When companies want to raise funds, they sell shares to investors. The owners give up part of their ownership in the company and, in return, receive money to develop the business. When these shares trade on an exchange, the public can buy into these companies and become shareholders.
Investing in stocks is a way for investors to participate in the growth of companies and the economy as a whole. Wealth is ultimately generated from owning shares of valuable businesses, rather than earning a paycheck.
On the other hand, investing in stocks that provide quarterly dividends is similar to receiving a regular paycheck. Dividends are regular payments made by some publicly traded company to its shareholders. When a corporation earns a quarterly or annual profit, that money can be either re-invested in the business or distributed to shareholders. If it is distributed, it is paid out to investors in the form of dividends at a fixed amount per share.
While everyone buys stocks that they think are undervalued, there is always a chance that it can slip in price. Buying shares in a company means you could lose some or even all of your initial investment if the company does poorly and its share price drops.
Many think the stock market is risky. While share prices may fluctuate based on any number of conditions, historically, stocks achieve more impressive returns over the long term than any other traditional investment category.
Through careful analysis, investors can own and participate in growing businesses as part owners. Of course, as in any business, success is not guaranteed and thorough research must be conducted before investing in stocks.
The S&P 500 may be entering bubble-like territory: that’s what I’ve been writing for the past few months.
Now, it appears as though I’m not the only one who’s worried about asset classes beginning to form bubbles from the excess money printing. 2013 Nobel Prize-winner Robert Shiller also recently stated that he is concerned that prices have risen far too quickly across many asset classes, from real estate to stocks.
As I’ve written several times over the past couple of months, investing in stocks at these elevated levels is quite risky. My belief is that much of the upward move in the S&P 500 has been primarily based on the liquidity (money printing) being pumped by the Federal Reserve.
Investing in stocks with this premise can only work for the very short-term trader who’s quick enough to get out when the tide begins to turn.
Because people are not investing in stocks based on actual fundamentals right now, one can’t expect the value in the S&P 500 to remain elevated once there’s a change in monetary policy, since much of the move has been artificially supported.
Let’s take a look at how the S&P 500 has been affected by monetary policy over the past few years, and how investing in stocks at the current level is becoming increasingly risky.
Chart courtesy of www.StockCharts.com
The first quantitative easing program by the Federal Reserve lasted from December 2008 until March 2010. This period is not shown on the chart above, as one could argue that the S&P 500 became extremely oversold and that investing in stocks for the long-term made sense at … Read More
With news that Twitter Inc. is about to make an initial public offering (IPO), there’s already a lot of buzz and publicity surrounding the event.
And there’s one big question most investors are probably asking: should you consider investing in Twitter?
Generally speaking, investing in stocks after their IPO is extremely dangerous, and many investors have lost money doing so.
If one is fortunate enough to be allocated shares prior to the IPO, that is a different matter altogether. But for most of us, we are considering investing in stocks on the secondary market, once shares are publicly traded.
However, while Twitter is seeing growth in many areas, net income is not one of them. One of the issues when it comes to investing in stocks in the social media market sector is that growth is seen as the main target, while net income lags. With Twitter, the theory is build first, profit later; many investors are hoping that Twitter can turn a corner and start generating profits soon.
The company is looking to raise $1.0 billion, which will value the firm at an estimated $12.8 billion. For the first six months of 2013, Twitter generated revenues of $253.6 million, which is essentially double what the firm produced in 2012. On a trailing 12-month basis, Twitter’s valuation would be 28 times (X) its revenues, which is certainly … Read More
Recently, we have heard a lot about currency wars being waged by various nations around the world. To those who are unfamiliar, “currency war” is a term that refers to countries that are actively looking to devalue their currency to help stimulate export growth and their domestic economy.
Investing in stocks in this type of environment can be tricky, as one needs to add additional variables to the analysis. Having a strong market sector, solid long-term fundamentals of the individual stock, and a favorable currency direction can help when considering investing in stocks.
While many look to the Federal Reserve as being the most active in trying to devalue the U.S. dollar, I would point to Japan. Newly elected Japanese Prime Minister Abe has been vocal about demanding massive and unprecedented monetary stimulus by the Bank of Japan to help stimulate the Japanese economy.
Large institutions interested in investing in stocks certainly have jumped on the export-oriented market sector, as Japanese stocks are up approximately 24% since mid-November, when elections were announced, and the yen is down in value by approximately 10%.
However, this is not a short-term phenomenon. I believe the yen will continue to remain weak for a long time, and this will benefit the Japanese export market sector. Those interested in investing in stocks could look to equities in Japan that will benefit from the yen’s devaluation.
One market sector that also has strong fundamentals in the U.S. is vehicle sales. The U.S. had extremely strong car sales in 2012, and I expect 2013 to be just as strong. When combined with a further lowering of the … Read More
While the economic data have continued to come in worse, the S&P 500 has strengthened over the past few months. What is the stock analysis that can justify such a move, and is it sustainable? These two questions are critical for those interested in investing in stocks. There are several reasons for why the S&P 500 is at current levels, and it starts with how stock analysis is conducted.
The first thing to remember when investing in stocks is that the market is a forward-looking mechanism. That means that the current economic environment is not as important as what will happen 6–12 months or more into the future. Proper stock analysis needs to take this into account and try to understand where the winds will be shifting.
Even in this weak world economy, there are several points of interest for those interested in investing in stocks. First, we have central bank activity. Question: is it more or less likely world central bankers will be adding monetary stimulus before the end of the year? I think it’s quite apparent that at least some central bankers will be increasing monetary stimulus. This is seen as a positive when conducting stock analysis.
While the Federal Reserve might wait for the September meeting to enact further monetary stimulus, if that were to occur it would be a positive when it comes to stock analysis. I also think the European Central Bank (ECB) and even the Chinese financial authorities will also add additional monetary stimulus; again, these are further positives when it comes to stock analysis.
A huge worry for those interested in investing in … Read More
Investors in Chesapeake Energy Corporation (NYSE/CHK) have been on a massive roller coaster ride. While external forces, such as the drop in natural gas prices, have hurt the shares, another negative not factored into the stock analysis has been CEO Aubrey McClendon. When someone is investing in stocks, you are essentially backing the management of that firm with the assumption that shareholder interests are being addressed. Investing in stocks is difficult enough, but having a CEO who is acting contrary to shareholder interests makes the situation that much worse. McClendon has made a lot of poor choices with regard to his management style and, frankly, has made strange decisions that were only in his best interests, causing much volatility and heartburn for those trying to do an effective stock analysis.
This is a warning sign for investors who are doing their stock analysis: don’t ignore management by only looking at the company’s assets. One must look at the organization as a whole. Shareholders have been so upset at the poor governance that four directors have resigned and McClendon has relinquished his role as chairman.
McClendon not only borrowed $1.1 billion against his stake in the company, but he also ran a $200-million hedge fund that traded the same commodities as Chesapeake. Performing stock analysis is impossible with hidden loans and secret hedge funds. McClendon’s blatant disregard for shareholder interests has caused the shares to stay depressed for an extended period of time. While McClendon has agreed to step down as chairman, his reckless financial behavior has cost shareholders billions. Investing in stocks is not easy as it is, so a … Read More