Find out the answers to some of the common questions we get asked. If you don't see your question on our list feel free to contact us.
Q: How much should I start investing with?
A: Many people believe that to start investing you need thousands of dollars. Actually, to start investing on your own, all you need is the minimum that the brokerage firm requires. In today's world of electronic trading you can start with as little as $2500.00.
By using an online discount broker you receive all of the benefits of a major brokerage firm without the big minimums they require.
Many investors are under the misconception that they have to trade in 100 share minimums. That's simply not the case. When handling and trading your own account you can trade any number of shares that fit your account size.
You should open an account with an amount that makes you feel comfortable. The money should be what you consider risk capital. So starting with a smaller amount will allow you the trading experience and risk that fits your own personal tolerance.
Q: What are the differences between Stocks and Options?
A: Shares of stock represent ownership in a corporation. Therefore, an investor who purchases shares is buying a small part of that company.
There are two different types of stock: common and preferred. As an owner of a common share of stock, an individual has several privileges: dividends, if declared by the board of directors, periodic financial statements, and voting rights to elect officers and directors. Common stocks provide the opportunity to participate in a company's growth. When a company prospers, so do the shareholders, and they are rewarded by an increasing share price and possibly dividends.
Preferred stock, on the other hand, is a little different than common stock. Although investors in preferred stocks are also shareholders of a company, holders of preferred stocks receive set dividends as either a coupon rate or stated dollar amount, but do not have voting rights. Thus, preferred stock is regarded more like a fixed income security. Dividends on a company's preferred stocks have to be paid first before dividends on its common stock.
Unlike common stock, an option does not represent ownership. An option is a financial derivative, meaning that its value is based on the price of an underlying security. An option gives the holder the right, but not the obligation to buy or sell a security at a set price (strike price) on a certain period of time (exercise date).
There are two types of options: call and put.
A call option gives an individual the right to buy a stock at a specified price and time period. Therefore, with a call option, the buyer expects the price of the stock to go up.
A put option gives one the right to sell stock at a set price and time period. With a put option the seller expects the price of the stock to decrease.
For example, let’s say that a stock is trading at $10.
Owning a call option with a strike price of $10 means that one could buy that stock at $10 no matter what price it is in future. It is important to understand that owning the option is not the same as owning a stock.
Owning a put option with a strike price of $10 means that one could sell that stock for $10 no matter what price it is in future.
Another key difference is that options have an expiration date, whereas stocks do not. After stock options expire, they cease to exist.
For the person new to investing, we recommend starting with stocks. As you become more familiar and comfortable with the market, then you can begin to learn more about options. Generally speaking, options are more complicated and can be riskier.
Q: What is a dividend?
A: A dividend is a payment to shareholders designated by the board of directors to be distributed on a set day.
Dividends are most frequently paid in cash as a dollar amount per share on a quarterly basis. Additionally, dividends may be paid in the form of stock. Companies are not required to pay dividends.
Dividend distributions follow a prescribed set of rules which are important for an investor to understand.
Q: What are the benefits of investing in dividend stocks?
A: Corporations that pay dividends are typically more mature and stable than companies that do not. Historically, dividend-paying stocks have outperformed the non-dividend payers regardless of interest rate movements. Moreover, dividend-paying stocks have lower relative volatility. When the market falls, these stocks tend to decline much less than non-dividend paying stocks.
A major benefit of investing in dividend paying stocks is that the investor has the opportunity to realize higher total returns over time. Return is comprised of two components: share appreciation and dividend payout. Thus, when the shares of a dividend paying stock increase, the investor receives an added bonus of income through the dividend payout. With non-dividend stocks, the only way one can earn a positive return is through share price appreciation.
Another big benefit of investing in dividend stocks is that they allow an individual to purchase additional shares by reinvesting all or some of the dividends paid. Through a Dividend Reinvestment Program (DRIP), a corporation allows investors to reinvest the cash dividends by buying additional shares or fractional shares on the dividend payment date without having to incur a transaction expense.
Overall, dividend-paying stocks are a great addition to an individual’s portfolio and we highly recommend investing in them.
Q: How Do I Research Stocks?
A: There are many ways to research stocks. In today's electronic age there are thousands of vehicles to research and screen for stocks.
Investing requires due diligence. Before committing capital, it is always important to try to have a basic knowledge of the markets and economy as well as understand the fundamentals of a company and its stock. With a ton of information to be found in newspapers, magazines, the Internet, and television, the task of how to become knowledgeable and where to turn to do research can be daunting and overwhelming.
Our best advice is to keep it simple. Watch television and stick to a couple of core websites and publications.
Perhaps the best manner in which to start one's education is to tune in daily to the television business cable channels, such as Bloomberg and CNBC. Throughout the day these channels provide great analyses of the markets and active stocks. Also, various market and stock professionals appear daily offering valuable insights. Listening to Bloomberg radio, especially pre-market, is another good idea.
When investing in the stock market, one should have a very clear idea of current business and political events, as well as a knowledge of the current state of the economy. It is imperative to read publications, such as the Wall Street Journal or Investor's Business Daily. Any individual interested in investing should get into the habit of reading a newspaper daily.
The Internet has many informational investing websites. An excellent, easy to understand website for the beginning investor is Yahoo Finance which provides the latest business news, comprehensive company and stock information, personal finance assistance, and other beneficial aids. Another great website which investors should consult is Finviz, a powerful minefield of excellent stock, company and markets information displayed in visual snapshot formats. For each stock, a large easy to read graph is shown along with relevant company financial statistics, analyst recommendations, and news. The site also provides news and blogs with links, advanced screeners, market maps, insider trades, and futures data.
It's important to try out different newspapers, websites, and television programs to decide which ones benefit you the most. Getting into a daily rhythm is best. You definitely do not need to keep your eyes glued to the television or Internet all day to watch the market, but you should have a general understanding each day of what is going on in the economy and market, and how and why your portfolio is being affected.
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