Wednesday, February 29, 2012

The Cost of Commissions

When investing the very first things you need is an account with a stockbroker and an idea.  These are today, generally, free.  After that, you start paying.

In order to buy shares of stock, brokers charge a commission, or fee.  Rates of commission vary between brokers for reasons that have nothing to do with anything related to the actual purchase of stock. You can pay $7 at Scottrade, $8 at Fidelity or $8.95 at Schwab for the exact same service. 

You pay this commission every time you buy or sell transactions.  For instance, if you want to buy a share of Apple Computer from your Fidelity broker, you will pay the price of the stock, currently $425 plus $8 commission.  If you buy 10 shares, you will pay $4,250 plus, still, an $8 commission.  If, after a time, you decide you don’t want to own your share of stock, you less it at whatever the market price is less another $8 commission. 

If you sell the stock at $425, you have paid $16 to your broker for the privilege of holding the share, which you made no money on.  You started with $425 and now have $407.   It is important to note here that $16 would have bought you a large pizza and your choice of beverage.  The good news is that the broker will now be able to now be able to buy that pizza for his family. 

Tuesday, February 28, 2012

Buying Stock in a Company

There are lots of way to invest your money, but the most common way, the one most investors take part in, and follow, is to invest in common stocks.  The simple definition of a share of common stock:  Equity in a publicly traded company.  A single share of stock is a piece of ownership of a company, and affords the same rights as other owners. 

The problem is that a single share of the company gives an almost infinitesimal share of a company traded on the stock market.  For instance, at this time, Bank of America has 10.54 billions shares outstanding.   So, a single share has an ownership percentage of                                                                         0.0000000000949, or 9.49E-11 in scientific notation. 

An ownership percentage such as this, or even 100 or 1000 times that isn’t going to give you much leverage in how the company is run.  So, we can discount any ownership advantages that shares might bring the small investor. 

Therefore, the reasons for owning a publicly traded stock are pretty much limited to the ability to make money off of the investment.  There are two main ways of accomplishing this:

  • Selling the stock to someone else at a higher price than you paid.
  • Receiving cash dividend payments
Sounds simple, right?  In concept, it is.  Making it happen consistently is beyond the reach of most small investors.  It is, studies show, even beyond many professional investors. 

The reasons why this is so difficult will be explored in the first section of this book.  If this gets too depressing, feel free to put the book down, (or more accurately, shutdown the computer or e-reader) and take a break.  Be sure to come back, though.  Knowing the downside of investing in stocks might save your financial fortune.   

Monday, February 27, 2012

Things Your Broker Won't Tell You

There are a lot of investing professionals and websites that can tell you how to invest your money.  The goal of most of these people is to get you to invest by telling you that you can make money, retire early, and provide for your family today and into retirement. 

The real reason to get you to invest is, of course, so that they can make money, by selling you investment products, books or educational courses.  There is nothing really wrong with this.  People have a right to make a living, and as long as the information is appropriate and sales tactics aren’t high pressure, there can be a mutual benefit. 

Unfortunately, this isn’t always the case. Much of the investment products and advice aren’t appropriate for you.   

The goal of this book is different.  I don’t have anything to sell you (well, other than the book) but to show you that it is really easy to lose money by investing in the stock market.  The active of an investor you are, the more you are likely to lose. 

Maybe the best thing you can do with your hard earned money is to dig a hole and bury it in the backyard. At least it will be there when you actually need it, and not frittered away on some harebrained scheme, flawed strategy or run of bad luck.

That may be overstating it a bit.  You can invest wisely.  But that’s not what this book is about.  This book is about how following most investment advice is likely to end up making someone else rich with your money.  As they say, Las Vegas wasn’t built by the winners.         

How to Lose Money in Stocks

Small investors have found many ways to lose money in stocks.  I could write a book about it.  As a matter of fact, that's what I am doing here.  Whether you invest in equities, bonds, options, ETFs or mutual funds, there is a way to generate losses quickly. 

The worst part is, the more you lose, the more desperate you are to find a way to get it back, and that generally leads to more losses.  The best thing you can do is stop the losing cycle. 

Before that happens, you need to recognize how and why you are losing money.  Don't make other people rich  That's the purpose of this book.