Whenever someone talks about getting rich or saving for retirement, stocks and bonds often enter into the conversation. You may have overheard a conversation about someone making it big in the stock market and may not be totally sure what that means. Well fear not! I will attempt to break down the basics of stock ownership so that you can determine if investing in stocks is something that is right for you.

Why Do Companies Sell Stocks?

Let’s say you’ve started a company selling widgets and things have been going fairly well for you. You have a decent amount of customers but there are opportunities to capture even more customers. The only thing is, you need a large sum of money. Right now, you are what we call a private company, meaning the ownership of your company is not traded publicly. However, in order to get that large sum of money, you have decided to take your company public, which means that you will be trading ownership of your company by selling stocks in the general public.

From this point, you will hire an investment bank to buy a portion of your company and sell the shares of that portion in the market place where investors like me can buy small pieces of your business. Your company gets that major cash infusion from the investment bank and I get to own a small percentage of your business which gives me the right to share in your profits. Everyone wins!

Common Stock

The most basic form of “equity” or “ownership” of a company comes in the form of common stock. Common stock can be bought and sold easily today. You can buy common stock online or with a broker without breaking a sweat. If you want to own a piece of company, then you buy shares of that company. Each share is worth a fraction of the company. If the company has 1,000 shares and you own 100 of them, then you own 10% of that company. Easy concept right?

As an owner of common stock, you are entitled to certain rights and privileges. You have the right to vote for any major issues that affect your status as a proportional owner of the corporation. These issues are usually stock splits, mergers, acquisitions, board elections, and changes of business objectives. Your votes are directly related to the amount of shares you own. If you own 100 shares of stock, then you have 100 votes to cast. However, shareholders never get to vote on rather or not a corporation issues dividends.

In addition to voting rights, as a shareholder (meaning you own stock in the company), you have the right inspect the corporation’s financials through quarterly (10Q) and annual (10K) reports. Inspecting financial data gives you an opportunity to see how your company is spending and making money. If your company goes bankrupt, as a stockholder you will be in line to receive money gained after the sell of that company’s assets. However, owners of common stock are last in line behind creditors, bondholders, and preferred stock holders. Note: A college professor reminded me that the people who really get paid first are always the lawyers

Dividends

Now that you own stock in a big corporation, you can enjoy the privileges of being an owner. The greatest benefit of all is that you get to share in the profits. After all, the only reason you’re investing in the first place is to make money! So if your company has a good year financially, the Board of Directors have the power to decided to pay a dividend to stockholders.

Simply stated, a dividend is money received from profits that is shared amongst shareholders. If a $.10 dividend per stock is declared by the company, the 100 shares of stock that you owned have just made you $1.00. As you accumulate more and more stock, those dividend payments can really add up. However, companies can also elect to pay dividends in stock. When this happens, you will receive extra shares of the company as payment instead of cash.

So How do People Make it Big In The Stock Market?

The same way you make money doing anything else. Buy low, sell high. Think of stocks as being something similar to real estate. In real estate, people look to make money by buying a home at one price and selling it down the road at a higher price for a profit. Stocks work something like that.

Let’s say that the company that went public at the beginning of this article started selling shares at $1.00 per share. As time went on the company became bigger, stronger, and more profitable. As a result, the demand for shares of their company has increased. When the demand of anything increases, it’s price will increase as well.

So a few years later, the market price for the company has risen to $20.00 per share. That’s a jump of 2,000% or $19.00 per share. Your $100 investment that gave you 100 shares in the beginning is now worth (100 x $20) $2,000. It’s that simple.

Buying stock and waiting for them to appreciate in value is the most common way that people make money in the stock market. There are a ton of other ways to invest but they require an in depth knowledge of markets and financial instruments. Understanding the basics is the best way to go before you get involved with options trading or any other strategy.

I hope this brief explanation of stocks helps! Now is always a good time to invest. Just remember, buy low and sell high. Also, Warren Buffet would caution you to never buy stock in a company that you don’t want to own for at least 5 years. The conservative approach is to buy and hold for the long term. As fast as you make money in this market, you can also lose it. Invest wisely and God bless.

Resources

Sharebuilder – Build an online account to invest regularly for only $4 per trade

Motley Fool – Provides practical investing advice

Wall Street Journal – The “Bible” of the Financial World

Up Down – A website that allows you to use fake money to invest in real stocks. Depending on how good you are, you can actually win cash prizes. Great for practice if you’re not comfortable doing the real thing.

Hey folks. There has been much talk in the news about a slowing economy and fast-approaching recession. What this means to most people is that job security is threatened, the cost of living increases, and people are generally fearful of their financial futures. Well fret no longer. Here are a few tips that I think may better allow you to survive and thrive in any economic condition:

7. Walk Whenever Possible – With the cost of energy being so high, many people have already begun walking as a way to get-around instead of driving their cars. Plan your days effectively and avoid driving as much as possible. Those extra dollars you save through out the week add up and could easily be used to pay a cell phone bill or some other common expense.

6. Eat At Home – In today’s world, this is hard for many of us to do. But when fighting for financial freedom, sometimes it’s necessary that we sacrifice a few frivalities now in order to better enjoy/afford them later. By preparing your own meals, you can expect to save somewhere around $200 a month. Not only is this is a great way to trim down on expenses, but you can also use it as an opportunity to buy healthier foods and develop healthy dieting practices. Just like building wealth, being healthy is like running a marathon instead of a sprint. Develop these practices for the long run.

5. Read books on personal finance and investments – You can not afford to not understand how to grow your money. It will cost you hundreds of thousands of dollars in your life-time. If you haven’t already, you should read Rich Dad, Poor Dad by Robert Kiyosaki, Think and Grow Rich by Napoleon Hill, and The Intelligent Investor by Benjamin Graham. Remember, increasing your knowledge is the best way to grow your savings account.

4. Pay Down Your Debt – If you have credit card debt, pay it off asap. This is a great time to do so with interest rates being so low. Plus, the sooner you pay off your debt, the sooner you will be able to save and be able to invest in better opportunities. Debt will hold you back from achieving financial freedom so freeze your frivolous spending and start paying credit accounts off. Don’t close them though. You’ll need them to remain open to optimize your credit score.

3. Find a New Savings Account – You need to know how hard your money is working for you at all times. You should also be looking for ways to make it work harder in the safest way possible. One of the simplest things you can do is to at least make sure that you’re getting the highest interest rate possible in your savings account. Doing anything else is like giving away free money. Because of the recent cuts in the Fed Rates, it’s going to be hard finding any savings account that yields over 4%, but make sure you get the highest rate you can find (use google).

2. Get a Second Job – This tip might sound crazy to some people, but it’s always great to have some extra income coming in if you have the time to do it. With various markets shaping up the way they are, it’s a great time to buy many assets that may have taken a significant dip in price but not in value. Getting a second job would help provide you with more cash to pay down your debt, or save and use as investment money while it’s a buyer’s market. Any other use of a second income may be wasteful.

1. Buy, Buy, Buy – I strongly agree with Warren Buffet when it comes to many (if not all) of his investment strategies. He says something to the effect of this: When people are afraid of the economy, buy everything; when people are buying everything, be afraid. What this means is that there are tons of opportunities out there to make huge gains over the next 5 to 10 years. For example, you can find a really good piece of property for much less than was paid for it not that long ago. By conducting an analysis of the property, you can walk away with it at a price that’s far below its appraisal value. When the market rebounds and prices stabilize (the market will stabilize. It always does), then you should have seen a nice gain on the value of your home. This same strategy also applies to the stock market. You should consult a stock broker to determine which companies are currently undervalued but will still be doing strong business over the next 5 to 10 years. Those are the companies you’ll want to buy as much as you can right now.

In summary, you must educate yourself on financial matters in order to maximize your chances of achieving financial freedom. When you get your Economic Stimulus Package, please pay off your debt and save the rest in a high yielding savings account if there’s any left over. The economic situation only looks bad to those who don’t train theme selves to find the opportunities. Don’t be afraid to buy the right assets, they’ll pay off huge in 5 years. Buy more liabilities, and this recession could be the spark that triggers a financial disaster in your life. Be wise with your money my friends!

Please post any comments, suggestions, or questions. Thanks!

- Ray

I was thinking: Small Cap companies are companies that have the greatest chance of high return but the risk is also relatively high. You receive a greater return because when you invest in a smaller company with a low stock price, you will enjoy huge gains if that company grows to become a big fish. Large Cap companies have over $5 Billion of capitalization. They are usually established, fairly predictable, and therefore generally give a lower rate of return. So what if you want to enjoy the possibilities of a huge upside but with less risk than small cap companies? Why not look to mid caps? Of course it would have been great to buy Microsoft back in 1983, but if you bought it in 1990, you’d still be wealthy today.

You may want to read this article from 2 years ago if you’re looking for some valuable stock tips. With the economy being the way it is, you can probably buy these stocks at a low price.

http://www.forbes.com/2006/08/24/mid-cap-stocks-cz_bz_0824intro.html

-RH

I discovered Freebie Force after speaking to a relative who heard about this company on a television show. I was told about these two guys who started a company that gathered information on corporate give-aways and made them available to members of their site. In other words, by signing up to Freebie Force you gain access to an inventory of free items given away by all types of different companies for promotional purposes.

Sounds interesting? Well it did to me. Upon further investigation, I found out that there actually was an inventory of items out there and Freebie Force had indeed centralized their location. It wasn’t like other promotional items where you have to fill in credit card information or take 30 minute surveys. Most of the time, all you had to do was click on the giveaway item and print a coupon. Sometimes they were for groceries, free flights, ice cream, and a host of other products. The inventory of free items is constantly updated and very useful.

I signed up after hearing more news about the site because it was only $10 dollars a month and I could cancel at any time. $10 a month is not much money at all and I figured that I would get enough coupons and free items to make the $10 investment worthwhile. So far, I have not been disappointed.

In addition to the free stuff, Freebie Force also offers the opportunity to partner with the business and make extra money through passive income. I’m all about passive income and I think Freebie Force has a simple business model that may work for most people looking to make extra cash. You can find out more details by clicking on the links within this post. Freebie Force is definitely worth investigating.

- Mr. H