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INVESTING 101 FROM STOCKS AND BONDS TO ETFs AND IPOs, AN ESSENTIAL PRIMER ON BUILDING A PROFITABLE PORTFOLIO MICHELE CAGAN, CPA Avon, Massachusetts CONTENTS INTRODUCTION CHAPTER 1: BASIC ECONOMICS BUYING AND SELLING INTEREST RATES ECONOMIC INDICATORS SECTORS THE SEC GLOBAL ECONOMICS COMPANY FUNDAMENTALS CHAPTER 2: WHAT... |
These are certainly among the most common forms that investments take, but there’s more to investing than that. Investing is about getting your money to make more money. That’s the simplest definition of it. And there are all kinds of ways to do that. They include: Stocks Bonds Mutual funds Precious metals Exchange-tra... |
Investing is a way of helping you reach your goals, whether those are paying for your education or that of your children; traveling and having new and exciting experiences; or financing a secure retirement. By investing wisely and well, you can expand your savings and make your financial dreams come true. There’s an ex... |
Understanding how the economy works, the cycles it goes through, and the impact changes have on the markets can help make you a more successful investor. In fact, investors who pay attention to the economy can be more successful because they can take advantage of impending changes. While everyone else is focused on wha... |
“The intelligent investor is a realist who sells to optimists and buys from pessimists.” —Jason Zweig Value and Price Humans buy and sell things because those things have value. This value is partly what you use them for (for instance, you use food to survive, you use a car for transportation, and you use movie tickets... |
Knowing your income is important, since this allows you to live within your means and not spend more than you have coming in. Economists consider various kinds of income, including national income, per capita income (that is, the average income a person has), and disposable income (the amount of money you and your fami... |
Personal Consumption Expenditure Economists track personal consumption expenditures (PCE). The Bureau of Economic Analysis (www.bea.gov) monitors and publishes PCE reports regularly. You can also find information at the Bureau of Labor Statistics (www.bls.gov). Saving and Investment Finally, we come to those things tha... |
For most of us, interest is just something we earn on our savings accounts, or (more often) more money we have to pay to credit card companies. For some, it’s the mysterious number connected with mortgage payments. And that’s where it ends for us; that’s the direct impact of interest rates on our lives. It begins, thou... |
Higher interest rates mean that more money goes to interest payments and less to shopping. When people and businesses have to pay more in interest, which leaves them less to spend, investors can take a hit. So while a change in the federal funds rate doesn’t immediately impact the markets, it does affect them indirectl... |
These risk-free investments guarantee you steady returns, and when rates go up, you’re guaranteed bigger interest payments on these government securities. This also has the effect of higher interest rates on newly issued municipal and corporate bonds. ECONOMIC INDICATORS Signposts in the Marketplace Whether the economy... |
One reason for this is that inflation strongly influences the level of interest rates, which impact the stability of the economy. Some are also linked with production or foreign trade, both of which eventually impact consumer goods prices. Indicators and You While you don’t need a degree in economics to be a good inves... |
Gross Domestic Product The GDP is the most important economic indicator published. Providing the broadest measure of economic activity, the GDP is considered the nation’s report card. The four major components of the GDP are consumption, investment, government purchases, and net exports. This lagging index takes months... |
In fall 2008, the index dropped again, as news of home foreclosures, the credit crisis, struggling markets, and government bailouts frightened consumers into saving their money. In bad times or good, consumer confidence serves as a reflection of the nation’s financial health. This index is particularly important to the... |
Essentially, this makes the unemployment index less significant to investors, who are looking toward the economic future. However, several months of low unemployment rates can signal that higher inflation is right around the corner. Housing Starts The housing starts indicator measures the new construction of single-fam... |
Business Inventories As a monthly running total of how well companies are selling their products, business inventories are like a big neon sign to economists and investors alike. The business inventory data are collected from three sources: Manufacturing Merchant wholesalers Retail reports Retail inventories are the mo... |
For example, some industries take off when the economy is expanding, while others actually profit more when the economy is in a slump. That means that investors can always find a way to profit in the markets, as long as they know where to look. To capitalize on sector rotation, you first need to get a handle on the sec... |
You can also find detailed information on the state of the U.S. economy from the Bureau of Economic Analysis at www.bea.gov. Once you know where the economy is, you can better predict where it’s going to go from there, even if you can’t predict the timing. That’s because the economic cycle follows a very definite patte... |
Different sectors thrive in different portions of the cycle. The basic sectors are highly predictable, following the economic cycle like clockwork. For example, the utilities and services sectors tend to perform well during an economic downturn; and as that downturn segues into a full recession, the technology, cyclica... |
Some widely used indexes track thousands of individual securities, while others look at fewer than fifty. The Dow Jones Industrial Average (DJIA, also called the Dow) is the most prominent stock index in the world. It was named after Charles H. Dow, the first editor of the Wall Street Journal, and his one-time partner ... |
General Electric was dropped in 1898, restored in 1899, taken out again in 1901, and then put back on the list in 1907. The thirty stocks of the Dow Jones Industrial Average companies are weighted by stock price, rather than market capitalization, which is how most indexes are weighted. Basically, the Dow number is cal... |
The Russell 2000 is a subset of the Russell 3000 index, following the performance of only the 2,000 smallest companies in the Russell 3000. Other indexes treat each stock equally. The Value Line Index tracks 1,700 equally weighted stocks from the NYSE, the National Association of Securities Dealers Automated Quotations... |
To help with that enormous task, the agency sets strict standards for brokers, investors, and publicly traded corporations. Every corporation whose stock trades on a U.S. exchange must be registered with the SEC. The agency’s main goal is to protect investors by making sure the securities markets remain honest and fair... |
SEC Division of Enforcement The SEC’s Division of Enforcement does just what the name suggests; it makes sure federal securities laws are followed to the letter. This division investigates possible legal violations, and when it finds that laws haven’t been followed, it recommends ways to remedy the situation. Most impo... |
The speed at which information now circles the world has meant that international boundaries have virtually been erased. As Thomas Friedman wrote in his well-known book, “The world is flat.” All this affects investments and the investment climate in which you operate. Investments don’t exist in a vacuum. What happens o... |
We now know instantly when something happens in the farthest corners of the earth. We know the second a stock exchange in Asia or Europe goes up or down a few points. Extensive international trade means the dollar can be affected when another country’s currency strengthens or weakens. All of this affects investors. Whe... |
COMPANY FUNDAMENTALS Looking at the ABCs When you buy stock in a company, you’re buying a part of that company. Just as you would do if you were making any other purchase, you have to know what you’re buying and why. This means doing research. Many people don’t like this aspect of investing; it sounds too much like wor... |
You have learned that you can get the best results by thoroughly researching your options before you make a purchasing decision. Maybe you’ve recently purchased some new electronics that you just can’t put down, switched cereal brands to cut some of the sugar out of your kids’ diet, or started a new medication that act... |
There’s really no way to make an easy buck, and by jumping into a stock because of a random tip, you’ll probably end up losing money. Whichever style of investing you choose, you need a place to get the information on which you can base your decision. These days, there’s no better starting point than the Internet. On t... |
The numbers inside, though, may tell a completely different story. It’s up to you to get comfortable with the numbers; when you do, you’ll find a wealth of information about the company’s current success. Make an Investment Checklist Every investor should use a research checklist to evaluate stock under consideration. ... |
Technical analysis is all about stock prices and how they move, and it relies on charts and graphs to determine patterns. Fundamental analysis, more common among beginning investors, involves studying the company itself, with a focus on financial statements and performance. For optimum results, many savvy investors com... |
Value investing and growth investing are two subdivisions of fundamental analysis. Proponents of fundamental analysis believe that stock prices will rise as a result of growth. Earnings, dividends, and book values are all examined, and a buy-and-hold approach is usually followed. Fundamental analysis advocates maintain... |
2. Superior management. An experienced, innovative, and progressive management team has the best chance of leading a company into the future. Star managers have had a major impact on their prospective companies, and a company will often witness dramatic changes when a new management team comes onboard. When key managem... |
5. New developments. If a company places a high priority on research and development, it’s likely to roll out successful introductions. If the product or service takes off, the stock price may very well follow. If the future outlook for a particular company appears promising—that is, as long as a company continues to e... |
That’s the way Warren Buffett, one of the world’s most successful investors, views it—and his philosophy is certainly worth noting. When you buy stock, you’re actually buying a portion of a corporation. If you wouldn’t want to own the entire company, you should think twice before you consider buying even a piece of it.... |
It holds 28.5 percent of SABMiller Brewing, the home of Miller beers. In addition, the company holds Philip Morris Capital Corporation, which is involved with the financing and leasing of major assets. Value the Company Let’s say you want to buy a convenience store in your hometown. You’ve reviewed such factors as inve... |
Disney’s ABC, Inc. division includes the ABC television network, as well as numerous television stations and shares in various cable channels like ESPN and SOAPnet. It should be increasingly clear that making money through investing requires work. The more research and thought you put into your strategy, the more likel... |
Corporations come in all sizes. You can invest in a wildly successful mega- company or a micro-cap company that is just beginning to show signs of growth potential. Some people prefer to buy the common stock of well-established companies, while other investors would rather invest in smaller, growth-oriented companies. ... |
STOCK EXCHANGES The Nexus of Trade Back in the 1990s, it became clear that individual investors were becoming serious players in the world of Wall Street. With the advent of online investing and an aggressive play for smaller investors by the two leading stock markets in the United States (the NYSE and the NASDAQ), buy... |
The Big Board is not for little-league players. Among other requirements for inclusion on the NYSE, a company must have at least 1.1 million publicly traded shares of stock outstanding, with a market value of at least $100 million. It must show pre-tax income of at least $10 million over the three most recent fiscal ye... |
Not content to rest on its laurels, NYSE Euronext acquired the American Stock Exchange (AMEX) in 2008, and fully integrated trading began in early 2009. Now called NYSE MKT, this combined exchange offers expanded trading capabilities, including stock options, exchange-traded funds, and other specialized securities. The... |
In fact, the NASDAQ boasts more than a $2 trillion total market value in the IT sector. Unlike the auction style of the NYSE, the NASDAQ works with more than 600 securities dealers called market makers. These market makers compete against one another to offer the best bid/ask prices or quotes over the NASDAQ’s complex ... |
Dividends are usually most important to investors looking for income, and stocks that pay dividends are thus known as income stocks. Many companies pay dividends on a quarterly basis, and special one-time dividends may also be paid under certain circumstances. The term shares outstanding refers to the number of shares ... |
Although dividend yields may be more important if you are seeking income, and price changes take center stage for growth stocks, the total return on any stock investment is extremely important. Knowing a stock’s total return makes it possible for you to compare your stock investments with other types of investments, su... |
Then your calculations would look like this: Dividend: $1.50 Price change: down $1.00 per share $1.50 – $1.00 per share = $0.50 $0.50 divided by $45.00 = .011 Your total return is only a 1.1 percent increase. Analyze Dividends To be entitled to dividends, you must actually own the shares on the record date, which is th... |
Growth Stocks Growth stocks, as you can probably guess from the name, include companies that have strong growth potential. Many companies in this category have sales, earnings, and market share that are growing faster than the overall economy. Such stocks usually represent companies that are big on research and develop... |
A word of caution: Beware of stocks whose price seems to be growing faster than would make sense. Sometimes momentum traders will help run growth-stock prices to sky-scraping levels, then sell them off, causing the stock to plummet. “Even the amateur investor who lacks training and time to devote to managing his invest... |
Essentially, this type of stock comes with a redemption date and a fixed dividend that gets paid regardless of the company’s earnings. If the corporation has financial difficulties, holders of preferred stock have priority when it comes to dividend payments. In times of prosperity, some preferred shares (called partici... |
Today’s small-cap stock may be tomorrow’s leader—it can also be tomorrow’s loser. Overall, such stocks tend to be very volatile and risky. A safe way of adding these to your portfolio can be through a professionally managed small-cap fund. That way, you’ll have exposure to potentially explosive profits without the adde... |
When the economy picks up momentum, these stocks follow this positive trend. When the economy slows down, these stocks slow down, too. Cyclical stocks would include companies like United Airlines (NASDAQ: UAL). Defensive stocks, on the other hand, are relatively stable under most economic conditions, no matter how the ... |
Basically, you’re getting more than what you pay for: a good value. When investors are high on growth stocks, value stocks tend to be ignored, making them even better bargains for savvy investors. Value investors believe that these stocks make the best buys given their reasonable price in relation to many growth stocks... |
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