Saturday, February 13, 2010

What does the stock price mean?


Todays lesson is pretty easy:
Everything you really should know about a stock can be narrowed down to pricing. Why does a stock go up or down? How do I forecast it?

To start off, imagine you own a company and decide to issue stocks. This means you split the whole company up in little, equal-sized pieces worth a certain percentage of your firm (you can also reissue stocks, but that's too complex for now).
I will skip all useless information I could throw in at this point and go directly to the important part:
How much is my stock really worth? In deciding how much a company as a whole (and therefore each stock) is worth we have two methods:
1. book value
The book value is basically everything the company owns. For understanding:
Suppose you're a producer of soft drinks. Your company owns a factory building where you mix the drinks, also you own all the machinery needed, plus you own an office building which is packed with desks, computers, chairs, etc.
Add all this stuff up and this is the book value of your firm (roughly). In econimist language we say: The value of a firm is determined by the value of its assets.

2. market value
Suppose, you are not any softdrink producer, you are Coca Cola Inc.
The market value is more or less the current stock price (if you haven't got any debt) * the number of stocks.
The thing is, the stock price is often enough above book value. Why is that so? Well, it's hard to tell how much a firm is really worth, because if you would buy Coca Cola, the company assets (along with the secret formula) might not be the expensive part, but the brand itself is: If you are coca cola, you are able to sell your products at a higher price than any no-name soft drink producer.
So we have to keep in mind how your company might make profits in the future.
You see it's pretty hard to calculate the exact price of a stock.

What can you do then?
Let us first take a look at why stock prices rise and fall:
We are back at your company coca cola.
The current stock price is 50$. Out of the blue McDonalds announces that they will team up with you and firmed a contract saying that for the next 100 years they will annualy buy drinks off you worth 1 million/year.
So how does that affect your company? Your stocks have to be worth more than before, since you know that you will earn an extra amount of cash each year.
So your stock price goes up to, say, 55 $ - meaning you just made your first 10% (of course you own a good amount of stocks in your own company).

Unfortunately, a month after that the fat-people-lobby managed to sue McD. for their unhealthy food and the whole court thing made McD. go bankrupt. This means the deal above will never take place. Therefore your stocks fall back to 50$. Easy come, easy go!

There is a certain saying:
Stocks rise on rumors and fall on news.

Mostly instead of the scenario above it goes like this:
Your mate Dave works at McDonalds. He overheard a conversation of the current CEO saying that he wants to team up with Coca Cola. Instantly Dave tells you and everyone he knows. The stocks rise, because investors expect Coke to have a deal no one yet knows about.
This is called speculation. Although you don't know how things end up, you have some kind of feeling how they could go (please, don't ever listen to an investment advice from a bro working at McDonalds - you will regret it, trust me).
Just remember 5th grade: Only because Dave told you he kissed Anna McGee doesn't mean it really happened (or it will ever happen for that matter).
So if things go bad, because maybe McDonalds denies any future plans with coke(or Anna with Dave), your stocks will fall again.
On the other hand they might rise even more if rumors are confirmed by the firm.
Interesting, isn't it?

To sum up the whole thing :
If you buy a stock, you need some sort of idea why the price could rise. This can be anything: Whether you believe Apple's iPad to be the next big thing or Amazon's Kindle (buy one of the two then, or maybe even both).

Friday, February 5, 2010

Indie Guide to Trading


Hello Folks,
I actually started all this so that at some point I could keep track of my wins and losses on my investments. Maybe before I will share my choices on stocks with you, I will make clear everyone gets what I mean and has more or less the same knowledge about trading.
I always thought that Trading should be Indie Career No. 1, because you can make money without really doing anything, and do you don't need very much to start - most people however don't get this, and are therefore scared by trading and miss out on a lot of money. I will make sure you are not one of them :)

What are stocks?
A stock is a tiny part of a company. If you buy a stock (also called share) you are a shareholder, meaning you own part of the company. Pretty cool, huh?

Where do I buy stocks?
To buy a stock you usually use a stock exchange market. Some bad movies (also some good ones) always show guys in a giant room screaming numbers to buy stocks. This isn't quite true anymore. Almost anything stock related is done through computers. So you would rather buy a stock online, silently than shouting out random numbers (your roomies may find that somehow annoying).

What do I need to buy stocks?
I will show you how to buy stocks online later on, because that's the cheapest way. So you need everything you already needed to read this blog, plus some money to invest and a bit of knowledge on the whole trading stuff.

Do really think it's a good time to buy stocks, after the financial crisis and all?
Well, yes I do. I did, and it brought in good money. But that's another story.
The thing about trading is that you can never really tell if it's a good time or not. And that's the fun part. If by calling it a bad time you mean that stock prices are steadily falling, well than it's great time! Why that? If you truly believe you know that prices are going to fall, you are able to buy products (other financial products than stocks) that make you profit from losses. Sounds pretty bad ass, and it is. It is always a good time to invest - a good trader makes the greatest profit when the rest of the world is falling apart.

Isn't the whole thing damn risky?
Yes, it is. It's riskier than your bank account, or a goverment bond your dad bought you.
But it's also a much better way to make money fast.
For example: I think the average bond might you about 3 or 4% interest on your money. In a year. Meaning that in one year your money will be worth 4% than it's worth today (at this point we assume you can forget about inflation).
4% ? You can make 4% with stocks in a day. Or you can make even more.
Some of my friends think that buying a stock is somehow like playing a slot machine in a casino. You invest money and you either win big or lose all. But it's really not that big a deal. You can limit losses, and after all only stocks usually don't lose all of their value in one day. Or after all.
We will come to this later.

So, hope I could give you a kind of introduction to the whole trading thing. I will go into more detail later on - keep checking ;)