Today we take a deep look into the stock market. Where it came from, how it developed, and how it works today. Learn how to open your first investment account and trade stocks for free.
- How the Stock Market Works
- Loyal3 – Trade stocks for free!
Eric Rosenberg: Ladies and gentlemen, boys and girls, children of all ages, welcome back to the Personal Profitability Podcast. I’m thrilled to have you back. And today I want to talk to you about a topic that is near and dear to my heart personally. It’s something that I thought I might have wanted to do as a career at one point, it’s a huge part of my education – that is the stock market and investing in general. I want to talk more about stocks and individual stocks and how that works because those are the foundations that mutual funds and other investments are often built on.
We’re gonna do a Back to Basics type of episode focusing on the stock market. I just made today a no guest; we’ve had some great guests lately. And today I just to have a one on one time hanging out with you. And as happens on occasion, and I like to say, finance should be fun so I’m recording this one on a Saturday afternoon, actually early evening about 4o’clock on a Saturday. As I like to do on occasion, particularly after dinner, but hey, why not on a Saturday afternoon. I’m having a little drink. This one is not my typical brewsky, I’m having a 12-year Glenlivet, it’s one of my favorite scotches, with one of those round ice balls. If you’ve ever seen one and you like scotch, definitely check that out. If you Google ‘scotch ice ball’, you’ll find it.
So, I’m lifting my glass. If you are able to join me in a drink, here’s your opportunity to pause, go fill up, grab whatever you’d like to join me with. If you’re driving a car obviously or at work, you probably shouldn’t be drinking. But otherwise here is your pause point.
Alright, welcome back. So here is a cheers if you have your drink. I’m holding in my 12 year old scotch so, L’Chaim as we say in Hebrew. That’s definitely one of my favorites. It’s smooth, it’s good. You know I always like the 18 year a little bit better but obviously I don’t want to spend for an 18 year; it’s an expensive bottle, so I’m having the twelve.
Anyway, back to the stock market. So the stock market is probably the most well-known place to invest. It’s been very glamorized by Hollywood. It looks fastpaced and exciting, millions of dollars made and lost every minute. It’s this huge fast paced world. A lot of people are intimidated when they are getting started. Once you really understand how it works and have a good grasp on that you will understand there’s no reason to be afraid of investing in the stock market or anywhere else.
You should be investing in the markets. That’s where you get most of your capital gains for any kind of investment. The two big ones that I’ve seen people do are generally either stock market or real estate. Those are the ways most people do it. You could also build and start your own business, something that I always encouraged. But for the money that you’ve already brought in, what do you do to grow it? You invest it. Those are my top two favorite places – real estate and the stock market.
So today let’s talk about, let’s start with the history of the New York Stock Exchange. I want to go way back in time. Picture yourself in New York City on May 17, 1972. That is the day the New York Stock Exchange came to be. Prior to that, everything was done very informally. If you wanted to buy or sell an ownership stake in a company, you’d have stock certificates in old paper documents; this is the 1700s. And you would make deals like legal deals today, you meet with people, you sign some paper work, money changes hands, the certificates are signed over and changed hands. And that portion of the company ownership changed hands along with it.
So the 1700s, that was a very informal place until later on in the century. And on that day May 17, 1972, twenty four stockbrokers gathered under a tree on 68 Wall St., that was the address in New York City in Manhattan, and signed what was known as Buttonwood Agreement. The Buttonwood Agreement is what formerly organized all of the different stockbrokers who are involved in these exchanges, again it was actually a lot like it is today. Stockbrokers were very well educated, you know formally educated people similar to a lawyer. They were not just average guys off the street. So these people got together, signed the agreement and that form the New York Stock Exchange which today is probably the biggest stock exchange in the world, I guess, definitely one of the top in the United States.
There are two major exchanges in the United States, the New York Stock Exchange and the NASDAQ. The NASDAQ is more text-talk focused, that you might guess that came along quite a bit later than New York Stock Exchange. But the New York Stock Exchange is actually today a publicly traded company on its own, that you can buy stock in and it’s surprised traded under New York Stock Exchange. You can see there are some profitability in that business they get paid listing fees and trade fees and they provide all that infrastructure and equipment, the computers, the building that allows the exchange to work for stock trades that happen today. So if you are ever down in New York, you can go try to find where 68 Wall St. is on the street and, you know it’s right by the New York Stock Exchange, where it sits today and all the rest of the financial district.
So the modern stock exchange was a long way off but that New York Stock Exchange board that came together allowed for a formal setting for people to buy and sell those portions of those companies and at that point they charged the .25% commission on each trade. They still met one on one to do the trades, they just did in a formal exchange. There are no auctioneers or anything like that and that is the way it all came together.
So with the last 200 years the market changed quite a bit. It used to be these one on one person trades. Today it’s primarily all done electronically, so I go to my Charles Schwab account or you can go to wherever you have your stocks and I also have a Loyal3 account, I have several accounts so I can, you know try them out and tell you which ones are my favorites. My Charles Schwab account is where I do most of my stock trading because it is an instant trade. Loyal3, which is actually maybe my favorite stockbroker for typical people. It lets you buy and sell stock for free. There are only limited list of stocks, you can’t buy every company, but it is a 100% fee free trading. The trades go through in batches throughout the day so it is not instant as another account.
But if you are a new investor or someone who wants to get on a plan or you are investing a little bit automatically every payday or every month, I totally recommend Loyal3. I’m an affiliate of Loyal3 so if you signed up through personalprofitability.com/loyal3 that’s spelled out L-O-Y-A-L 3, I get a little commission for sending you over it does not cost you anything different so I would appreciate it. If you do want to give it a try if you go to my link you can get all sort of stocks there, major brands that you’ve heard of, companies like McDonald’s, Walmart, WWE, Google, Apple, it is a pretty big list; it’s not just 1 or 2 company. So Loyal3 or Schwab that’s generally where I do my stock trading.
So now you go in you click a button it is all done by computer. A person is not actually, physically involved anymore. Though even up to even if you watch movies in the ‘80s or ‘90s, you can see the guys in their colored jacket on the floor of the stock exchange, those colored jackets representing the company that they work for. So if you work for, I do not know, J.P. Morgan you will have a different color coat and if you work to Goldman Sachs, the different stock traders out there. People were going around with these slips of paper and throwing them and shouting and yelling and that is how they exchange work.
Now it is actually a pretty boring place, I got to go visit the stock exchange in a graduate school class. It was a few years ago, but when I went it was already at a time where things are pretty much electronic. It’s not this exciting thing with so many blinking lights and people shouting and yelling anymore. There are still some blinking lights; it’s all computer screens now. So much is in electronically. There are some people who are still there in person. But generally it’s all moved to computers.
And how that develop in that last 200 years is 24 original brokers had seats on the exchange that allowed them to execute trades on behalf of their clients. And overtime those original brokers, they needed more seats. More people wanted to come in and a part of this exchange and it’s grown to 1,366 seats.
So you have to have a seat to access the New York Stock Exchange and execute trades. And those seats are very valuable. In 2005 it was about the peak of what a seat would cost, that was 4 million dollars. Today there are more like $40,000 and that’s because things have gone so electronic. You don’t need a seat anymore. You just go through a different operator or your company might have a license and they can execute trades electronically. That all really started around 1995. That’s when the all-paper trading system began to accept electronic trades.
And in 2007, that was the year people like you and me could go and enter our own orders electronically through our stock broker so we didn’t have to make a phone call or enter an order that they would read physically and enter for us. We can trade directly now ourselves so, that’s how the computers work.
In 2007, that stock exchange merge with Euronext, which is in Amsterdam based stock exchange, and that exchange is operating primarily in Belgium, France the Netherlands, Portugal, and the United Kingdom. And that merger created NYSC Euronext, which is certainly the largest stock exchange in the world. Do I answer my own question from a minute ago, ‘Is the New York stock exchange the biggest in the world?’ Then the answer is yes on its current form in it is merger to Euronext.
What is a Stock?
So now that we now have the markets have evolved, let’s talk about what is a share of a stock. What is a Stock? So a stock is, it used to be a piece of paper, now it is pretty much all digital, it is a representation of a share of ownership in a publicly traded company. That is why it is called a share, because you own a share or a piece of that company. When you owned a share of stock.
Now when a company becomes a public company, there is no rule on the number of shares they can issue. So if it is a, you know let us say, a company that has 10 owners they can decide to issue 10 shares of stock and each shareholder owns 1 share, that’s 1/10 of the company. There could also be other stocks out the company with you know billions with a B shares of stock or hundreds of millions. That is much more common especially now.
That happens because over time when a company starts out there might be a few owners and they take investments from outside companies, venture capitalists. There could be any number of reasons that you can take outside investments and also different ways that could happen. But each time you take investments it usually dilutes the ownership of the original shareholders.
So rather than saying okay you can have you know 1/2 of my share you, will just issue a whole lot of shares so that everyone proportionally owns the right share of the company. In most companies, its many millions of shares out there and that is what is traded.
So if you’ve go on to stock market and decide I want to buy a hundred shares you are buying those 100 portions of ownership and your percent ownership would be dividing by the total number of shares outstanding.
Annual Shareholders Meeting
So someone like Berkshire Hathaway, led by Warren Buffett, when they say they own, you know 10% of a company like AmEx or Wells Fargo, they have bought up enough millions of shares that they own 10% of the company and they have that portion of the vote.
Every year all public companies in United States are required to have a shareholders meeting where certain business can be brought by shareholders to the board. Generally the board of directors, which is elected by shareholders at that annual meeting, they represent the shareholders at the company and with its executives. But once a year everyone get together and chat about it.
I’ve been to some annual meetings, I went to the annual meeting for a company I used to work for in Denver, a telecom company that is no longer around. And I’ve also gone to the annual shareholder meeting of Berkshire Hathaway that I just mentioned to see the work, the Oracle of Omaha himself, Warren Buffet. So I’ve gone down three times to Omaha to the shareholder meeting. That one’s actually really cool, it’s not just people talking about business all day. It is about business but a little different.
So being a shareholder I am eligible to go to that meeting and I can vote my shares as that you know tiny percent of every company that I own stock in. Any time you own stock you will likely get an annual report and a voting sheet delivered either electronically or in the mail that you can fill out or type in online to exercise your votes. So you really are a portion owner of the company.
Stock Certificates and Dividends
Some companies pay back a dividend to their owners which is a cash that pay out so companies might payout 25 cents per share quarter of these that be a dollar a year. Yes, it’s not going to make you rich if you just have one share but if you have 50,000 shares that’s a $50,000 a year they’re paying out. It scales some companies pay bigger dividends, some pay smaller dividends. But your ownership is real and that’s what you are buying and selling on the exchanges.
When a private company, like I was mentioning earlier might be in by just ten people, they typically they have a, it’s called a board of directors. If you’re a C Corp, that’s a legal entity in the United States that a company can be registered as, they have to have a board of directors. And that’s the point where most companies will definitely have a stock of some sort that’s defined.
If you own a small freelancing business and you’re the only person in it, like I do with my own freelancing, there are no stocks certificates or stock holders out there. I’m the only owner. With the C Corp, you can have all sorts of different owners. There’s other different types of legal structures for businesses but typically large companies are C Corps sometimes there’s LLCs, there other structures, but typically it’s a C Corp.
Stock Trading 101
Let’s go back to the beginning of a company, we’re talking about how shares can get diluted over time. I want to talk a bit more about that whole process and how a stock would get listed on stock market. Let’s go back to that example, a company that has ten owners, each owns 10%. They all work really hard, they try to build the business.
One day they decide okay, we need another $500,000 that will let us hire some more people, let us buy equipment, whatever the company needs that injection of capital let them grow and become a more successful and larger business. They can do that through numbered different means.
Typically, if you read a lot about startups that go to large venture capital firms or investment banks to try to raise the funds to get that to do whatever they need. Let’s say they set up a $500,000 goal. That could be a one person or a company putting that money and every time someone invests they get a portion of the company.
So at that point because the companies aren’t publicly listed, the value of the company is determined by how much money is invested and what percent of the company they get. If a company invests $500,000 it gets half the company, that would say the companies worth a million dollars and you can do the math and so on to value company. That is still how companies are valued once they’re public on the exchange. You could look at the number of shares outstanding and the current stock price and multiply them together, that is the total value of the company or the market capitalization; that is what a company’s worth.
So let’s keep following the path of that companies. They got the first $500,000 investment, they’re rocking along but that money is running out, they want to get a bigger office, they want to grow more open another factory, whatever they’re doing, this time they decide they need the raise a $100 million or $10 million, whatever the amount is. They can go out and raise different rounds of capital from different investors. And venture capitalists are the typical place that this kind of money comes from or investment banks. In each round the number of shares usually goes up and the percent ownership of the original owners all shrinks by a little bit as there’s more shares added.
Initial Public Offering
And after multiple rounds eventually a company make it to the point that the owners decide to hold what is called Initial Public Offering or IPO; that’s a really important phrase to know if you’re an investor. An IPO is the day that the company publicly lists its shares on one of those major exchanges like New York Stock Exchange or the NASDAQ.
So an example this in the last couple of years the company Facebook went public on the NASDAQ. And on the day they went public it raised $16 billion. And the original owners, because all of their shares became worth more as the stock praise traded up, the owners became very, very rich. That’s how Mark Zuckerberg became the young, one of the youngest billionaires ever in the world. That’s how a lot of this big tech people make their money.
So when you hear Bill Gates the richest guy in the world it’s not because he’s sitting with piles and piles of cash he just owns a lot of stock in Microsoft, which is one of the biggest companies in the world. He could hypothetically sell that and have cash in the bank. But usually a lot of those original owners and a lot of investors even still hold on to shares because the value may keep increasing and going up and they want to have that as the value goes up.
The largest IPO ever the last I read, was when Visa went public in 2008. They raised $17.9 billion. Actually now that I’m saying that, I think there might be a newer one that was bigger, it was Alibaba. [Let me look that up. This is probably the worst podcast moment ever as I’m typing into the computer] [typing keyboard] Alibaba, that’s a big – that is the largest IPO ever, see. [I just second guess myself and I was right] Alibaba is a large company in China. They’re very similar to Amazon.com. And they went public and that happened in 2014. Last September, they went public and raised, looks like $25 billion. That’s the biggest IPO ever. That is a huge IPO, $25 billion that company raised in one day. And in that day every person who put money in became a part owner and the company got to keep that money and they in exchange they give out those shares. Now you can go buy shares of Alibaba that the company issued that day whatever the current market price is. That was the biggest.
The biggest in the US ever that was a US based company, I think is still Visa. It was a few years ago, right before the big market great recession market crash around 2008 to 2009. So the day to day decisions at these public companies are still left up to the CEO and the executive teams. There’s a C suite group of people, like a Chief Executive Officer, Chief Financial Officer, etc. They represent the, they go the direction that the board of directors tells them to go and they run the day to day operation the business.
As a shareholder you don’t have to worry about, let’s say you buy shares in Google, you don’t have to go work on Google to make it make more money. Your opportunity to give your opinion on that would be the annual shareholder meeting or contacting the investor relation office. But typically people just exercise their right by voting on the issues brought to the annual meeting and by electing those board of directors, members who then represent your best interest. Usually by a proxy ballot which is mailing in your ballot rather than going in person to vote.
Stock Trading – Then and Now
Now that – let’s say this company is gone public, how are their shares traded? What does that look like? Again, in the old days it was a pretty straight forward process and a broker representing a shareholder wanted to sell a stock would go under that tree on Wall Street and talk to the other brokers trying to find someone who wants to buy that stock or the other way around – someone looking to buy it might try to find someone who has a client who owns it. And those two people would just negotiate a price and what would pay and they would exchange certificates and that would be that. Today, it’s the same principle except because it’s all electronic things work a little differently.
Types of Orders
When you buy stock or sell stock, there’s different types of orders you can put in. The most common that I’ve used myself, probably the most simple, is called a market order and that’s says whatever the last trading price that happened on stock exchanges you are willing to buy or sell at that price. Let’s stay the stock is $50 a share at the last trade is say buy or sell you can expect you’ll get a – your trade will execute right around $50, usually within a few cents.
Now if you want to limit or set a price that you want to buy or sell at you’re allowed to do that as well, with again different types of orders. So that type is called a limit order. The limit order, let’s say that stock is $50 a share but you think it’s not really worth buying unless it goes down to $48 a share. You can put in a limit order that you will buy it at $48 a share and if the market price goes down low enough that it hits 48, your trade will execute and you’ll get those shares. The same can be done when selling a stock using a stock or limit order where if it hits a certain price up or down the order will execute.
So you can set certain rules around it. Let’s say though that you set – that you will sell for 51, someone else says it will buy for 49, no trade will execute but because people want to buy or sell even if you have a different price in mind, they might just wait for someone else to be willing to buy or sell. You have to be someone willing to sell for trades to execute and that’s how the market price goes up and down. Eventually it might go up a few cents, it might go up or down a quarter, some stocks they can take even bigger swings.
Eventually most shares, most order limit are, or stop orders any kind of trade, will execute eventually if you wait, but that’s not necessarily the rule. If there’s a stock at 50 a share and you say you want to buy it 40 it might never come down to $40 a share so you might never get it. Then, on the other side of the coin when if it has a really, really bad day and it goes down to 30 a share, your order will still execute at 40 and then you’re all of a sudden you’re instantly down 10 dollars a share. That can be happened when you’re far away from the computer.
I usually don’t like to put in those types of trades, the limit or the stock trades because I really don’t know what’s going to happen. No one really has that crystal ball so I usually just do market orders. I know exactly what I’m getting and what price I’m getting it at.
Let’s say, you have a stock and you’ve already bought it and you want to lock in your profit. Let’s say, you bought it at 50 and now it’s at 75 dollars a share you’re like, “well, you know I want to keep the stock because it might go up more but if it goes down too much I just want to sell it.” So it’s 75 a share you might want to enter called a stop loss, which is a type of trade does exactly what the name implies, it stops a loss automatically. Let’s say, the stock is at 75 you put it in an order a stop at 70. The stop drop start at $71 you still keep the shares it doesn’t trade. If it goes down to 68 your trade will have executed at 70, you keep your profits and the stock falls down farther and you don’t really care what happens.
Again, things can happen you don’t expect what happens if it goes down to 69.50 and then shoots up to 80 or 90. Your order will execute when it drop down below 70 then the price goes way up and you’ve already sold it so you’re not getting any of that profit. Again, that’s the reason that I don’t like to use stop losses very often. A lot of people do and if you’re at a point when you’ve had a stock a long time you think it’s not really going to go up more, you might put a stop in but if I have a stock that I didn’t think was going to go up more probably sell it and buy something else because that’s the whole point, you know. You don’t buy a stock to just have the value hover unless it’s paying a very good dividend. You buy because you want to go up. Those are the two most common types of trades.
Finding a Brokerage that Suits You
If you want to do this yourself, I mentioned earlier on, there are different brokerages who each have seats on the stock exchange and that is how you buy and sell stocks. I was already talking a bit about Loyal3 where you get free trades [I’m stumbling my words today] so there you can buy stock as even a percentage of a share.
Let’s say you want to buy a share of Berkshire Hathaway, the highest price per share on the stock exchange it’s, I think it’s over 200,000 a share now. But you obviously are probably not going to have $200,000 sitting around to buy one share.
With Loyal3 you can buy percent’s of a shares. There’s another brokerage called ShareBuilder, though is really the same thing. With Loyal3 you can just buy a dollar, with ShareBuilder I think you have to be on a recurring purchase plan if you want to buy fractional shares.
Then there’s a lot of other brokerages out there. I said I use Charles Schwab. There’s one like Scottrade and TradeKing, and Fidelity, and E*Trade, and TD Ameritrade. There’s lots of brokerages. If you find the one that you like best just stick with it. They’re generally pretty similar. They offered a lot of the same things. The benefit of one over another might be, if you have an account Vanguard you can buy and sell Vanguard mutual funds and ETFs for free. That’s not a stock but it’s an investment vehicle that’s made up of lots of different stocks. That’s what any fund is generally. It would say in the name if it’s something different. There’s ones that you can buy shares in real estate and shares in precious metals and commodities and things like that.
Most funds are made up of bundles of stocks that are bought on behalf of the owners to give instant diversification. You could buy one share the mutual fund and own little tiny pieces of, you know of hundred companies or fifty companies whatever the funds are own.
So each different brokerage usually has its own fund family like Vanguard or Schwab or Fidelity I just want this less. If you really like one fund family over another that might be a reason to pick one brokerage over another.
If you’re a bit trader and you want to trade a lot, you might want to gravitate towards one with the lowest fees. I personally don’t trade very often. I’m more of a long term investor. I like the Warren Buffet value investing model, you just buy and keep it forever. And most brokerages ends within a dollar or two so just picking the one that you are most comfortable with that you like best is great. I don’t think you should really be spending more than about ten dollars of trade, that’s about the cap the other sum that you buy like Loyal3 for free or I think TradeKing is the lowest cost of all the others I’ve mentioned. Just do a little research and find the one that you like best. If you’re brand new, I recommend Loyal3, otherwise you know you might already have account.
You can also, when you get an account there’s a different types of research that they give you access to on the companies. A lot of that information are already free publicly on sites like Yahoo Finance and Google Finance or the company’s websites and financial statements where you can pull up their financial records and performance and see how they’re doing as a company because stock prices generally go up when a company performs really well. Profits go up or signal that profits are going to up in the future that is a good thing. The stock price will generally rise. If the company is not doing so well it will go down. When you have a brokerage account you usually get access to reports that the brokerage company prepares. It’s telling you if they think the stocks going to go up or down based on that financial information. That’s the big ‘how it all works.’ Now you got the basics.
And now I want to talk a little bit about diversification, which I briefly mentioned a minute ago. Before I do that, my voice is getting kind of dry and crack-y from talking so much so I’m going to have another toast, so cheers.
So as I said you can buy funds that are made up of buckets of stocks. And that’s how I do most of my investing. I have one account, probably my smallest account that has my individual stocks in it worth probably about $10,000. Most of my money which is my retirement funds, my bigger accounts, those are primarily made up of mutual funds and exchange traded funds.
Exchange traded funds are a newer idea of mutual funds. You buy and sell them through your brokerage just like a stock. But when you do, one example is I’ll talk about, there’s a fund that I own called the Vanguard Equity Income Fund, it’s a symbol VEIPX. I have that on my Roth IRA. So why would I have that rather than just going and buying a single stock? That fund owns 164 other stocks that has really low fees. Based on the name equity income, it’s focused on stocks that will provide income and hopefully grow.
So there’s other different categories of funds out there. The ones that most people I think should invest in, they’re the simple ones, the boring ones. Stock market looks all sexy and exciting on TV but the best way to invest is really just the set-it-and-forget-it really boring method.
I like the S&P 500 Index Funds. Vanguard has, I think the lowest fee out there but there’s some others out there. What those kinds of funds do because as they say Index Funds in the name, they track in index. So the S&P 500 is the biggest most popular index to get a wide number of stocks all at once. There’s 500 stocks you get when you buy that.
There’s other indexes like the Dow Jones Industrial Average, the DJIA, that’s called The Dow a lot on TV; that’s a popular fund. There’s another one called Russell 1000 or Russell 3000, those are really broad market funds that buy lots and lots of stocks. There’s also, it’s a different ways to do it but the one that has historically just always done really well even the market gets bad but the dollars comes up and grows more than it’s ever grown before, is S&P 500, that’s where I have most of my focus
I also have funds that are called Target Date Funds. They are specifically managed funds for people of a certain age or a certain target retirement year. And they buy, the managers because each of these funds has a manager, will buy and sell different assets which are mostly stocks but it can also be bonds which have fixed income investment. They pay a certain amount every month for the life of the bond that’s how most of them work or real estate or there’s a very big list that what funds can own. But the ones that are Target Date Funds will automatically, without you having to do anything someone else does it for you, shift the asset allocation to have the right risk for typical investors trying to retire at a certain point.
Getting more diversified lowers your risk. Buying stocks is risky. If you buy one company it can go up or down quite a bit but if you have a bunch of companies and one goes down it won’t hurt as bad as if you only have one company and it goes down or just the few.
Diversification is a good thing. If you are going to buy individual stocks please try to buy as many as you can. Don’t put all your money in one basket. Have it be a basket with lots and lots of different eggs in it or ideally even lots of baskets. Try to be as diverse as you can and that protects you if the stock market goes up and down or if one stock goes up and down. If the whole market goes up and down you’ll go up and down with the market.
Knowing When to Buy and Sell Stocks
If you do decide to buy and sell individual stocks you have to decide how – when to do that and which ones to buy. There’s two really popular methods to do that. There different kinds of analysis. The biggest two are fundamental analysis and technical analysis.
Now as I’ve mentioned earlier, I like value investing. The Warren Buffet style that is based on fundamentals. That’s how much money the company is making, how much it’s spending, what it has in the bank, what it owes; those are the fundamentals. And that what is used to put together different financial metrics and projections that tell you what you think the intrinsic value of a share of stock is worth. You compare it to other stocks and look at how much money their making. If you think it’s going to keep growing you can use these complex formulas that they teach in business school, things that I learned about like the capital asset pricing model or discount cash flow models and decide what a share of stock is worth. And based on that information decide is this a good buy or bad buy. That’s the basics of fundamental analysis.
Technical analysis is looking at what is going on in the market and using that to inform whether you should buy or sell. With that you look at patterns and history and see trend lines and say, ‘Oh this stock is moving above its 120 day moving average or below its 30 day moving average.’ They use all these different lines and trend lines to decide this is a good one to buy or bad one to buy.
My favorite technical analysis tool is called Bollinger Bands. They predict a top and bottom price based on historic trends over certain different time period that gives you a range where you think the stock should go. I think that’s a little bit more reliable than some of the other methods but, and I really like fundamental analysis better.
I think that’s a better way to buy for most people unless you’re going to stare at the computer all day every day and do nothing else, technical analysis isn’t worth as much to most people. It’s a lot more risky, it’s more like gambling than investing I think. You really don’t know what’s going to happen the other day but over a long term of stocks tend to go up.
Trading with Emotion – Why it is not a Good Idea
When you’re buying and selling anything, ignore emotion. Always use sound analysis and logic. I’ve made some emotion trades before and they turned out bad. One that I’m, I don’t know if I should be proud of or embarrassed of it. I should be embarrassed because it went down ultimately was a WWE, the pro wrestling company. I was a big pro wrestling fan and I decided this is an awesome stock. I bought it and I use great analysis when I bought the stock it made a lot of sense the time. Then I ignored all of the signs that I should sell. If I hadn’t ignored the signs I would have made a bunch of money but I did and I was like “Oh, it’s alright it will always come back” and then it didn’t come back and it went down and I lost some money.
Always never use your emotion when you’re buying and selling because you’ll end up losing money. Always be willing to lose anything you put in because the stock market is not guaranteed, it’ not FDIC insured. There’s no magic secret out there. If you buy something it could go down; it could go to zero. Enron was one of the biggest most powerful companies in America until the day that it wasn’t and people who had stock in it just lost everything. Really understand the risks of investing anytime you buy and sell.
Stock Market Games
Now if you want to give it a try without risking, there’s stock market games. You can do some google-ing online, there’s a lot of different stock market games out there where you can buy and sell stocks with simulated money not actual money.
It’s a fun way to get started. That’s how I did my first investing was fake investing. It was in 5th grade; I did my first stock market game. I did several of them through high school then college because I went to business school and focused on investing. We focused on lots of stocks as I went through school.
That’s really it that I wanted to talk to you all about today – how the stock market works, the history of it, what shares of stock are all about, how trades work, how to decide whether to buy and sell. These are all the things we covered today. You can also – I’ll link in the show notes to my most in depth post on how the stock market work. So you can read a little bit more about this if you missed anything. You don’t have to worry if you didn’t take notes. Most of this information is available there which you will find a link to in the show notes.
Everyone, thank you so much for listening. If you enjoy the show really please do go on to iTunes and leave a rating. It helps other people find the show. Don’t be greedy and keep all this goodness to yourself. Help me spread my wings and help as many people as possible.
If you do want to support me and give it a try for to Loyal3 that link is personalprofitability.com/Loyal3 and I get a little kickback and you can buy and sell shares of stock absolutely free online. What’s better than that? So I’m going to lift up my drink and say a big cheers.
This upcoming week I’m going to FinCon, the financial blogger conference that I talk all about on the show. It’s in Charlotte, North Carolina this year. I’m going to be live recording the next episode there at the conference. I have some special guests who run some very big blogs before, we call these guys the Godfathers of Personal Finance blogging, lined up to join us so I’m super excited about that.
I’m excited that you guys came and listened all the way to the end. Thank you very much for being a part of it. I really appreciate your support. Until next time, stay profitable.