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.
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
In a recent CNBC interview, Charlie Munger, Vice-Chairman of Berkshire Hathaway, stated:
“Gold is a great thing to sew onto your garments if you’re a Jewish family in Vienna in 1939, but civilized people don’t buy gold—they invest in productive businesses.”
Although I’m appalled at such a sentiment, I’d like to take—as Munger would appreciate—a more businesslike approach to this comment.
In 1939, the Nazis were a centralized power that confiscated the wealth of the people: financial repression.
Today, we should be investing in productive businesses or we should be investing in stocks, because that is where wealth will be created, according to Munger. Investing in large-cap stocks has been the rage recently because of their strong balance sheets and their generous dividend payments that are more attractive than a bank deposit, which will pay virtually nothing.
Just a few decades ago, government represented seven percent of the U.S. economy. Today, they represent 40% of the U.S. economy. Maybe we should find a way to invest in government instead of investing in stocks, since that is where the majority of power seems to lie. Maybe a government stock could be bought along with investing in large-cap stocks.
This distorts free markets. The productive use of capital comes from the private sector or, as Munger would put it, productive businesses.
With the government representing so much of the economy, the entrepreneur is unable to participate and create true wealth, which is why we should be investing in stocks instead, I suppose.
The top 20% in this country own 85% of the wealth and so can afford investing in stocks while the … Read More