What Are Dividends – Stock Dividends

Posted on by Ryan

If you are new to investments, you may or may not know what dividends are. Hopefully you understand what a stock is and how it makes money. It is simply a piece of a company that you can own. Let’s say a company has 1,000,000 shares of stock that cost $10 each. You can purchase 10 shares for $100 dollars.

How do you make money from stocks?

Over time, the value of these shares of stock may increase or decrease. This is based on the supply and demand principle of economics. As more people want to buy stock from a particular company, the price of that stock increases. The reverse happens when more people are selling their shares, the price goes down.

Where do dividends fit into all of this?

When a corporation is doing well, they may decide to pay dividends. This is a payment to their shareholders separate from stock increases. The increase from their stock doesn’t come from the corporation, but the dividends do.

The amount of dividends depends on the corporation’s net income and how much they are willing to pay. It could be anywhere from $.25 to $1 or more per share. So, if you have 100 shares of stock of a company and they decide to issue $.50 per share in dividends, you will make an extra $50. This is usually done on a quarterly basis.

Should you search for dividend paying stock?

Some companies almost always pay dividends. These stocks are popular among retirees because it is another source of income. Whether or not you look for dividend paying stock is entirely up to you.

I wouldn’t suggest you buy stock only based the fact that they pay dividends. You should conduct proper research of any company you are willing to buy stock in and there is no problem making dividends one of your criteria.

Of course, if you are young, you have more time and can take more risk. Many of the younger companies don’t pay dividends because they are still becoming established, but they might give you a much higher return.

How Do Bonds Work? – Bonds 101

Posted on by Ryan

For this articles I’m going give you the basics, so you’ll be able to answer “How do bonds work?”. During my undergrad I had a finance class that dedicated 1/4th of the semester to bonds. Lucky for you, I’ll cover what every basic investor should know before investing in bonds. Bonds are another popular investment and teens can invest in bonds, too. They are less risky than stocks and therefore usually have a smaller return. In other words, you’ll probably make more money off of stocks. It is often recommended to make bonds only about 30% of your portfolio.

Bonds may be a little less nerve racking than stocks. If you check your stocks everyday, you might give yourself many unnecessary anxiety attacks. If you have bonds, there are no prices to check.

A bond is a certificate of debt issued by a government or corporation guaranteeing payment of the original investment plus interest by a specified future date, according to the dictionary. This means that the government or a business sells a bond to you for a certain amount of money and after a certain period of time they will pay it back and then some.

For example, you may buy a bond from a corporation for $1,000 and after 10 years they will pay you back the $1,000 dollars plus, let’s say 6%, which would be $60. All your really doing is lending someone money and getting paid for it.

Different Types of Bonds

There are several different types of bonds. There are government bonds, corporate bonds, and municipal bonds. Government bonds are issued by the U.S. government, corporate bonds are issued by corporations, and municipal bonds are issued by local and state governments.

You may have gotten savings bonds from relatives or as awards. These are EE bonds and are available in the denominations $50, $75, $100, $200, $500, $1,000, $2,000, and $10,000. The U.S. treasury also offers I Bonds, Treasury bills, Treasury notes and other bonds. Government bonds are usually the least risky bonds.

Corporate bonds are rated based on the quality and safety of a bond. The higher the rating, AAA the highest, the better, and D is the worst. The lower the rating the more risk there is, but this also means you will probably get a much higher return. A bond with a D rating may promise a 20% return, but they are also probably very unlikely to pay you. Low rated bonds are often called junk bonds.

Dollar Cost Averaging – Everything You Need To Know

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As an investor, you want to get the most for your money. You want to get the highest return and pay the least for your investments. This ensures that you get the most for your money.

What is dollar cost averaging?

If you want to make the most money, dollar cost averaging is the way to go. Dollar cost averaging is a very simple principle. You buy stock on a regular basis paying the same amount each time. For example, you invest $500 every month into the stock market. One month you might buy 50 shares, another you might buy 60.

By doing this, you are buying more shares when the price is lower and less when it’s higher. For example, let’s say you put $500 into the same company each month. In month one, the price is $10 per share, so you buy 50 shares. In month two, the price is $9 per share, so you buy approximately 56 shares, 6 shares more than before.

In month three, the price goes down to $9 per share, so you are able to purchase approximately 63 shares. Then in month 4, the price moves up to $11 dollars per share and you purchase approximately 45 shares. Finally, in month 5, the price is $13 per share and you are able to purchase 38 shares.

What have you gained from dollar cost averaging?

By the end of the four months, you have purchased 251 shares for $2,000. At $13 per share, it is worth $3,263. If you had spent all the $2,000 in month one, you would have only been able to have 200 shares now worth $2,600.

Even if you spent all the shares in the third month, you would end up with about the same amount of shares. The reason this works so well is because you are spreading out your risk. When investing, you should always buy low and sell high, but you never really know when it will be at the all-time low or high.

A Good Habit

Investing regularly is not only good to get the benefits of dollar cost averaging, but you can also reap the benefits of continuous the investing. If you only invest sporadically when you can, you are likely to invest less. Investing less means fewer capital gains and less interest earned.

Mutual Funds Vs Stocks (Equities)

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Understanding mutual funds vs stocks and the benefits of each will help increase your basic investment knowledge, while better preparing you to make an informed decision on which investment is right for you. So what do they have in common? You might be thinking “They both have to do with owning a company, right?”. A better question to ask is, “what is the better about one than the other?”

Both of these investments are meant to make you money, and which one is better depends on what you are looking for.

Do you enjoy researching and following the ups and downs of the market?

You may find yourself leaning towards investing in stocks. When you invest in stocks, you are investing in just one company at a time.

You decide which companies you’re going to buy. You decide when you’re going to buy them. You decide how many shares you are going to buy.

When investing directly in stocks, you are in control. The problem is, you may feel inexperienced and unsure about your choices. Maybe if you’ve been investing longer you would have known not to put $1,000 into that company that lost you so much?

When investing in stocks, that is not the way to look at it. Yes, researching and knowing a little bit about the company, both in the past and present, might help and is completely necessary, but you have just as much of a chance to gain a lot from an investment as an experienced investor. Besides, everyone starts somewhere, and it’s best to learn from your own mistakes.

Do you want to invest but worry about the risks?

When you invest in mutual funds, you are investing in several companies at once. A money manager of the mutual fund you chose is deciding which companies to buy, when to buy them, and how many shares.

It’s important to remember that just because you are investing in a mutual fund doesn’t mean there is no possible way you could lose money. There are risks just as when you invest in stocks directly yourself.

There is less effort on your end with mutual funds, but there are other perks, too. You are able to obtain a large amount of diversification that you may not have been able to get with only your money. You’re pooling all your money with other investors and the money manager is able to stretch your money farther.

Either way, you’re making money

And either way, you could lose money. However you choose to invest, stocks, mutual funds, bonds, etc. just remember the risks you are taking. In one instance, you may be doing more work yourself, but in either instance, you are not guaranteed anything.

Stock Market Definition – Investing 101

Posted on by Ryan

The stock market. It sounds like a simple concept. It’s a market for stocks. You go to the stock market and buy stocks just like you go to the supermarket and buy food, right?

You can browse stocks like you browse through chips down the snack isle, but what you choose to buy and how you buy them is very different. Instead of choosing what you like best in a few seconds, it takes a lot more careful thinking and instead of jumping on line at the cash register, well, that’s just entirely different.

Here are the basics of the stock market.

1. What are stocks?

When a corporation wants to expand or needs to raise money for their company, they may decide to sell stock. A stock signifies ownership in the company. When an investor buys a share of stock they are called a shareholder and become a part owner of that company.

Yes, that means if you own a share of Disney, you are a part owner of the company. With one share, you don’t get much say in anything, but you can vote at the annual shareholder meetings.

When you invest in a company, you may get a stock certificate. The stock certificate is a written indications or proof that you own part of the company. Most brokerages will keep the stock certificates with them. This is a good thing so you don’t have to worry about losing or damaging them.

If you want to own a purchase shares of a company, you will need a brokerage firm to facilitate the transaction. They are good gift ideas. You can buy one share of many different companies that they offer and the certificate is dressed up and looks very fancy. You can buy them framed as well.

2. Stock Exchange

The three major stock exchanges are the New York Stock Exchange (NYSE), the American Stock Exchange (AMEX), and the National Association of Securities Dealers Automated Quotations System (NASDAQ). A stock exchange is a place where stocks and other securities are bought and sold.

3. Buy and Hold vs. Trading

There are two different common ways to buy and sell stock. Long term investors often use the buy and hold method. This is pretty self explanatory. You buy a certain amount of stocks and you keep them long term. Usually this means you don’t sell them for at least 1 to 5 years.

With trading, you buy a sell very often. Sometimes you may buy and sell the same stock in one day. The point is you are trying to get the short term gains. I wouldn’t recommend this method, especially if you are trying out. If you are a trader, you would need a certain brokerage that caters to it.

Some say that the gains made through trading over the long term aren’t any higher than the gains from a well diversified buy and hold portfolio.

4. Diversify

It is very important that when you have a portfolio it be well diversified. A diversified portfolio means that you don’t have all your eggs in one basket. You must have a wide variety of companies in order to minimize risk.

If you have $10,000 all in one company and the company loses 20% for the year, you have a total loss of 20%. If you hade $10,000 divided between 5 companies evenly, $2,000 each, and the same company goes down 20%, but the rest go up 10%, you will gain 20% in the end. Basically, if you have several different companies in different industries and one goes down, the ideal effect is that an increase in another will help balance it out and relieve some of the burden.

Of course, ideally you will want all of the companies to go up, but it’s impossible to predict, so you might as well reduce the risk.

5. Stock Symbol

The Stock symbol is a short symbol used on the stock exchange to symbolize each company. For example, the stock symbol for Johnson & Johnson is JNJ.

6. Fundamental Analysis

Fundamental analysis is used to analyze stocks. You wouldn’t go out and buy just any old car without knowing anything about it and you shouldn’t go out and buy any old stock without knowing anything about it.

With this type of analysis you would examine the company. A great way to start is by finding a company through certain criteria at an online stock researcher such as at MSN money’s stock screener. You type in what you want such as the industry, market cap, dividend yield, and P/E ratio.

Do you have no idea what I am talking about? A great book to read and find out more about researching stock you should read The five rules for successful stock investing. They will go into all the details about analyzing stocks.

Here is just a basic background about investing in stock market.