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Buy On The Upside
Chapter 1: Snow White
Snow White waited for her prince to come, and almost wound up dead. Don’t
wait for your prince to come. To make money in the stock market, you need
to be proactive. This means being motivated, setting goals, making plans,
studying the stock world, and most of all, taking responsibility for your
investment decisions. As classroom veterans, we think personal example
is often the best teaching tool. In this chapter, we talk basics about
stocks and bonds, and Richard Howard tells about his investor’s
journey to confidence, focus, and realism. But first, we review briefly
the basics of stocks for stock market beginners. If you are not one, skip
to the next section. Whether you are a beginner or a more experienced
investor, begin now to become familiar with the Web site www.buyupside.com.
It contains a huge range of data and advice on everything from sector
funds to example portfolios. Also, it explains two important analytical
tools for more advanced investors, the Complete Trading Model (CTM) and
the Price Direction Indicator (PDI). These tools, developed by Richard
Howard, are enormously helpful in identifying market trends and are particularly
useful for analyzing and trading cyclical stocks. And it is free.
What Is a “Stock”?
When you buy stock (we are talking about what are technically called common
stocks) you are buying “shares” of a company. The price of
an individual unit (share) of a stock multiplied by the number of shares
the company has sold (“shares outstanding”) is one measure
of the value of the company, and is call “market capitalization.”
By buying shares, you become an owner of the company that issues the stock.
You are entitled to attend annual meetings, vote on the selection of the
board of directors, and other important matters and receive dividends,
which may be in the form of cash or additional shares of stock. You may
obtain a paper stock certificate as proof of ownership or record your
shares at your broker’s firm. You may buy and sell shares at anytime;
thus you can buy stocks and hold them until you retire or you can actively
trade stocks by the minute.
A share of a well-managed company has the potential for price appreciation
so you can make a profit on your investment, a compelling reason to buy
a stock. If, however, the stock price falls you can lose money. Before
you purchase any stock, be sure to learn about the company. Research its
products, quality of management, and future profit growth prospects. This
is called “fundamental analysis.”
Some companies pay dividends to shareholders from current or accumulated
profits. A shareholder receives a dividend for each share owned. For example,
if a company pays a $1.20 annual dividend, a shareholder with two hundred
shares receives $240 for the year. A dividend is usually paid every three
months so the quarterly dividend is $60 for this example. For an investor,
who wants dollar income, a dividend-paying stock may be the answer.
A company issues stock to receive money from the sale of its stock. The
number of shares owned by shareholders is called the shares outstanding.
The total value of a company can be measured by multiplying the shares
outstanding by the current price of the stock. This amount is called the
market capitalization. For example, a stock with one hundred million shares
outstanding selling at $50 per share has a market capitalization of $5
billion.
A company may choose to split its stock when the price becomes so high
that some investors regard it as too expensive to purchase. Upon splitting,
the number of shares that you own increases according to the magnitude
of the split. But the value of your shares remains unchanged because the
price per share is adjusted accordingly. Assume you own one hundred shares
of a $50 stock that splits two for one. This means you will now own two
hundred shares but the price of the stock is reduced to $25. So the value
of your shares is still $5,000 after the spilt.
Occasionally a company with a very low-priced stock will execute a reverse
split, which decreases the number of shares that you own but increases
the stock price. A company would do a reverse split because some investors
will not purchase low-priced stocks. For example, a five for one reverse
split means one hundred shares become twenty and a $2 stock price becomes
$10. The total value of your shares is unchanged.
If a company is liquidated, the stock you own is usually worthless and
you will lose your entire investment. Other creditors are paid before
the owners of common stock. But if you buy the stock of a well-established,
well-managed company, the likelihood of the stock going to zero is remote.
| More
in this chapter:
Howard’s Story - Make a Living from
Buying and Selling Stocks |
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2 Chapter 3 Chapter
4 Chapter 5 Chapter
6 Chapter 7
Posted May 16, 2008.
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