Beating Broke

Personal Finance from the Broke Perspective

Has Stock Trading Ruined the World?

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The very basic essence of stocks is that you buy a “share” of a company in order to own a portion of the company and “share” in it’s successes.  If the company decides to not reinvest it’s profit into itself and instead pay a portion, or all, of that profit to the owners, you get a bit of it in the form of a dividend.  It the company does reinvest the profits into itself, it increases the value of the company, and your “share” of the company increases in value as well.  You can then sell your “share” of the company to realize that increase.

But, that’s only at it’s most basic level.  Today, the world of stock investing is so much more.  There are options, short selling, margin trading, ETFs, mutual funds, hedge funds, and a myriad other ways that you can partake in this sometimes exciting, and always risky world.  It isn’t just simply owning a portion of a company anymore.  You can sell shares of companies that you never owned in the first place.  You can buy on margin with money you never had.  And you can do it all whenever you want.

Bear MarketBut, has this evolution of the stock market become a cancer on the world?  So much of our economy relies on the stock market as an indicator of the world economic health.  If stocks drop, so too does much of the rest of the economy.  And if a company does poorly, and many of it’s shareholders sell, causing the price to drop, it can have a ripple effect on the rest of the industries companies, or even on the stock market as a whole.  In May of 2010, just such a sell off caused a drop in the stock market that had the entire world trembling in fear of a worldwide economic collapse.  It was caused by a trigger in an computer algorithm that was mistakenly set wrong.  Many of the stock markets closed early to try (unscheduled rather than one of the normal stock market holidays) and curb the crash and hold off a more drastic drop.

The way the stock market works has evolved so much in order to optimize the buying and selling of shares of companies merely for the profit of the brokers and day-traders.  Very few investors will buy a share with the intention of holding it for more than 5 or 10 years.  That’s a drop in the bucket for companies that have been around for over 100 years.

Events like the crash of May 2010 and the crash in 2008/2009 due to the real estate bubble bursting give us all pause when we think about investing.  For those of us who don’t want to try and “beat” the market and who proscribe to a more long term approach to investing, the drastic ups and downs of the market are cause for concern.  What happens if the crash can’t be stopped?

Is it fixable?

Perhaps, but I don’t think that the many brokers and traders who make their money with the newer methods of investing will allow it to happen.  To truly fix the market, it needs to revert to it’s much more simple state.  Simple buying and selling of shares.  No options, no shorting, no margin.  Just ownership of a company.  After all, that’s what it’s really about.  And if it can’t be fixed (or won’t be allowed to be fixed), perhaps it’s time the investors who don’t like the way it’s working move our money someplace else.  There are plenty of opportunities in your local communities to invest in start up companies and other investment vehicles.

A word of warning though.  Those local opportunities are generally much more risky than buying a share or two of a company like Proctor and Gamble who have been around for decades.  Only about 10% of start-ups still exist 5 years later.

Risky as it is, the stock market can still be a sound place to keep your money.  Yes, you do run the risk of losing your investment.  Nothing there is insured or guaranteed like you would see if you had your money in a savings account at a NCUA insured Credit Union or a FDIC insured Bank.

Has stock trading ruined the world?  Not yet.  Will it?  Let’s hope not.

Image Credit: Bear Market by AZRainman, on Flickr

Why are We so Clueless about the Stock Market

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Why are we so clueless about the stock market

By: Mariusz Skonieczny

Mariusz could have just as aptly named this book something like “The Beginners guide to the stock market” because that is what the book is; essentially.  He takes a very low level approach to the stock market in an attempt (I believe) to bring the chaos that is the everyday market to a much slower and easier to understand pace.

Even having read the book, and seen some of the examples he used, my mind is still having a hard time with it.  I’ve been so conditioned to see the stock market as this super-duper complex machine that only the smartest and best educated can even begin to understand.  And some of the elements of the stock market are that.  But, at it’s very core, the stock market is nothing more than an exchange for shares of companies.  The beginning of the book makes that abundantly clear.  It goes on from there, to explain some very simple concepts about earnings, e/p ratios, dividends, and stock price.

The book has a couple of failings, in my opinion.  One, it’s terribly short.  At 164 pages, it’s reminiscent of a “how-to” manual or very in depth brochure.  I also think that he took the concepts down to a too simple level.  I would like to believe that a company like Microsoft is similar to a lemonade stand, but I just can’t accept it.  Also, with as much explanation as he gives about the structure of business and the simpler indicators of a business’ health, it would have been nice to see him give a more in depth look at a few of the methods he uses for researching a company, as well as the use of various trading platforms or some of the best share dealing account UK trade brokers can offer.  He very briefly mentions a few, like annual reports, but it would be nice to maybe have examples of where in an annual report to find the information we need and also what form it might take.

The book gives a beginner the tools to understanding the basics of the stock market and to begin investing on the markets simplest level.  And I think that was the goal of the book.  Mission accomplished.  I would have liked to see it have a bit more information on the back end of the stock research and selection process.

Disclaimer: I was given a copy of this book by the author for review purposes.  If you’d like a copy for yourself, you can pick it up at Amazon.  Or, there may be a giveaway here in the coming months, so you could wait for that as well.

Dollar-Cost Averaging

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Let me start by saying that investing is risky business.  You should consult a professional for professional advice before doing any investing.  I’m a hobbyist, not a professional.

What exactly is dollar-cost averaging?

Dollar-cost averaging is a method of long-term investing.  By buying stocks in smaller chunks over time, the amount you pay for the stocks will balance itself out to an average.  So, in an example, if you were to buy 1 share of Microsoft for $50, then another share for $40, your dollar-cost average price per share would be $45.  So if the shares go back up to $50, you would be making money by selling.  Obviously, this is normally on a much larger scale.  Think 10s, 100s and 1000s of shares.

Another example.  If I buy 50 shares of Microsoft stock at $50 and then the stock market tanks.  Suddenly, my 50 shares of MSFT are only worth $25 each.  That hurts.  The stock is still strong, but the market is poor.  I decide to buy more.  This time, I can buy 100 shares for the same amount as before.  Now, I own 150 shares of Microsoft and my total cost is 50@$50 and 100@$25.  My cost per share is dollar-cost averaged down to $33.33 each.  The stock only has to gain $8 for me to break even, and anything beyond that is gains. (note that I’m not including anything as far as fees.  Those will vary)

In troubled economic times, many people often overlook the benefits of dollar-cost averaging and participate in the mass hysteria.  If, instead, investors would take advantage of the opportunity, they could find themselves the recipients of a handsome profit when the market returns to it’s normal levels.  That, of course, is if it returns to it’s normal levels.  Which it most likely will.