gravediggah

does anybody invest in stock, if so what advise would you give someone that is just starting out?

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topane

Visit G|A?'s very own Finance and Investments forum .

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gravediggah

damn, never knew they had that...thanks

welfareloser

my advice: don't.

we own stock in a company... prm developed a technology about 4 years ago that has suddenly become amazingly useful in the tracking of mad cow disease. and we'll be unloading it about as soon as his bossman has an ipo and putting it someplace safer. if it skyrockets after we sell, oh well... it could just as easily become worthless. i won't be kicking myself saying "if only!" those words are the fast track to ruin...

my advice if you don't follow my advice: trust nobody. only you have your best interests at heart. and diversity will save your ass more than once.

even the people who study stocks for a living get burned.

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Merlin

Go to the Motley Fool's web site. There you can get a good primer on pretty much everything you need to know. Things like how the exchanges actually work, what type of financial analysis you'll need to know how to do, and the like. Once you get that base of knowledge, then go to the investment forum and float some questions. You'll get some okay answers. After that I'd advise doing some paper trading. The folks here have run in investment game. You could get in on something like that and get the feel for what's happening. After that, look for a stock and buy a small amount, like only a few hundred bucks or so. Don't go hogwild in the beginning. Start slow.

That should be enough to put you down the path...

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ray

Definitely visit websites like Fool.com to learn the lingo and basics of investing. You may want to start reading the Wall Street Journal and/or Financial Times as well, as they provide great articles on the economy and the business world. If you're not into reading, check out television programs on CNBC that may also give you some useful information.

Also, we have a few very knowledgable people here on the forums (ie: LK, Brainsmile) who may be able to answer questions that you may have as you learn.

In response to Welfare's post. Investing in stocks IS a scenario where you could lose all of your money. Whenever you put money into a stock, just be prepared to never see that money again. If you choose to seek outside advice (ie: personal broker), be sure to do your OWN research before heading in there. As Welfare pointed out, you can get burned by even those who have chosen 'investing' as a career.

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Johnnymac

Where then would you invest? Stick cash under your bed?

ray

There are other investment opportunities that carry less/zero risk such as government bonds. Real Estate can produce extraordinary gains and if you do your homework, can be relatively low risk when compared to stocks.

Then there's certificates of deposit, savings accounts (some banks are apparently advertising 2%+ interest rates).

The list goes on and on. If WF doesn't believe in investing in stocks, I'm sure she has chosen other things to invest/save her money.

LegendKiller

I am going to sum up Welfwarelosers post in one word. Ignorance.


Anyway, now that that is done.


I would not invest in "stock", nor would I invest in one company. If you wanted to maximize your return, I would first look into getting what is called a "Spider". More or less, they are a portfolio of stocks (big basket) that represents a certain index. For example, if there was a spider for the S&P500 that you wanted to buy, you purchase it for $500. This 500 will get you a share representing ALL of the stocks in the S&P500, which means that you will get the EXACT return of the S&P500. The NASDAQ spider is ticker symbol "QQQ".

This is beneficial because it removes most of the fees of a mutual fund and gives you full market diversification. Historically, the market has earned ~9% annual return, some people put it at 7, others at as much as 12% annual.

I would get a nice base of diversified funds up, follow them to get better acquanted, then start getting into individuals once you know better what to look for.

here are some rules to follow.


1. If you read the Wall Street Journal, NEVER buy into stocks that they pick as "hot". Usually those who know they are hot have already gotten "in" and raised the price by doing so. THey will dump them eventually. What usually happens is you buy in at the top, they sell and you dont sell fast enough (because they are THERE to sell and you have to call your broker or go online), Thus you hit the downside and get f'd.

2. NEVER buy into a stock that you "heard" about that was hot. These most often lead to bad investment decisions.

3. NEVER "double down". If you are in a losing position, make rules for yourself such as "If it goes down to x% I will sell", if it goes up x%, I will sell.

I usually look to make 3-4%. Also, dont knee-jerk your picks, going down 5% doesn't matter, as a stock will ALMOST always come back up.

4. NEVER day trade. There have been hundreds of studies that have shown that people who suddenly buy on big news during the day and sell that night LOSE money. Sure, some get abnormal profits, but the VAST MAJORITY LOSE. If you are going to buy a stock, pick your limits and ALWAYS stick with them. NEVER sell off of news and NEVER buy off of news.


Now, as far as analysis goes. There are some things you should always check. One is the Price per share/ Earnings per share (P/E ratio). This represents many things to different people. Purely, it shows how much you are paying for each dollar the company makes. Technically, every dollar the company makes in earnings WILL get paid out in the future. Thus, if a company makes 1.00 per share and costs $50 per share, then it COULD take the company as much as 50 years to pay you back once it starts paying out dividends. However, if the company is doing well and invests in good projects and keeps plowing money into investments AND increases shareholder capital, then the stock will keep appreciating and you will get returns that way.

Look at a company and its peers, if the one company has a super-high P/E, its either doing something REALLY right compared to peers, or people are going crazy-stupid over it.

Next, check out why its high. Did they suddenly discover a new product? Did they get a new patent? Is there ANYTHING that shows that their future is better than the competition?

If there is nothing, then what about their business model? Does it make any sense? If you are lucent and you are growing at 30% per year, can you continue this trend? Will people keep buying 30% more switches than the previous year?

If this doesn't make sense, then the stock price doesn't make sense. Which means that people are crazy-stupid, or management is doing something whack.

To check if something is wrong with the company, start looking at ratio's. Compare year-to-year, and then break it down quarter-to-quarter. If you see a quarter-to-quarter downward trend in asset turnover, the company is becomming less efficient in utilizing its resources.

If you see Work In Progress Inventory going down, this means that the company is expecting sales to slow (which lucent predicted in 1999...go figure).


My favorite one is increasing Earnings Per Share (EPS), even earnings. Which means there are less shares. Most companies claim that they are "giving" their investors returns by buying back shares. However, this also means that the company cannot find any better investments (ahem, IBM), which is a prelude to the company declining.

Of course, there are dozens of other tricks that companies pull to "even" earnings, Microsoft and support allocations, Pfizer and R&D "capitalizations". AOL and their capitalization of their stupid discs.

You need to be sceptical of companies that are "too good to be true". Not being sceptical enough lead to the .com boom/bust.

However, dont be jaded because of that. Doing your homework on major investments ALWAYS pays off.

The stock market isn't a gamble if you are learned. If you do not want to put as much work into learning, then go for a diversified Spider or a mutual fund, you can never go wrong as long as it is diviersified.

If you want to pick stocks on your own, make sure that you balance your portfolio. Pick stocks in a variety of markets, heavy industry, auto, homes, durable goods, retail, tech, consumer goods. Some go up in a down economy (luxury and durable goods) and some go up in a down economy (consumer goods). Pick a good balance (20+ stocks) and you will do ok.


LK

Merlin

After reading that you're probably more confused than ever. Maybe you can start by telling us what your current background is. This way we know where to start with the advise.

LegendKiller

Hey, I thought it was a good "skimming", but I guess I have a tendancy to not skim as much as needed.

Basically I said, invest in Spiders because its cheaper than mutual funds. Invest in mutual funds if you aren't comfortable with Spiders. If you know more you eventually move into stocks, if you do that, then make sure you do your homework.


LK

Johnnymac

I agree that there are plenty of options for investing but I would argue that stocks, over the long tearm, are at the top of the list performance wise. (assuming a balanced portfolio etc...)

ray

I'm definitely not going to argue that. Like many of us have mentioned. As long as you do your homework you should be okay.

gravediggah

my background is as follows: I am very new to this, but would like to learn as much as I can before I start trying to put money into this

ray

If that is the case, see my first post up above.

LegendKiller

If you wanted to read a pretty good book on the do's/donts of investing, read "Beyond Greed and Fear" by Shefrin.

http://www.amazon.com/exec/obidos/se...121423-0661453

Probably one of the better books I had to read for classes. Lots of examples that cover everything from normal trading of stocks to options and big don'ts like insider trading. INcludes trading off of old news and such. Really gets into the psychological impacts of trading also.

One of the most interesting parts of trading for me was the psychological impacts, that area of study let me combine my psych degree with my finance concentration. I am thinking of having that be the basis for my doctorate thesis.


LK

Merlin

Fair enough. Do you know what stocks actually are? Bonds? Options? Mutual funds?

Do you know how to read quotes? Not just that last price but the Bid and Ask?

Do you have any experience with financial statements like an Income Statement, Balance Sheet, and or a Cash Flow Statement? These will be important to be familiar with. Maybe not an accountants level but at least how to interpret them.

gravediggah

I would say that I know what they are, but I really dont know what they are.