If you think of yourself as a loyal shareholder it doesn’t seem fair
to have to suffer at times like this. But as a shareholder often you
are not even the most important stake holder in the company. There are
two types of stocks preferred and common stocks. Then you also have
bondholders who lend money to companies. When a company goes bankrupt
bondholders and owners of preferred stock get any proceeds from
liquidation first. Common stockholders almost always get completely
wiped out.
When you buy stock off of the stock exchange you are almost always buying
common stock, so you are not considered one of the most important
shareholders in the company. You may occasionally be asked to vote on
changes in management or proposals brought up ahead of shareholder
meetings, but that is the extent of your rights as a common stock
shareholder.Just because a stock has fallen from a high price to a
low price doesn’t mean it’s cheap. You can’t just assume because a
stock has a low price it’s a bargain. Companies can go bankrupt and
stocks do go to zero at times. In fact there are a reason penny stocks
are penny stocks and what I’ve shown you so far may look like buying
stocks that are at a low price. However, it does not involve trying to
guess the exact bottom of a stock, but buying after the bottom has
come in and the stock has stabilized by going through a stage one
basing phase. You want to buy low and sell high.
To know if a stock is cheap you have to understand some simple valuation
metrics. The valuation of a stock is calculated by taking all of the
shares outstanding and then multiplying that by the price. This will
give you the stocks market capitalization. So for instance if a stock
has 100 million shares outstanding and is trading at five dollar a
share then it has a market cap of $500 million. Most people think that
investing in stocks means either being a value or a growth investor.
Value investors look for stocks that are priced at a value below that of
the worth of the underlying company, while many growth investors do
not worry about valuation at all and just look for companies with fast
earnings growth. You can combine both strategies by looking at some
key valuation metrics to get the both of best situations and buy
stocks that have the most potential stocks of growth companies priced
incredibly low.
When it comes to valuing stocks in regards to company earnings the
most common metric used is the price to earnings ratio. P/E ratios are
calculated by taking the price of a stock and dividing it by the
earnings per share that the company generates in a year. So In fact
Wall Street firms are more in competition with each other than they
are with small investors. Think about this. Say one firm owns one
million shares of stock. If they sell those shares they are more
likely to be selling them to another firm looking to buy a huge number
of shares than to ten thousand people looking to buy one hundred
shares each.
Both firms will have skilled professionals and spend millions on research
and simply have different views of the stock or need to buy and sell
for any number of reasons. One firm may have extra money coming into
a mutual fund that it has to spend while another has to meet
redemptions.
The real smart money traders are not the people on Wall
Street, but the people in the know the company insiders and their
friends. And then there are those that simply completely know the
company and its industry and understand it much better than anyone
else, because they live it. There are very few people with such
knowledge, but they have the power to move stocks by buying and
selling themselves ahead of future developments and by influencing
others close to them to do so too.
When a stock moves before news breaks it is these people that start such
moves. It is these people who make up the bulk of trades in the stock
market even though they aren’t
the real force that moves stocks in the long-run. The thing is though
the biggest group of dumb money traders and investors actually is on
Wall Street.
The very people who try to appear to be the smart money are
not the smart money at all. You can actually beat Wall Street traders,
mutual fund managers, and hedge fund managers at the stock picking
game, because you have a real edge over them. The thing is though the
biggest group of dumb money traders and investors actually is on Wall
Street. The very people who try to appear to be the smart money are
not the smart money at all. You can actually beat Wall Street traders,
mutual fund managers, and hedge fund managers at the stock picking
game, because you have a real edge over them.
For instance professional money managers are graded on a quarterly and
often monthly basis. As a result they often make buy and sell
decisions designed to lock in profits at the end of a month. They have
to think short term whereas by being completely independent you do not
have to take such actions. The very fact that you are independent and
can focus your resources is what gives you an inside edge over Wall
Street. |
