idiots who invest

Stock Investing For Dummies

You're investing in stocks — good for you! To make the most of your money and your choices, educate yourself on how to make stock investments confidently and intelligently, familiarize yourself with the Internet resources available to help you evaluate stocks, and find ways to protect the money you earn. Also, be sure to do your homework before you invest in any company's stock.

The Ten Most Important Points about Stock Investing

If you're committed to investing in stocks, keep the following points in mind as you make your choices and reap your rewards. After all, stock investing is fun and frightening, sane and crazy-making, complicated and simple — and you may need reminders to stay focused.

1. You're not buying a stock; you're buying a company.
2. The primary reason you invest in a stock is because the company is making a profit and you want to participate in its long-term success.
3. If you buy a stock when the company isn't making a profit, you're not investing — you're speculating.
4. A stock (or stocks in general) should never be 100 percent of your assets.
5. In some cases (such as a severe bear market), stocks aren't a good investment at all.
6. A stock's price is dependent on the company, which in turn is dependent on its environment, which includes its customer base, its industry, the general economy, and the political climate.
7. Your common sense and logic can be just as important in choosing a good stock as the advice of any investment expert.
8. Always have well-reasoned answers to questions such as "Why are you investing in stocks?" and "Why are you investing in a particular stock?"
9. If you have no idea about the prospects of a company (and sometimes even if you think you do), use stop-loss orders.
10. Even if your philosophy is to buy and hold for the long term, continue to monitor your stocks and consider selling them if they're not appreciating or if general economic conditions have changed.

Checking Important Company Fundamentals before Investing in a Stock

Before you buy stocks, you have to do a little research on the companies you're thinking of investing in. Pay attention to the following key components when you look at a company's main financial statements (the income statement and the balance sheet):

• Earnings: This number should be at least 10 percent higher than the year before.
• Sales: This number should be higher than the year before.
• Debt: This number should be lower than or about the same as the year before. It should also be lower than the company's assets.
• Equity: This number should be higher than the year before.

Financial Measures to Consider before Investing in a Stock

You're thinking of buying stock in a company, but before you invest your hard-earned money in hopes of a profitable return, check out some financial ratios that can help indicate whether the company is on sound financial footing. Here are key measures to consider:

• Price-to-earnings ratio (P/E): For large cap stocks, the ratio should be under 20. For all stocks (including growth, small cap, and speculative issues), it shouldn't exceed 40.
• Price-to-sales ratio (PSR): The PSR should be as close to 1 as possible.
• Return on equity (ROE): ROE should be going up by at least 10 percent per year.
• Earnings growth: Earnings should be at least 10 percent higher than the year before. This rate should be maintained over several years.
• Debt-to-asset ratio: Debt should be half of assets or less.

A Mandatory Reading List for Stock Investors

Before you buy stock in a company, you need to do a little light — or not-so-light — reading. Investing in stock without checking out the company beforehand is a recipe for disaster. So before you plunk down your money, be sure to read the following:

• The company's annual report
• The 10K and 10Q reports that the company files with the SEC
• Standard & Poor's Stock Reports
• Value Line Investment Survey
• The Wall Street Journal and/or Investor's Business Daily
• Reputable stock investing websites

Internet Resources for Stock Investing

With the tools available on the Internet, you have no excuse for not researching any and every potential stock investment. The following list of resources links you to some of the best financial websites around. Look at what they have to say about a company or an investment before you take the plunge.

• Bloomberg
• Financial Sense
• Forbes
• King World News
• MarketWatch
• The Ludwig von Mises Institute
• Nasdaq
• The U.S. Securities and Exchange Commission
• Yahoo! Finance

Reassuring Points for Nervous Stock Investors

With the world looking so crazy and volatile sometimes, it's important to note that prudent investing isn't just about what you invest in but also how you invest. If you want to build long-term wealth through stock investing and still be able to sleep at night, then consider these points:

• Invest in stocks of profitable companies that sell goods and services that a growing number of people want. Your stocks will zigzag upward.
• As long as you invest in stocks and exchange-traded funds (ETFs) with human "needs" (rather than "wants") in mind, your long-term investing success will be more assured.
• If you keep your money diversified broadly across stocks, ETFs, mutual funds, and hard assets (such as real estate and precious metals) and keep adequate cash in the bank, you'll be much safer in the long run.
• Keeping informed every day about your portfolio, the financial markets, and the general economy will keep you from the fear and anxiety that come from the unknown and the surprises that are inevitable.
• Being aware of investing tools and using them regularly (such as stop-loss orders and put options) give you more control against the downside and more peace of mind.
• Keep a tight control on your debt and finances. In turn, this practice will ease the pressure to invest aggressively with a short-term focus and help you focus more on the longer term instead.

• Top Ten Mistakes Made by Online Investors

  By Matt Krantz from Investing Online For Dummies, 8th Edition
  With its jargon, formulas, charts, and Wall Street slang, investing online can seem scary and intimidating. For some investors, the thought of managing their money by themselves is overwhelming. The fear of making a mistake and losing hard-earned money is too much to bear. Most of the mistakes investors make can be neatly placed into the following ten categories.

  Buying and selling too frequently

  One of the greatest things about online investing is that it gives investors the power to buy and sell stocks whenever they want. Unfortunately, though, some investors turn this 24/7 access to their portfolios and stock trading into a liability.

  Constant access turns some investors into obsessive portfolio checkers and trigger-fingered investors who can't help but trade.

  Letting losers run and cutting winners short

  Human nature, in some respects, is your worst enemy when investing online. Humans react in particular ways when faced with certain circumstances, but those reactions can work against you in investing. Two of those elements of human nature are defending bad decisions too long and cashing in on good decisions too early.

  Investors who buy an individual stock that collapses often hang onto it, figuring that “it will come back” because “it’s a good company.” When you’re buying individual stocks, it’s critical that you cut your losses. Pick a percentage you’re willing to risk and stick with it. You can use stop market orders or protective puts.

  Other investors make the opposite mistake by cashing in winning stocks too soon. Say your asset allocation tells you to put 20 percent of your stocks in emerging markets, so you buy an emerging markets index mutual fund.

  If emerging markets soar in the following few weeks, but your emerging market index fund still accounts for 20 percent or less of your portfolio, you should resist the temptation to sell it all to lock in your gains. Instead, you should stick with your asset allocation.

  Focusing on the per-share price of the stock

  The fact that one stock is $2 a share and another is $500 a share tells you absolutely nothing about either stock. The $2-a-share stock might actually be more expensive than the $500-a-share stock because it either doesn’t grow as rapidly, doesn’t earn as much relative to its stock price, or is riskier.

  A stock’s per-share price is meaningful only if you compare it with something else. Typically, investors multiply the stock price by the stock’s number of shares outstanding to get the company’s market value or market capitalization. A stock’s market value tells you whether a stock is small, medium, or large, and gives you a good idea of its valuation.

  Failing to track risk and return

  For some reason, prudence often vanishes when it comes to online investing. Many online investors, perhaps because it takes some effort and practice, don’t take the time to see how much risk they’re taking on to get the reward they’re expecting from stocks they buy.

  The biggest danger of investing without knowing your risk and return is that you gamble not knowing whether you’re doing more harm than good to your portfolio. You might be spending a great deal of time and effort buying individual stocks, thinking the effort is worthwhile, but it might turn out you’d be better off buying and holding index mutual funds.

  Instead of burning hours looking at stock charts, you might be better off spending the time with your family, on hobbies, or at work.

  Taking advice from the wrong people

  It’s almost hard not to get stock tips. Turn on the TV. Talk to people sitting next to you on an airplane. Chat with other browsers in the financial section of the bookstore. Connect with other investors online. You’ll constantly encounter people who are convinced that such-and-such a stock is going to take off and that you need to buy in now.

  Unless Warren Buffett is the guy sitting next to you on the airplane, you’re better off politely nodding and wiping your memory clean of all the investing advice you get. Stick with your asset allocation plan.

  Trying to make too much money too quickly

  As an investor, you need to appreciate that wealth is built over time as companies you’ve invested in expand their revenue and earnings. Generally speaking, stocks have returned about 10 percent a year. You may be able to boost that 10 percent a bit with smart asset allocation and exposure to riskier types of stocks like emerging markets and small companies.

  Some investors, though, just aren’t satisfied with that. They chase after brand-new IPOs, pile into stocks that have been the market’s leaders, and load up on penny stocks. These investors are typically the ones who get sucked into “get rich quick” e-mails, stock conferences, and other dubious stock promotion schemes that make only their promoters rich.

  Letting emotions take over

  The stock you fall in love with is the one that you happened to buy at just the right time and have never lost money on. It’s easy to be proud of a stock just like parents who see their kid’s name in the paper for being on the honor roll.

  Periods of self-doubt and second-guessing account for many investors’ worst decisions. These investors might be so blinded by their enduring affection for a stock that they proudly ride it down lower and lower.

  If you let your greed for huge returns and fear of losses run your investment decisions, you can practically guarantee you’ll buy and sell at the wrong time.

  Blaming someone else for your losses

  No one likes to lose money on stocks. And everyone loses money on stocks from time to time. It’s how you react to the losses that makes the difference. Some investors go on a witch-hunt and start trying to track down anyone who might have mentioned a stock as a good buy, ranging from publications and websites to friends or the company’s executives.

  Ignoring tax considerations

  Many investors ignore or aren’t aware of ways of investing that can save them thousands on taxes. Uncle Sam offers extremely generous tax breaks for investors, if you just know how to take advantage of them. Look into them or speak with an accountant when you begin investing. Don’t forget that tax laws and breaks tend to change from year-to-year.

  Dwelling on mistakes too long

  It’s important to not let a mistake in the past paralyze you. So, you bought a stock and rode it down too long before selling it. Don’t linger on the mistake. Just don’t do it again, and over time, you’ll obtain the success in investing you’re shooting for.