Since common stock price changes typically reflect changes in net income and cash flow earnings per share of common stock, long-term success in common stock investing is directly related to finding and investing in companies with consistent annual increases in net income and cash flow earnings per share of common stock.
- Decide whether you should invest in common stock at all due to inherent common stock ownership risks. You should be prepared for the market fluctuations and risk management.
- Invest with a long-term prospective. Companies are established to make profit. In the long term, companies generally increase their earnings, which results in higher stock price.
- Do your homework to find companies with long-term net income and cash flow earnings growth prospects. Use the available information to find and select the companies with highest potential growth rate of income.
- Do not worry about forecasts for the general economy, stock market, or interest rates. The economy has ups and downs over time. It might not be the most profitable case, but investing on companies with consistent income growth rate is usually a safe investment.
- Diversify your investments over no fewer than four, and no more than twenty common stocks, or invest in a growth stock mutual fund. Diversification is always an efficient method for risk management.
- Continue to monitor your common stock investments after you buy.
Price-Earnings Ratio is a measure that determines whether a company’s stock is priced high or low. Price-Earnings Ratio is the ratio of one stock share price and net earnings per share for a twelve month period. If a stock has a price-earnings ratio between 10 and 20 with an average of 15 for the last thirty years, it can be said that the stock is relatively fairly priced.
The following expressions are very common in stock trading context (please watch the videos in the links):
Please watch the videos linked below
Investopedia Presents: Long Position
In the investing world, a long position refers to having a positive investment balance in a stock, bond, commodity. This is done by simply buying and owning the investment. For example, a person who buys Microsoft stock is said to have a long position in Microsoft. This is sometimes shorted to “She is long Microsoft” and an investor takes a long position when she feels the asset will gain in value. After holding the investment until prices rise the investor can sell the stock at a profit. In contrast, a short position refers to borrowing shares of a stock that is expected to decline in value from a broker, selling the stocks on the open market, then buying the shares back at a reduced price to make a profit. The vast majority of investors take only long positions. Short positions are more complicated and are generally used only by sophisticated investors. In summary, a long position means having a positive balance of an investment or simply owning the investment while any an investor who owns Microsoft can say I am long Microsoft the term is most useful to advanced investors who take short positions. These investors might say I am long Microsoft and short IBM.
Investopedia Presents: Short Selling
Short selling is a concept that can be confusing to a lot of investors so if you feel a little uncertain as we go through this description, hang tight because we are going to do a case example that I think will make it much more clear. Short selling is basically opening a position by selling it first assuming in the future you’re going to be able to buy it back at a cheaper price. Now, how do you do that? Well, when we sell to open and buy to close, you’re basically borrowing the stock from somebody else and in reality, you’re borrowing it from your broker basically. So, you sell to open by borrowing the stock and you don’t need to worry about that it’s just an order type. Sell to open is the order type selling short on a particular stock or ETF. Now, buy to close is just unwinding that position or basically buying the stock or the ETF back later, hopefully at a cheaper price so you get to keep the difference and then pay that back to your broker. Now, margin and interest are going to be required an incurred in a short trade. Now, what I mean by that is you have to have a margin account to engage in short selling. If you don’t know what that is, spend some time talking to your broker, find out whether or not you’re qualified to use margin and whether or not it’s something you’re interested in. And assuming that you are qualified for margin short selling does incur some interest charges because remember, you’re borrowing stock from your brokers so they’re going to charge you for that.
Investopedia Presents: Bull Market
A bull market is a financial market with rising financial assets fueled by investors' optimism, confidence, and expectations. While bull markets are partially based on actual investment performance, they are also partly based on investor psychology. The bull market gets its name from the way a bull thrusts its horns upwards. When investors are optimistic about investment performance, they are called bullish. The term bull market can be applied to the market as a whole such as the stock market or bond market, or to a specific security such as shares in a publicly-traded company or a particular commodity such as light sweet crude oil. A bull market is a long-term trend lasting several years. It usually occurs when a country's overall economic performance is strong, and unemployment is low. In a bull market, demand for securities exceeds supply which drives share prices up. People also have more money to spend in a bull market which improves company profitability and further drives up share prices. The United States has experienced 12 bull markets since the great depression. Bull markets last for different lengths of time and experience gains and different paces. The strongest one lasted from December 1987 through March 2000 and experienced a 582% gain over 148 months. This was also the longest bull market. The shorted began in 1942 and lasted just 14 months gaining 177%. The bull market that included the housing bubble which lasted from October 2002 through October 2007 saw a 101.5% gain over 60 months. The median bull market experiences gains of about 3% per month.
InvestoTrivia Presents: What’s a Bear Market
Question What’s a bear market? A. Year-long stretch where stocks end lower B. A 10% decline in a broad market index C. Marketplace overrun with large honey eating animals, D. Downturn of 20% or more in multi-market indexes for more than 2 months.
Person 1: Somewhere in here I know but I forgot
Person 2: A?
Person 3: Bad, Bad, Bad, it’s the bad one (laughs)
Person 1: I thought it had something to do with more people like pulling out their money than investing it.
Person 4: A bear market is when most of the stocks are turning down
Person 5: Ummm, everybody’s buying
Person 6: (laughs)
Person 3: People are hesitant or timid
Person 1: or vice-versa maybe? I don’t know
Person 7: You’re speaking gibberish to me, but I think D?
Host: That’s correct!
Person 7: Whoo!
Person 6: (laughs)
Person 4: (see’s answer is D) Good.
Host: It’s D
Person 2: Laughs
Person 6: I got zero so far, we’re doing good