different companies and industries.P/E Ratio: Using The P/E RatioTheoretically, a stock's P/E tells us how much investors are willing to pay per dollar of earnings. For this reason it's also called the "multiple" of a stock. In other words, a P/E ratio of 20 suggests that investors in the stock are willing to pay $20 for every $1 of earnings that the company generates. However, this is a far too simplistic way of viewing the P/E because it fails to take into account the company's growth prospects. Growth of Earnings Although the EPS figure in the P/E is usually based on earnings from the last four quarters, the P/E is more than a measure of a company's past performance. It also takes into account market expectations for a company's growth. Remember, stock prices reflect what investors think a company will be worth. Future growth is already accounted for in the stock price. As a result, a better way of interpreting the P/E ratio is as a reflection of the market's optimism concerning a company's growth prospects. If a company has a P/E higher than the market or industry average, this means that the market is expecting big things over the next few months or years. A company with a high P/E ratio will eventually have to live up to the high rating by substantially increasing its earnings, or the stock price will need to drop. A good example is Microsoft (MSFT). Several years ago, when it was growing by leaps and bounds, and its P/E ratio was over 100. Today, Microsoft is one of the largest companies in the world, so its revenues and earnings can't maintain the same growth as before. As a result, its P/E had dropped to 16 by 2015. This reduction in the P/E ratio is a common occurrence as high-growth startups solidify their reputations and turn into blue chips. Cheap or Expensive? The P/E ratio is a much better indicator of the actual value of a stock than the market price alone. For example, all things being equal, a $10 stock with a P/E of 75 is much more "expensive" than a $100 stock with a P/E of 20. That being said, there are limits to this form of analysis - you can't just compare the P/Es of two different companies to determine which is a better value. It's difficult to determine whether a particular P/E is high or low without taking into account two main factors: 1. Company growth rates - How fast has the company been growing in the past, and are these rates expected to increase, or at least continue, in the future? Something isn't right if a company has only grown at 5% in the past and still has a stratospheric P/E. If projected growth rates don't justify the P/E, then a stock might be overpriced. In this situation, all you have to do is calculate the P/E using projected EPS. 2. Industry - It is only useful to compare companies if they are in the same industry. For example, utilities typically have low multiples because they are low growth, stable industries. In contrast, the technology industry is characterized by phenomenal growth rates and constant change. Comparing a tech company to a utility is useless. You should only compare high-growth companies to others in the same industry, or to the industry average. You can find P/E ratios by industry on Yahoo! Finance for example. P/E Ratio: It's Not a Crystal BallWhat goes up ... well, sometimes it stays up for an awfully long time… A common mistake among beginning investors is the short selling of stocks because they have a high P/E ratio. If you aren't familiar with short selling, it's an investing technique by which an investor can make money when a shorted security falls in value. Secondly, you can get into a lot of trouble by valuing stocks using only simple indicators such as the P/E ratio. Although a high P/E ratio could mean that a stock is overvalued, there is no guarantee that it will come back down anytime soon. On the flip side, even if a stock is undervalued, it could take years for the market to value it in the proper way. Security analysis requires a great deal more than understanding a few ratios. While the P/E is one part of the puzzle, it's definitely not a crystal ball. P/E Ratio: ConclusionWhat have we learned about the P/E ratio? Although the P/E often doesn't tell us much, it can be useful to compare the P/E of one company to another in the same industry, to the market in general, or to the company's own historical P/E ratios. Some points to remember: ?The P/E ratio is the current stock price of a company divided by its earnings per share (EPS). ?Variations exist using trailing EPS, forward EPS, or an average of the two. ?Historically, the average P/E ratio in the market has been around 15-25. ?Theoretically, a stock's P/E tells us how much investors are willing to pay per dollar of earnings. ?A better interpretation of the P/E ratio is to see it as a reflection of the market's optimism concerning a firm's growth prospects. ?The P/E ratio is a much better indicator of a stock's value than the market price alone. ?In general, it's difficult to say whether a particular P/E is high or low without taking into account growth rates and the industry. ?Changes in accounting rules as well as differing EPS calculations can make analysis difficult. ?P/E ratios are generally lower during times of high inflation. ?There are many explanations as to why a company has a low P/E. ?Don't base any buy or sell decision on the multiple alone.Quotes on the Internet Nowadays, it's far more convenient for most to get stock quotes off the Internet. This method is superior because most sites update throughout the day and give you more information, news, charting, research, etc. To get quotes, simply enter the ticker symbol into the quote box of any major financial site like Yahoo! Finance, CBS Market watch, or MSN Money Central. The example below shows a quote for Microsoft (MSFT) from Yahoo Finance. 60960021463000Stocks Basics: The Bulls, the Bears and the FarmOn Wall Street, the bulls and bears are in a constant struggle. If you haven't heard of these terms already, you undoubtedly will as you begin to invest. The Bulls -29083024955500A bull market is when everything in the economy is great, people are finding jobs, gross domestic product (GDP) is growing, and stocks are rising. Things are just plain rosy! Picking stocks during a bull market is easier because everything is going up. Bull markets cannot last forever though, and sometimes they can lead to dangerous situations if stocks become overvalued. If a person is optimistic and believes that stocks will go up, he or she is called a "bull" and is said to have a "bullish outlook". The Bears 42862508890000A bear market is when the economy is bad, recession is looming and stock prices are falling. Bear markets make it tough for investors to pick profitable stocks. One solution to this is to make money when stocks are falling using a technique called short selling. Another strategy is to wait on the sidelines until you feel that the bear market is nearing its end, only starting to buy in anticipation of a bull market. If a person is pessimistic, believing that stocks are going to drop, he or she is called a "bear" and said to have a "bearish outlook". The Other Animals on the Farm - Chickens and Pigs -152400190500Chickens are afraid to lose anything. Their fear overrides their need to make profits and so they turn only to money-market securities or get out of the markets entirely. While it's true that you should never invest in something over which you lose sleep, you are also guaranteed never to see any return if you avoid the market completely and never take any risk, 49434753111500Pigs are high-risk investors looking for the one big score in a short period of time. Pigs buy on hot tips and invest in companies without doing their due diligence. They get impatient, greedy, and emotional about their investments, and they are drawn to high-risk securities without putting in the proper time or money to learn about these investment vehicles. Professional traders love the pigs, as it's often from their losses that the bulls and bears reap their profits. 014224000What Type of Investor Will You Be? There are plenty of different investment styles and strategies out there. Even though the bulls and bears are constantly at odds, they can both make money with the changing cycles in the market. Even the chickens see some returns, though not a lot. The one loser in this picture is the pig. Make sure you don't get into the market before you are ready. Be conservative and never invest in anything you do not understand. Before you jump in without the right knowledge, think about this old stock market saying: "Bulls make money, bears make money, but pigs just get slaughtered!"Stocks Basics: ConclusionLet's recap what we've learned in this tutorial: ?Stock means ownership. As an owner, you have a claim on the assets and earnings of a company as well as voting rights with your shares. ?Stock is equity, bonds are debt. Bondholders are guaranteed a return on their investment and have a higher claim than shareholders. This is generally why stocks are considered riskier investments and require a higher rate of return. ?You can lose all of your investment with stocks. The flip-side of this is you can make a lot of money if you invest in the right company. ?The two main types of stock are common and preferred. It is also possible for a company to create different classes of stock. ?Stock markets are places where buyers and sellers of stock meet to trade. The NYSE and the Nasdaq are the most important exchanges in the United States. The TSX is the most important exchange in Canada.?Stock prices change according to supply and demand. There are many factors influencing prices, the most important of which is earnings. ?There is no consensus as to why stock prices move the way they do. ?To buy stocks you can either use a brokerage or a dividend reinvestment plan (DRIP). ?Stock tables/quotes actually aren't that hard to read once you know what everything stands for! ?Bulls make money, bears make money, but pigs get slaughtered!Types of Investment strategiesStyle Strategy Stock selection for individual investors can be a daunting task. Choosing securities from the global marketplace, analyzing, evaluating, purchasing and tracking performance of those securities within a diversified portfolio is not something most individual non-professional investors are able or willing to do. Instead, investors can make portfolio allocation decisions by choosing among broad categories of securities, such as "large-cap", "growth", "international" or "emerging markets". This approach to investing - looking at the underlying characteristics common to certain types of investments - is termed style investing. The popularity of style investing increased considerably for institutional investors during the 1980s as the pension consulting community encouraged clients to categorize equity styles during the asset allocation process. Both institutional and individual investors found that categorizing stocks by style simplifies investor choices and allows them to process information about stocks within a category more easily and more efficiently. Allocating savings across a limited number of investment styles is a far easier and much less intimidating task than choosing among thousands of investment options available throughout the world. By classifying assets according to a specific style, investors are also better able to evaluate the performance of professional money managers. In other words, all the money managers handling emerging growth stock funds can be ranked by performance in that particular category. In fact, money managers are generally evaluated not in terms of absolute performance but relative to a performance benchmark for their style of investing. Over the past decade, a new set of sub-styles, in addition to the usual styles of value and growth, has been accepted by the investment community. These are: deep and relative value and disciplined and aggressive growth. -9525010223500Value style managers look for stocks that are incorrectly priced given the issuer's exiting assets and earnings. They employ traditional valuation measures that equate a stock's price to the company's intrinsic value. Value companies tend to have relatively low price/earnings ratios, pay higher dividends and have historically more stable stock prices. The value manager's basic assumption is that the issuer's worth will, at some point, be revalued and thereby generate gains for the money manager. There are several reasons that a stock might be undervalued: the company may be so small that the stock is thinly traded and doesn't attract much interest; the company is operating in an unpopular industry; the corporate structure is complicated, making analysis difficult or the stock price may not have fully reacted to positive new developments. Value stocks are typically found in slower-growing sectors of the economy like finance and basic industry but there are bargains to be found even in "growth" sectors such as technology. During the 1990s, Standard & Poor's identified three specific sub-styles: deep value, relative value and new value. ?Deep Value style uses the traditional Graham and Dodd approach whereby managers buy the cheapest stocks and hold them for long periods in anticipation of a market upswing. ?Relative Value money managers seek out stocks that are under-appreciated relative to the market, their peer group, and the company's earnings potential. Relative value stocks should also feature some sort of channel (such as a patent or pending FDA approval) that has the potential to unlock the stock's real value. A typical holding period is three to five years. Unlike traditional value managers, relative value managers pursue opportunities across all economic sectors and may not concentrate on the usual "value sectors". ?New value managers choose their investments from all securities categories, seeking any stock that holds prospect for significant appreciation. Growth style managers typically focus on an issuer's future earnings potential. They try to identify stocks offering the potential for growing earnings at above-average rates. Where value managers look at current earnings and assets, growth managers look to the issuer's future earnings power. Growth is generally associated with greater upside potential relative to style investing and, of course, it has an accompanying greater downside risk. ?Traditional growth style investing has also spawned a few sub styles, specifically, disciplined growth or growth-at-a reasonable-price (GARP), and aggressive, or momentum, growth.?Disciplined growth style managers concentrate on companies that they believe can grow their earnings at a rate higher than the market average and that are selling for an appropriate price.?Aggressive growth styles tend not to rely on traditional valuation methods or fundamental analysis. They rely on technical analysis. Sector Strategy Look at a particular industry such as transportation. Because the holdings of this type of fund are in the same industry, there is an inherent lack of diversification associated with these funds. These funds tend to increase substantially in price when there is an increased demand for the product or service offering provided by the businesses in which the funds invest. On the other hand, if there is a downturn in the specific sector in which a sector fund invests, the fund will face heavy losses due to the lack of diversification in its holdings. Index Strategy Tends to track the index it follows by purchasing the same weights and types of securities in that index, such as an S&P fund. Investing in an index fund is a form of passive investing. The primary advantage to such a strategy is the lower management expense ratio on an index fund. Also, a majority of mutual funds fail to beat broad indexes such as the S&P 500. Global Strategy A global strategist builds a diversified portfolio of securities from any country throughout the globe (Not to be confused with an international strategy, which may include securities from every other country except the fund's home country.) Global money managers may further concentrate on a particular style or sector or they may choose to allocate investment capital in the same weightings as world market capitalization weights. Stable Value Strategy The stable value investment style is a conservative fixed income investment strategy. A stable value investment manager seeks short-term fixed income securities and guaranteed investment contracts issued by insurance companies. These funds are attractive to investors who want high current income and protection from price volatility caused by movements in interest rates. Dollar-Cost Averaging Dollar-cost averaging is a straightforward, traditional investing methodology. Dollar-cost averaging is implemented when an investor commits to investing a fixed dollar amount on a regular basis, usually monthly purchase of shares in a mutual fund. When the fund's price declines, the investor can buy a greater number of shares for the fixed investment amount, and a lesser number when the share price is moves up. This strategy results in lowering the average cost slightly, assuming the fund fluctuates up and down. Value Averaging This is a strategy in which an investor adjusts the amount invested, up or down, to meet a prescribed target. An example should clarify: Suppose you are going to invest $200 per month in a mutual fund. At the end of the first month, thanks to a decline in the fund's value, your initial $200 investment has declined to $190. In this case, you would contribute $210 the following month, bringing the value to $400 (2*$200). Similarly, if the fund is worth $430 at the end of the second month, you only put in $170 to bring it up to the $600 target. What happens is that compared to dollar cost averaging, you put in more when prices are down, and less when prices are up.Five Minute Investing: Things to AvoidMistake No.1: Not Having an Exit Plan before Buying No matter how well or poorly founded, every stock selection strategy produces both losers and winners. In the case of both losers and winners, the reason for selling a stock is always the same: to preserve capital and allow you to redeploy it to more profitable investments. The relevant question is, "how to determine the right time to sell?" The time when you can think most clearly about why you would eventually sell a stock is before it is purchased. Before you buy anything, you have no emotional attachment to it, which means you can make totally rational decisions. Once you own something, you tend to get either greedy or scared. These emotions lead to a desire to preserve profits, leading to prematurely cutting off an ascending price trend. How Not Having an Exit Plan Hurts Your PerformanceBig losses are one thing that destroys most investors' performance, and these are almost always a direct result of the investor failing to plan, before entering a trade, how he/she will exit it. Since the potential gains from a stock are always higher than the potential losses (100% loss potential versus unlimited upside potential), an even bigger source of under-performance is selling too soon when you do find a great winner. An exit plan is one thing that experienced investors/traders always have before initiating a position. The reason is simple: you must have a plan and stick to it, or else every decision you make will be emotional, not rational. Worse yet, the larger the position is, the less rational your decision-making will be. Therefore it is vital to make all decisions up front, before you are scared (if the position happens to go down), or greedy (if it soars). Emotional decisions almost always are poor ones, leading to large losses and small gains. The pitfalls of trying to manage a stock portfolio without a plan are many and varied. The advice of friends, stockbrokers, market advisors and the like are all likely to have a magnifying effect on the natural elements of fear and greed that are present in every investor. These influences can cause someone who does not have a well-thought-out plan to abandon profitable positions and hang on to losing ones. This is exactly why the majority of amateur investors underperform the market: they do not have a plan. As the saying goes, "when you fail to plan, you plan to fail." This saying is as true in the stock market as it is in any other aspect of life. With emotions running rampant from a loss or a large gain, it is virtually impossible to make a good decision. This is precisely the point at which most investors fail: They have no preconceived plan for exiting a stock before they buy it. As a result, when they hear a tip or rumor on a stock they get so excited that they forget to ask themselves what they will do if it turns sour, or if it soars, what will be their plan for letting the profit ride? If the investor who doesn't plan ahead also happens to believe some of the myths presented in Chapter 1 then his or her chances of making a good decision are almost zero. If you are a decision-maker of any kind, you no doubt realize that making decisions based on wrong assumptions renders your chances of success to be very small. For this reason, the need for an exit plan based on sound theory before a stock purchase cannot be overemphasized. Unfortunately, most investors don't want to think about planning ahead, (especially for adverse possibilities) when they are buying a stock - they put the selling criteria decision off until it is unavoidable, and usually too late. An exit plan must be identified for every investment before the investment is made. This plan should cover all possible outcomes of the trade, both profit and loss. Mistake No.2: Plunging Too much Into a Stock All at Once Another common error committed by many investors is plunging. This means that the investor makes two mistakes: First, they purchase entirely too large a position in a single stock. Secondly, they do it all at once. The real problem with doing this is that investors put themselves in a perfect position for their emotional decision-making to run wild. Typically what happens is the following: First, the plunger takes a huge position. Then, his stock either begins declining or increasing. In either outcome, the emotions of plunging work against the poor investor. For if the stock declines, the plunger will either get scared and sell out with a loss that is a sickening percentage of his capital, or hold on in the hope of an increase in value (which may never happen). If the stock increases in value, the investor will often have a large dollar gain that is hard to resist cashing in. In this latter case, the investor makes the mistake of cutting his gains short. In short, plunging leads to cutting your potential gains short and letting your losses keep mounting - exactly the opposite of what you should be trying to accomplish. Almost always, the plunger lacks an exit plan for the purchase before buying. If the plunger had thought about an exit plan beforehand, he probably would have realized the potential pitfalls and would have taken a more appropriately-sized position. Plunging can work occasionally if one is fortunate enough to select a stock that immediately increases in value and never looks back. However, in most cases the plunger has such a large percentage of his capital riding on a single stock that the emotions of greed and fear work against him in a major way. The normal fluctuations of stock prices have an exaggerated effect on the plunger's emotions by virtue of the huge amount of capital represented by the position. Taking too large of a position leads to emotional involvement, which leads in turn to poor decisions. It also exposes you to the potential for lots of damage from one bad trade. Diversify - don't bet the farm. Mistake No.3: Failing To Cut Losses A certain percentage of stocks you choose will show themselves to be losers. Count on this fact. These losers must be dealt with in some way in order to limit their impact on your overall performance. Once a stock starts to decline it can become a vicious cycle, leading to even more declines. As unbelievable as it seems to the novice investor, the more and longer a stock declines the more it is apt to continue declining, or continue going sideways. Even if a stock does come back, it will likely take a long, long time to do so, and time is money. For this reason, it is important to stop the bleeding once it becomes apparent that you have chosen a loser. Oftentimes, the actions of most investors are opposite the logical course of action. Most hold on to their losers, hoping against hope that the stock will someday pull itself together. Some also hold on because they can't face up to the fact that they made a mistake. They reason (poorly) that as long as they don't sell, then they haven't really lost anything. This is an error because the value of their stock is the current market price, not what they paid for it - but their rationalization helps them feel better about themselves. The other compelling reason for selling losers is the concept of opportunity cost, that is, the money you could have made by redeploying your capital to a more promising investment. Often, the opportunity cost of holding a losing stock is far greater than the loss on the stock itself. Let's say we have $10,000 invested in a particular stock and it declines to where it is worth only $8,000. There are two reasons to consider selling the stock in this example. First, the stock is clearly in a downtrend, and like most trends, the decline is most likely to continue. If it does, the decision to sell may save us as much as $8,000, the current market value of our stock. The second reason for considering cutting our loss short is that by redeploying the $8,000 into a stock that is trending upward, we increase our chances of making up the $2,000 loss more quickly than if we'd continued to hold the losing stock, waiting for it to come back. The possibility exists that we could make up the $2,000 loss and make an additional $8,000 profit by redeploying our capital from the declining stock to the ascending one. All the while, the original purchase may still be languishing far below where we dumped it. While there are no guarantees that the ascending stock will continue ascending, it is a much better bet statistically than the declining one. In the stock market, going with the long-term statistics is a key to long-term success. Beware of the common compulsion to hold onto your losers. If you do succumb to this temptation, your portfolio may still be profitable (as long as you also do not sell your winners), but it will not be as profitable as it could be. Mistake No.4: Selling Too Soon Another error that cuts seriously into many investors results is the error of selling a winning stock too soon. Though it might seem that this is a relatively minor problem, it actually is a very serious error because it robs you of your really big profits. I believe it is a bigger mistake than failing to cut your losses, because in a properly diversified portfolio the potential profit from any one stock is far more than the potential loss. That's simply another way of saying that the most you can lose on a single stock is 100% of what is invested, but the potential gain from every stock is unlimited. If your objective is to make as much money as you can, then you must put yourself into a position to hold onto really big winners when they come your way. If you have a strategy that emphasizes taking the money and running every time you get a double or triple, then you are seriously shortchanging yourself. Think BigI believe the reason most investors fail to hold onto winners long enough is that they simply do not realize how big a move can sometimes be realized. They wrongly assume that if a stock has doubles or triples then that is about the best they can hope for. However, investors who take the time to study the history of stock trends know better. Sometimes a stock that has doubled will go on to make another tenfold increase from there. It can (usually does) take years for this type of move to occur, but over a several year time frame your chances of finding a huge upward trend is far better than you'd think. Again, the best way to convince yourself of this is to get a long-term stock chart publication and start studying it. Price ObjectivesAnother insidious reason for investors selling too soon is the use of price objectives. This is when you buy a stock and set a price that at which you will sell if and when the stock makes it to the target price. These target prices are usually arrived at as a certain percentage above the entry price, or else are based on some analyst's assessment of the 'value' of the stock. However arrived at, most feel that use of target selling prices is a seriously flawed practice. One of the enigmas of the stock market is the tendency for what seems overvalued to keep going higher still, and what seems reasonably valued or cheap to keep on retreating. The reason is that when a company's earnings are (or are about to start) growing rapidly, the price of the stock may be high relative to the current earnings, but only a few times the next year's actual earnings, if next year's earnings could be known. The stock may even be selling for many times the earnings estimate for next year, because it takes time for good trends to be recognized and assimilated by stock analysts. Thus, stock analysts' earnings estimates for coming years tend to lag when something good is brewing, just as they often lag when bad things are in the works. The thing to remember about this is that the aggregate consensus of all market participants (as reflected in the stock's price trend) tends to be more accurate and more timely than published earnings estimates. If you study stock trends it is likely that you will come to the conclusion that the trend of a stock is a more accurate indicator of when to sell than are calculated estimates of a stock's value. Why then are price objectives used? The reason they are so popular is because of the need for retail brokerage houses and newsletter writers to give some sort of selling advice to large numbers of retail clients. Through the use of price objectives, the task of giving advice to large numbers of people is made manageable for the advice-giver. However, it seldom results in the best possible outcome for the client. This is a good reason to become your own investment advisor and portfolio manager. The use of price selling targets mostly results in you capping your profits, as you cannot possibly make more of a profit than that which is reflected in the target price. Finally, it should be obvious to all that capping your profits is not a good thing. If you employ a strategy which cuts your losses but also caps your gains, by definition you'll be worse off than if you had bought your stocks and done nothing but sit on them forever. Don't try to guess how far a stock can move up. If you do not give your stocks a lot of room to move upward, you will guarantee that your stock market profits will be below average. Mistake No.5: Choosing Stocks that are in a Downtrend Buying stocks that are in a downward price spiral is the most common mistake among novice investors. In order to profit from such a strategy, you need to be right about two things at once: First that the stock's slide will end (a surprising number never do until they become worthless), and secondly, the timing of when (and at what price) the stock's slide will end. Your chances of being right about both things are slim. The typical scenario for this particular mistake is an inexperienced investor scouring the stock boards looking for stocks near their 52-week lows, since this information is readily available. The novice wrongly assumes that if a stock is near its low for the year then it must be "low" and therefore in an opportune position to be bought. As we have seen, the hapless bottom-fisher finds out after it is too late just how easy it is for such a stock to keep on making new (and even lower) 52-week lows. As an aside, it's interesting to note that it's fairly common that a stock which is today making a new 52-week high has as its 52-week low a price that was a 52-week high< a year ago. That might seem like a confusing statement but if you think about it, it will make a lot of sense. If the stock has been in an uptrend for a year or more, that price which was once a new high will now be listed as the lowest price for the past 52 weeks. Beginning investors usually do not even consider the possibility that this could be true, so they keep on buying dogs until their portfolio looks like a kennel. Woof, woof!Often, investors convince themselves that buying a stock from the 52-week lows list is not a risky proposition because of that stock's low price relative to past earnings, book value, or some other measure of value. But in reality, buying a down- trending stock is always risky, as you are betting against the entire market's assessment of the company's earnings trend. If a stock is making a serious decline it is because market participants know some facts about the company's future earnings potential - facts that you may not be aware of no matter how well you research the company. Seldom is the entire market wrong about these matters. Sometimes the market is wrong, of course, but your chances of finding those exceptions are mighty slim because you are only one of thousands of people who are looking for such leads. It is very hard for one person to correctly second-guess the sum total wisdom of thousands of other investors. Try to keep in mind that your objective is to maximize profits, not to outsmart the market. The two objectives are vastly different. Listen to the signals of the market. If a stock is trending steadily downward, there is a good reason for it. Find greener pastures elsewhere. Mistake No.6: Adding to a Losing Position Another strategic error commonly practiced by many amateur investors is adding more money to a losing position. The reasoning in the mind of the investor who does this goes something like this: "I bought the stock when it was $40. Now it is $20, so it's twice as good a deal as it was at $40. Besides, my average cost per share will come way down once I add to the position." Sometimes this is called Dollar Cost Averaging (DCA) - putting a certain dollar amount into a stock at specified time intervals or at specified price intervals when the stock drops in value. When an investor adds to a position on equal time periods (i.e. $1,000 every quarter) independent of the price of the stock, it is called Time-Based Dollar Cost Averaging. When an investor invests an equal dollar amount each time a stock declines in price by a certain level (i.e., $1,000 with each 20% decline in price), it is called Price-Based Dollar Cost Averaging. What you need to remember is that while Time-Based DCA can make sense if done in a controlled manner, Price-Based DCA makes no sense in any circumstances and is sure to bankrupt you if practiced consistently. The rest of this section I want to devote to explaining why you must never practice Price-Based DCA as a strategy, because it is the most destructive of all investor mistakes and represents in the extreme why you should never add to a losing position. The fallacy of Price-Based DCA can best be illustrated by the following example. Let's assume we have the ability to anonymously observe a certain naive investor, Mr. Jones, who is going to pursue a Price-Based Dollar Cost Averaging strategy. Mr. Jones picks a portfolio of ten stocks and puts $10,000 into each stock, for a total investment of $100,000. Just for fun, let's also assume we know ahead of time that one of the stocks in Mr. Jones's portfolio is going to go bankrupt (that is, decline until it becomes worthless) sometime within the next year. (Of course Mr. Jones doesn't know this, and we aren't going to tell him, either). But, since he is a devout Price-Based DCA advocate, his trading rule is that whenever one of his stocks declines 50% in price from his purchase point, he will sell $5,000 worth of one of his better-performing stocks and use the proceeds to buy more shares in the declining stock. If the issue declines another 50% from his second purchase point, he will sell another $5,000 of one of his other stocks and again add to this declining stock. Can you guess what will happen to Mr. Jones over the next year as we watch him trade? It should be an agonizing thing to watch because, as you may have figured out by now, Mr. Jones' strategy will over the course of the next year automatically allocate all of his capital to the stock that is to go bankrupt. This is because there are an infinite number of sequential 50% declines that can occur between his initial purchase point and zero. He will lose his entire $100,000 unless he has the good sense at some point to realize what a bloody poor strategy he has. If you pursue a Price-Based DCA strategy consistently, eventually you will become bankrupt as Mr. Jones is about to. This is because inevitably you will someday get a stock in your portfolio that is bound for the scrap heap. When you do, cut the loss and don't even think about adding to the position! Otherwise, you may find yourself standing in bankruptcy court with Mr. Jones. When you have a losing position, it means something is starting to go wrong. Never add to a losing position. Mistake No.7: Falling in Love with a Stock It's a common mistake to have a good run with a stock and then decide that you will never sell it. Some folks have a hard time parting with something that has done so well for them, but again, what your emotions tell you to do and what you should do are two different things. Save the ''til death do us part' thing for your marriage, not for your stocks. Even a noted long-term investor like Warren Buffett takes profits occasionally. Many people are of the mindset that bull markets go on forever, but few remember that Warren Buffett cashed out nearly completely in the late 1960s. Besides, few people have the skill to pick truly long-term investments the way Warren Buffett has. So for most of us the time comes when it makes sense to redeploy our assets to something more productive. Every gardener knows that the fruit of even the best-growing plants eventually needs to be picked before it turns overripe and finally, rotten. Likewise, even the stocks that grew so well in their season eventually need to be sold. Some plants are annuals, lasting but a single outstanding season and then dying. Others are like apple trees, bearing fruit year after year, but eventually they decline in productivity and die or produce substandard fruit. A stock can have a phenomenal rise that lasts many years, but most will eventually start lagging and break down. In the most extreme case, they may go from star to oblivion and bankruptcy. Therefore we must reap, but we need to make sure that our reaping is not done prematurely but allows for long-term growth. The perfect system would be one which tells us the exact top, but that is impossible in reality. We must instead find a balance between selling too soon and selling too late. It must not be done based on guesswork but instead on the actual performance of the stocks in your portfolio. There is no doubt that our chances of making really big money on a stock increases with the length of time we hold it. Try to remain emotionally unattached to a stock so that you are not blinded to what the market is telling you about it. Mistake No.8: Trying to "Get Even" with a Stock One of the big investor mistakes I've observed is that some investors, once they've taken a loss on a stock, keep looking for an opportunity to buy that same stock. Without realizing it, they become enamored of the stock simply because it has done them wrong. They are looking to get even. "I'll show that stock," they say to themselves. By so doing they lose focus of what they are trying to do: make money, not save face. There are thousands of companies available for them to invest in, so why do they keep coming back to a proved loser? The answer is, of course, ego. Ego is one of the most destructive forces that you can unleash on your investment performance, and we will take a close look at how it manifests itself in the next chapter, so you can recognize it. It crops up in everyone now and then, but when it does, you must resist it and think logically. If you are fishing and a fish slips off your hook, do you refuse to pull in any fish other than the one that got away, from then on? Of course not - you throw your line back into the water in hopes of catching "a fish," not "the fish." It seems obvious when fishing, but unfortunately, many people's common sense goes out the window when it comes to the stock market. They keep gunning for that one particular stock, ignoring the other rich targets which abound around them. Thus, one mistake begets another. Sometimes, people also return to a stock because they had such a good experience with it. They made some good money off this stock and so they have warm, fuzzy feelings for it. Again, this is not logical thinking unless the stock has recovered and is showing itself still to be one of the stronger stocks in the market. Once you have sold a stock, forget it, whether it was sold for a profit or a loss. Capital GainsThe term capital gain, or capital gains, is used to describe the profit earned from buying an investment (e.g. stocks or real estate) or other asset at one price and selling it at a different, higher price. For instance, if you bought a piece of real estate for $500,000 and sold it for $800,000, you would need to report total capital gains of $300,000 ($800,000 selling price - $500,000 cost basis = $300,000 capital gains profit).What is it?You have a capital gain when you sell, or are considered to have sold, what the Canada Revenue Agency deems “capital property” (including securities in the form of shares and stocks as well as real estate) for more than you paid for it (the adjusted cost base) less any legitimate expenses associated with its sale.How is it taxed?Contrary to popular belief, capital gains are not taxed at your marginal tax rate. Only half (50%) of the capital gain on any given sale is taxed all at your marginal tax rate (which varies by province). On a capital gain of $50,000 for instance, only half of that, or $25,000, would be taxable. For a Canadian in a 35% tax bracket for example, a $25,000 taxable capital gain would result in $8,750 taxes owing. The remaining $41,250 is the investors’ to keep.How to keep more of it for yourselfThere are several ways to legally reduce, and in some cases avoid, capital gains tax. Some of the more common exceptions are detailed here:?Capital gains can be offset with capital losses from other investments. In the case you have no taxable capital gains however, a capital loss cannot be claimed against regular income except for some small business corporations.?The sale of your principal residence is not subject to capital gains tax. For more information on capital gains as it relates to income properties, vacation homes and other types of real estate, read “Can you avoid capital gains tax?”?A donation of securities to a registered charity or private foundation does not trigger a capital gain.?If you sell an asset for a capital gain but do not expect to receive the money right away, you may be able to claim a reserve or defer the capital gain until a later time.If you are a farmer or a newcomer to Canada, they are special capital gains rules for you. The specifics can be found at the CRA website. ................
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