My take on Activision Blizzard

If you are looking for the perfect gift for the video gamer in the family perhaps you should consider skipping the hustle and bustle of Walmart Stores (WMT) during the holidays and purchase a handful of share of Activision Blizzard (ATVI). Your gamer, regardless of his or her age, will have undoubtedly played one of Activision’s vaunted titles. Even those not amongst the ranks of avid gamers are likely familiar with one or more of their award winning games like the massive multiplayer online game World of Warcraft. Another popular Activision title, Call of Duty, released another iteration, Modern Warfare III in November garnering $1 billion in just 16 days outpacing the science fiction mega hit Avatar to the mark. No small feat.  

Traditional video game companies, as opposed to social media gaming companies like Zynga, live or die by their flagship titles. Activision has a strong stable of blockbuster titles diversified amongst the various gaming genres. These titles include World of Warcraft, Call of Duty, Starcraft and Diablo. The latter is due to release a highly anticipated sequel, Diablo III but what really makes Activision special is what you find under the hood if you care to look.

This company’s market value is just over $14 billion and they have zero debt. They also have over $2.9 billion dollars in cash on hand which equates to just over $2.50 per share. With a stock price of only $12.25 that adds significant value to Activision’s shareholders. (To read more click link below)

Read more...

My take on the Zynga IPO

If you are interested in reading my take on the upcoming Initial Public Offering (IPO) of the social media company responsible for Mafia Wars, Farmville, Words with Friends and many other games made famous by Facebook click the link below.

Investment Underground

I have been writing for Investment Underground for a few months now. You can read my articles as well as many others there. Give it a loook. I would be happy to hear your impressions.

How to Analyze a Dividend Stock

I recently wrote an article for the Investment Underground (Click Here) in which I provided recommendations on five dividend stocks and a justification for each recommendation. When you analyze so many similar stocks one right after another you tend to find a system and a rhythm. The first stock might require 3 hours or more to really feel comfortable before making a call. The next may go faster since you have identified where to find the information you seek already and have another set of stocks (the first stock and competitors) in which to compare. By the fifth stock (which actually means you have looked at 20 or so) the system is tight and you can see the patterns and make the calls in 30-45 minutes.

Since I have been there and done that, I figured I would share. Here is my system for analyzing dividend stocks. I am not suggesting that there won't be a learning curve. Don't expect to make a call on a stock in the same amount of time it takes you to watch an old episode of Wonder Years on Netflix (Ticker Symbol: NFLX) but you should be able to decide whether or not a stock is worth putting on your watchlist and whether you should do a bit more homework on it.

The obvious place to start is at the dividend yield. For those new to the world of dividend investing the yield is calculated by taking the annual dividend distribution and dividing it by the current stock price. If you are scared of math you may have stumbled into the wrong hobby but don't fret. This value is given to you free of charge at nearly every finance website. I prefer Yahoo!

Determining what size dividend yield you want is a personal choice. I will leave that part up to you. I am going to focus on the actual analysis of the stock in question but it is important to know what the dividend yield is so we can compare it to what it was and what it could be in the future.

Knowing what the yield right now doesn't do you much good if the dividend might vanish or be reduced next quarter. To ensure that doesn't happen you have to determine the dividend's sustainability. This is primarily a question of the company's overall financial health. To get a handle on that you should look at the following key statistics;

Earnings - Like any stock evaluation, you want to see positive and improving earnings. The more the company makes on the bottom line the more they can potentially distribute to their shareholders.
Cash - A healthy cash reserve will allow the company to sustain the dividend even if they have a few rough quarters. I like to see a cash reserve that is no less than 1/4 the amount of debt a company holds. This ratio is somewhat arbitrary and may not be appropriate for all industries but it is an indication that the company can handle it's debt load and can cut interest expense by paying down debt quickly. That flexibility is very attractive.
Operating Cash Flows - This is another number that should be compared to the amount of debt a company holds. Again, I would like to see a 1/4 ratio of operating cash flow to debt. As stated above, This shows the ability (though not the intent) of a company to pay down debt to ensure that interest expense does not eat away at profits.
Debt - As long as the comparison of cash and operating cash flows and debt stay reasonable everything looks OK. When a company's earnings can't support the dividend and the company starts borrowing to pay their dividend there is cause for concern.
Payout Ratio - The payout ratio shows how much of a company's earnings go towards dividend distributions. In general, the lower the number, the better. However, a number below say, 15% may be an indication of the company's lack of conviction regarding returning cash to its shareholders. This may warrant additional investigation into the company's philosophy on dividend distributions. If the company can afford to provide more cash to the shareholder, why isn't it? A number above 90% may mean that the company isn't earning enough to sustain the dividend at its current yield.

Once you are reasonably sure that a company can afford to continue to provide a dividend the next step is to check on the consistency of that dividend. Poor financial health isn't the only reason a dividend stock might decide to reduce or eliminate its dividend. Often a yield will be affected in the short term by a steep reduction in stock price. Whether or not that stock price change is justified does not really matter. The company may have a specific target for it's dividend yield and may adjust the distribution lower to account for the change in stock price. To get a feel for the dividend's consistency look at the following information;

Distributions over the past 5 years - This information can be quickly retrieved through Yahoo! Finance. Simply go to the stock's summary page by typing in the ticker symbol in the search bar and clicking "Get Quotes". Along the left side of the page click "Historical Prices". Toggle to "Dividends Only" and viola. Here you want to see a reasonable progression upward which would indicate distribution growth. If you see wild distribution changes the company may be adjusting in consideration of stock price, earnings, seasonal trends or on a whim. Regardless, unpredictability is not an attractive trait in a dividend stock.
Earnings Call transcripts - I like to search the earnings call transcripts for the word "dividend" to see what the company has to say about their intentions regarding the dividend.
10-K and 10-Q reports- You can also do a search on these annual and quarterly SEC filings to identify the comapny's philosophy on dividend distributions.

Now that sustainability and consistency have been checked it is time to look at dividend growth prospects. At this point you have already looked at the statements regarding dividend distributions in both the SEC filings and the conference call transcripts. You should have a decent grasp of whether the company is satisfied with its current distribution and yield but if they were mum on the subject you can look at thier ability to grow the distribution and make your own decision. To do this we consider some of the same information that we have already collected; payout ratio, cash, debt, operating cash flow. I like to compare these numbers to that of there nearest competitors. For instance, if I wanted to look at Coca Cola Company (Ticker Symbol: KO), I would also look at Pepsico Inc (PEP) and Dr Pepper Snapple Group (DPS). Comparative analysis is an important part of any first quick turn around analysis because it provides context and a jumping off point. Things to consider;

Who is the industry leader? - The leader may not provide as big a dividend as the 2nd and 3rd ranked company because they don't need to do so to attract investors. They often have a slightly higher P/E as well.
Who has greater growth prospects? The industry leader may not grow as fast as the smaller, younger companies and may compensate for a stagnant stock price with an increased dividend yield. Likewise, companies with greater growth prospects will have to spend money instead of distributing it as a dividend to achieve that growth.
Which comapny appears to be operating more efficiently - Companies that are more mature tend to operate more efficiently and can therefore afford to provide a higher dividend yield with less impact to there bottom line. Compare return on equity (ROE), return on assets (ROA) and return on investment (ROI) for an indication of a company's efficiency.

This is not an all inclusive analysis and more homework needs to be done. However, I did provide a great base for your analysis that may speed things up. Chances are you will rule more out quickly with this system and that is a good thing. A thorough end-to-end analysis should be done prior to making any buying decisions. I hope you found this article helpful. Thanks for reading.

Earning cash on the side through Odesk.com

We can all use a bit more cash even in the best of times and these, I am sure you have noticed, are not 'the best of times'. Unemployment is pegged at over 9% and under-employment (current employment not adequately meeting your financial needs) is far higher. If you are one of the unlucky ones that has been unemployed for more than six months, finding a job isn't getting any easier. The daily grind of job searching, resume editing, cover-letter writing, filling out applications and the occasional interview is taxing. If your looking for a way to break up the drudgery and make a few bucks while your at it, I have a few suggestions.

This is the first of a series of blogs I call Cash on the Side. This series will focus on methods of legitimately earning cash to keep you going through the tough times, pad your nest egg, save up for tickets to Disney World or whatever your financial aspirations may be.

Let me introduce you to ODESK.com.  

Some of my more observant readers might notice the Odesk advertisement over there (=====>>>). Odesk is an online resource that connects online employers to online contractors. You might be saying to yourself, "but I am not an online contractor." Neither was I but that is the good part, you can be. If you have knowledge, skills or an abundance of spare time you can be an online contractor. Unemployment might be sky high but there is no lack of online work and through Odesk you can find thousands of job listings.

This is not a get rich quick scheme. The pay is commensurate with the difficulty of the work. The more tedious, repetitious and unskilled the job requirements the lower the pay. More specialized, difficult work pays more. For example, I have earned a few hundred bucks through ODesk by ghost-writing 500 word articles that serve as content for other peoples websites at $5 per article.

What types of job listings are on ODESK.com? 

The jobs posted vary in duration from a single task that may take 20 minutes, like creating a spreadsheet t, to long term employment as a virtual assistant or software developer. The pay ranges from a couple of bucks for unskilled work to thousands. Some jobs are as simple as data entry (transcribing a PDF document into an Excel spreadsheet) or as complex as software development, drafting a business plan or providing financial analysis reports. There really is an amazing range of job listings. Below you will find a list of some of the available categories and sub-categories posted;

• Web Development - Web design, E-commerce, Website Project Management
• Software Development - Desktop Applications, Game Design, Mobile Apps
• Network and Information Systems - Network, Server and Database Administration
• Writing and Translation - Technical Writing, Creative Writing, Website Content
• Administrative Support - Data Entry, Personal Assistant, Web Research
• Design and Multimedia - Graphic Design, Logo Design, 3D Modeling and CAD
• Customer Service - Technical Support, Phone Support, Customer Service and Support
• Sales and Marketing - Advertising, Search Engine Optimization, Public Relations
• Business Services - Accounting, Business Consulting, Statistical Analysis

How does ODESK.com work?

The first question on your mind is probably the cost. Good news! It's is free for contractors. Employers foot the bill. The rate that Odesk charges the employer is 10% for each transaction. If the contract is for $50 then the work will cost the employer $55 total.

WARNING: Be sure to discuss whether or not the Odesk fee will be passed to you prior to accepting a contract. Otherwise you may take a job and fined your payment reduced by 10%.

Anyone can search for opportunities on Odesk but to apply for a contract you will have to take the time to build a profile. I highly recommend crafting a meaningful profile. Online contracting requires a certain amount of trust on both sides of the job. Providing a profile picture, listing work history, taking some assessments to back up your expressed skills and abilities will likely garner more invitations to apply for contracts. The number of jobs you can apply to is directly linked to how much effort you put into creating your profile.

WARNING: Likewise, you should not accept contracts from employers that do not have a history of paying for work. Odesk does allow employees and employers to provide feedback similar to that on EBay or Amazon. This helps to ensure the employer is reputable. Odesk also allows you to see how many jobs an employer has posted, how many are active and how much money they have paid out. All good indicators of whether you can trust the employer. 

After you create a profile you can cruise the site for jobs. Read the entire job description before applying for a contract. I recommend steering clear of job listings that use poor grammar, have misspellings and lack detail. Many employers will put a key phrase at the bottom of their job listing and request that you transcribe it at the top of your application. This is to determine whether or not you read the entire listing and can follow direction. It also ensures that an actual person has applied for a job manually and is not using a computer program (computers cannot read text directions). Many employers want you to have Skype (Free online video chat service) for interviews or project meetings.

Added benefits of online contracting....

Being an online contractor, even if you don't get an abundance of work, can fill gaps in your work history on your resume. This continuity could be the difference between getting the job or not. The resourcefulness and determination to be a part of the workforce and not rest on your laurels is a quality that many employers can appreciate.

You can also expand your skill set by taking assignments that require you to learn new things and develop skills you already have. This is a way to gain the experience you need to get to the next level in your current career path or to transition to another career without the risk of quitting your current job.

You can look for work that aligns with a hobby, creative writing perhaps. If you have every wanted to be a writer or jounalist, this is an opportunity to test those waters albiet at reduced pay. There are many job listing for ghost-writers or collaborators on books, manuals and scripts listed.

If it is too good to be true, it probably is....    

I listed a few warnings above but just in case you breezed by them or have a pronounced inability to see words written in italics (Hey, it could happen), here they are again;

There are scammers on this website. Be careful. Odesk does not provide any sort of conflict resolution. There are pretty simple ways to avoid them but it requires you to stay vigilant. Don't accept contracts from people that have no feedback, have not paid out to contractors or have very brief or grammatically incorrect job listings. Be sure to ask questions and clarify the expectations, deadlines, pay and whether you or the employer will pay the Odesk fee prior to accepting a contract.

Good luck!!!

NOTE: If you decide to create a profile on Odesk you can get to the webpage by clicking the Odesk advertisement on the top right of this page. If you create a profile and start working, I would appreciate if you come back and leave a comment on this page. Let me know if this article helped you out.  

Comparative Analysis: Apples to Apples

If you have been following this blog over the last couple months, first, I would like to say, Thank you! It has been a pleasure writing for you. If you haven't, you can catch up by visiting a few of my other posts. We have been discussing how to find stocks of interest in your everyday life (here), a few tips on what to look for in a stock as a beginner (here) and some free online resources to dig up additional information (here) on a publicly traded company.

Today, I am going to discuss comparative analysis. It sounds intimidating but trust me, you are already familiar with the concept. You have probably heard someone say the phrase "compare apples to apples", "that's apples and oranges" or some other similar phrase. It just means that it is far easier to compare things that are alike.

Consider the following question; Which is a better movie, Braveheart or The Notebook? I personally think they are both great movies (yes, I have been known to enjoy a chick flick on occasion). But I like them both for very different reasons. If I watched Braveheart and I wrote down what I thought made it such  great movie and then judged The Notebook by the same criteria I don't expect I would consider it great or even good. Nearly everything I enjoyed about Braveheart was absent The Notebook. I simply cannot compare the two by the same criteria and come to an honest conclusion. The same is true for Stocks.

When you are doing your stock research you will come across a lot of number and ratios that won't make sense by themselves. How much debt is too much? What is a good dividend? What is a good Price/Earnings ratio?

There is no template for what a good investment looks like. Different industries or sub-industries should be judged by different criteria. To determine what criteria a company should be judged and to get some context for all of those numbers and ratios you should look at a few different things;

Revenues ~ Looking at the reported quarterly revenues is a good place to start. Revenue is the total amount of cash coming in from sales of the product or service the company provides. This is often referred to as the "top line". For this number obviously higher is better.

Net Income ~ Net Income is the revenues minus expenses and losses. This is commonly referred to as the "bottom line". Again, the higher the number the better but you also want to be mindful of the relationship between revenue and net income. If revenue goes up drastically but net income stay the same there may be issues that need to be investigated. There are many factors that can impact that relationship, some good, some bad. Perhaps raw material costs are going up (probably bad) or maybe the company has been investing in new equipment (probably good) but whatever the case, it is important you know why.

Gross Margin ~ The gross margin can help you define the relationship between the revenue and the net income. It is generally expressed as a percentage. That percentage identifies how much revenue is turned into profit on a per unit basis. It sounds complicated but conceptually it is not. Think of it like this; If I own a sandwich shop and I sell a foot long sub for $5 and the cost of the bread, meat, cheese, vegetables, condiments, paper wrapping and labor come to $3 my Gross Margin per unit is 40%. This is an indication of how efficiently the company makes money.

Debt ~ Not all debt is bad. In many industries you will find that a certain amount of debt (it varies) is appropriate. In fact, having little or no debt might actually be harmful to a company in a competitive industry. Debt is often used to expand a company. Having no debt might mean that the company does know how or has no desire to expand which can limit earnings potential. Of course having too much debt is bad as well. Finding a range of what is the appropriate amount of debt for a company can be difficult but comparative analysis can help.

Price to Earnings Ratio (P/E) ~ As I explained in a previous article (here) the P/E is a very important number that can signify the perceived growth potential (or lack thereof) or value of a company. This number more than all the others discussed above is only valuable when compared to other P/Es.

That is a few of the numbers you should be comparing but to what do you compare them? 

• Competitors ~ Always look at the competition, preferably the company's chief rival like Coke and Pepsi. 
• Past Performance ~ To know where a company is going it helps to know where it has been. What is the company's P/E ratio now and how does that compare to its highest and lowest over the last few years? Are they accruing more debt or paying debt down? Are revenues trending up? Is net income outpacing the trend in revenue or is it lagging? Identifying trends is an important part of Stock Analysis. Often companies have a seasonal cycle, so be sure to compare the 1st quarter of one year to the 1st quarter of the next, the 2nd quarter to the 2nd quarter and so on.
• Expectations ~ Company's often make statements in earnings reports or press releases that indicate how much they expect to earn or grow in the upcoming quarters. Financial Analysts do the same. How do their expectations compare?  Do they match your expectations?

When performing comparative analysis, context is king. The more context you have the more sense you can make of that great jumble of numbers you will find in earnings reports, financial statements and Yahoo! Finance pages.

I will break down those numbers in a future blog so stay tuned and as always, if you have any questions feel free to post them in the comments section. I would love to hear them.      

Despite all the fear, Economy on the mend

If you have been paying attention to the Stock Market over the last few weeks you are probably confused, perhaps frustrated and maybe even feeling a bit nauseated. Since last Thursday the DOW has been like the ocean roiled by a great storm, swinging over 400 points alternating from positive to negative, 4 times (see the chart below) over the last week. Overall the DOW is down over 1,500 points since mid-July. If your new to the Stock Market or have purchased any stock in the last few months chances are you are in the red. This is a scary time but there is a valuable lesson here. Much like the ocean, one must respect the power of the Stock Market. It can bring you a great bounty or ruin if you do not take proper precautions but you can stay afloat.



DOW 5-day chart: Dangerous Waters



Don't Panic!!! 

The first step to surviving in these dangerous waters is to keep your wits about you. This is not the time to bail out of your holdings. Remember, you haven't lost a penny until you sell your stock for less than you bought in. It may make your stomach turn to look at your unrealized gains/losses but I highly recommend you hold on and let this storm pass. The Stock Market has weathered many storms over the last century and I don't expect that this one will be different.

If checking on your portfolio is giving you heart burn I recommend tuning it out for a little while. Take into account your time horizon (when you plan on accessing the funds in your account). If it is an IRA and you have 25 years until retirement age, you don't have to watch your portfolio every day, week or even every month. You should be investing with a very long term view and your holdings should not require a lot of maintenance (check out this article for more details).  

This isn't 2008 

A lot of media folks are trying to draw comparisons to the market in 2008. Don't buy it. While economic conditions seem worse now than they did then, the truth is, underneath it all companies are far healthier. They have less debt, more cash and are more efficient than they were in 2008. While our Government may be worse off, American companies are stronger than they have been in years. Its going to be American companies that drag us out of the recession, not the US Government.

Unfortunately, the health of American companies has not translated to a much needed increase in hiring. Unemployment is the greatest risk to the economy. While the health of the US Government is a concern, it is a symptom not the cause of our economic troubles. Companies are not hiring because up until now they have been able to squeeze greater productivity out of fewer employees but that only last so long. Eventually, efficiency is maximized and to increase capacity a company has to hire. I believe after 2 years of layoffs and process improvements American companies have reached that point. Hiring will soon follow. It may be in fits and starts but I think we could see hiring turn around as early as this fall.

What is happening?

A few things are causing this crazy volatility in the Stock Market but it all really boils down to fear and uncertainty. There are a lot of people that are genuinely frightened by the European debt crisis. There are some fairly large economies in Europe that are in trouble. While the Global economy seems to be in recovery the worry is that the instability that these countries may cause by going bankrupt would push us back into recession. People are also concerned that America may be on a similar path to bankruptcy and the political strife in Washington, DC isn't building confidence. The recovery is not happening fast enough for many analysts and that is prompting a lot of media reports that foster more fear and uncertainty.

A slow recovery is .....good?

Yes, the pace of the recovery is slow but I view that as a good sign. Sound crazy? If you think so, believe me, you are not alone. I know lot of people are still unemployed and people are losing their homes to foreclosure. That is terrible but give me a chance to explain.

Think of the Global Economic Crisis of 2008 like a broken bone. When you break your arm you go to the hospital and have it set and placed in a caste so that you will not damage it further and to give it a chance to heal, right? We did that by bailing out some banks and automakers, injecting cash into the economy with government bond buying programs (Quantitative Easing and QE2) and lowering the cost of borrowing by keeping interest rates low.   

Eventually, you have to take the caste off but the limb has atrophied. It is weaker and you use it reluctantly afraid it may snap.You use it tentatively and rehab it, slowly building the muscles back to their previous strength. Similarly, households, companies and even countries are rehabilitating their economies. Everyone is altering their sending habits whether they be cutting coupons, laying off workers or establishing austerity measures. Everyone is reestablishing fiscal responsibility by saving more and spending less. We are all strengthening our balance sheets and trying to improve our credit. It is a slow but rewarding process of which there are no real effective shortcuts.

One might suggest a shot of steroids to help with muscle growth but if the muscle recovery outpaces the bone hardening that may cause the bone to snap all over again. Even if the bone doesn't snap, the muscles may become dependent on the artificial enhancer or grow a tolerance requiring more and more of the supplement. No supplement is completely devoid of side effects and as the dosage rises so does the potential for those unintended side effects.

The very same can be expected if the US or any government attempts to meddle with the progress of this recovery. Like most things worth achieving in this world, a recovery of this sort will be long and not without suffering and there is no shortcut to success. Anyone promising the contrary (*cough, Washington) is selling something and I am not buying.  

Speaking of buying

The silver lining to this troublesome tale is that the recent downturn in the Stock Market has improved the value of quite a bit of companies like Ford, Southwest Airlines, General Electric, Caterpillar and Imax (All of which I own). It is a stock pickers market and if you do your research you are likely to find some great deals. 

   

How To Use P/E To Compare Stock Values

In a previous blog (here) I took you on a quick tour of the Yahoo! Finance and explained what some of the numbers and ratios mean. Today I will expand on one of the most prevalent ratios when analyzing stocks, P/E or the Price to Earnings ratio, also known as "the Multiple". Calculating this ratio is simple. You just take the stock price (P) and divide it by the earnings per share (E or EPS). The hard part is interpreting the P/E. There are no hard and fast rules that indicate what is a good or bad P/E.

You will find that this is a continuing theme in stock analysis. I would love to provide you with a check list of what makes a great stock but we live in a complex world where context is very important.

Using P/E to compare stock values

P/E serves a couple important functions. First, it provides a means of comparing the value of companies of different sizes. A common misconception when people look at stock prices is that a higher priced stock is more expensive than a lower priced stock. The truth is that there are a lot of factors that change a stocks price but to keep it simple consider these two;

• How much is the company worth? 
• How many shares of stock are in circulation?

Theoretically, if both of these numbers were concrete and indisputable you would just take the first number and divide it by the second (company worth / total shares) and that would give you a concrete stock price. Unfortunately, the first bullet is not a concrete number though. Many people will have many different opinions on a company's worth or total value. 

Since the company's total value is not concrete, financial analysts look to a company's earnings instead. Earnings are concrete, indisputable and reported quarterly by every publicly traded company. But stock analysis is about comparing company's to one another. How do you do that for companies of different sizes? McDonald's (MCD) is the largest fast food chain in the world. How can we compare its stock to say, Chipotle Mexican Grill (CMG). We just add up the previous four quarters worth of earnings (1 year) and divide that by the total number of shares in circulation. That gives you the Earnings Per Share (EPS).

EPS shows you the earning power each share represents, essentially telling you how much your portion of the company earns for each share you own. It is easy to assume that higher numbers are better but that isn't the whole story. What you and I am concerned about as investors is the value of a stock and to find that you have to consider what it cost, its price. That is where the P/E ratio comes in.

For example;

Apple (AAPL) has a stock price of about $393.30 and a EPS of just $25.56.

Coinstar Inc. (CSTR), owner of Redbox movie kiosks, has a stock price of about $54.23 and a EPS of $1.62.

At a glance most people would say that Apple is more expensive than Coinstar but Apple also has a much higher EPS and that has to count for something, right? How can you definitively compare them? You take the stock price and divide it by the EPS. It shakes out like this;

Apple: $393.30 / $25.56 = 15.56
Coinstar Inc: $54.23 / $1.62 = 33.54

What do these numbers mean? Well, at the current price you have to pay over 33 times what Coinstar has earned per share to by the stock where as you only have to pay just over 15 times EPS to purchase Apple. This seems to indicate that Apple is curently a better value despite the fact that the stock costs almost $400 per share.   

Analysis does not end there, of course. A lower P/E does not necesarily mean that the company is a better value or that it will provide better returns. But now you should have a better understanding of how and why those ratios were derived. I will follow up with another post that discusses P/E as an indication of potential earnings growth pretty soon. As always, f you have any questions feel free to post them to my comments section below and I will respond quickly. Thanks for stopping by.

3 Long Term Trends

When you are picking stocks for your retirement portfolio you don't want to have to fuss over them on a daily, weekly or even monthly basis. You should shoot for low maintenance stocks that you can buy hold and largely forget about. You can do this by purchasing industry leaders that support long term trends. These are trends, not fads. Fads can make you money but you have to babysit them. Below I have identified a few trends that I think are lasting. I also threw in a few companies that I personally think will benefit greatly from these trends.

NOTE: The companies mentioned below are meant as an example of how to play the trends I have identified. I am not recommending anyone purchase these stocks at their current prices without additional research and due diligence. 


E-Commerce -There isn't much that is out of reach if you have an Internet connection and a credit card these days. People are more comfortable shopping from home or on their mobile devices than they have been in the past and that seems to be a continuing trend. Obviously online retailers like online mega-store, Amazon.com (AMZN) benefit but retail is only one of the benefactors. I think some of the less obvious plays on this trend are potentially more lucrative in the long run.

Visa (V) is one of my top picks for playing this trend. E-commerce requires a credit card and Visa is the most widely used card out there and they get a cut of every transaction. I also think that the younger generation uses far less paper money than previous generations and I do not expect that to change. Not long ago it would seem silly to use a credit (or debit) card to buy a gallon of milk but that is normal these days. One must also consider the emerging markets. Many countries are improving the overall quality of life for their people and that includes infrastructure upgrades that lead to Internet access and access to credit. While I don't believe paper money will be phased out anytime soon, I do think the volume of credit card transactions is climbing steadily higher and will continue to do so for a very long time.    


Waste Disposal - This is a service that will always be needed and there is significant room for growth in emerging markets. Countries like China and India have vast populations that are clawing their way out of poverty into a rapidly growing middle class. Suddenly these people have income and access to all sorts of packaged goods that were previous unavailable or out of reach. This is going to increase the volume of trash and keep companies like Waste Management (WM) and Republic Services Inc (RSG) very busy for decades to come.

In particular, I like Waste Management. They are the largest waste disposal company in America and already have a number of joint ventures with Chinese companies that have given them a foothold in the world's fastest growing economy. It also happens that China has a vast and increasing problems with illegal dump sites, water contamination and mismanaged landfills. That foothold represents a lot of potential profit in the not too distant future. Waste Management is also a leader in the technologies that turn waste into fuel and sports an attractive 3.5% dividend yield.      


Green Technology - I am not buying into green technology companies right now because they currently rely too heavily on government subsidies and tax incentives to maintain their profitability. Those government subsidies and tax incentives are in danger during these uncertain economic times. However, I do believe that resource conservation is a long term trend and not a fad. Because of that belief I am on the lookout for a green technology company that has a sustainable business model.

Other ways to get in on green technology is by supporting (owning) larger, well established companies with significant green initiatives. For instance, automakers like Ford (F) that are striving to not only make their vehicles more fuel efficient but are making their manufacturing processes more efficient as well. Or a company like Johnson Controls Incorporated (JCI) that specializes in batteries and making  buildings more efficient (among other business lines) through the use of smart power control systems.

Teaching Our Children Financial Responsibilty

I am going to step away from my discussions on the Stock Market for a moment and answer a question that I get asked often by parents with young children. The question is "How do I teach my children financial responsibility?"

This is a GREAT question!
 
It is my firm belief (and the reason for this blog) that as a nation we are severely under-educated when it comes to finance. Ironic, considering we are the richest nation in the world and the founders of capitalism. Often financial lessons are learned the hard way and generally at the expense of our credit scores. The majority of our important life lessons are learned while we are still young children. whether we are talking about manners, good hygiene, sharing or financial responsibility.

My recommendation for teaching financial responsibility is simple really, an allowance but with a few significant tweaks. A typical allowance grants the child a set amount of cash on a weekly basis. This could be automatic or based on the child completing their chores. In my opinion, both of these methods are flawed.

How to teach the value of a dollar?

An automatic allowance teaches the child that they can get something for nothing and that just doesn't happen in the real world. I recommend a real allowance, not an entitlement. Tying the allowance to the child's chores is a step in the right direction. My concern is paying for chores that the kid should be doing anyway like keeping their room clean or doing the dishes after dinner. Those are obligations that are inherent to being part of the family. In an effort to teach the value of a dollar, I think an unintended consequence is a diminished acceptance of family responsibility.


So, how do you teach your child the value of a dollar without them trying to squeeze you for a few bucks every time they put a dish in the dishwasher or make their bed?

I recommend having two lists of chores. The first is a list of their responsibilities; things like keeping their room clean, helping with the common areas (vacuuming the living room, dusting the den etc), mowing the lawn and similar chores. This is stuff they do because they are part of the family and they  live in the house too. I believe rewarding these things monetarily under-minds the sense of responsibility to family that we all want our children to feel. Somethings you do because it is right without the expectation of a cash reward.

For the second list I recommend focusing on chores that the kids can do that make life easier for the parents or save the family money; things like washing Dad's car, cleaning the garage, doing the laundry (at least, their own), weeding Mom's garden, perhaps mowing Grandma's lawn. For this list you can set prices and add new tasks to the list as you go. Some of these jobs might be one time things like helping Dad tar the driveway. If you want to make the lesson especially realistic, you can focus on jobs that are unpleasant and time-consuming.

This teaches the value of hard work and of the all-mighty dollar but it doesn't necessarily instill the best spending or saving habits.

How to teach your child to save?

For this I recommend opening the First Bank of Mom and Dad. Make a deal with your kids that at the end of each month you will give them a nickel for every dollar they save. You can choose whatever interest rate you like of course but I think 5% is enough to make them think twice about spending without breaking your own piggy bank. In a previous blog (here) I wrote about the power of compound interest. Arming them with this knowledge early on can have a huge impact on their financial health for years to come.

How to teach financial discipline?

Financial discipline is all about delayed gratification and spending within your means. This is perhaps the most important lesson of them all because as soon as your children turn 18 they will be assaulted with dozens of applications for credit cards. While credit cards are not evil, they can cause a lot of damage if not handled correctly.

So, you have already provided an incentive for saving money but what do you do if they want advance on their allowance. Well, the First Bank of Mom and Dad can handle that too. If they need a loan, offer them the same terms (5% a month) with an additional fee if they are late with a payment, maybe an additional 10%. This may seem harsh but it is far more lenient than the credit card company will be.

Free Investing Tools for Beginners: Yahoo! Finance

In previous blogs I wrote about what the stock market is (here), how to find stocks you may be interested in buying based on your own knowledge and experience as a consumer (here) and a few tips for picking stocks for beginners (here). If you happened to have read them over the past few weeks (or hastily over the last 15 minutes) you may have some ideas for companies you want to invest in. But how do you find out whether your ideas are good ones? There really is only one way. Research. Don't worry, it's not nearly as dull as it sounds. 

So you have a company name. Where do you go from there?

Its time to do a little digging. You should be familiar with the product or service the company provides to some degree already but you have to find out more about the business. What is the company's ticker symbol? How big is it? Where do they operate? What other products and services to they provide and to whom? Who are there major competitors?

Eventually, these and other important questions will have to be answered, preferably before you decide whether to buy in or not. I write "eventually" because I think a layered approach is the most accessible. Over the next few blogs I intend to show you around some useful (and free) tool available right here on your friend the Internet. These are websites that I use to track the market and investigate companies that I invest in.

The first tool I would like to introduce is the Yahoo! Finance page. I think a visual aid will help so right click here and select "open link in a new window". Got it open? It might be helpful to have this page and the Yahoo! Finance page open side by side.

Welcome to the Yahoo! Finance homepage. Here you can check out some financial headlines, get a snap shot of the markets activities for the day (notice the chart a quarter way down the left side of the page) or use the "Get Quotes" search box (top left). I am going to let you poke around on the homepage on your own. I am more interested in the company pages on Yahoo! Finance. You access these pages through the "Get Quotes" search box.

Get Quotes: This search box is a great way to find the company's ticker symbol. The ticker symbol is a  unique identifier (usually 3 letters or less) used when trading stock. You likely have seen ticker symbols marching across the bottom of your television screen if you have ever flipped to CNBC or FOX Business channel. To find the ticker symbol just start typing the company name in the search box. A drop down list of companies will appear and you can select the intended company.

Go ahead, try it! If you don't have a company in mind take a look at Walt Disney Corporation (DIS). I split this page into 4 sections. I am only going to go over the first section today, the Stock Information. The otther sections, the Chart, the Headlines and the Links along the left side of the page, require a blog or more of their own.

Section One: Stock Information 
This is the section smack dab in the middle of your screen just below the company name. Some of this information is pretty intuitive but I am going to go over it line by line starting with the left-most column.

Last Trade: This is the price that this particular stock was sold for in the last trade. This isn't necessarily the price it is still selling for though. Price changes happen rapidly and there is a fifteen minute delay before this information shows up on your screen.

Trade Time: Another easy one. This is the time (or date if it is a weekend or holiday) that the last trade was executed.

Change: This line shows the difference in the stock price since the market open (9:30 AM EST M-F, excluding holidays). The arrow indicates whether the price has increased or decreased (also illustrated by the color: green for an increase, red of a decrease). It shows the dollar value of the increase and the percentage (in parenthesis).

Prev. Close: Short for previous close. This is the price that the stock closed at on the previous trading day.

Open: This is the price that the stock was at the market open. This price is often different than the previous day's closing price because there is after market trading in the US and other the markets around the world (Asian, European etc) effect US stocks as well.

Bid: Here you see two numbers that look something like this: 40.00 x 300 (or something similar). This means that there is a large open order to purchase 300 shares of this stock at the price indicated ($40.00 per share). This is the highest bid of the currently open orders. These numbers will change when this order is filled, canceled or modified so it is no longer the highest bid, or a new higher buy order is placed.

Ask: This is the flip side of "Bid". Here you see two numbers in the same format as above. The difference here is that instead of a buy order. This represents a large sell order.

SIDE NOTE: Often these numbers will change very rapidly for popular stocks and the two prices, Bid and Ask, will be very close, within pennies of one another. This is not always the case though. Some stocks will show a large gap between the Bid and Ask prices. This might indicate a divergence in public opinion. 

1y Target Est: Short for 1 year Target Estimates. This is supposed to be a prediction of what the stock price will be a year from now. Honestly, I am not sure where Yahoo! gets these numbers. I suspect this is the average, median or mean of a group of Analysts following the stock. Frankly, I put absolutely no faith in these numbers and I implore you to ignore them as well.

Day's Range: This is another easy one. This is the lowest and highest price the stock has traded for over the course of the day.

52wk Range: Short for 52 week Range. This one is similar to the Day's Range but instead of the day it represents the lowest and highest prices over the past year.

Volume: This is how many share of this stock have changed hands today. This number is often in the tens of millions for well known corporations. By itself this number doesn't tell you much.

Avg Vol (3m): Short for Average Volume (3 months). This is the average number of share traded daily over the past three months. If you compare this number to the number above it (Volume) you have an indication of how much interest there is in this particular stock. A spike in volume generally coincides with some news or event that may impact the stocks value. It is a sign that you should be looking for that news because it may require some action (buying more, selling etc).

Market Cap: This number is the perceived value of the company based on the price of the stock and multiplied by the number of shares outstanding. So, if you happen to be wondering how many shares of Disney stock are out there simply divide the Market Cap by the stock price for a ball park (accuracy is effected by how much rounding Yahoo! does to the Market Cap).

P/E (ttm): Here is where things start to get interesting. P/E is short for Price to Earning ratio, also known as "the multiple". To get this number you take the stock price (P) and divide it by the earnings per share (E or EPS). This is a very important number. A high P/E generally indicates a stock may be expensive or that there is a great expectation for growth in future earnings. A low P/E generally means a stock may be cheap or that the expectation for earnings growth is limited. It isn't as simple as that of course. I will write more about this in a later blog.

EPS (ttm): Short for Earnings per share. This number represent the company's annual earnings (think revenue or sales, not net income. I will write more about this when I go over financial statements) divided by the total number of shares.

SIDE NOTE: I am sure you didn't miss the fact that I ignored the (ttm) on the previous two definitions. It stands for trailing twelve months. This indicates that the EPS number is a total of the previous years earnings. This effects how we consider this information. A lot can happen in twelve months that can impact (positively or negatively) a company's ability to earn. Like everything, these numbers cannot be taken at face value. 

Div & Yield: This one is short for Dividend and Yield. I wrote briefly about dividends in a previous blog (here). The first number is the dollar amount you will earn annually for each share of this stock you own. It is often split into quarterly payments.

The yield is a percentage that represents the annual return you will gain simply for owning the stock. To find the yield you divide the dividend by the stock price. There are a lot of reasons that a high yield is attractive. First and foremost it is the closest thing to a guaranteed return you will find when dealing with stocks.

5 Classic job hunting tips that never went out of style

I decided to take a detour on my blogging adventure to write about a topic that is relevant for far too many Americans these days, many of which are friends and family, job hunting. This topic is not directly related to my previous articles but since it involves income and a persons ability to save, invest and support a family, I think it isn't too far off topic.

Over the course of my career I have had the opportunity to take part in dozens of interviews, both as an interviewer and an interviewee. I have noticed a significant change over the past decade in the observance of common customs and courtesies surrounding the interview process.

I think during the boom times when unemployment was at 5% or lower, job seekers became complacent. It was easy too become a passive job seeker. The Internet provided an easy way to apply to position or simply post a profile with a resume and let recruiters and employers find you. Common customs and courtesies seemed to have eroded because separating yourself from the pack wasn't a requirement anymore. Those times have come and gone and they may not be back any time soon. Unemployment is still near 9% years after the worst of the financial crisis and job growth has been slow. There are more college graduates flooding the talent pool each semester and experienced and educated people have been laid off and are willing to accept lower tier positions that they may not have considered in the past.

Here is a list of 5 classic interview tips that are still relevant and maybe more so now than ever.

Dress the part (even at a job fair)

I've been to job fairs in which 30% of the job seekers are decked out in their very finest flip flops and t-shirts. If you want an interview, DRESS LIKE IT!! While clothes don't make the man, they do say something about the amount of effort you put into your job search and that may correlate to your work performance. Employers don't have the time to get to know you. They have to rely on superficial evidence to weed out candidates. Don't give them a reason to doubt your considerable desire to work for them.

Smile

I have been on both sides of the desk at interviews and let me tell you, it is OK to smile. In fact, it is more than OK. Interviews are generally a high pressure situation.  Smiling makes you appear comfortable, calm under pressure, approachable and friendly. Moreover, you may find that it actually boosts your confidence. Interviews needn't be clinical and serious. A well written resume illustrates your experience and expertise but can't effectively communicate your personality, social aptitude and enthusiasm. That is what the interview is for and a smile is a great start.

Customize your resume

Employers want to think that you only have eyes for them. You wouldn't recycle a love letter from an ex-girlfriend with your new lady love, right? Guys.....right? If you are struggling to answer, let me help you. Of course you wouldn't. Don't do it with employers either. Ensure that your resume matches the job description, skills and experience requirements as closely as possible without exaggeration or falsehood.

Effort is important. Taking the time to customize a resume is a way to show the employer that you are willing to go the extra mile.

Be prepared

If you get called in for an interview be prepared. Bring copies of your resume  (I recommend at least 4), recommendation letters (no more than two) and past performance reviews. I have gotten a lot of positive feedback on my "candidate packet". I take a standard navy blue folder, staple a cover sheet on the front that lists the position title, requisition number, company name (and logo if you can find one online), my name and the date and time of the interview. On the inside (left pocket) I provide an index. In the right pocket I provide a copy of my resume, a recommendation letter, a customer feedback letter and 3 years worth of performance reviews.

Remeber, effort is important. This will take you 10 minutes to create but can leave a lasting impression. It shows you are thoughtful, organized and willing to work for what you want.

Write a thank you letter (maybe two)

Within 3 business days of your interview be sure to send a thank you letter to everyone that participated in the interview. Thank them for their time and consideration and remind them why you want the job. This is your last chance to make an impression so if you walked out of the interview and thought about things you should have said, now is your chance.

If you find out later that you did not get the job I recommend writing a second letter to the hiring manager. Again you should thank them for their time but also solicit feedback. Reiterate your desire to participate in this particular line of work. Ask for any feedbacks or notes from the interview the hiring manager may have and is willing to share. Ask if the hiring manager would recommend a particular experience, training or education to pursue that will better prepare you for future interviews. In my experience, only 1 in 10 hiring managers will provide feedback but that feedback is nearly always invaluable and can be the first step to establish a lasting business relationship. You may not have been selected for this job but your persistance may be rewarded with a future opportunity working for the same employer.

Picking Stocks: For Beginners

If you read my last post  you may have a few ideas for stocks you might like to own. If not, you can check that post out here. So, you have an idea for a stock but how do you know if it is a good one? Here are a few rules for beginners that will help you separate your good ideas from the bad ones.

Go with what you know: Being intimately familiar with a company, its products or services is crucial for the beginning investor. The incite gained by being a customer is invaluable and can make up for a lack of financial education to some degree. Let's look at McDonald's (Ticker Symbol: MCD). You have probably been to McDonald's a few dozen, if not hundreds of times over the course of your life. If you haven't think of a fast food chain that you have.

You would notice if the prices went up or the customer service went down. You can probably identify when a new item is put on the menu or an old one removed. You might have tried the new item and have an opinion or heard opinions from your friends and family about the new item. You probably noticed that quite a few McDonald's are selling specialty coffee now and it is pretty good. Many McDonald's stores have been renovated to look more upscale. You probably drive buy one or more McDonald's on a weekly basis and would notice if they were shutdown. You can probably list at least 5 competitors and have an opinion on why McDonald's is better or worse than they are. Wow, after looking at all of that, you seem like an expert, don't you? Furthermore, you have friends, family and co-workers that have incite that you can leverage by having a casual conversation.

For example, I was talking to a family friend today that works as a mail carrier. He told me that at one point a couple years ago a few of his co-workers were discussing the huge increase in the number of Netflix envelopes they were delivering. That is a pretty good indication of that the company was doing very well.

Understand the business:
This is an expansion of the first rule but it is important and distinct enough to warrant a few paragraphs of its own. When I say "understand the business", I don't simply mean knowing what a company sells. I mean understand how they make money. For instance, movie theaters make most of their money in concessions. Tickets sales largely go to the studio that produced the film. The extra $3 (or so) that you pay for a 3-D movie might go the 3-D technology company (but not necessarily).

You should also understand what sets them apart from their competitors. This rule is why I avoid pharmaceutical companies. It isn't that they are not profitable companies, I just don't understand why Merck is any better than Pfizer. I do have a pretty strong opinion when I choose an airline though. I can explain why I prefer Southwest Airlines (Ticker Symbol: LUV) over every other domestic airline.

You should also think about who a companies primary customers are. This will help you understand what events (global, national, regional or local) might impact a stock. For instance, we are currently experiencing extremely high unemployment. Certain companies actually benefit from these conditions. For instance, Monster Worldwide Inc (Ticker Symbol: MWW), is the company resonsible for Monsters.com, the website that assists job seekers find employers and vice versa. Discount stores are another industry that does well in tough economic times, companies like Walmart (Ticker Symbol: WMT).

Go with established companies: I always recommend folks new to the stock market choose companies with a history of success and a solid brand name. Companies like Walt Disney (Ticker Symbol: DIS) or Coca Cola (Ticker Symbol: KO) This does not guarantee success (nothing really does) but it will help you avoid companies that that don't have staying power or are fads or fly-by-night operations. These are companies that have been around long enough to see difficult economic times and have survived or even come back stronger. They have made mistakes and recovered. They are mature, stable and generally return cash to their stockholders in the form of a quarterly dividend.

SIDE NOTE: Stay away from penny stocks (stocks priced under $4.00).

Power to the people!

Finding a good stock isn't nearly as complicated as you think it is. No, really. I mean it. You know far more about picking stocks than you realize. You are a consumer. You interact with dozens, maybe hundreds of products, services, and companies on a weekly basis. You have family, friends and co-workers that talk about products, services and companies daily. You know what you like, you know what they like.

That is a pretty good start when you are considering buying stock. It isn't enough but it gives you a place to begin your research. In later blogs I will take you through my process for that deeper research but for now lets keep it simple. Here are some questions you can ask yourself that can lead you on your search for a winning stock;

• What product or service just seems to be everywhere? What product can you not leave the house without seeing? Coke, McDonald's, IPads and IPhones (Apple), Amazon Kindle (I'm a big fan by the way).
• What marketing push worked on you? Domino's pizza admitting that they were selling an inferior product and promising to fix it won me over. I was intrigued. I had to try it and I have to say, I like the new pizza. I hadn't eaten a Domino's pizza in over 5 years but I am a regular customer now. Apparently, a lot of other people felt the same way. Domino's Pizza's stock (Tiker symbol: DPZ) is up over 80% since last August.
• What company consistently delivers a quality product, service or experience? 10 out of 11 Pixar movies have been #1 in the box office and all of them have been extremely profitable. The only reason Tangled did not make it to number 1 was because a Harry Potter movie came out the previous week. Pixar was purchased by Disney (Ticker Symbol: DIS).  
• What product or service do you abslutely love? For instance, when I am booking a flight I always fly Southwest (Ticker Symbol: LUV) if there are seats available. They generally have the lowest fares, they don't charge to check a bag and I think they have great customer service. Chances are, if I feel that way about them many other people do to.   
• What product or service can you not imagine living without? or said another way, what product or service has changed your life permanently? There are certain products or services that change the way we do things forever. For instance, the internet, cell phones, credit cards, DVR, GPS, streaming video (Netflix) etc. Finding the leader in these segments of industry might be a pretty good start.

Finding a winning stock isn't about crunching numbers and watching CNBC 12 hours a day. Its about recognizing the impact consumers (you, me, your friends, family and co-workers) have on individual companies and the stock market as a whole. Where we decide to spend our money decides which companies succeed and which fail. We, the middle class and below, power the stock market but too few of us participate in it. If we want to close the gap between the rich and the rest of us, we need to leverage all of the tools available to us. 

So, hopefully I have gotten you to start looking around, thinking about your own habits, experiences and interactions with companies and their products and services in  a new way. If you have time think about the questions I posted above, try jotting a few companies down over the next week or two. I will follow up this post with one that will get into the next layer of research.

What is the Stock Market?

The Stock Market can be an intimidating place. The recent financial crisis which decimated so many people’s retirement accounts is still fresh on everyone’s mind. Economists and Financial Experts are all over the news talking in jargon that 90% of Americans don’t really understand. They use acronyms, terms and ratios that are confusing and overwhelming. It makes the Stock Market seem inaccessible at best. I have heard people commonly refer to the Stock Market as gambling (my wife is one of them) or a fool’s game. Many people have told me that the Stock Market is a game for the rich, that lower and middle class folks don’t stand a chance.

I am trying to dispel some of those misconceptions because I believe the best way for someone to claw their way out of the lower or middle class is by taking advantage of the Stock Market. It can help you put your kids (or yourself) through college. It can ensure that you can live comfortably in retirement or help purchase your first home. There are risks. I won’t deny that but there are simple ways to minimize them. It is far easier than it looks but it is not intuitive. You need someone to walk you through it, someone that can translate the jargon and explain financial concepts in simple terms.     

Let’s start from the beginning;

What is the Stock Market?

The Stock Market, for the most part, is a secondary market. That means that when you purchase a company’s stock you are not buying it from the company but from someone else. You are buying stock second or third or 23^rd hand. Stocks for the most part are used goods. Think of the Stock Market like a giant swap meet but instead of crafts, clothes and used furniture people are haggling for stocks, bonds, mutual funds, commodities and other more obscure financial products.

What is a Stock?

Each share of stock represents a miniscule portion of company ownership. Many companies have sold millions or even hundreds of millions of shares. When I write that you own a portion of the company I do not mean that in some abstract sense. You literally own a portion of the company. You have voting rights (each share is a vote) on company matters. You can attend and be heard at company shareholders meetings. Some companies even give you a cut of the profits called a “dividend” for each share of the company you own (I will write about that in great detail another time). All of this participation is strictly voluntary.

So why own Stock?

The goal of every company is to make money for the owners. As a stock holder, that’s you. Ever considered opening a business but decided it was just too risky. Maybe you just didn’t have enough cash on hand to make it happen. Well, why not just buy into a well established company with great leadership and a product line that anyone born after 1975 can’t seem to live without; Apple (AAPL). Or how about a fast food company that has stores in 119 countries world-wide but is still an American icon; McDonald’s (MCD).

These two companies are highly respected organization and while their stock price may go up and down over the weeks, months and years the general trend is up and they will be around for a long, long time. It is important to remember during those down days that you do not gain or lose money until you purchase and then sell your stock. It may worry you to the point of giving you hives but you are not out of the game until you sell.

SIDE NOTE: I would suggest that any new investor stick to this type of large, well known, highly established companies that would make headlines if they were in trouble. I am not saying it is a fool proof investing plan or a plan at all really but you will avoid a lot of risk by simply choosing companies that you know and are familiar with. I mean, if a few of McDonald’s near you boarded up their windows you would notice.

How does owning stock make you money?
There are two primary ways that a stock can make you money. The first way is stock appreciation. You have probably heard the phrase "buy low, sell high" before. It refers to buying stock at one price and selling it at a higher price. It is a very simple concepts that we all are familiar with but it is easier said than done.

The second way a stock can make you money is through a dividend. A dividend is basically profit sharing. The company distributes cash to its owners based on the number of shares they hold. The distributions generally happen four times a year (quarterly) at a set annual rate. For intance, Windstream Corporation (WIN), offers $1.00 per share, broken into quarterly distributions of $0.25. This is often represented as a percentage of the stock price called the dividend yield. Windstream's price is currently about $13.00 a share. To get the yield take the dividend and divide it by the stock price and multiply it by 100 like so: ($1.00 / $13.00) X 100 = 7.7%. That means if you purchase the stock at $13.00 a share and you keep it for a year you will earn a 7.7% return without selling the stock.

SIDE NOTE:  Dividends can be altered or suspended at any time. Buying a stock with a dividend does not guarantee the yield. Also of note, this percentage changes as the stock price changes. If the dividend stays the same but the stock price drops the yield increases.    

What is a Bond?

When you purchase a bond you are purchasing debt or in more familiar terminology, you are loaning money. There are many kinds of bonds. You can buy them from the United States Federal or State governments, another country’s government or a corporation. Bonds have far less risk than stocks but the potential for reward is capped by the interest rate. Just like any loan, when a bond is purchased it has an interest rate and a specified duration. For instance a 2 year treasury note right now will earn you around a 2% guaranteed annual return (unless the US government collapses). Stocks do not come with a guarantee but the potential gain is unlimited. Most bonds do not really come with a guarantee but the risk of a government or company defaulting on a loan is generally pretty remote because the impact is to the company or governments well being is often catastrophic. The more likely a company or government is to default the higher the interest rate they will offer for their debt.

What is a Commodity?

In a word, Stuff. Commodities are everything from oil and gold to coffee and grain. This stuff, or more often the paper contracts that represent the purchase or the option to purchase this stuff is bought and sold daily.

What is a Mutual Fund?    

A mutual fund is a collection of stocks, bonds, commodities and other financial products crafted and managed by a financial professional. When you buy shares of a mutual fund you are purchasing a portfolio of financial products that when combined are supposed to meet an objective. An example of a common objective would be to match the performance of a particular index, say the S&P 500. That portfolio is not static. It is professionally managed which means the mix of stocks, bonds, commodities etc can and often will change. The point of a mutual fund is for a bunch of individual investors to pool their money together so they can achieve a level of diversification they couldn’t on their own. They also have access to investment products and opportunities that are only available for larger investors. The down side of course is that there are fees associated with the professional management.         

I managed to avoid discussing the mechanics of purchasing stock or methods for stock valuation yet again. I am starting with baby steps so that this can be a comprehensive resource for all levels of traders. Trust me, I am as anxious as you to discuss the nuts and bolts of stock valuation. I hope you found this primer helpful. I will spend more time on all of the topics discussed above in the future so if I did not get to your specific question, come back at a later date (or you could ask me by commenting below).

Family Man Mission

I often recommend, as I have in past blogs, that people open Individual Retirement Accounts (IRA) or 529 accounts (college savings plan). Both of these accounts allow you to participate in the Stock Market. I understand the fear and suspicion people feel towards the Stock Market. It is understandable really. When you don’t understand the rules or why things are happening it can be confusing and scary. I feel the same way about Cricket. I am sure it is a really great sport but for the life of me I just can’t figure it out.

I hope over the course of the next few weeks, months, maybe years to help you figure out the Stock Market (in return, if anyone knows how Cricket works, I am listening). If you’re interested in learning how the Stock Market works and maybe even how to manage your own brokerage account then subscribe to my blog or visit me periodically. If you have questions, please ask them and if I don’t have the answers I will do the research to find them. This is a passion of mine. I enjoy Finance and enjoy helping people out. That’s what this is all about.

I want to show you that the Stock Market isn’t gambling or throwing money away. It isn’t magic. You can make sense of it, you just need a guide.

The Stock Market is a tool that can help send your children to college. It can allow you to retire with dignity. It can help you buy your first house or get out of debt. I am not interested in making rich people get richer. I will not promote get rich quick schemes or promise guaranteed returns if you just donate x amount of dollars. This information is meant for anyone that is struggling to keep their head above the water or just wants to improve the quality of life for thier family.

From one Family Man to another (or to a Family Woman), I just want to share what I have learned through my experience and my studies.

College Savings Plan (529 Account)

Over the past 30 years it has become increasingly evident that getting a college education improves everyone’s chance to be financially comfortable or even wealthy. We all want our children to have a better life than we have had. While college is not a ticket to easy street it gives our children a fighting chance in the real world. Unfortunately college tuitions are going up fast and average household income rate cannot keep pace.

In a previous blog I mentioned college savings plans and specifically referred to a 529 account. This article will focus on what a 529 account is and how it can help pay for your children’s college expenses.

What is a 529 plan?

A 529 Plan is a tax-advantaged education savings plan that is run by a state that is designed to help pay for tuition and other college expenses. Every state has at least one 529 account and many have 3 or more. Think of the 529 account as a 401k or IRA but instead of saving for retirement you’re socking away cash (and hopefully getting a good return) to pay for college. A 529 account and an IRA share many of the same benefits but they are not identical and they differ from plan to plan. Here are answers to frequently asked questions regarding the 529 account:

What are the Federal Tax benefits?

In this respect a 529 acts like a ROTH IRA. The contributions to the account are not tax deductible but if the money is pulled out to pay for college expenses the contributions and any gains will not be taxed.

What are the State Tax benefits?

Some, not all, 529 accounts will allow you to deduct your contributions for your state taxes. Of course, this benefit doesn’t mean much for those that live in states like Florida or Texas which don’t have state taxes.

Who is in control of the money?

The owner of the account retains all rights to the account. This means that even if you appoint a beneficiary (a requirement for most 529 accounts) you still dole out the money as you see fit. If your beneficiary decides not to go to college, gets a full ride scholarship, joins the military or if you decide that they just don’t deserve it, you maintain all rights to that money. Furthermore, you can pull all of your contributions out of the account at any time without penalty (unless you touch the gains).

Who can contribute to the 529 account?
Anyone. Most 529 account websites will provide a link that you can email to your friends and family that will allow them to directly deposit money into the account. Contributions to a 529 account make great gifts for babies and toddlers especially since they would rather play with a cardboard box or wrapping paper than the expensive new toy you got them.

How much maintenance is this going to take?

Generally, when you open a 529 account you are given a number of investment options. The one I recommend is the aggressive time based option. It may be called something different depending on the account. This is a management technique that takes into account the beneficiary’s age. The portfolio will be a mix of bonds, stocks, mutual funds and cash. When the beneficiary is very young it will be mostly stocks and mutual funds and little bonds and cash which is considered riskier but should provide for higher gains. As the beneficiary approaches 18 years of age the investment mix will progressively become more conservative. The manager will cycle the investments out of stocks and mutual funds and into bonds and cash to protect it from potential economic threats.

How flexible is a 529 account? What if I change my mind?

You can change the beneficiary or your investment option once a year or name multiple beneficiaries if you would like. You don't even have to wait to have children before you open a 529 account. You can open the account and name yourself as the beneficiary or your spouse, cousin, mother or father. If your child happens to get a full ride due to some academic or athletic achievement you can wait until your future grandkids are heading of to college. As long as the money goes towards college expenses there will be no penalty. If you do decide to use the money for something other than college expenses there is a penalty. That is discussed a bit more below.

Will this complicate my taxes?

Since the money you contribute is already taxed there are zero tax implications until you start distributing the money. Even when you do start taking or doling out distributions as long as they fall within the rules for a qualified college expense you will not be penalized. You also won’t receive a 1099 form to report taxable or nontaxable earnings until then.

What qualifies as a college expense?

Surprisingly, a lot qualifies as a college expense. College tuition is a no brainer but books, room, board, school supplies (paper, pens, scan-tron sheets etc). Even a laptop computer can fall into the category of qualified college expense as long as its primary purpose is school. Let’s get back to room and board for a second. This is not just a dorm room and a college cafeteria card. This can go towards an apartment or a mortgage (though not as a down payment). Groceries and dining out also count (but I wouldn’t push it by running up a large bar tab). 

What’s the limit on contributions?

Unlike a ROTH IRA, no one is excluded from using a 529 account regardless of income. Also, the contribution limit varies from state to state but it is typically a total of $300,000 per beneficiary. This means that you can contribute as much as you want annually but be careful, if you contribute too much ($13,000) you may have to pay the federal gift tax (but that is another blog entirely).

Will this impact my child’s financial aid application?

Parental assets are assessed at a maximum 5.64% when determining whether a student is eligible for financial aid. So the impact should be very small.

What if I decide not to use the 529 account for college expenses?

If the account distributions do not go to qualified college expenses than a penalty of 10% will be assessed. On top of that, if the gains on the account (anything over the total amount contributed) are used in an unqualified way taxes will also be assessed.

How do I set up a 529 account?

I suggest that you visit your bank and discuss it with someone from the investment group there. They will likely have a few to choose from that they recommend.

This was just an introduction to the 529 account. In a later blog I will dissect the 529 account, typical cost and the best benefits.

Remember, saving for your children to go to college is a high priority but you need to ensure that your retirement plan is in full swing first. The last thing your child will need when they are 30 years old and have a family of their own to take care of is the additional financial burden of supporting you through retirement.