Chapter 5 Say Cheese: Getting a Snapshot of the Market

[Audio] Chapter 5 Say Cheese: Getting a Snapshot of the Market Knowing How Indexes Are Measured: An index is a statistical measure used by investors to track the market's progress. The oldest index is the Dow Jones Industrial Average, created in 1896 by Charles Dow. It covers 12 stocks and has been updated to account for stock splits. Indexes differ from averages in weighting, which is the relative importance of items within the index. Various types of indexes exist, including the average of 12 companies divided by 12. Price-weighted index: A price-weighted index tracks changes in individual stock prices per share. For example, if two stocks are owned, the $40 stock would account for 67% of the index, while the $20 stock would represent 33%. Market-value weighted index: A market-value weighted index tracks a stock's proportion based on its market capitalization, or market cap. For example, if you have 10 million shares of a $20 stock and 1 million of a $40 stock, Stock A represents 83% of the index's value..

[Audio] Broad-based index: The sample portfolios in the bullets only feature two stocks, not a representative index. Most investing professionals use broad-based indexes like S&P 500 or Wilshire 5000 for benchmark comparison. Composite index: An index is a combination of multiple indexes, like the NYSE Composite, which tracks all NYSE-listed stocks. Checking Out the Indexes: The Dow, Nasdaq, and Standard & Poor's 500 are the most popular financial indexes, but other indexes cover other market facets, small-cap and mid-cap stocks, and specific sectors. For Internet stock investors, the Internet Stock Index can be used to compare their stock's performance against the index. Reliable and respected indexes are produced by Dow Jones, Standard & Poor's, major exchanges, and smaller exchanges. The Dow Jones Industrial Average: The Dow Jones Industrial Average (DJIA) is a popular stock market barometer that tracks 30 of the largest and most influential public companies in the market. It has been used for over a century to gauge market activity, but its limited sampling means it doesn't accurately represent the true pulse of the market. The Dow Jones roster has changed numerous times over its 100-plus years, with most changes due to mergers and bankruptcy. Additionally, it includes a hodgepodge of nonindustrial companies such as J.P. Morgan Chase and Citigroup, Home Depot, and Microsoft, which doesn't adequately reflect industrial activity. Despite challenging times in the late 1990s and up to 2005, the Dow rose to record levels..

[Audio] Broad-based indexes: The S&P 500 and Wilshire 5000 are more accurate indicators of the stock market's performance than the Dow. Industry or sector indexes: Dow Jones' indexes, such as the Dow Jones Transportation Average and Dow Jones Utilities Average, provide accurate gauges of industry growth or lack thereof, such as gold stocks in the precious metals industry, managed more strictly than Dow..

[Audio] NASDAQ indexes: NASDAQ, formerly known as the National Association of Securities Dealers Automated Quote system, became a formalized market in 1971. It has two indexes covering companies traded on NASDAQ. NASDAQ Composite Index: The Nasdaq Composite Index, a news source, comprises over 5,000 Nasdaq-traded companies, primarily in technology, telecom, and internet industries. It reached an all-time high in 2000 but dropped 60% by 2003. NASDAQ 100 Index: The Nasdaq 100 index tracks the top 100 NASDAQ companies, focusing on technology-related companies like Microsoft, Adobe, and Symantec. These growth-oriented indexes carry risk due to their volatile stocks, which experienced over 60% decline in the bear market of 2000 and 2001. Standard & Poor’s 500: The Standard & Poor's 500 (S&P 500) is a market-value weighted index that tracks the 500 largest publicly traded companies. It represents overall market performance better than the DJIA's 30 companies and is closely watched by money managers and financial advisors. The index includes companies that are widely held and followed, including industry leaders in energy, technology, healthcare, and finance. However, the top 50 companies account for 50% of the index's market value, making it less accurate than the DIJA. S&P can add or remove companies as market conditions change, ensuring a more accurate representation of the general market. Wilshire Total Market Index: The Wilshire 5000 Equity Index, also known as the Wilshire Total Market Index, is the world's largest stock index, covering over 7,500 stocks since its inception in 1980. It is a market-value weighted index, covering all stocks on major stock exchanges, including those covered by the S&P 500. It is particularly useful for investors and analysts seeking comprehensive market representation..

[Audio] International indexes: Investors should monitor the global marketplace's impact on individual national economies and markets, using indexes to gain insights into international markets, including popular international indexes. Nikkei (Japan):This index is considered Japan’s version of the Dow. If you’re invested in Japanese stocks or in stocks that do business with Japan, you want to know what’s up with the Nikkei. FTSE-100 (Great Britain): Usually referred to as the “footie,” this market-value weighted index includes the top 100 public companies in the United Kingdom. CAC-40 (France): This index tracks the 40 public stocks that trade on the Paris Stock Exchange. DAX (Germany): This index tracks the 30 largest and most active stocks that trade on the Frankfurt Exchange. Halter USX China Index (China): This index tracks a basket of 50 U.S. public companies that derive most of their revenues from China. International indexes, like Bloomberg and Market watch, can be used to analyse stock progress. For companies with Japanese customers, the Nikkei can provide a snapshot of the economy's well-being. If a company's business partners or customers are in the Nikkei, it indicates a potential "sayonara" for its stock price..

[Audio] Using the Indexes: The sections below provide suggestions on how to organize and utilize all available indexes. Tracking the indexes: Indexes provide investors with an immediate snapshot of market performance, allowing them to compare their stock portfolio or mutual funds with the rest of the market. However, they can be misleading if taken too literally as an accurate barometer of stock success. For example, the Dow has changed its roster of companies since 1896, replacing laggard stocks with more promising ones. Investing in indexes Investing directly in indexes is possible, allowing one to invest in the general market or a specific industry. For example, if you want to invest in the DJIA, replicating its portfolio may be impractical and costly due to the 30 stocks involved. However, there are alternative methods to achieve this investment goal. Index mutual funds: An index mutual fund invests in securities closely matching the basket of stocks in a specific index, such as DJIA and S&P 500, and can be found at the Investment Company Institute. Exchange Traded Funds (ETFs): ETFs, similar to mutual funds, can reflect a basket of stocks based on an index and can be traded like stocks. They offer diversification and versatility, with options like buying, selling, going short, and margin purchases. Examples include DJIA ETF and ETF for NASDAQ..

[Audio] Chapter 6 Gathering Information Knowledge and information are crucial for success in stock investing. Investing without sufficient knowledge can lead to missed opportunities and financial losses. Opportunities to make money in the stock market are always present, regardless of the economy or market performance. To make the most of stock investing, build knowledge and find quality information before buying stocks. Ensure the company is financially sound, growing, offering in-demand products, and in a strong industry. Looking to Stock Exchanges for Answers Stock investing involves buying a company's shares that will provide appreciation or income. Stock exchanges, such as the New York Stock Exchange (NYSE), American Stock Exchange (AMEX), and NASDAQ, are essential resources for understanding stock investing. The NYSE provides a framework for transactions and earns money from fees charged to members. The main exchanges for most stock investors are the NYSE and AMEX. These exchanges offer free or low-cost information and resources, including tutorials, glossaries, news, industry analysis, stock quotes, and free tracking of stock selections. The offerings of each exchange/market are updated regularly, so visit their websites for updates..

[Audio] Looking to Stock Exchanges for Answers Stock investing involves buying a company's shares that will provide appreciation or income. Stock exchanges, such as the New York Stock Exchange (NYSE), American Stock Exchange (AMEX), and NASDAQ, are essential resources for understanding stock investing. The NYSE provides a framework for transactions and earns money from fees charged to members. The main exchanges for most stock investors are the NYSE and AMEX. These exchanges offer free or low-cost information and resources, including tutorials, glossaries, news, industry analysis, stock quotes, and free tracking of stock selections. The offerings of each exchange/market are updated regularly, so visit their websites for updates. Understanding Stocks and the Companies They Represent Before buying stocks, understand the companies and their operations. Companies operate similarly to individuals, making daily decisions. Financial difficulties can affect both people and companies. Understanding companies' finances requires knowledge in accounting and economics, which play a significant role in understanding their stock performance. Low earnings and high debt can affect both individuals and companies.

[Audio] Accounting for taste and a whole lot more Accounting is the language of business, and understanding three essential principles is crucial. Assets minus liabilities equal net worth, which is calculated by subtracting liabilities from assets. A company's net worth is its bottom line and indicates its ability to pay debts without going out of business. A successful company's net worth is regularly growing, as seen in a company's net worth increasing from $4 million in 2005 to $5 million in 2006. Income less expenses equal net income, or net profit or net earnings. Profitability is the main reason for investing in a company's stock. To determine a company's net income, analyse its income statement and assess its use of gains wisely. Conduct a comparative financial analysis to compare a company's current performance with a prior period or similar company. Assessing a company's net profit based on its profitability is crucial. If a company's net profit is lower than its previous year's, it may be a good time to avoid or investigate the issue. Understanding these basic accounting points can help in stock investing and personal finances.

[Audio] Understanding how economics affects stocks Understanding basic economics is crucial for success as a stock investor, as the stock market and economy are interconnected, with positive or negative events affecting each other. Getting the hang of the basic concepts Many investors struggle with basic economic concepts, but understanding them can help filter financial news, filter relevant information, and make better investment decisions, as seen in the success of a student of economics. Supply and demand: The concept of supply and demand in economics is crucial for stock investing analysis and understanding the relationship between available resources and demand, driving economic activity. The decision-making process involves considering whether to buy stock in a company producing elephant-foot umbrella stands if the company has an oversupply and no demand for it. Cause and effect: When reading business news, consider cause and effect to understand the potential impact on a company's sales. Logic is crucial for sound economic thought, and understanding the cause can lead to a positive or negative outcome. Examples of events that can cause a stock's price to rise include falling sales. • Positive news reports about a company: The news may report that a company is enjoying success with increased sales or a new product. • Positive news reports about a company’s industry: The media may be highlighting that the industry is poised to do well • Positive news reports about a company’s customers: Maybe your company is in industry A, but its customers are in industry B. If you see good news about industry B, that may be good news for your stock • Negative news reports about a company’s competitors: If they are in trouble, their customers may seek alternatives to buy from, including your company..

[Audio] Economic effects from government actions: Political and governmental actions have significant economic consequences, with government actions often manifesting as taxes, laws, or regulations. They can cause company bankruptcy, disrupt industries, or even cause depression. For example, a 50% sales tax on an industry like umbrella stands may make it uneconomical and boost wastepaper basket sales. Conversely, a tax credit for solar power can positively impact industries that manufacture or sell solar power devices. Gaining insight from past mistakes In the late 1990s, investors lost trillions in their stock portfolios due to the US experiencing the largest debt expansion in history and a record expansion of the money supply. The Federal Reserve, the central bank, controlled both, leading to increased consumer borrowing, spending, and investing. This hyper stimulated the stock market, causing stocks to rise 25 percent per year for five consecutive years. However, this artificial stimulation led to depletion of savings, increased credit usage, and borrowing against homes. Companies expanded too eagerly, leading to a financial bind, leading to profits shrinking or disappearing. To stay in business, companies cut expenses, including laying off employees, which led to consumer spending dropping further. As a result, stocks fell in 2000, and earnings and stock prices also fell..

[Audio] Staying on Top of Financial News Reading financial news can help investors decide where to invest. Many newspapers, magazines, and websites provide coverage of the financial world. However, the information overload can lead to little time for investing. Stock investors should focus on publications like The Wall Street Journal and Investor's Business Daily, which provide news and stock data within 15-20 minutes. Appendix A of this book provides more information on these resources along with a treasure trove of some of the best publications, resources, and Web sites to assist you. Before investing, it's crucial to understand a company's current state through its literature or media sources, asking specific questions about the company. Figuring out what a company’s up to Is the company making more net income than it did last year? You want to invest in a company that is growing. Are the company’s sales greater than they were the year before? Remember, you won’t make money if the company isn’t making money. Is the company issuing press releases on new products, services, inventions, or business deals? All these achievements indicate a strong, vital company. Knowing how the company is doing, no matter what’s happening with the general economy, is obviously important. To better understand how companies tick, see Chapter 12..

[Audio] Discovering what’s new with an industry When investing in a stock, it's crucial to understand the company's industry's performance. A strong industry is more likely to lead to a successful stock. However, successful stocks can be picked in failing industries. Analyse the industry's strength and dynamicity when watching news or financial pages. Knowing what’s happening with the economy Staying informed about the economy's progress is crucial, as stable or growing economies make stock value increase, while declining or contracting economies make it harder to maintain value. Gross domestic product (GDP): GDP, measured in goods and services, indicates a nation's total output value. A rising GDP indicates solid growth, while a rise of 3 percent or more indicates mediocre growth, and a GDP under zero indicates recession. The index of leading economic indicators (LEI): The LEI is a set of economic statistics that provide a comprehensive understanding of the economy, similar to barometers and windows. Chapter 14 delves into the impact of the economy on stock prices. Seeing what the politicians and government bureaucrats are doing Monitoring the political landscape is crucial for stock investors, as government actions significantly impact investments. To stay informed, check the Thomas legislative search engine, run by the Library of Congress, and organizations like the National Taxpayers Union, which provide information on tax laws and their impact. Checking for trends in society, culture, and entertainment Trends in society, popular culture, and entertainment can impact investments, either directly or indirectly. As more people age, companies catering to this growing market will perform well. Staying alert to emerging trends and choosing stocks appropriately gives investors a profitable edge. Owning a solid company with growing sales and earnings rewards investors as the stock price increases..

[Audio] Reading (And Understanding) Stock Tables Stock tables in major business publications like The Wall Street Journal and Investor's Business Daily provide valuable information for investors. They help select investment opportunities and monitor stock performance. However, without understanding the purpose or purpose, it can be overwhelming. Understanding stock tables is essential for making informed decisions and staying informed about stock market trends..

[Audio] 52-Wk High: Highest price at which the stock was traded over the past 52 weeks. 52-Wk Low: Lowest price at which the stock was traded over the past 52 weeks. Name (Symbol): Company name and its stock symbol. Div.: Dividend per share (if applicable). Vol: Volume of shares traded. Yld: Yield, calculated by dividing the annual dividend by the stock's current price. P/E: Price-to-Earnings ratio, calculated by dividing the stock's current price by its earnings per share (if available). Day Last: The stock's price at the close of the most recent trading day. Net Chg.: The net change in the stock's price from the previous trading day.

[Audio] Using News about Dividends Understanding dividend news is crucial for income investors, as discussed in Chapter 9 on investing for income. Looking at important dates Understanding how companies report and pay dividends is crucial for investors to benefit from buying dividend-paying stocks. Important dates in the dividend life include: Date of declaration: The date of declaration is the date a company reports a quarterly dividend and its subsequent payment dates, not the date of record. Buying the stock before, on, or after the declaration doesn't affect the quarterly dividend. Date of execution: The day of execution is the day you initiate a stock transaction, not the day you own the stock. It's the day you put in the order, not the day you initiate the transaction. Closing date (settlement date): The closing date, typically three business days after the execution date, is the finalization date for trades and stock. Date of record: The date of record is used to determine which stockholders qualify for the declared dividend, as stock is traded daily. Official stockholders receive the dividend on the payment date, regardless of stock sale plans. Ex-dividend date: The "ex-dividend period" refers to the three-day period before a stock purchase becomes an official owner, after which the closing date falls after the record date, preventing the buyer from being on the books of record. Payment date: The date on which a company issues and mails its dividend checks to shareholders. Finally! For typical dividends, the events in Table 6-2 happen four times per year..

[Audio] Date of declaration: January 15 This is the date when the company announces or declares that it will pay a dividend for the quarter. Ex-dividend date: February 7 This marks the start of the three-day period during which, if an investor buys the stock, they are not eligible to receive the upcoming dividend. To receive the dividend, an investor must purchase the stock before the ex-dividend date. Record date: February 10 Investors must be on the company's books as shareholders by this date to qualify for the declared dividend. Shareholders as of this date are entitled to the dividend. Payment date: February 27 On this date, the dividend is distributed to eligible shareholders. Dividend checks are issued and mailed to shareholders who were recorded as shareholders on the record date, February 10..

[Audio] Understanding why these dates matter Three business days pass between the date of execution and the closing date, as well as between the ex-dividend date and the date of record. Understanding these dates is crucial for determining when to purchase stock and whether you qualify for a dividend. For example, if you want to buy ValueNowInc (VNI) to qualify for a quarterly dividend, you must execute the trade by February 7 to ensure the dividend. However, during the ex-dividend period, the stock trades at a slightly lower price, allowing you to save on the purchase. Evaluating (Avoiding?) Investment Tips The speaker advises against automatically investing based on a hot tip from someone, stating that good investment selection requires considering multiple sources before making a decision. They highlight the importance of carefully analysing opinions and advice from others. Consider the source. People often buy stocks based on market strategists or analysts' opinions, often seen on television financial shows. However, this can lead to bias due to undisclosed relationships. For example, an analyst may recommend a company with upside potential, only to later reveal that the analyst's employer receives investment banking fees. Get multiple views. Avoid relying solely on one source for investment decisions, instead, consider independent financial publications like Barron's, Money Magazine, and Smart Money for reliable information. Gather data from the SEC. To obtain objective information about a company, consider the 10K reports filed with the Securities and Exchange Commission (SEC). These reports, which are read by pundits and financial reporters, provide valuable information on a company's operations and financial data. Accessing these reports can be done through the SEC's EDGAR database, which includes balance sheets, income statements, and other related information..

[Audio] Chapter 7 Going for Brokers To invest in stocks, choose a broker after conducting thorough research to select a company to invest in. This chapter introduces the investor/broker relationship and covers various types of orders, such as market and stop-loss orders, which can be placed with a broker, whether over the phone or online. Defining the Broker’s Role Brokers are organizations like Charles Schwab, Merrill Lynch, and E*TRADE that buy or sell stocks on your behalf. They can also be individuals working for these firms. While direct purchase plans are available, most stocks still require a broker. Brokers can perform other tasks for clients, including financial or paper investments. Providing advisory services: Investors pay brokers a fee for investment advice. Customers also get access to the firm’s research. Offering limited banking services: Brokers can offer features such as interest-bearing accounts, check writing, direct deposit, and credit cards. Brokering other securities: Brokers can also buy bonds, mutual funds, options, Exchange Traded Funds (ETFs), and other investments on your behalf. Personal stockbrokers make their money from individual investors like you and me through various fees, including the following: Brokerage commissions: This fee is for buying and/or selling stocks and other securities. Margin interest charges: This interest is charged to investors for borrowing against their brokerage account for investment purposes. Service charges: These charges are for performing administrative tasks and other functions. Brokers charge fees to investors for Individual Retirement Accounts (IRAs) and for mailing stocks in certificate form. Brokers should be registered with the National Association of Securities Dealers (NASD) and the Securities and Exchange Commission (SEC) and a member of the Securities Investor Protection Corporation (SIPC) to protect your money after depositing. Institutional brokers earn from institutions and companies through investment banking, securities placement fees, advisory services, and other broker services..

[Audio] Distinguishing between Full-Service and Discount Brokers Stockbrokers are categorized into full-service and discount options, with full-service brokers suitable for guidance-seeking investors and discount brokers for confident, knowledgeable investors. Full-service brokers Full-service brokers offer numerous services to investors, with a representative, typically an account executive, registered rep, or financial consultant, typically a securities licensee, knowledgeable about stocks and investing in general. What they can do for you Your account executive handles account inquiries, portfolio securities transactions, and offers assistance, while full-service brokers handle these tasks. Offer guidance and advice. Full-service brokers provide personal attention from their account reps, allowing first-name interactions and disclosure of financial goals, recommending suitable stocks and funds. Provide access to research. Full-service brokers offer in-depth investment research on companies, providing valuable insights but should be aware of potential pitfalls, as outlined in the "Judging Brokers' Recommendations" section. Help you achieve your investment objectives A good representative provides personalized investment advice, answering questions about specific strategies to help achieve wealth building goals. Make investment decisions on your behalf Full-service brokers can make investment decisions for your account with your authorization, but it's important to require them to explain their decisions..

[Audio] What to watch out for Full-service brokers offer extensive assistance to investors, but it's crucial to understand that they are still salespeople, compensated based on their ability to generate revenue for the brokerage firm. They should ask why and provide a complete explanation for any recommendations. Full-service brokers are more expensive than discount brokers, as they provide advice and guidance, and typically require a minimum investment of $5,000 to $10,000 to open an account. Handing over decision-making authority to brokers can be risky, especially if they use your money. Some brokers engage in churning, which can negatively impact your wealth. Before dealing with a full-service broker, obtain a free report from the National Association of Securities Dealers to check if any complaints or penalties have been filed. Full-service brokers like Merrill Lynch and Morgan Stanley offer comprehensive services, ensuring wealth building rather than brokering. Discount brokers Discount brokers offer basic stock transactions without advice or premium services, making them cheaper to engage than full-service brokers. However, it's crucial to understand your personal goals and needs before working with a discount broker. Conventional and Internet discount brokers were once two types, but they are now so similar that the differences are minimal. Conventional discount brokers have fully featured websites, while Internet brokers have added more telephone and face-to-face services. Examples include Charles Schwab and TD Waterhouse, while internet brokers like E*TRADE.com and Scottrade.com have added more conventional services. What they can do for you Discount brokers offer some significant advantages over full-service brokers, such as: Lower cost: Discount brokers typically offer lower costs due to lower commissions, which is the primary advantage of using them. Unbiased service: Discount brokers facilitate stock transactions without providing advice, ensuring they have no vested interest in selling any specific stock. Access to information: Established discount brokers offer extensive educational materials at their offices or on their Web sites..

[Audio] What to watch out for No guidance: You've chosen a discount broker, but they should clarify this. As a knowledgeable investor, the lack of advice is seen as positive. Hidden fees: Discount brokers often charge extra fees for services like issuing stock certificates or mailing statements. It's important to ask about fees for maintaining IRAs, transferring securities, and interest rates for borrowing through brokerage accounts. Minimal customer service: When dealing with an Internet brokerage firm, ensure they have good customer service capabilities and know where to call for assistance if transactions aren't possible through their website. Choosing a Broker To choose a broker, analyse your personal investing style and find a firm that charges the least amount for the services you use most frequently. Compare all costs of buying, selling, and holding stocks and other securities through a broker, including margin interest and service charges. Use broker comparison services like Gomez Advisors and read articles in publications like Smart Money and Barron's. Find brokers easily through Yellow Pages, investment publications, and financial websites..

[Audio] Cash accounts A cash account, also known as a Type 1 account, requires a deposit of money with the new account application. Brokers may offer varying minimum deposits, with some offering no minimum deposit as part of promotions. Qualifying for a cash account is easy as long as you have cash and a pulse. The account must be deposited before the closing date for any trade, which occurs three business days after the date of execution. Brokers may pay interest on uninvited cash, and you can choose between a regular money market account or a tax-free municipal money market account. Margin accounts Margin accounts allow users to borrow money against their securities to buy more stock, but require broker approval. The margin limit for stock trading is 50%, and a minimum of $5,000 in cash or securities is required. Margin is similar to buying real estate with a mortgage, as it allows users to buy $10,000 worth of stock with as little as $5,000. The broker charges a higher interest rate than their own borrowing rate. Option accounts An option account, also known as a Type 3 account, offers the same capabilities as a margin account and allows trading options on stocks and stock indexes. To upgrade, brokers require a statement of understanding and risk awareness. Options are beneficial wealth building tools. Judging Brokers’ Recommendations Americans are increasingly enjoying the sport of rating stocks on television financial shows, often featuring influential market strategists. While some stocks may jump significantly after a buy recommendation, investors should be cautious as these recommendations are often just showbiz. Brokers issue recommendations based on their general opinion. Strong buy and buy: The analyst recommends buying shares, but it's important to remember that buy recommendations are common as brokers sell stocks. Accumulate and market perform: An analyst's positive yet unexcited recommendation is akin to a friend's polite response to a new suit, but the reader wishes their opinion was more enthusiastic..

[Audio] Hold or neutral: Analysts use language to maintain a positive attitude, avoiding negative feedback. This rating serves as a way for analysts to maintain a neutral stance. Sell: During 2000 and 2001, many analysts should have issued a recommendation, but few did, leading to many investors losing money due to their lack of honesty. Avoid like the plague: The author discusses the importance of considering analysts' recommendations when investing in stocks. They argue that while they are generally better than personal recommendations, it is crucial to consider the reasoning behind the recommendation. Analysts have biases and their employment depends on the companies they recommend. However, they suggest that analysts' recommendations can be useful in personal stock investing research. How does the analyst arrive at a rating? The analyst’s approach to evaluating a stock can help you round out your research as you consult other sources such as newsletters and independent advisory services. What analytical approach is the analyst using? Analysts often use fundamental analysis to assess a company's financial health and industry standing, while technical analysis examines a company's stock price history for future price movement, often combining these approaches to gain insights. What is the analyst’s track record? Major financial publications and websites track recommendations from renowned analysts and stock pickers, ensuring their consistent good record in both bull and bear markets. How does the analyst treat important aspects of the company’s performance, such as sales and earnings? How about the company’s balance sheet? The essence of a healthy company is growing sales and earnings coupled with strong assets and low debt. Is the industry that the company is in doing well? Do the analysts give you insight on this important information? A strong company in a weak industry can’t stay strong for long..

[Audio] . What research sources does the analyst cite? Does the analyst quote the federal government or industry trade groups to support her thesis? These sources are important because they help give a more complete picture regarding the company’s prospects for success. Imagine that you decide on the stock of a strong company. But what if the federal government (through agencies such as the SEC) is penalizing the company for fraudulent activity? Or what if the company’s industry is shrinking or has ceased to grow (making it tougher for the company to continue growing)? The astute investor looks at a variety of sources before buying stock. Is the analyst rational when citing a target price for a stock? When she says, “We think the stock will hit $100 per share within 12 months,” is she presenting a rational model, such as basing the share price on a projected price/earnings ratio? The analyst must be able to provide a logical scenario about why the stock has a good chance of achieving the cited target price within the time frame mentioned. You may not necessarily agree with the analyst’s conclusion, but the explanation can help you decide whether the stock choice was well thought out. Does the company that is being recommended have any ties to the analyst or the analyst’s firm? During 2000–2002, the financial industry got bad publicity because many analysts gave positive recommendations on stocks of companies that were doing business with the very firms that employed those analysts. This conflict of interest is probably the biggest reason that analysts were so wrong in their recommendations during that period. Ask your broker to disclose any conflict of interest. The bottom line with brokerage recommendations is that you shouldn’t use them to buy or sell a stock. Instead, use them to confirm your own research. I know that if I buy a stock based on my own research and later discover the same stock being talked up on the financial shows, that’s just the icing on the cake. The experts may be great to listen to, and their recommendations can augment your own opinions; however, they’re no substitute for your own careful research..

[Audio] Chapter 8 Investing for Growth People invest in stocks to grow their wealth, also known as capital appreciation. Growth stocks, which are riskier than other categories, offer excellent long-term prospects for making the big bucks. Successful investors like Warren Buffett and Peter Lynch have shown that their long-term, value-oriented approach has been successful. To make money consistently in stocks over the long haul, investors must remember that they are investing in a company, not just buying a stock. Investing in a stock should be done with enthusiasm and a strong desire to know the company's success. This attitude and discipline can enhance goals as a stock investor, especially if the investment goal is growth. Becoming a Value-Oriented Growth Investor A growth stock is one that is growing faster and higher than the overall stock market, performing better in sales and earnings categories. Value stocks are priced lower than the company's value and assets, with less risk and more steady growth over a longer term. There is a debate about whether growth and value investing are mutually exclusive, with some believing that growth investors are not put off by price to earnings ratios. However, a value-oriented approach to growth investing is best, as long-term growth stock investors analyse the company's fundamentals to ensure a solid foundation for growth prospects. Growth is easier to achieve when seeking solid, value-oriented companies in growing industries.

[Audio] Getting Tips for Choosing Growth Stocks This section aims to help narrow down stock choices to a few dozen or a few hundred, focusing on growth stocks. It emphasizes the importance of meeting as many criteria as possible when selecting a stock. When choosing growth stocks, invest in companies that make a profit and understand their revenue sources. Research industry trends and economic trends to make informed decisions Making the right comparison To determine if a company is a growth stock, it must measure its growth against a benchmark like the Dow Jones Industrial Average (DJIA) or the Standard & Poor's 500 (S&P 500). A company with annual earnings growth of 15% or more over three years and an industry average growth rate of 10% is considered a growth stock. Consistent growth is essential for a growth stock. Checking out a company’s fundamentals Fundamentals in stock investing refer to a company's financial condition and related data, including its balance sheet, income statement, cash flow, and other operational data. Value investors analyze these factors, focusing on sales, earnings, and debt. A good benchmark is sales at least 10% higher than last year, with earnings growing at the same rate as sales. Excessive debt can be a significant issue for a company. While using a 10% figure may seem oversimplification, it's important to keep it simple. Noticing whose buying and/or recommending the stock Stock prices can rise due to demand, with more buyers than sellers. To increase a stock's price, investors should watch for institutional buying, analysts' attention, newsletter recommendations, and consumer publications. Institutional buying from mutual funds and pension plans can exert significant upward pressure on the stock's price. Analysts' attention on financial shows can also reinforce a stock's price. Newsletter recommendations from independent researchers can also boost a stock's price. Consumer publications, such as Consumer Reports, rate products and services for consumer satisfaction, which can positively affect a company's stock. However, it's important to be cautious when buying a stock based solely on an analyst's recommendation, as it can lead to a stock's decline..

[Audio] Learning investing lessons from history Growth stocks have been a part of the financial scene for nearly a century, offering valuable insights for today's stock market environment. Past market winners, particularly those from the 1970s and 1980s, demonstrate the importance of strong fundamentals, a growing industry, full investment during bull markets, and a shift in money during bear markets. Successful stock investing involves monitoring stocks, holding onto growth stocks and selling declining ones, and being aware of warning signals. Evaluating the management of a company The management of a company is crucial for its success, and to ensure proper operation, it is essential to check the company's numbers. A rising stock price is a sign of good management, as it can be difficult to verify through phone calls. Return on equity A company's return on equity (ROE) can be used to assess management competence. A higher percentage indicates efficient use of equity, while a 10% or higher ROE is considered solid. Income statements, which express the equation of sales minus expenses, provide a more detailed view of a company's earnings. Not all industries have identical ROEs.

[Audio] Analysis: Sales: Grubby, Inc.'s sales revenue increased from $82,000 in 2005 to $90,000 in 2006, indicating a growth in the company's top-line revenue. Expenses: The Company’s expenses also rose from -$75,000 in 2005 to -$78,000 in 2006. This suggests that while the company's sales increased, its expenses also grew, although not as much as the increase in sales. Net Earnings: Grubby, Inc.'s net earnings (or net income) surged from $7,000 in 2005 to $12,000 in 2006. This is a positive sign, indicating that despite increased expenses, the company managed to significantly increase its profitability between the two years..

[Audio] Analysis: 2005: Earnings: $7,000 Equity: $35,000 ROE = (Earnings / Equity) * 100 = ($7,000 / $35,000) * 100 = 20% 2006: Earnings: $12,000 Equity: $40,000 ROE = (Earnings / Equity) * 100 = ($12,000 / $40,000) * 100 = 30% Interpretation: 2005 ROE: The Return on Equity for Grobaby, Inc. in 2005 was 20%. This means that for every dollar of equity invested, the company generated a return of 20 cents in net income. It indicates a solid performance but might suggest room for improvement. 2006 ROE: The Return on Equity increased to 30% in 2006. This signifies that the company's profitability in relation to the shareholders' equity improved significantly from the previous year. It indicates that the company was more efficient in generating profits from shareholders' investments. Conclusion: Grobaby, Inc. showed an increase in profitability between 2005 and 2006, as reflected in its ROE. A higher ROE generally indicates that the company is effectively utilizing its shareholders' investments to generate profits. The increase from 20% to 30% in ROE demonstrates an improvement in efficiency and performance in utilizing shareholders' equity to generate earnings..

[Audio] Equity and earnings growth $5,000 (from $35,000 to $40,000), or 14 percent, which is very good — management is doing good things here Insider buying Monitoring management's business management and observing their stock purchases can indicate a company's growth potential. En masse buying of stock indicates a company's growth potential, as discussed in Chapter 19. Protecting your downside Trailing stops are stop losses that investors regularly manage with their stocks, especially if they are new to buying growth stocks. They can help protect investments from loss, regardless of the economy or the stock's performance. For example, if you invested in Enron, a growth stock that went bad, you could place a stop-loss order with your broker at $45, keeping the stop-loss trailing upward. When Enron hit $70, the stop-loss was changed to $63, and so on, until the stock reached $76. The new price of $76 triggered the stop-loss, and the stock was automatically sold, stopping the loss. However, trailing stops are not a good idea if the market is doing well, as they protect investments from loss Making sure a company continues to do well Investors are drawn to small-cap stocks, which have a market value under $1 billion. These stocks have the greatest growth potential, with the potential to become the next IBM or Microsoft. They face more risk but also have greater gains. Small-cap stocks grow when they produce goods and services that customers want, increasing sales and earnings..

[Audio] Don’t rush to buy IPO stock Don’t rush to buy IPO stock An IPO is a process where a private firm seeks investment banking assistance to gain financing by issuing stock that the public purchases. IPOs are often seen as a ground-floor opportunity, but they have a poor track record of success in their first year. Studies show that IPOs often decline in price during the first 12 months, with a better than even chance of dropping. Investors should wait to see how the stock and company perform before speculating, as many small companies fail to grow or go out of business. Avoid IPOs, unless . . . Initial public offerings (IPOs) are the first public offering of a company's stock, often involving an unproven enterprise. There are two types of IPOs: start-up IPOs, where entrepreneurs create a business plan and go public to obtain financing, and private company IPOs, where a company seeks expansion capital. Private companies are less risky as they are already a proven business, making them a safer bet. Successful IPOs include United Parcel Service and Google. However, many IPOs fail, highlighting the importance of waiting for a track record before investing in a company. It's crucial to avoid speculating and investing in a company that hasn't shown success. If it’s a small-cap stock, make sure it’s making money When investing in stocks, ensure a company is established and profitable, especially for small-cap investors. Start-up ventures often lose money but hope for future profits. Biotechnology companies, for example, may struggle to use technology in profitable ways. Investing in unproven, small-cap stocks is speculating and not a wise investment. Investing in small-cap stocks requires analysis Small-cap stocks are riskier than large-cap stocks due to their smaller numbers and need for more research. To offset this risk, investors should understand their investment style, invest in large-cap stocks, ETFs, bonds, bank accounts, and mutual funds. Check with the SEC for financial reports and complaints filed against the company. Additionally, check if brokers and independent research services follow the stock. If multiple sources like the stock, investigate further. Appendix A provides additional resources for further information before investing..