Investing 101

Stock:  A monetary segment of partial ownership.  It is when a company divides market value into little chunks that are affordable.

Market Value:  How much a company is reported to be worth.  Evaluated and verified by the SEC.

SEC:  Securities and exchange commission.  This is a tax-funded government branch that monitors companies for fraud, safety, and validity of investment.  Very good track record, as far as government work goes.

Share:  A portion of stock.

Dividend:  A regular payment, usually in small amounts every quarter as a “thank you” for having purchased shares.  You can think of it like this:  An apartment building has 100 apartments, or 100 shares.  You buy 2 shares/apartments.  Those renters pay rent.  The apartment building keeps some for maintenance, utilities, etc.  You get the rest of the rent.  Solid companies with expected growth pay dividends.  Some don’t.  It is just an investment strategy.

DRIP:  Dividend Reinvestment Plan.  This is an agreement with a company.  You say “Hey, I’ll buy 1000 shares in a Drip Fund.”  The company says “Cool.  Here is your receipt.”  You now own 1000 shares.  As those shares earn dividends (rent), that rent immediately goes back into buying MORE shares.  So next quarter, your dividends bought you 10 shares.  Now you have 1010 total.  Next they buy you an additional 10.1  So you have 1020.1  Etc. etc.

Price:  How much a share costs.

Broker:  A person or company that negotiates the selling and buying of stocks.  Middle men, really.  But these guys are crafty, and know how things work.  Generally they want you to do well, because they will do well.

Bull/Bear:  Bull means the market, company, or sector is in a position where it encourages purchasing of shares.  Bulls Charge, Bears Hibernate.  A Bear market means the market, company, or sector is in a position where it encourages SELLING of shares.

Discount:  If a stock is oversold, it means that it is generally priced LOWER than it is evaluated.  It is like something on sale, a discount.  You can buy it, hoping the price goes up, then sell it for a profit.

Risk:  This could be a total calculated risk regarding possible bankruptcy of a company, loss of value, being bought for less than its value, or some just…dissolving.

Sector:  A chunk of the economy a few businesses fall under.  Energy, Food, Minerals, Manufacturing, Real Estate, FOREX, etc.  Some people are really good at certain sectors and making money, but are terrible at others.  This is why fund managers tend to stick to their market sector they like.

Fund:  A single stock symbol you can buy.  The fund takes your money and divides it among other stocks.  Sometimes just two, sometimes hundreds.  This way, if you only have 10$, you can still diversify your money safely.

Forex:  Foreign exchange markets.  The New York Stock Exchange isn’t the only one!  There are others!

ETF:  Exchange Traded Fund.  This is a fund in which you can purchase and sell it like a stock, but still enjoy diversification.

YTD:  Growth earned in a year.  6% a year is very good.  50% on year is highly suspicious.

 

There are a million more terms to learn, but this is 101.

First, you need a broker.  If you are new, I highly recommend TD Ameritrade.  They have educational classes you can take, webinars, that gradually unlock more investment skills.  Like leveling up.

I recommend Motif after that, and in addition to that.

For a completely new investor, you’ll want to take the educational courses.  They aren’t long, and you can generally try out your new skills AS you learn them.  TD Ameritrade also gives you $100,000.00 of practice money in a dummy account to learn with.

For a new investor, pick a few stocks.  Something big and blue.  Blue Chip.  Blue Chip companies are the giants, worth billions of dollars that are very stable.  Just google a few!  Google is one.  Apple.  Amazon.

Most brokers will charge you 5$ a trade, sometimes 10$.  So don’t trade throughout the day unless your skills and gains can more than make up for your investment costs.  If that doesn’t sound like you (which it isn’t for any new investor,) then you need to find an ETF with no commission fee.  This is an ETF that you can buy or sell without any fee at all.

Let’s look at an example:

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This ETF costs $109.48 a share.  It looks like it lost value a little today, 0.15%.  It also looks like it took a hit right around election time, but has been climbing.

See the “Distribution Yield?”  That is the Dividend.  It says it again right below.  So if you own this stock, you will earn $2.63 a year just for having it.  That is free money, folks.  You can sell your share at any time and get your 109.48$ back, and keep your $2.63.  Or buy a bunch and just…earn an income.

It has a morningstar rating of 3 (which is good.)  That is like the Michelin Star.  One is good.  Two is great.  3 is awesome.  4 is perfect.  5 is godlike.  It also has a little “about” section.  But we can look in more detail what kinds of things this fund uses your investment to ..invest in.  “Total Assets” is 47 Billion.  That is a big, cozy, secure company, especially since it was started in 9/22/2003.  Before the recession in 2008.  It is commission free as well, at least at TD Ameritrade.

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Here is a breakdown of the things that fund likes to invest in.  So when you buy your share, you are actually dividing up your 109$ this way.  It can change, if the fund manager thinks something bad (or good) will happen.

Pretty cool.  But what if you don’t have 109$???

1234

Here is a more affordable stock.  Notice, it is 100 times smaller than the previous one, has no morningstar rating.  Hence…Risk.  Now you know why it is cheaper.

Full disclosure…I am not paid by TD Ameritrade.  I am no a broker.  I’m not the best investor.  I really recommend you talk to a bank, or a broker to learn about stocks and trading if you really want to do this.  You can pick any broker that is right for you, and any stock that fits your financial needs.

Ideally, your stock will grow in value over time.  Turning your regular investment into something substantial.  If it is something like real estate, you’ll basically be buying tiny little apartments with your monthly deposit, until you are eventually sitting on a huge ownership of real estate, getting monthly dividends/cash for doing nothing.  That is called Passive Income.12345

That stock symbol, “O”, is the golden child of the passive income traders.  This company has always paid a dividend, and always increased their dividend.  MONTHLY.  Which means you get a chunk of cash every month, whether or not the price goes up or down.  As you can see, the price trends upwards, so not only do you get monthly payouts which you can reinvest, but your actual shares gain value too.  Lets take this screen cap and do some math.

Lets say you start investing…60$ a month in this stock starting at age 25.  Lets say, for some reason, they STOP increasing the dividend, but pay that rate every month and you use it to buy more “O”.  When you are 60 years old, you’ll have $145,584.26 in one stock.

That’s a lot, right?  But remember, this isn’t just shares you can sell, these shares have special powers.  They pay dividends.  Monthly.  So if your annual pay out is 4.38%, lets divide that by 12 months.  .365 % a month.  Multiply that by your nest egg of $145,584.26.  That means you will earn $531.38 dollars a month.  Forever.  If you pass that ownership to your kids, it means they will also earn $531.38 a month forever.  Unless they add to it, in which case…it grows.

What if you put in $120 a month?  That is $1062.77 a month.  $240? That is $2125.53 a month for the rest of your life.  The rest of your child’s life.  Forever.  Effectively preventing them from EVER being in poverty, unless they are stupid and sell the capital shares and spend it on a big house or car.  But if you teach them to protect their assets, they will always be safe.

THINK about that.  How much is your car insurance?  Your car?  What if you really committed this?  I know most of us can’t afford $240 a month right now.  I’m fortunate enough to be able to afford it, but not comfortably.  But I deal with it, you know?  I don’t ever travel, I buy generic crap on sale.  Our clothes are discounted usually from walmart.  I don’t smoke or drink or party, or go to bars.  We put that money away so that our kid(s) will never have to suffer.  We put it away so that our family line will be shielded from poverty.

So you see…it curdles my milk when people talk about “wallstreet” being corrupt.  Sure, keep them out of government.  But you realize my investments tie me to foreign governments, oil companies, and everything else?  I’m not evil.  I just want a shield for my baby.  I don’t want my kid to ever have to be jealous of fat people on welfare.  I don’t want my kid to ever have to worry about where money will come from.

I want them to feel free to take chances, take risks, because our planning will be there to protect them, long into the future.

You ought to invest to.  If you haven’t already, learn.  It starts slow, but I was thrilled when the first few cents trickled into my investment account…like a pay day of $0.05.  Not much…but it was PROOF.  It works…Ever since, i’ve been hooked.

I have some funds set to reinvest in themselves.  Some that split dividends between my checking account and reinvesting in themselves.  Some set to just fill up a checking account until there is enough to buy shares of something ELSE.

Poor people buy stuff.  Middle class buys liabilities (things that cost money.)  Rich people buy assets (things that generate money.)

You should to.

8 comments on “Investing 101

  1. Jul 31, 2017 07:39:10 PDT Transaction ID: 8UB58324NK961094P https://www.paypal.com/myaccount/tra..
    Generally good piece, the overall advice is well thought out and sound, and I have thought about it quite a bit. There are a few places you might consider revising, as I have noted below. Feel free to check out what I say and make changes if you want. I do not want attribution if you use my words because I do not give investment advice, and would prefer if you do not approve this for posting, but am fine with it if you do. Of course, if you conclude I am full of . . .beans?. . . discard this or put it on your page and tear me apart.

    You define Market Value as How much a company is reported to be worth. Evaluated and verified by the SEC. No, It is simply the price at which the stock is traded multiplied by the number of shares in play (it is a little more complex than this—like, should the price and outstanding shares be averaged over some period, and should fully-diluted shares be used in the calculation—but it is close enough.). Also, the SEC does not evaluate and verify the market value. If anyone does, it is the analysts, who indicate potential target ranges for the stock in the future.

    SEC: Securities and exchange commission. This is a tax-funded government branch that monitors companies for fraud, safety, and validity of investment. Very good track record, as far as government work goes. Not really. What it does is to try to ensure the financial statements and disclosures and press releases by publicly traded companies tell the truth about the company. They also try to make sure the markets are efficient. And, they enforce fairness and honesty—or try to—on those who offer securities to the public. In the case of public offerings or bulk transfers or mergers or spin-offs and other activities, they will review the documents being voted on or offered and quite often there are multiple rounds of questions before they sign off. Their sign off does not mean anything is a good investment.

    It has a morningstar rating of 3 (which is good.) That is like the Michelin Star. One is good. Two is great. 3 is awesome. 4 is perfect. 5 is godlike. It also has a little “about” section. But we can look in more detail what kinds of things this fund uses your investment to ..invest in. “Total Assets” is 47 Billion. That is a big, cozy, secure company, especially since it was started in 9/22/2003. Before the recession in 2008. It is commission free as well, at least at TD Ameritrade.

    No, it is not like a Michelin Star. It takes a whole lot of excellence to get a one-star rating from Michelin. Morningstar ratings indicate whether the stock is trading at a discount or a premium relative to their estimate of the stock’s fair value, which is different than the market value or book (equity) value—their evaluation of fair value takes into account their estimate of the riskiness of the stock (some of this evaluation is contained using the leveraged beta).

    Stocks that are trading at or near fair value are assigned a 3; stocks sold at a discount are assigned a 4 or 5, depending on their evaluation of the discount; and those with a 1 or 2 are being traded at a premium. 5 star stock offer higher potential returns on investment than 3 or 1 rated stocks. And a riskier 5 rated stock would be expected to return more than a conservative 5 star stock. The higher the number, the greater the anticipated return on investment.

    A few comments on Realty Income Corp, in re your analysis.
    It has a Price-earnings ratio of 49.56 today, which means it is selling at almost 50 times its earnings (divide market price by earnings per share). Typical of SEC stocks is a PE of 20-25. What this means is that Realty Income has a return on investment of 2% annually and the market currently has a 4% to 5% return on investment. Now, when you add in their dividend rate, the yield goes up. The current rate is almost double the income it earned.This is evidenced by its pay-out ratio of 211% of earnings. Unless something changes,this dividend is not sustainable in the long term.

    None of this means Realty Income is a bad investment. It seems interesting, and meets your the 4% annual distribution of savings in retirement, which is a general rule of thumb to keep in mind.

    In the long-horizon, (since 1929), the average return on investment in publicly-traded stocks was roughly 7% per year. The smaller the stock in terms of market capitalization (sort of a risk rating), the higher the average return. Depending on the industry, I am not sure that entire period is appropriate—computer technology might be better evaluated from 1970 forward. (Duff & Phelps puts out a pretty good book on valuation of stocks every year. I use them in the process of valuing companies for transactions. It is called “Valuation Handbook—Guide to the Cost of Capital”. Its predecessor was called “Stoicks, Bonds, Bills and Inflation,” put out annually by Ibbotson. In many ways, Ibbotson’s book was better, but they stopped doing it a few years ago and Duff & Phelps filled the void. I do like that D & P publishes betas by industry SIC. These are fairly expensive, but if you want and will give me an address, I will send the 2010 Ibbotson book to you (I need to keep the D & P books). They are very interesting to study and can give insight to investment theory. I will mail it no cost to you if you want it. For most people)

    You may know this, but there is a concept known as the “Rule of 72.” What this tells one is how fast an investment will double if earnings are reinvested (or compounded). Divide 72 by the rate and you get your answer in years. 72 divided by 7.3% is ten years. 72 divided by the 4.38% for Realty Income is 16.4 years. Most brokers will tell you that it is the last doubling that is the most important. For example: $100 invested at an average return of 7.2% will be worth roughly $200 in 10 years, $400 in 20 years, $800 in 30 years and $1600 in 40 years.

    Another thing to consider is that in retirement, one might consider separating the savings into two pots: one that will be needed for the next five years, and the balance. The next five years should be invested in very safe investments, like Treasury bills or CDs (even though they pay almost nothing) and then one should evaluate whether longer-term amounts should be invested with the eye on a more market based return of about 7%. If you get the Duff & Phelps book or if you want me to send you the Ibbotson book, you can evaluate how long it has taken the market to recover from economic downturns, like the Great Depression. You can also do this by mapping the S & P or DOW by months for whatever period you want, but to get it right—the way Ibbotson and D&P do, one has to take into account the changing mix of stocks in those indices.

    Either way, good luck. You seem very serious about your intent to fund your own retirement.

    Liked by 1 person

    • I am going to approve this to be visible, despite your protests. I despise being corrected privately. I was totally wrong on morning star, and I’m glad you pointed it out. I’m buying a heck of a lot of funds at a premium! These points were all too good not to share with people.

      I’m sure you have a portfolio, but I’d love to talk stocks with you some time. gentfound@gmail.com if you are interested.

      Like

      • I don;lt mind it in comments per-se, but if you want to ensure people read them, you might want to insert some int he body of your piece or refer from the appropriate places in your piece to the comments. ESpecially the Morningstar stuff.

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      • I ultimately wrote the blog entry in a hurry, and broke a few of my rules, which is referencing and fact checking (even things I think I know.) I’m amused that a commie-leftist knew to correct me. (JK, Petriesan.) Just goes to show that you can always learn.

        I try to gear my investments in different ways. I buy some stock in companies that are blue chip and very solid with predictable returns and low risk with low volatility. Others are more of a gamble, with betting on things like advanced infrastructure, and movements in the third world.

        What trade platform do you use?

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      • I don’t trade stocks. The 401 (ks) are at American Funds. Everything else is through Edward Jones, which is more expensive than what you use, but there are reasons other than cost to use them.

        A significant issue I have with buying individual stocks is that if people who do this full-time–those who manage funds–cannot consistently beat the market (most do not)–then it is hubris to think I can do it in far less time. So, I put my money in a diverse collection of funds, trying to achieve a balance between risk and safety I am comfortable with

        Liked by 1 person

      • Sound logic. I always think that fund managers are inherently biased towards stocks that have less risk and less speculation. So their range of risk and reward is skewed due to job security. Also, being a fund manager does not require a degree, did you know that? Kinda crazy…

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      • Yeah, I know no degree is required to manage funds –just like the best CFO of a large public company I ever knew was not a CPA

        They all try to beat the market and have different flavors of funds with varied risk. A general rule is that one should hold growth stock in a percentage equal to the number generated by subtracting their age from 100. SO, in theory, I should have 38% in growth stocks; I have about 55%. Also, they say one should have 10% to 15% in foreign stock. Index funds are a good way to go if you want to match
        the market

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      • Robert Reich is the economist I trust the most. Below is a link to an anecdote about me and economics (in the end, I took seven or eight econ classes (depending on how one was a classified), two or three of which were graduate level).

        I believe that my views on economics are conservative – but in a more nuanced way than simply “supply-side” (which is trickle down or “horse and sparrow economics”) or cut taxes.

        https://petriesan.wordpress.com/2012/07/12/a-funny-thing-happened-on-the-way-to-becoming-an-economist-why-i-did-not/

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