Dave: 00:35 All right folks, we’ll welcome to the Investing for Beginners podcast. This will be our podcast episode 100 Ooh; we made it. That’s awesome. All right, so today we’re going to talk about the basics of spinoffs and acquisitions, and we’re going to, we’ve talked a lot about these from the aspect of the company buying, but today we’re going to kind of go over some generalities of the other side. So the company that’s being acquired or spun off. So Andrew, why don’t you go ahead and take us off. I know we have a listener question regarding this as well as some are our general thoughts on this.
Limit order -- A limit order differs from a market order in that the trade is only completed at a certain price. For example, if you enter an order to buy 10 shares of Nike at $70 each, the order will only go through if the broker can fill at it at a price of $70 per share. Limit orders are a good way to buy and sell stocks that trade less frequently, since there may not be enough willing sellers to fill a market order at a reasonable price. These orders are a good for “set and forget” investing, since you can place a limit order that will remain in effect until a stock reaches the price at which you’d like to buy.
Option trading entails a high level of risk and is not suitable for all investors. Certain requirements must be met to be approved for option trading. Those trading options (both Buyers and Sellers) should be familiar with the theory, strategy, pricing of options and related risk factors. Please read the Characteristics and Risks of Standardized Options before trading options.
Billionaire investor and CEO of Berkshire Hathaway, Warren Buffett, wanted to enable everyday investors to get in on his stock while not splitting the existing stock (making one existing share worth two or three shares, etc.). While splitting stock can attract new investors, it can also encourage speculative investment from those looking to make a quick profit by buying into the new, cheaper stock and getting out a short time later after making a quick profit when the stock goes up. If enough people were to sell too quickly, it could seriously devalue the stock.
Avoid buying on hope and selling on fear. It's very easy and too tempting to follow the crowd when investing. We often get caught up in what other people are doing and take it for granted that they know what they're talking about. Then we buy stocks just because other people buy them or sell them when other people do. Doing this is easy. Unfortunately, it's a good way to lose money. Invest in companies that you know and believe in — and tune out the hype — and you'll be fine.
Investing is defined as “the outlay of money usually for income or profit.” The idea behind investing? Put your money to work for you in something you believe will increase in value over time. Investing your money in the stock market may seem like a foreign concept; how do you know which funds to invest in? How does trading actually work? And what the heck is a mutual fund?
To the inexperienced investor, investing may seem simple enough - all you need to do is go to a brokerage firm and open up an account, right? What you may not know, however, is that all financial institutions have minimum deposit requirements. In other words, they won't accept your account application unless you deposit a certain amount of money. With a sum as small as $1,000, some firms won't allow you to open an account.
Discounted cash flow (DCF) model: the value of a stock is the present value of all its future cash flows. Thus, DCF = CF1/(1+r)^1 + CF2/(1+r)^2 + ... + CFn/(1+r)^n, where CFn = cash flow for a given time period n, r = discount rate. A typical DCF calculation projects a growth rate for annual free cash flow (operating cash flow less capital expenditures) for the next 10 years to calculate a growth value and estimate a terminal growth rate thereafter to calculate a terminal value, then sum up the two to arrive at the DCF value of the stock. For example, if Company A's current FCF is $2/share, estimated FCF growth is 7% for the next 10 years and 4% thereafter, using a discount rate of 12%, the stock has a growth value of $15.69 and a terminal value of $16.46 and is worth $32.15 a share.
A dividend stock, in simple words, is a stock that pays a dividend on a regular schedule. The schedule can be annual, semi-annual, quarterly or monthly. A dividend represents cash returned to investors which technically reduces the value of the company by the amount of dividend paid. In practice, with the stock price trading up and down during the day, it rarely settles that way.
Diversify. Diversifying your portfolio is one of the most important things that you can do, because it diminishes your risk. Think of it this way: If you were to invest $5 in each of 20 different companies, all of the companies would have to go out of business before you would lose all your money. If you invested the same $100 in just one company, only that company would have to fail for all your money to disappear. Thus, diversified investments "hedge" against each other and keep you from losing lots of money because of the poor performance of a few companies.
If you still have high-interest debt, such as credit cards or personal loans, you should hold off on investing. Your money works harder for you by eliminating that pesky interest expense than it does in the market. This is because paying off $1 of debt balance saves you 12%, 14%, or more in future interest expense. More than traditional investments can be expected to return.
Let’s say you’re interested in investing in Nike. If you look that up, the stock symbol is NKE on the New York Stock Exchange (NYSE). The first number you’ll probably notice on any financial news site with a stock tracker is the current share price. In the United States, this is measured in dollars and cents, but the units may vary depending on where in the world you’re investing. In London, for example, they measure stock prices in pence.
You will want to build a solid foundation for your investments. This includes having a large base of stocks. One of the easiest places to start if you only have enough for one investment is to purchase a mutual fund or ETF in the S&P500. This provides access to the largest 500 companies in the United States. Then, you can branch out into other investments such as the Total US Stock Market Index and the Total International Stock Market Index. However, diversification is not only within stocks but also though different asset classes such as Bonds and international stocks/bonds. Always, consult a professional to create an investment portfolio tailored to your needs.
While a limit order guarantees the price you’ll get if the order is executed, there’s no guarantee that the order will be filled fully, partially or even at all. Limit orders are placed on a first-come, first-served basis, and only after market orders are filled, and only if the stock stays within your set parameters long enough for the broker to execute the trade.
As a financial advisor, I recommend this book to anyone wanting to learn the Wall Street stock market game and build wealth. The book explains in plain English how to calculate rates of returns,determine your risk level and the rule of 72, which will help you reach your financial goals. One of the best chapter is on the fundamentals of the stock market. It explains the various exchanges, how to value a stock and a list of the typical questions and answers a novice investor would ask.
Investing in stocks is a good strategy to build your wealth over time and generate income for your retirement. Once you have tried various trading strategies and developed your own personal investment strategy, you will learn how to make money in stocks. The downfall of many investors is trading with their emotions or being fearful of volatility, but conducting research and making disciplined decisions will go a long way.
Warren Buffett is the best example to hit this point home. In 2008, he bet some hedge fund managers $1 million that they wouldn’t be able to make more money in a decade than a cheap, boring index fund. An index fund uses simple investing algorithms to track an index, and doesn’t require active, human management. Conversely, hedge funds stack management fees on top of trading fees to pay for the time and knowledge actual strategists are putting into your investments.
The performance data contained herein represents past performance which does not guarantee future results. Investment return and principal value will fluctuate so that shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance quoted. For performance information current to the most recent month end, please contact us.
Market order -- This is an order that will be placed immediately at the prevailing market price. Thus, if you enter an order to buy 10 shares of Amazon, your trade will be filled by matching it with someone who wants to sell shares of Amazon, though not at a known price per share. I like to call this the “get me in!” order type, since it will be filled quickly, although you could end up paying a slight premium for every share to do it.
This next tip is a crucial one if you’re studying how to invest 101. What does it mean to be diversified? It means to not have all your eggs in one basket but also to make sure you are in the right baskets. Sure, you’ll want to pinpoint good stocks to invest in – but don’t focus solely on one industry, or even one person’s advice. The more information you can get from many trusted sources, the better off you’ll be.
In terms of diversification, the greatest amount of difficulty in doing this will come from investments in stocks. This was illustrated in the commissions section of the article, where we discussed how the costs of investing in a large number of stocks could be detrimental to the portfolio. With a $1,000 deposit, it is nearly impossible to have a well-diversified portfolio, so be aware that you may need to invest in one or two companies (at the most) to begin with. This will increase your risk.
The easiest option is to buy what's known as an ETF (an exchange-traded fund) like SPY (SPY). It trades like a stock, but it means you own a basket of stocks. In the case of SPY, the basket is made up of 500 of America's largest companies. Sure, a few might struggle, but all 500 probably aren't going to tank at the same time, so it helps lower the risk.
There are no guidelines for dollar amounts per investment. The best rule is to select many different investments, and put no more than 5% or 10% of your money into any one investment. That way a single failure will not hurt you too badly. That's why mutual funds and ETFs have become so popular: they allow you to be invested in many different stocks, bonds, or commodities at once.
Other key clues to look out for are how long the management team has been serving the company. Longevity is often a good sign that the folks in charge are doing something right. You'll also want a management team that's innovative and willing to take risks, but not too many risks. By reading up on a company and its history, you can get a sense of the sort of decisions its management team has made, and how those decisions have panned out.
Not if you can supply your own financial acumen and practical level-headedness. If you are not clueless about finances, or if you're personally acquainted with someone with considerable financial experience to share with you, there's no need to pay for advice. Having said that, however, the more money you have at risk, the more an advisor is worth hiring.
When Should You Invest in Stocks? – Obviously, the stock market rises and falls. However, as noted above, it will almost certainly provide you with higher returns over time than other investments. Consequently, you should normally be invested in stocks. Trying to time when the best moment is to enter or exit the market is nearly impossible, even for professional investors. Therefore, the best time to invest in stocks is generally today.
Buying at the best time. Once you know what to buy, don't run out and make a purchase immediately. "There's a reason Wall Street makes money consistently and the average investor doesn't," Seiden says. According to him, that's because Wall Street investors wait until the share price drops before making a purchase, while many new investors buy when prices are highest. The World's Worst Stock Investment Advice