Why You Really Need to Invest


You’ll find a lot of blogs on people getting out of debt.  Perhaps they start out with a student loan balance of $150,000 and pay it off over a period of three years.  If they are persistent, and particularly if they see their income rise, perhaps because they get a lot of revenue from their blog and affiliate advertising, they will make their way out of debt.  But what then?

What happens after you pay off that last student loan?  After you close that last credit card account?  You make your last car payment?  You make your last mortgage payment?  And what if you never got into debt in the first place?  Often that’s where the blog stops.

If you want to move from just being debt-free to being financially independent – being able to pay for things without needing to depend on a paycheck – you need a way to make money efficiently.  There is only so much time in the day.  Even if you get a second job, unless you have a phenomenal salary, it is really difficult to simply work and save enough money to reach financial independence.  Plus, your income level is usually limited and it will top out at some point in your career.  If you make an average of $60,000 during your working career and save 10% per year, you’ll have $240,000 over your entire career.  If you save 20%, you’ll still only have about half a million dollars at age 60.  To sustain yourself, you’ll probably need something north of $2 M unless you live a very meager existence.
                           

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One way to attain financial independence is to start a business.  If you start a business and run it well, your potential income is theoretically limitless.  If you open a store and do well, you can open a whole chain.  The same thing goes for a lawn care business, or a manufacturing business, or a restaurant.  Because you can hire people to work for you, and take a small percentage of the amount of money they generate, you can expand your income.  But many businesses fail, and you often need to take a big risk to start a business, possibly borrowing a lot of money.  Starting a business when you already have a family that depends on your income is also risky.  Is there another way?

The answer is investing.

When you invest, it is like you are buying an ownership stake in a business, which means that, just like starting a business, your theoretical income is limitless.  There are people who bought a $5,000 stake in Home Depot or Wal-Mart who are now millionaires.  The beauty of investing is that you get to enjoy the possibility of growth that you get from starting a business, but don’t have all of the headaches that come from actually running a business. You don’t need to check inventory, order supplies, or manage employees.

Not only that, but you get to benefit from other people’s good ideas.  You probably didn’t get the idea to build a search engine that everyone would use, let alone go through the hassle of coding it, getting servers set up, and getting the word out.  But you can buy shares of Alphabet and benefit from the efforts of people who did.  You can buy shares of Walgreen’s and have drug stores on all of the best corners in every city in America.  You can buy into a successful restaurant, a successful credit card issuer, or a successful tobacco company.  If it trades publicly, you can get a stake in the company and take advantage of other people’s good ideas, execution, and hard work.

 

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There are some people who will become rich by working really hard and saving  every dime.  There are others who will become doctors or lawyers, get hired by the right firm or practice or start their own practice, and live on little enough to build up their savings and become wealthy.  There are still others who will start a business and work hard to grow it into a huge company and become wealthy.  For the rest of us, investing is the way to wealth.  If you’re interested in learning how, pick up a copy of The SmallIvy Book of Investing and keep reading The Small Investor Blog.

Have a burning investing question you’d like answered?  Please send to vtsioriginal@yahoo.com or leave in a comment.

Follow on Twitter to get news about new articles.  @SmallIvy_SI

Disclaimer: This blog is not meant to give financial planning or tax advice.  It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA.  All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

How to Place an Order to Buy or Sell a Stock


So you’ve decided to take the plunge and buy your first individual stock.  Now what?  In order to place a stock order, it is important to learn the lingo of stocks trades.  This allows you to communicate clearly with your broker to avoid misunderstandings.  If you’re buying online, knowing what the different orders are and which ones to uses is equally important.  Learn these terms and you’ll be sounding like a pro in no time.

Here are the types of orders for buying or selling stocks and other securities, plus some other ordering terminology, that every investor should know:

Buy – An order to buy a security.

Sell – An order to sell a security.

Bid price:  The highest price at which someone is willing to buy shares at a given time.  For example, someone may be out there ready to buy 500 shares of XYZ corporation for $30.25 per share.

Ask price:  The lowest price at which someone is willing to sell shares.

Market Order – An order to buy or sell a security at the current market price.  Because at any given time the market price includes the Bid price (the price someone is willing to pay for a security) and the Ask price (the price at which someone is willing to sell), if you put in a market order to buy you will pay the ask price, and if you put in a market order to sell you will sell at the bid price.  The difference between the Bid and the Ask is called the Spread.  In actuality, professionals in the markets will buy shares from someone at the bid price and then sell it to others at the ask price, so they will get to keep the spread as profit.

Limit Order – An order in which a price is set as a threshold for the sale.  For example, a buy order with a limit of $50 would execute when the Ask price of the stock was at $50 or lower.


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Stop– An order to buy or sell a stock if it passes through a specific price.

All or None – An order which is executed only if all the shares can be bought or sold in one lump.

Good ‘Til Canceled (GTC) – An order that will stay open for a month after it is entered.  Normal orders are only open for the trading day and must be reentered if not executed on that day.

So, if you wanted to buy 100 shares of XYZ corp, which was currently trading with a bid price of $50 and an ask price of $50.25, and you wanted to pay mno more than $50.50 per share, you would tell your broker:

“Buy 100 shares of XYZ corp with a limit of $50.50.”

Because the ask price was below your limit, assuming there were 100 shares available at that ask price and there were no one else in front of you, you would end up buying 100 shares at $50.25 since that was below your limit price. If there were only 50 shares available at that price and 50 more at $50.50, you would get fifty shares at each price.

The above terms can be combined.  For example, one would say “Buy 100 shares of XYZ at the market” to buy 100 shares of XYZ corporation at the market price.  One could say “Buy 100 XYZ, limit of $50 or better, GTC” to put out an order that would stay open for a month in which 100 shares of XYZ corporation would be bought if the Ask price dropped to $50 or lower during that month.

Note that stop orders can be stop limit or stop market orders.  If you place a stop limit order, it will create an order to sell (or buy) if the stock price reaches your limit with a minimum (maximum) of your limit price, where a stop market order will sell (or buy) at the market price if your limit is reached.


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You may be thinking that this is all well and good, but which orders should I uese and when?   Let’s now go into the strategies I use when selecting the type of order to use.

The investing strategy I use and that I promote with this blog is to invest for the long-term and make a lot of money with each successful trade.  We’d like the stock to go up 1000% or more over the time period that we hold it.  Because of the long time period involved, we are not that concerned with getting a few extra pennies per share on a trade.  For this reason, I generally use a market order when buying.  This will cause the order to be filled within the next few trades (we may need to wait a few trades if there are people ahead of us with market orders).  On a stock that trades a lot, said to be “liquid,” market orders are generally fine and we won’t get a crazy price, which can happen in stocks that trade rarely and therefore are illiquid.  There,  a limit order is needed to prevent getting a bad price.  Buying stocks at-the-market prevents us from missing a good buying opportunity and seeing the stock shoot up out of range be cause we’re waiting for the price to drop by a few cents.  If you make $30,000 from a stock trade, it won’t matter much if you pay an extra $50 for the shares.


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When I’m looking sell because I’ve made a good profit and I’m worried it may evaporate, I also find that it is best to use a market order and get out.  I’ve had the experience before when a gain turned into a loss because I set a limit and it didn’t fill before the bottom dropped out.  Again, it is usually best not to quibble over pennies.

If I’m in the process of accumulating shares and I feel that the stock has good long-term prospects but there is probably nothing to cause it to shoot up in the near-term, I may set a limit order and wait.  I may also enter with a market order to get some shares, and then place a limit order a little lower to buy more shares if the price then dips.  (Note with a limit order I also tend to use Good-Til-Canceled since it may take a few days to execute.)  When setting a limit, I pick an odd amount (for example, $20.16 per share or better) because there will generally be other people with limit orders in and people tend to like round numbers.  With a limit order, the first in line at the price gets the shares.  If the stock is thinly traded, or illiquid, I will never place anything but a limit order.  This is because if there are only a few buyers or sellers, the price may easily change by 10% or more between trades.  Looking at the typical spread for the stock (difference between the bid and the ask price) and the volume is a good way to tell if the stock is illiquid.   I also always use a limit order when selling stocks short or covering a short position, generally setting the limit slightly above the ask price in the latter case to make sure it executes rapidly, but giving me protection fram radical price movements.

Stop orders, often called “stop loss” orders, are sometimes recommended as a way to limit losses.  For example, you buy 100 shares of xyz, and then set a stop loss order at $36 so that if the stock drops by 10% you’ll get out automatically.  I generally don’t recommend stop loss orders for two reasons.  The first is that the market will set all kinds of prices based on rumors, news, and just fluctuations driven by trading (the stock goes down a little so more people jump out, causing it to continue down).  These fluctuations really mean nothing about the underlying business, and we don’t want to get out of a good company just because it becomes temporarily unpopular.  The second reason is that various traders use stop loss orders to make profits and get shares at lower prices.  A stock may move down temporarily, hit your stop causing you to sell your shares, and then shoot back up, leaving you behind.

One case where I may use a stop order is when a stock has gone up a lot and I’m looking to take some of the money off of the table and move it somewhere else (the stock has gone up enough that I don’t want to risk the loss).  In that case I may set a stop loss a few dollars below the current price, and then move the stop up if the stock rises until it eventually hits.  This is nice psychologically since you don’t feel like you’re selling a stock that is a winner and will climb higher, but in general I’ve found I end up just losing a couple of dollars when my stop gets hit and I should have just put in a market order and sold the shares.

As said above, there is what is called a stop market and a stop limit.  A stop market will sell the shares at the market price if the stop price is reached.  The stop limit will put in a limit order at the stop price if the stop is reached.  Never use a stop limit because if the stock falls below your limit price, the order will not be executed and you will still own the shares.

Finally, I may use an all-or-none order for a thinly traded stock to avoid getting a few shares and having to pay minimum commissions on more than one trade.

So there you have it.  Time to buy some shares.

To ask a question, email vtsioriginal@yahoo.com or leave the question in a comment.

Follow on Twitter to get news about new articles. @SmallIvy_SI

Disclaimer: This blog is not meant to give financial planning advice, it gives information on a specific investment strategy and picking stocks. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

 

Go from a Budgetor to an Investor.


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So you’ve paid off your credit card debt, paid off your car, and you’ve shifted to a 15-year mortgage that you’ll pay off in 12.  Now you’re wondering, what’s next?  The answer is: Investing.

Many people have heard that it is good to invest in stocks and build up a portfolio but don’t know how to start.  In this article I’ll go over some of the basics to get you started.  There is really no secret to stock investing – it is just a matter of investing regularly, understanding risk, and properly evaluation companies for potential return.

The first concepts that one must understand are volatility, diversification, and time frame.  First, we will discuss volatility.  Stocks and other assets go up and down in price.  It is not like a bank account where one can calculate the interest rate and know the value at a future point in time.  One must therefore not invest money needed in the next few years; however, by taking on more risk, one can make returns that are much better than bank rates.


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The potential return on an investment is proportional to the volatility.  Bank accounts and CDs are not volatile – the rate of interest is easily calculated such that the value at any given time will be known.  There is a slight risk that the bank may close and not be able to repay the money — a risk that was reduced after FDIC insurance was started — but most fo the time the money is repaid and one is able to ask for the money back at any time, albeit with a forfeiture of interest some times.
                           

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With stocks and bonds, the value of the investment fluctuates with time.  One can not be certain what the value will be tomorrow or the next day, or even next year – it is whatever someone is willing to pay for the stock or bond at the time.  For a stock one can assume that the price will be close to where it was the day before, but news — good or bad — can cause the price to move by 10% or more in a day.  Sometimes a stock will rise or fall for reasons that have nothing to do with the company.  The whole market will move due to word of recession, war, pending legislation, or other events.  Sometime it is just movements of the stock prices themselves or various trading strategies that are being employed that will cause a stock price to move precipitously.

It is this volatility, however, that makes stocks grow more over time and provide a greater return than safer, fixed income investments.  Because there is risk involved, one is able to buy stocks at significant discounts to what the earnings prospects of the company indicate the price will be.  Because the company may not make the earnings, and later pay the dividends, that are expected the price will drop until it is low enough to justify the risk taken.


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To reduce risk caused by uncertainty and volatility, one uses diversification.  Diversification is spreading out one’s money over several stocks.  It is uncommon, but not unheard of, for single stocks to drop by half or more over short periods of times.  If a scandal breaks out or a large lawsuit occurs, a stock may go bankrupt in a period of days.  By buying several stocks, however, a loss will be limited even if a single stock in the portfolio drops to zero.  If one owns 10 different stocks in equal amounts, one can only lose 10% in any individual stock.  If one buys a significant number of stocks, or buys a few mutual funds, one will get about the return of the market, which generally ranges between about -10% and +15% in a year, but can see swings of between -50% and +100% in a year time period.  During the Great Depression, the market fell by 90%, but then proceeded to rally back, increasing tenfold (1000%)in the years that followed.

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The third concept is time frame.  Because stocks are volatile, it is difficult to predict price over short periods of time, between one and three years.  Over five to ten-year period or longer, however, stocks tend to rise.  Returns on stocks over long periods of time have averaged between ten and fifteen percent — much better rates that most other investments.  Also, buy buying shares regularly, rather than putting all of one’s money in at once, one can do even better since more shares will be bought while prices are low than when they are high.  This process, called “dollar cost averaging,” is a popular and effective technique.

The best strategy therefore is to:

1)Invest only with money that is not needed in the next several years.  If the money is needed, it is better to forego the added return and just keep the money in cash.

2) Have only as much money in a single position as you would be willing to lose.  As the amount of money invested increases, the money should be spread over more and more stocks and into other assets such as bonds to reduce risk.

3) Invest for the longterm.  Select stocks that have earnings that are growing steadily and have lots of room to expand.  Once you have invested, then ignore the price fluctuations that occur and focus on the earnings.  As long as earnings continue to increase, the price will also, eventually.  Remember that time is on your side – if things look bleak, just ignore it for a while.  A rally will eventually come.

Have a burning investing question you’d like answered?  Please send to vtsioriginal@yahoo.com or leave in a comment.

Follow on Twitter to get news about new articles.  @SmallIvy_SI

Disclaimer: This blog is not meant to give financial planning or tax advice.  It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA.  All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

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