Archive for Stock Market

Teaching Children How to Invest in the Stock Market

One of the ways through which we can teach our children about the value of money is helping them to invest in the stock market (on a small scale of course). Some of the ideas that would definitely help parents are the following:

1- Keep talking to your children about companies. To make it more interesting, take the Walt Disney or Pixar as your model: what happens after they release a new movie and how does it affect the stock price?

2- Help your children to create their favorite portfolio out of the companies they know and like (Ford, Coca-Cola, Nike, Microsoft, McDonald, Mattel … etc). Teach them how they can check the stock prices of each company on a regular basis.

3- Another way (which also helps with their Math skills) is documenting all the hypothetical gains and losses in a spreadsheet.

4- When your child starts grows up and becomes mature enough to get really involved in taking investment decisions, he/she can start with the following accounts:

· DRPS (DRIPS - Dividend Reinvestment Accounts)

· 529 Plans - Education savings accounts

· Custodial Accounts (UGMA/UTMA)

· Joint Tenant Accounts (A joint account between child and parent but the parent would control it until the child becomes an adult)

The Guide to Understanding Financial Statement - How to Read a Financial Statement

Income statements and balance sheets are two common annual financial statements. These reports contain information about a company’s performance that year and present a snapshot of the health of the company at a given point in time. Publicly traded companies are required to file them to the SEC and they are available to the public through EDGAR. Understanding the information contained in them can help an investor make better decisions. An income statement will always contain figures for revenue, cost of goods sold (COGS), selling, general, and administrative expense (SG&A), and earnings.

Revenue is gross income. It is the total income before any deductions are made for taxes, etc. COGS is the cost of purchasing raw materials and production costs. This is where accurate inventories are important because COGS equals the beginning inventory plus the cost of produced goods during the previous year, less the previous inventory. COGS figures show the cost of producing goods. These costs can show how well managed a firm is. SG&A expenses are the sum of salaries, commissions, and traveling costs for management and salespeople, advertising costs, and payroll costs. These figures also need to be controlled by management because, if they get out of control, they affect the profitability of the firm. Finally, earnings are the company’s revenue less expenses (COGS, SG&A, and taxes).

On the income statement these figures are easy to see because they are labeled just as described. Sometimes firms may refer to COGS as cost of sales, however.

The balance sheet is a snapshot of the firm’s health at a given point in time. The balance sheet has two parts: assets and liabilities. Asset items on the balance sheet are listed in the order of their liquidity or availability for use as company funds. Commonly listed asset items on the balance sheet are cash, accounts receivable, current assets, and fixed assets. We all know what cash is. Accounts receivable are debts owed to the firm. Accounts receivable are a current asset in that they are expected to be converted to cash within the year. Other current assets are cash, inventory, marketable securities, and prepaid expenses (rent, for example). Fixed assets are depreciated over time and are tangible, long-lived resources like plants and machinery. Liabilities are current liabilities (debts owed within the year), long term debt (payments over years), and equity (total value of shares owned by shareholders).

What’s most important to investors about the balance sheet is the book value of a stock can be determined from these lists of assets. Stockholder equity, or book value, represents the amount shareholders would theoretically receive if a firm went immediately out of business. Market value of the company is generally higher as firms do tend to make money. How much higher this market value is can help the investor determine if a stock is overvalued or, perhaps, undervalued.

Stock Dividend Record - What is a “Dividend Record” Where can I find it?

Standard & Poor’s (S&P) Dividend Record provides comprehensive information on dividend payments and corporate actions of over 22,000 equity securities. It is available through S&P’s Data Services for a fee. S&P is widely accepted as the world leader in independent investment research. The information focuses on cash and stock distributions and consequences these will have on taxes. Mergers and acquisitions affecting dividend payments, redemptions, outcomes of stockholder meetings are also detailed. Dividend Record focuses on companies listed on American and major Canadian exchanges, as well as selected foreign stock issues.

The information is accessible through the Internet direct from S&P. Information from Dividend Record can be used to research individual companies, market sectors, market indices, or the market as a whole. Emerging trends can be studied from the data. Even though the information isn’t free, reports about the latest Dividend Record are widely reported every time the quarterly versions are published.

Mergent also publishes its version called, appropriately, Mergent’s Dividend Record.

Another use of the term “dividend record” has to do the date a company actually makes announced dividend payments. This record date is important because shareholders on record on that date will be paid. For example, a company would announce that it will pay a dividend on April 1 to shareholders on record as of March 15.

Personal Balanced Portfolios Guard Against Recession

Creating an evenly balanced investment portfolio by dividing assets among such diverse classes as stocks both foreign and domestic, bonds, mutual funds, real estate, cash equivalents, and private equity can help guard against recessions. Determining how much to invest in each asset group depends upon the investor’s individual situation and future needs.

Throughout most of American history it has been more profitable to invest in stocks rather than bonds. However, there have been times when stocks are unattractive compared to other assets. For example, right before the tech bubble burst in late 1999 these stocks had prices so high earnings yields were non-existent. The wary investor could have weathered this situation by diversifying stock investments into real estate investments or other types proven to be less risky.

Making major changes in one’s portfolio should be done at various stages in the investor’s life. A young investor is less risk-averse, that is, he is less susceptible to market corrections for the simple fact that he has a lot of years left to make up for the losses. This investor is looking more to the long-term and wealth accumulation in the distant future. This investor’s portfolio would be mostly invested in the riskier assets such as carefully researched foreign and domestic stocks. Still, the young investor needs to have some balance to guard against market setbacks.

As retirement approaches, perhaps 10 years before, the investor should start diversifying holdings into income-oriented assets. These include government and corporate bonds that pay a fixed return rate on the investment. Certain blue chip stocks with long, proven track records of dividend payments can also be included as an income-oriented asset. Yearly, as retirement approaches, a larger percentage of the investor’s portfolio should be income-oriented until that total is 100% at retirement. After all, as an investor, the ultimate goal should be a comfortable retirement. Once at retirement the time to take risks is over and income must be guaranteed.

Stock Market Trading Tip - Which companies do I choose? How do I know which sectors will do well?

An investor can use a number of criteria when determining a sector from which to select prospective stocks. However, it is important to do your own sector research to avoid becoming trapped by “professionals” who have vested interests in the sector they are promoting. So, ask yourself, is the stock in a sector that you think will do well? What are your reasons for thinking this? Answer those questions with careful research before selecting stocks within the sector for prospective investment.

P/E (profits/earning) ratios are most helpful as a prospective tool when comparing stocks within the same sector. Stocks competing within the same sector have similar expenses and expectations. With the P/E ratio the general rule of thumb is the lower the ratio the sooner stock prices are expected to rise. The P/E ratio represents the stock valuation of the company.

Now that you’ve selected some companies you wish to research further, you should be able to answer the following questions:

How has the company performed so far? Is the company growing regularly, from year to year?

How much cash does the company have available? Having cash available details the company’s ability to pay its bills and generally can determine how well managed the company is. Look at financial statements that are required by law to be filed with the SEC.

Look at the volatility of the share price. Have there been wild fluctuations? Compare charts over different periods.

Finally, determine if the prospective company is geared for quick gains or as a long-term investment. Answering this question may have to do with the type of investor you are personally.

Once you’ve done the research you should be able to determine why you want to select a stock for investment. You can invest with confidence, knowing that you have the research to back up your prospects. The better-informed investor makes better decisions.