Stock Investing For Dummies book cover

Stock Investing For Dummies

By: Paul Mladjenovic Published: 05-19-2020

The bestselling guide to holding steady through the stock market's highs, lows, and stable stretches

When you decide to jump into the stock market, there’s a lot to know. Stock Investing For Dummies covers the factual and emotional aspects of putting your money into stocks. In clear, easy-to-understand language, this book explains the numbers behind the stocks, the different categories of stocks, and strategies for building a solid portfolio. On the flip side, it also addresses the emotional aspects of investing: setting goals, knowing when to sell, and balancing risk vs. return.

For nearly a century, the well-to-do have been building their wealth by investing in stocks. Here’s your opportunity to do the same. The sooner you start investing, the sooner you’ll see your money grow. Make that a reality by discovering:

  • Approaches for investing for income or growth
  • Steps for evaluating your financial health, setting financial goals, and funding your first purchases
  • How to read stock tables and pull information out of stock charts
  • What to look for on balance sheets, income statements, and annual reports to choose strong performers
  • Advice for minimizing losses and maximizing gains
  • Tax implications and how to reduce their impact on your earnings
  • Suggestions on what to do and buy in a down market

Put all of this information together, and you have a straightforward resource that helps you build and manage a portfolio that will serve you well for years to come. Stock Investing For Dummies gives you the confidence you need to send your portfolio soaring!

Articles From Stock Investing For Dummies

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Stock Investing For Dummies Cheat Sheet

Cheat Sheet / Updated 03-15-2022

You're investing in stocks — good for you! To make the most of your money and your choices, educate yourself on how to make stock investments confidently and intelligently, familiarize yourself with the online resources available to help you evaluate stocks, and find ways to protect the money you earn. Also, be sure to do your homework before you invest in any company's stock.

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10 Ways to Profit in a Bear Market

Article / Updated 07-01-2021

Bear markets are brutal when they hit. Ask any stock investor who was fully invested in stocks during 1973–1975, 2000–2002, or 2008. You relieve the pain from the carnage by vigorously pulling your lower lip up and over your forehead to shield your eyes from the ugliness. Fortunately, bear markets tend to be much shorter than bull markets, and if you’re properly diversified, you can get through without much damage. For nimble investors, bear markets can provide opportunities to boost your portfolio and lay the groundwork for more long-term wealth-building. Here are ten ways to make bear markets very bear-able (and profitable). Find good stocks to buy In a bear market, the stocks of both good and bad companies tend to go down. But bad stocks tend to stay down, while good stocks recover and get back on the growth track. For the investor, the strategy is clear. If the stock of a good, profitable company goes down, that presents a buying opportunity. Translation: Good stuff is on sale! Here’s where some basic research yields some diamonds in the rough. When you find companies with good sales and profits and a good outlook and then you use some key ratios, you can uncover a great stock at a bargain price (thanks to that bear market). Hunt for dividends A dividend comes from a company’s net income, while the stock’s price is dictated by buying and selling in the stock market. If the stock’s price goes down because of selling yet the company is strong, still earning a profit, and still paying a dividend, it becomes a good buying opportunity for those seeking dividend income. Unearth gems with bond ratings A bear market usually occurs in tough economic times, and it reveals who has too much debt to deal with and who is doing a good job of managing their debt. This is where the bond rating becomes valuable. The bond rating is a widely viewed snapshot of a company’s creditworthiness. The rating is assigned by an independent bond rating agency (such as Moody’s or Standard & Poor’s). A rating of AAA is the highest rating available and signifies that the agency believes that the company has achieved the highest level of creditworthiness and is therefore the least risky to invest in (in terms of buying its bonds). The ratings of AAA, AA, and A are considered “investment-grade,” whereas ratings that are lower (such as in the Bs and Cs or worse) indicate poor creditworthiness. If the economy is in bad shape and stocks have been battered, and if you see a stock whose company has a bond rating of AAA, that may be a good buy! Rotate your sectors Using exchange-traded funds (ETFs) with your stocks can be a good way to add diversification and use a sector rotation approach. Different sectors perform well during different times of the ebb and flow of the economic or business cycle. When the economy is roaring along and growing, companies that offer big-ticket items such as autos, machinery, high technology, home improvement, and similar large purchases tend to do very well, and so do their stocks (these are referred to as cyclical stocks). Sectors that represent cyclical stocks include manufacturing and consumer discretionary. Basically, stocks of companies that sell big-ticket items or “wants” do well when the economy is growing and doing well. However, when the economy looks like it’s sputtering and entering a recession, then it pays to switch to defensive stocks tied to human need, such as food and beverage (in the consumer staples sector), utilities, and the like. Go short on bad stocks Bear markets may be tough for good stocks, but they’re brutal to bad stocks. When bad stocks go down, they can keep falling and give you an opportunity to profit when they decline further. When a bad stock goes down, the stock often goes into a more severe decline as more and more investors look into it and discover the company’s shaky finances. Many folks would short the stock and profit when it continues plunging. Going short is a risky way to bet on a stock going down. If you’re wrong and the stock goes up, you have the potential for unlimited losses. A better way to speculate on a stock falling is to buy long-dated put options, which gives you the potential to profit if you’re right (that the stock will fall) but limits your losses if you’re wrong. Carefully use margin Many investors don’t use margin, but if you use it wisely, it’s a powerful tool. Using it to acquire dividend-paying stocks after they’ve corrected can be a great tactic. Margin is using borrowed funds from your broker to buy securities (also referred to as a margin loan). Keep in mind that when you employ margin, you do add an element of speculation to the mix. Buying 100 shares of a dividend-paying stock with 100 percent of your own money is a great way to invest, but buying the same stock with margin adds risk to the situation. Notice the phrases “after they’ve corrected” and “dividend-paying stock.” Both phrases are intended to give you a better approach to your margin strategy. You would hate to use margin before the stock corrected or declined because the brokerage firm wants you to have enough “stock collateral,” so to speak. Using margin at the wrong time (when the stock is high and it subsequently falls) can be hazardous, but using margin to buy the stock after a significant fall is much less risky. Buy a call option A call option is a bet that a particular asset (such as a stock or an ETF) will rise in value in the short term. Buying call options is about speculating, not investing. Remember, a call option is a derivative, and it has a finite shelf life; it can expire and be worthless if you’re not careful. The good part of a call option is that it can be inexpensive to buy and tends to be a very cheap vehicle at the bottom (bear market) of the stock market. This is where your contrarian side can kick in. If the stock price has been hammered but the company is in good shape (solid sales, profits, and so on), betting on a rebound for the company’s stock can be profitable. Options are a form of speculating, not investing. With investing, time is on your side. But with options, time is against you because options have a finite life and can expire worthless. For more on wealth-building strategies with options, consider the book High-Level Investing For Dummies (Wiley). Write a covered call option Writing a covered call means that you’re selling a call option against a stock you own; in other words, you accept an obligation to sell your stock to the buyer (or holder) of the call that you wrote at a specified price if the stock rises and meets or exceeds the strike price. In exchange, you receive income (referred to as the option premium). If the stock doesn’t rise to the option’s specified price during the life of the option (an option has a diminishing shelf life and an expiration date), then you’re able to keep both your stock and the income from doing (writing) the call option. Writing covered call options is a relatively safe way to boost the yield on your stock position by up to 5 percent, 7 percent, and even more than 10 percent depending on market conditions. Keep in mind, though, that the downside of writing a covered call is that you may be obligated to sell your stock at the option’s specified price (referred to as the strike price), and you forgo the opportunity to make gains above that specified price. But done right, a covered call option can be a virtually risk-free strategy. Write a put option to generate income Writing a put option obligates you (the put writer) to buy 100 shares of a stock (or ETF) at a specific price during the period of time the option is active. If a stock you’d like to buy just fell and you’re interested in buying it, consider instead writing a put option on that same stock. The put option provides you income (called the premium) while it obligates you to buy the underlying stock at the option’s agreed-upon price (called the strike price). But because you want to buy the stock anyway at the option’s strike price, it’s fine, and you get paid to do it, too (the premium). Writing put options is a great way to generate income at the bottom of a bear market. The only “risk” is that you may have to buy a stock you like. Cool! Be patient If you’re going to retire ten years from now (or more), a bear market shouldn’t make you sweat. Good stocks come out of bear markets, and they’re usually ready for the subsequent bull market. So don’t be so quick to get out of a stock. Just keep monitoring the company for its vital statistics (growing sales and profits and so on), and if the company looks fine, then hang on. Keep collecting your dividend and hold the stock as it zigzags into the long-term horizon.

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What to Consider When Buying Put Options in Stock Trading

Article / Updated 07-01-2021

When you buy a put option, you’re hoping that the price of the underlying stock falls. You make money with puts when the price of the option rises, or when you exercise the option to buy the stock at a price that’s below the strike price and then sell the stock in the open market, pocketing the difference. By buying a put option, you limit your risk of a loss to the premium that you paid for the put. If, for example, you bought an ABC December 50 put, and ABC falls to $40 per share, you can make money either by selling a put option that rises in price or by buying the stock at $40 on the open market and then exercising the option, thus selling your $40 stock to the writer for $50 per share, which is what owning the put gave you the right to do. Put options are used either as pure speculative vehicles or as protection against the potential for stock prices to fall. When you buy a put option, you are accomplishing essentially the same thing as short selling without some of the more complicated details. Put options also give you leverage because you don’t have to spend as much money as you would trying to short-sell a stock. Out-of-the-money puts are riskier but offer greater reward potential than in-the-money puts. The flip side is that if a stock falls a relatively small amount, you’re likely to make more money from your put if you own an in-the-money option. In contrast to call options, you may be able to buy a longer-term put option for a fairly good price. Doing so is a good idea, because it gives you more time for the stock to fall. Buying the longer-term put also protects you if the stock rises, because its premium will likely drop less in price.

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The Tax Treatment of Different Investments

Article / Updated 05-13-2020

The following discussion tells you what you need to know about the tax implications you face when you start investing in stocks. It’s good to know in advance the basics on ordinary income, capital gains, and capital losses because they may affect your investing strategy and your long-term wealth-building plans. Understanding ordinary income and capital gains Profit you make from your stock investments can be taxed in one of two ways, depending on the type of profit: Ordinary income: Your profit can be taxed at the same rate as wages or interest — at your full, regular tax rate. If your tax bracket is 28 percent, for example, that’s the rate at which your ordinary income investment profit is taxed. Two types of investment profits get taxed as ordinary income (check out IRS Publication 550, “Investment Income and Expenses,” for more information): Dividends: When you receive dividends (either in cash or stock), they’re taxed as ordinary income. This is true even if those dividends are in a dividend reinvestment plan . If, however, the dividends occur in a tax-sheltered plan, such as an IRA or 401(k) plan, then they’re exempt from taxes for as long as they’re in the plan. Keep in mind that qualified dividends are taxed at a lower rate than nonqualified dividends. A qualified dividend is a dividend that receives preferential tax treatment versus other types of dividends, such as unqualified dividends or interest. Typically a dividend is qualified if it is issued by a U.S. corporation (or a foreign corporation listed on U.S. stock exchanges) and the stock is held longer than 60 days. An example of an ordinary dividend that is not qualified is a dividend paid out by a money market fund or a bond-related exchange-traded fund (because the dividend is technically interest). Short-term capital gains: If you sell stock for a gain and you’ve owned the stock for one year or less, the gain is considered ordinary income. To calculate the time, you use the trade date (or date of execution). This is the date on which you executed the order, not the settlement date. However, if these gains occur in a tax-sheltered plan, such as a 401(k) or an IRA, no tax is triggered. Long-term capital gains: These are usually much better for you than ordinary income or short-term gains as far as taxes are concerned. The tax laws reward patient investors. After you’ve held the stock for at least a year and a day (what a difference a day makes!), your tax rate on that gain may be lower. (See the next section for more specifics on potential savings.) Get more information on capital gains in IRS Publication 550. Fortunately, you can time stock sales, so always consider pushing back the sale date (if possible) to take advantage of the lesser capital gains tax. You can control how you manage the tax burden from your investment profits. Gains are taxable only if a sale actually takes place (in other words, only if the gain is “realized”). If your stock in GazillionBucks, Inc., goes from $5 per share to $87, that $82 appreciation isn’t subject to taxation unless you actually sell the stock. Until you sell, that gain is “unrealized.” Time your stock sales carefully and hold onto stocks for at least a year and a day (to make the gains long-term) to minimize the amount of taxes you have to pay on them. When you buy stock, record the date of purchase and the cost basis (the purchase price of the stock plus any ancillary charges, such as commissions). This information is very important come tax time should you decide to sell your stock. The date of purchase (also known as the date of execution) helps establish the holding period (how long you own the stocks) that determines whether your gains are considered short-term or long-term. Say you buy 100 shares of GazillionBucks, Inc., at $5 and pay a commission of $8. Your cost basis is $508 (100 shares times $5 plus $8 commission). If you sell the stock at $87 per share and pay a $12 commission, the total sale amount is $8,688 (100 shares times $87 minus $12 commission). If this sale occurs less than a year after the purchase, it’s a short-term gain. In the 28 percent tax bracket, the short-term gain of $8,180 ($8,688 – $508) is also taxed at 28 percent. Read the following section to see the tax implications if your gain is a long-term gain. Any gain (or loss) from a short sale is considered short-term regardless of how long the position is held open. For more information on the mechanics of selling short, check out Chapter 17. Minimizing the tax on your capital gains Long-term capital gains are taxed at a more favorable rate than ordinary income. To qualify for long-term capital gains treatment, you must hold the investment for more than one year (in other words, for at least one year and one day). Recall the example in the preceding section with GazillionBucks, Inc. As a short-term transaction at the 28 percent tax rate, the tax is $2,290 ($8,180 multiplied by 28 percent). After you revive, you say, “Gasp! What a chunk of dough. I better hold off a while longer.” You hold onto the stock for more than a year to achieve the status of long-term capital gains. How does that change the tax? For anyone in the 28 percent tax bracket or higher, the long-term capital gains rate of 15 percent applies. In this case, the tax is $1,227 ($8,180 multiplied by 15 percent), resulting in a tax savings to you of $1,063 ($2,290 less $1,227). Okay, it’s not a fortune, but it’s a substantial difference from the original tax. After all, successful stock investing isn’t only about making money; it’s about keeping it too. Capital gains taxes can be lower than the tax on ordinary income, but they aren’t higher. If, for example, you’re in the 15 percent tax bracket for ordinary income and you have a long-term capital gain that would normally bump you up to the 28 percent tax bracket, the gain is taxed at your lower rate of 15 percent instead of a higher capital gains rate. Check with your tax advisor on a regular basis because this rule could change due to new tax laws. Don’t sell a stock just because it qualifies for long-term capital gains treatment, even if the sale eases your tax burden. If the stock is doing well and meets your investing criteria, hold onto it. Coping with capital losses Ever think that having the value of your stocks fall could be a good thing? Perhaps the only real positive regarding losses in your portfolio is that they can reduce your taxes. A capital loss means that you lost money on your investments. This amount is generally deductible on your tax return, and you can claim a loss on either long-term or short-term stock holdings. This loss can go against your other income and lower your overall tax. Say you bought Worth Zilch Co. stock for a total purchase price of $3,500 and sold it later at a sale price of $800. Your tax-deductible capital loss is $2,700. The one string attached to deducting investment losses on your tax return is that the most you can report in a single year is $3,000. On the bright side, though, any excess loss isn’t really lost — you can carry it forward to the next year. If you have net investment losses of $4,500 in 2019, you can deduct $3,000 in 2019 and carry the remaining $1,500 loss over to 2020 and deduct it on your 2020 tax return. That $1,500 loss may then offset any gains you are looking to realize in 2020. Before you can deduct losses, you must first use them to offset any capital gains. If you realize long-term capital gains of $7,000 in Stock A and long-term capital losses of $6,000 in Stock B, then you have a net long-term capital gain of $1,000 ($7,000 gain minus the offset of $6,000 loss). Whenever possible, see whether losses in your portfolio can be realized to offset any capital gains to reduce potential tax. IRS Publication 550 includes information for investors on capital gains and losses. Here’s your optimum strategy: Where possible, keep losses on a short-term basis and push your gains into long-term capital gains status. If a transaction can’t be tax-free, at the very least try to defer the tax to keep your money working for you. Evaluating gains and losses scenarios Of course, any investor can come up with hundreds of possible gains and losses scenarios. For example, you may wonder what happens if you sell part of your holdings now as a short-term capital loss and the remainder later as a long-term capital gain. You must look at each sale of stock (or potential sale) methodically to calculate the gain or loss you would realize from it. Figuring out your gain or loss isn’t that complicated. Here are some general rules to help you wade through the morass. If you add up all your gains and losses and The net result is a short-term gain: It’s taxed at your highest tax bracket (as ordinary income). The net result is a long-term gain: It’s taxed at 15 percent if you’re in the 28 percent tax bracket or higher. Check with your tax advisor on changes here that may affect your taxes. The net result is a loss of $3,000 or less: It’s fully deductible against other income. If you’re married filing separately, your deduction limit is $1,500. The net result is a loss that exceeds $3,000: You can only deduct up to $3,000 in that year; the remainder goes forward to future years.

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10 Investing Pitfalls and Challenges for 2020–2030

Article / Updated 05-13-2020

Stock investing doesn’t happen in a vacuum. The stock market can face major events that can either help or hurt it — and of course affect your stock portfolio. Some events can have a direct impact (such as a pandemic), while others just provide a glancing blow. But most macro-events have a material effect on stocks. Invest in quality, dividend-paying stocks for the long term, which (in the past) have overcome the occasional crisis or crash. This article gives you the scoop on potential challenges that the stock market may face during the next decade. Trillion-Dollar Pension Shortfalls The biggest point about stock investing is that it can be a fantastic bulwark in your finances to cement your future financial security. Many people feel the same way about pensions. Most pensions have stocks and stock-related investments (such as mutual funds) in their portfolios. The problem is that many (most?) pensions are underfunded and/or undercapitalized, so the risk of a shortfall (more money leaving pensions during the retirement years versus going in) is a real and present danger. Depending on whose research you are reading, the shortfall is a minimum of $1.5 trillion and is likely much, much more (double or triple that figure). So, speaking to your pension administrator about the financial health of your pension amount is a necessity. I personally believe that people should do some stock investing outside their pension plans for diversification and focus on income stocks (dividend payers). European Crises The European Union fostered a bureaucratic setup that is the calm before the storm. A batch of countries there decided to open the floodgates to millions of immigrants, which has caused a massive spike in crime along with exploding public assistance and national security costs. With soaring violence and related socio-economic problems, this has caused a significant drop in tourism while spiking government costs and debt. Given this, countries such as Sweden and Greece are trending toward financial crisis and major economic difficulties. Stock investors shouldn’t wait for a crisis before acting; it’s time to reduce your exposure to European stock markets since those stocks will be at great risk. The Bond and Debt Bubble In recent years, interest rates in the United States (and elsewhere) have reached a historic low. Unfortunately, this has helped to fuel a historic bond bubble that dwarfs the bond bubble of 2006–2007 (which led to the 2008–2009 market crash and recession). Given that, the current bond bubble will be much more problematic since it is much bigger by trillions and it is a worldwide phenomenon. The question is not if it will pop but when — and what the repercussions will be. What can a stock investor do? First, start thinking about what companies and industries will be hit the worst. Companies tied to excessive debt — either having too much or lending too much — will be at greatest risk. Therefore, review your stock choices and start removing debt-laden companies and reducing your exposure to financial stocks such as banks and mortgage companies. A Demographic Upheaval The driving demographic considerations 10–15 years or so ago were baby boomers along with their needs and spending patterns, but that group has been supplanted by — drum roll, please — millennials! Millennials are definitely a different category with very different spending habits and financial concerns. They are less interested in luxuries and walk-in retail spending, while they love their technology and online shopping. These changes mean new pitfalls and opportunities that stock investors need to pay attention to. Given that, start doing some research online about millennials and their financial habits so that you can adjust your portfolios accordingly. Federal Deficits and Debt During 2019, the U.S. federal government’s national debt rocketed past the $23 trillion level. Politicians wring their hands about this mind-boggling debt during campaign season but quickly go back to spending mode (increasing the national debt) after election day. This monumental debt has been growing for decades, and many folks and politicians have been lulled to a point of ignoring it or just shrugging it off. However, some rumblings and milestones could take this issue from dormancy to our TV screens in the coming years. Our total debt now exceeds 100 percent of our gross domestic product (GDP), which means we may be entering a period where carrying this total debt is not sustainable. In addition, much of this debt is held as bonds across the globe and by governments that are not friendly toward the United States, and this debt could easily be re-patriated to the United States. It is uncertain what dangers would arise since other factors could come into play as well (war, trade embargos, and so forth), but these developments could cause major stock market declines and gyrations as investors panic. I don’t know what our political and economic conditions will be when that happens, but it is probably safe to say that quality companies with good fundamentals offering needed products and services will weather the storm, which means if you stay focused on a company’s quality and profitability, you’ll get through okay. (If not, make sure you have an adequate supply of soup cans and precious metals.) A Social Security Reckoning You have heard for decades about how problematic the multi-trillion-dollar imbalances in Social Security spending have been, but nothing has seemed to materialize in recent years. What gives here? According to both public and private Social Security watchdogs, the full unfunded liabilities for Social Security exceed $50 trillion, and we have entered a period where current outflows (payments to beneficiaries) will exceed the current inflows (social security taxes). I think that if you are on Social Security now, you should be okay, but future beneficiaries may be at risk during 2025–2035 as shortfalls become more problematic. Whenever I am doing retirement planning with folks, every chance I get, I plan without imputing Social Security income in the numbers. Why? Because if my client (or you, dear reader) can achieve financial independence without Social Security, then of course any Social Security money you receive is a nice plus! Given that, start loading up on quality dividend-paying stocks as part of your overall wealth-building approach and you’ll sleep better. Terrorism As I write this book, the world is generally placid in spite of all manners of issues, conflicts, and problems that plague humanity on a daily basis. Unfortunately, a single major terrorist event could easily trigger a stock market panic or be the tipping point that turns a muddled economy into the recessionary zone. Major terrorist events are never a good thing of course, but in the singular scope of stock investing, they can cause major damage. In the wake of 9/11 back in 2001, terrorism caused a painful decline that rattled many investors and sent many a stock portfolio plummeting. In the aftermath of a terrorist event, both good and bad stocks do go down, but the good stocks do recover and typically get back on positive track afterwards while the bad stocks have their weaknesses exposed and either stay down or suffer a worse fate (such as bankruptcy). The lesson is clear: While the world looks rosy, take that opportunity to analyze your stock positions. Get rid of the weak stocks before they go down — now! Keep the strong ones so your long-term portfolio can continue to zigzag upwards. A Potential Currency Crisis I could easily do a book titled Economic Collapse For Dummies, but until then I will cover all the various types of collapses in pages such as these. And the most common type of collapse is a currency collapse. In the United States, our currency is a global reserve currency that gives it strength versus other currencies since a global reserve currency is necessary for international trade. This provides some insulation from typical currency problems. But that doesn’t mean that the world is safe from a crisis coming from lesser currencies. A currency crisis typically occurs when a currency is overproduced by that nation’s central bank. When you overproduce a currency, you tend to diminish the value of each unit. This translates into higher prices for goods and services — inflation! This makes it tougher for consumers as the currency keeps losing value. If the situation is not remedied, the currency will be in crisis and economic suffering by the public will increase. At the time I am writing this, the currencies in Venezuela and Argentina are in crisis mode (hyper-inflation!), which is making the citizens suffer big-time in those countries. What would happen if the Euro or the yuan (China’s currency) were to become inflated and start to lose its value? Fortunately, quality stocks tend to perform well during inflationary times, and dividend payouts tend to match (or exceed) the rate of inflation. A good additional strategy is to consider precious metals and/or precious metals mining stocks, which tend to do very well during inflationary times. Find out more in Precious Metals Investing For Dummies (published by Wiley). I believe that inflationary times are very possible in the coming years, so get ready now. A Derivatives Time Bomb In the past 20–30 years or so, a number of crises were caused when derivatives positions imploded and caused massive losses. Some good examples of this have been the collapses of once-mighty companies such as Enron, AIG, and Bear Stearns. On a grander scale, derivatives played a major role in the housing bubble that popped in 2006–2007 and the 2008 market crash. The top 25 U.S. banks have total derivatives exposure exceeding $204 trillion, according to the 2Q 2019 bulletin issued by the Office of the Comptroller of the Currency. Because many of these trillion-dollar derivatives positions are tied at the hip with debt markets, and debt markets are larger and more unsustainable than ever, it is only a matter of time before the next massive crisis hits. What should you do? The main crisis will be with the banking industry, so reduce your exposure to bank and financial stocks. If you have them currently in your portfolio, monitor them and consider trailing stops. Socialism I saved the worst for last. Socialism has caused more economic crises than any other singular economic set of policy ideas. Communism and fascism are just more logical extremes of this dangerous, fallacious ideology. Socialism (entirely or partly) has been the culprit of an extraordinary range of economic crises throughout history and includes the Great Depression, the Great Recession of 2008, and the collapse of the Soviet Union and more recently Venezuela, Zimbabwe, and scores of other ill-fated economies. So, what should stock investors know? Stock investors should be wary when socialists take over an economy (or even an industry) and they should exit positions that are exposed to it. The United States is, fortunately, on balance a free-market capitalist economy and we can only hope it stays that way, but a recent survey indicated that a plurality of young adults are favorable toward socialism so we can only hope they learn better. Find out more about economics and socialism.

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Introduction to Stock Trends for Investors

Article / Updated 05-13-2020

Identifying trends is a crucial part of technical analysis. A trend is just the overall direction of a stock (or another security or a commodity); you can see trends in technical charts. Which way is the price headed? This article describes different types of trends, talks about trend length, and discusses trendlines and channel lines. Distinguishing different trends Three basic trends exist: An uptrend or bullish trend is when each successive high is higher than the previous high and each successive low is higher than the previous low. A downtrend or bearish trend is when each successive high is lower than the previous high and each successive low is lower than the previous low. A sideways trend or horizontal trend shows that the highs and the lows are both in a generally sideways pattern with no clear indication of trending up or down (at least not yet). It’s easy to see which way the stock is headed in the following figure. Unless you’re a skier, that’s not a pretty picture. The bearish trend is obvious. What do you do with a chart like the one that follows? Yup . . . looks like somebody’s heart monitor while he’s watching a horror movie. A sideways or horizontal trend just shows a consolidation pattern that means that the stock will break out into an uptrend or downtrend. Regardless of whether a trend is up, down, or sideways, you’ll notice that it’s rarely (closer to never) in a straight line. The line is usually jagged and bumpy because it’s really a summary of all the buyers and sellers making their trades. Some days the buyers have more impact, and some days it’s the sellers’ turn. This figure shows all three trends. Technical analysts call the highs peaks and the lows troughs. In other words, if the peaks and troughs keep going up, that’s bullish. If the peaks and troughs keep going down, it’s bearish. And if the peaks and troughs are horizontal, you’re probably in California (just kidding). Looking at a trend’s length With trends, you’re not just looking at the direction; you’re also looking at the trend’s duration, or the length of time that it goes along. Trend durations can be (you guessed it) short-term, intermediate-term, or long-term: A short-term (or near-term) trend is generally less than a month. An intermediate-term trend is up to a quarter (three months) long. A long-term trend can last up to a year. And to muddy the water a bit, the long-term trend may have several trends inside it (don’t worry; the quiz has been canceled). Using trendlines A trendline is a simple feature added to a chart: a straight line designating a clear path for a particular trend. Trendlines simply follow the peaks and troughs to show a distinctive direction. They can also be used to identify a trend reversal, or a change in the opposite direction. The following figure shows two trendlines: the two straight lines that follow the tops and bottoms of the jagged line (which shows the actual price movement of the asset in question). Watching the channel for resistance and support The concepts of resistance and support are critical to technical analysis the way tires are to cars. When the rubber meets the road, you want to know where the price is going: Resistance is like the proverbial glass ceiling in the market’s world of price movement. As a price keeps moving up, how high can or will it go? That’s the $64,000 question, and technical analysts watch this closely. Breaking through resistance is considered a positive sign for the price, and the expectation is definitely bullish. Support is the lowest point or level that a price is trading at. When the price goes down and hits this level, it’s expected to bounce back, but what happens when it goes below the support level? It’s then considered a bearish sign, and technical analysts watch closely for a potential reversal even though they expect the price to head down. Channel lines are lines that are added to show both the peaks and troughs of the primary trend. The top line indicates resistance (of the price movement), and the lower line indicates support. Resistance and support form the trading range for the stock’s price. The channel can slope or point upward or downward, or go sideways. Technical traders view the channel with interest because the assumption is that that the price will continue in the direction of the channel (between resistance and support) until technical indicators signal a change. Check out the channel in this figure; it shows you how the price is range-bound. The emphasis on trends is to help you make more profitable decisions because you’re better off trading with the trend than not. In the figure, you see a good example of a channel for a particular stock. In this case, the stock is zigzagging downward, and toward the end of the channel, it indicates that the stock is getting more volatile as the stock’s price movement is outside the original channel lines. This tells the trader/investor to be cautious and on the lookout for opportunities or pitfalls (depending on your outlook for the stock).

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The Yahoo! Finance Stock Screening Tool

Article / Updated 05-13-2020

Most stock screening tools have some basic elements that are very useful in helping you narrow your search for the right stocks in your portfolio. The figure shows a typical stock screener from Yahoo! Finance; the following discussion walks you through the major fields of this tool. Keep in mind that with the minimums and maximums in the following sections, there will be variations. Also, some market analysts and financial advisors are more or less lenient than I am with these numbers. Don’t sweat it. Do your research and come up with similar numbers that you’re comfortable with. Before you begin: Select your screener At the Yahoo! Finance stock screener page, you see the following links at the top: Saved screeners: When you design your own screeners, you can save them for future use. This option will come in handy as you become experienced and proficient with screeners. Equity screener: This option is for finding and analyzing stocks. I work with this particular screener in the upcoming sections. Mutual fund and ETF screeners: When you’re looking for the right mutual fund or ETF, these screeners will help. Future and index screeners: These categories are more for the speculators and traders in the world of futures and indexes. First up: The major categories After you choose the equity (stock) screener in Yahoo! Finance, you have to address a few major categories first before you get to the “guts” of screening stock data (refer to the figure): Region: Here you enter data about your chosen country to refine your search. If you’re looking for U.S. stocks, the choice of course is “United States.” In the menu, you see countries with public stock exchanges ranging from Argentina to Vietnam. Market cap: In the Market Cap (Intraday) category, you can designate the criteria for your search based on market capitalization and choose Small Cap, Mid Cap, Large Cap, or Mega Cap. Looking for growth potential? Go for small cap or mid cap. Looking for more safety? Go to large cap or mega cap. Price: In the Price (Intraday) field, enter criteria based on share price, such as “greater than” or “less than” your chosen price. There are also options for “equals” and “between.” Sector and industry: A sector is a group of interrelated industries. For example, the healthcare sector has varied industries such as hospitals, medical device manufacturers, pharmaceuticals, drug retailers, and so on. Choosing an industry rather than a sector narrows your choices. The main event: Specific filters After you make choices in the major categories covered in the preceding section, you drill down to find stocks that meet your standards with various filters. I don’t cover all the metrics here since there are literally too many to cover, but in the following sections, I briefly touch on the most relevant subcategories and then you can dive in. (To get to these filters in the Yahoo! Finance screener, just click Add Another Filter, as shown.) Share statistics In the Share Statistics menu in the Yahoo! Finance screener, you find over 40 stock-related criteria ranging from share price action (the 52-week high or low) to fundamentals such as total assets or total liabilities. One area I like to focus on is the price-to-earnings (P/E) ratio. This ratio is one of the most widely followed ratios, and I consider it the most important valuation ratio (it can be considered a profitability ratio as well). It ties a company’s current stock price to the company’s net earnings. The net earnings are the heart and soul of the company, so always check this ratio. All things being considered, I generally prefer low ratios (under 15 is good, and under 25 is acceptable). If I’m considering a growth stock, I definitely want a ratio under 40 (unless there are extenuating circumstances that I like and that aren’t reflected in the P/E ratio). Generally, beginning investors should stay away from stocks that have P/Es higher than 40, and definitely stay away if the P/E is in triple digits (or higher), because that’s too pricey. Pricey P/Es can be hazardous, as those stocks have high expectations and are very vulnerable to a sharp correction. In addition, definitely stay away from stocks that either have no P/E ratio or show a negative P/E. In these instances, it’s a stock where the company is losing money (net losses). Buying stock in a company that’s losing money is not investing — it’s speculating. Make sure your search parameters have a minimum P/E of, say, 1 and a maximum of between 15 (for large cap, stable, dividend-paying stocks) and 40 (for growth stocks) so that you have some measure of safety (or sanity!). If you want to speculate and find stocks to go short on (or buy put options on), two approaches apply: You can put in a minimum P/E of, say, 100 and an unlimited maximum (or 9,999 if a number is needed) to get very pricey stocks that are vulnerable to a correction. A second approach is putting in a maximum P/E of 0, which would indicate that you’re searching for companies with losses (earnings under zero). Income In the Income menu in the Yahoo! Finance screener, there are some important metrics tied to sales and profits. Keep in mind that that income in terms of sales and profits are among your most important screening criteria. For sales revenue (called Total Revenue in the Yahoo! Finance tool), there may be absolute numbers or percentages. In some stock screeners, there may be ranges such as “under $1 million in sales” up to “over $1 billion in sales.” On a percentage basis, some stock screeners may have a minimum and a maximum. An example of this is if you wanted companies that increased their sales by at least 10 percent. You’d enter 10 in the minimum percentage and either leave the maximum blank or plug in a high number such as 999. Another twist is that you may find a stock screener that shows sales revenue with an average percentage over three or five years so you can see more consistency over an extended period. Profit margin (called Net Income Margin % in the Yahoo! Finance tool) is basically what percent of sales is the company’s net profit. If a company has $1 million in sales and $200,000 in net profit, the profit margin is 20 percent ($200,000 divided by $1,000,000). For this metric, you’d enter a minimum of 20 percent and a maximum of 100 percent because that’s the highest possible (but improbable) profit margin you can reach. Keep in mind that the data you can sift through isn’t just for the most recent year; some stock screeners give you a summary of three years or longer, such as what a company’s profit margin has been over a three-year period, so you can get a better view of the company’s consistent profitability. The only thing better than a solid profit in the current year is a solid profit year after year (three consecutive years or more). Valuation measures For value investors (who embrace fundamental analysis), the following parameters are important to help home in on the right values (check out Appendix B for more details on ratios): Price-to-sales ratio: A price-to-sales (PSR) ratio close to 1 is positive. When market capitalization greatly exceeds the sales number, then the stock leans to the pricey side. In the stock screener’s PSR field, consider entering a minimum of 0, or leave it blank. A good maximum value is 3. PEG ratio: You obtain the PEG ratio (price/earnings to growth) when you divide the stock’s P/E ratio by its year-over-year earnings growth rate. Typically, the lower the PEG, the better the value of the stock. A PEG ratio over 1 suggests that the stock is overvalued, and a ratio under 1 is considered undervalued. Therefore, when you use the PEG ratio in a stock screening tool, leave the minimum blank (or 0), and use a maximum of 1. Other valuation ratios: Some stock screeners may include other ratios. A good one is the average five-year ROI (return on investment), which gives you a good idea of the stock’s long-term financial strength. Others may have an average three-year ROI. Because this is an average (in percentage terms) over five years, do a search for a minimum of 10 percent and an unlimited maximum (or just plug in 999 percent). If you do get one that’s anywhere near 999 percent, by the way, call me and let me know! Dividends and splits For income-minded folks, go to the Dividends and Splits menu in the Yahoo! Finance screener to enter criteria such as Dividend Per Share (DPS) and Dividend Yield %. ESG scores For many investors in recent years, nonfinancial and nonmarket aspects of corporate governance have gained greater importance. In the category of ESG Scores (environmental, social and governance criteria) in the Yahoo! Finance screener, you can enter aspects of corporate behavior that you seek (or want to avoid) in the public company that you’re considering for investment. Screening stocks with technical analysis Many stock screeners have the ability to use technical analysis by using technical indicators. Technical analysis is more important for those with a short-term focus, such as stock traders and short-term speculators. Here are some common technical indicators: Moving averages: Looking for stocks that are trading above their 50-day moving average or have fallen below it? How about the 200-day moving average, which can be a more reliable indicator of the stock’s near-term strength (or weakness)? Relative Strength Index: The RSI is one of my favorite technical indicators. It basically tracks a stock in terms of being overbought or oversold in the near term. If a stock has an RSI of over 70, it’s overbought, and the stock is vulnerable to declining in the near future. A stock with an RSI under 30 is considered oversold, and that’s potentially an opportunity for the stock to rally in the near term. Don’t use the RSI to determine what to buy, but certainly consider it as a way to time a purchase (or sale). In other words, if you’re attracted to a stock and want to buy, consider getting it in the event that it’s oversold. That gives you the chance to get a stock you want at a favorable price. When you do your search and you’re using the RSI as one of your criteria, consider using a maximum RSI of 50, which is essentially in the middle of the range, with a minimum RSI of 0. If you’re looking to speculate by going short, make sure your minimum RSI is 70 and the maximum is unlimited. Here are some popular screening tools online for technical analysis: StockCharts StockFetcher MarketInOut

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How to Use an ETF Screening Tool

Article / Updated 05-13-2020

In addition to stock screeners, there are screeners for bonds, mutual funds, and now exchange-traded funds (ETFs). The figure shows a typical ETF screener like many online. You won’t find minimum and maximum with ETF screeners as much as with stock screeners. There are more varied categories to filter through and different performance criteria. The following sections cover the main categories. Keep in mind that most of the popular financial sites (such as Yahoo! Finance and MarketWatch) have good ETF screeners (as well as stock screeners); most of the stock brokerage sites have search and screening tools as well. Some other popular sites that have ETF screening tools include the following: com ETF Database; you see this screener in the figure ETF Screen Asset class Choosing your asset class is the first search criteria, and of course in a book like this, the focus is stocks (equity). However, this category shows the range of choices that ETFs have to offer. There are ETFs that concentrate on bonds, currencies, precious metals, real estate, basic commodities, or “multi-asset” portfolios. There are also inverse ETFs, which have within their portfolio speculative derivatives such as put and call options (found in the asset category called “alternatives”). Attributes In the Attributes category in the ETF Database tool, you can choose Active, Passive, or Any. ETFs, by and large, are passive, meaning that the portfolio isn’t actively managed like a typical mutual fund portfolio. However, in recent years some ETFs have become more active in their portfolios (meaning more active buying and selling of positions within the portfolio). If you aren’t sure, just click Any as your choice. Issuer Looking for an ETF that was issued by a financial institution such as iShares, State Street SPDR, or VanEck? If the issuer is an important consideration, check out the comprehensive list of financial firms that issue and sponsor ETFs. Structure Although you’re most likely looking for a conventional ETF, you can find other structures, such as a commodity pool or exchange-traded notes (ETNs). For most beginners, the standard ETFs are fine. Expenses and dividends In the Expenses & Dividend category in the ETF Database screener, you can perform your search using an expense ratio and/or a dividend yield. Maybe you want an ETF with a relatively low expense ratio — say, under 2 percent. You can then adjust your search with this criteria, and the search will exclude all ETFs with expense ratios higher than 2 percent. As for the dividend yield, you can adjust it based on your preference. Indicate that, for example, you want ETFs with a minimum yield of 2.5 percent, and the screener will exclude all ETFs with a reported dividend yield lower than that percentage. Liquidity and inception The typical criteria in the Liquidity & Inception Date category shown in the figure are the following: Assets ($MM): This field measures the market capitalization of the ETF in case you want to make sure that you’re buying a large ETF versus a smaller ETF that has a lower market capitalization. For novice ETF investors, go for the higher market capitalization (larger asset size). Average Daily Volume: This field refers to how many shares of a particular ETF are traded in the market on a typical trading day. Novice ETF investors want a higher trading volume, which indicates greater liquidity and hence is easier to buy and/or sell. Share Price: Here you indicate whether you have a limit as to share price. For example, if you can afford ETFs only at $50 per share or lower, use that criteria. Easy! Inception Date: Here you put in the criteria, if you wish, regarding how long an ETF has been around. All things being equal, an ETF around for 15 years or longer is a safer investing vehicle to choose than one that started just last year. Returns search criteria Looking for ETFs based on how well they have performed over a year or longer? Then the Returns search criteria shown in the figure is for you. You can designate a time frame such as year to date or a longer one such as one year, three years, or five years. I take seriously the admonition that “past performance is not necessarily indicative of future results,” but check out the returns since they help confirm that an ETF’s portfolio is a good consideration. After all, all things being equal and you’re choosing between one ETF that went up 87 percent in the past three years and another ETF that dropped 12 percent in the same time frame, your choice should be a no-brainer (Put away that coin! No heads or tails here). ESG scores category Are social or other nonfinancial considerations important to you? Perhaps you’re worried about the environmental effects of corporate activity. Maybe moral considerations are important because you want to invest in companies that are “good citizens” or that do not exhibit practices you disagree with. Given that, the ESG Scores category in the figure will be a prime consideration in your search criteria. In the ETF Database screener, there is a single composite ESG score ranging from 0 to 10, with 10 being the most favorable — the higher, the better. Fund flows The Fund Flows metric in the ETF Database screener tracks how much money is flowing into an ETF over a given period such as one week, one year, or five years. Fund flow essentially means that when you tally money coming into and out of various financial assets, you can gauge the popularity (or unpopularity) of a given asset. If there is a net inflow of money for a given asset, then ETFs with that asset are in a bullish position (and that’s a good thing for your ETF’s share price). Risk Metrics category The Risk Metrics category in the figure touches on volatility and beta characteristics of a particular ETF. It also includes the price-to-earnings (P/E) ratio if available. You can find out whether an ETF has lower volatility (compared to the total market) or higher. Higher volatility means ultimately greater risk. A tech stock ETF, for example, has higher volatility than a utilities stock ETF. ETFs with portfolios that have a higher P/E ratio can be riskier than those with a lower P/E ratio. The bottom line is that if you’re concerned about risk, select search criteria with low P/E ratio and low volatility. Holdings criteria Holdings criteria cover what asset(s) are in an ETF. Does the ETF have one asset or 50? In addition, this category covers how balanced and deep an ETF is relative to its peer group. In other words, is this ETF’s holdings in the top 10 percent, 15 percent, or 50 percent of their peers in the category? Themes You can see the top ETFs in terms of popular themes in the final category in the figure. At the time of writing, the most popular themes are artificial intelligence, blockchain, marijuana, and FAANG (referring to Facebook, Apple, Amazon, Netflix, and Google). The problem here is that what is popular today may not do well next year, so novice investors should focus on long-term profitability and the fundamentals for more assured success over time.

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