Questions from a stock market beginner

[burglar]

Apologies, I assumed it was criticism! I understand having to answer beginners questions such as myself's would feel like the tech support department for internet troubleshooting, "have you tried turning it on and off?"

Researching this topic is very difficult, finding the right way to get THERE (alpha?) QUICKER as you mention...

I'm finding no balance on information. Reading 'The Intelligent Investor' was a nightmare. And rich dad poor dad seeming only relevant for poor money management.. When I look up key terms, valuation techniques etc information either seems too basic or too complex to understand.

Does anybody else experience this?
Cheers

Everyone, almost without exception, had to learn.
I wrote you a more intelligible response.
My internet fell over while transmitting.
My IT man asked, "Tin roof?"
And suddenly it was my fault.

If you don't have a tin roof too,
perhaps you could rephrase the biggest questions you have.

 

[pixel]

Today, I was talking to a friend who would like to start investing in/ trading Aussie shares.
His questions were as basic as they come; so I sent him an email with some very basic answers.
Why waste the effort on one? I thought. One or two noobs on this Forum may also get some use out of it.

I'm just browsing through some of my research tools and thought I'd share a few more websites with you. They're all free of charge, which means they can be worth infinitely more than what you pay.

First and foremost, http://www.aussiestockforums.com will have an answer to most of your trade-related questions, and much more. But if you can't find what you're looking for at the ASF, try Whirlpool. That is a free Forum of Forums on just about anything and everything.
Membership is free, or search as guest. Initially, I joined for Internet-related research, but there's advice on anything you could think of asking. Among others, trading and investment scams like 1wealth etc: http://forums.whirlpool.net.au/archive/2140654 - backing up what ASF members knew all along too.

For investing specifics, bookmark the Investopedia: http://www.investopedia.com/
... or feel free to drop me a line if you have a particular question. The most important concepts are
risk assessment, position sizing, and stop loss discipline.

I use a lot of trailing stops (and entries), well explained at: http://www.tradernexus.com/advancedstop/advancedstop.html#tradestages
(except that my triggers are using a different algorithm AND additional discretionary rules thrown in.)

If it's cash flow you're after, here is a guy that I know personally; he invests mainly in the top 50 stocks on the ASX, increasing profits and cash flow from dividends by selling covered call options. While options may not be immediately suitable for a novice investor, it's worth watching his half-hour market analyses, which come out a few times a month. Simply watching him talk about strategies and his "take" on particular companies, explaining his views with fundamental and technical reasoning, can make a great learning experience:
His website is http://www.investorsignals.com.au/
his discussions are on youtube: https://www.google.com.au/search?q=...hannel=sb&gfe_rd=cr&ei=zVBPVNzjN-_C8gf-roH4Bg
or start with the one from September 2nd: https://www.youtube.com/watch?v=XTnjZ3eczAI

That should keep you busy for a few weeks. Enjoy
Cheers,
Pixel

 

[grah33]

more beginner questions.

basic quesitons.

Hi
just a few more questions if you guys don't mind:

1. i'm still unclear behind the logic of buying shares. say you have a company that starts out small, and has a low share price, and its destiny is to increase it's wealth and profits quickly. and, for this example, it will pay no dividends. why do people buy the share? we don't get none of those profits, just gains from the share price rising, ie from what people think about it's worth . but why are we all buying it ? because other people will buy it for more later, but still, why are we buying it? if it was a dodgy company, everyone could buy the share too, and it would go up. whether great or bad company, we don't get those profits,so i'm unclear on the logic of why we are buying the share .


2. why do companies want to keep their share prices up? when they raise money after the IPO, they get the money there and then. why would they want to keep the share price high? i get the impression that they want to do this. it seems too that they may pay dividends to keep the share price up.

thanks again

 

[luutzu]

Re: more beginner questions.

basic quesitons.

Hi
just a few more questions if you guys don't mind:

1. i'm still unclear behind the logic of buying shares. say you have a company that starts out small, and has a low share price, and its destiny is to increase it's wealth and profits quickly. and, for this example, it will pay no dividends. why do people buy the share? we don't get none of those profits, just gains from the share price rising, ie from what people think about it's worth . but why are we all buying it ? because other people will buy it for more later, but still, why are we buying it? if it was a dodgy company, everyone could buy the share too, and it would go up. whether great or bad company, we don't get those profits,so i'm unclear on the logic of why we are buying the share .


2. why do companies want to keep their share prices up? when they raise money after the IPO, they get the money there and then. why would they want to keep the share price high? i get the impression that they want to do this. it seems too that they may pay dividends to keep the share price up.

thanks again

In general, don't mix dividends with the company's prospect or profitability. Don't put the cart before the horse as they say.

Ideally, honest, owner-like-thinking management will only ever pay dividends if they find no better use for the profits the company earn; so they keep what earnings they can make the most of and return to the shareholders, its owners, excess cash. But there are fund managers, widows and orphans and trust fund kids so most established companies pay dividends regardless of performance.

As you alluded to, some companies, in an effort to increase the share price, would even borrow money to pay dividends. Those management who does not see the sense in that, but who also recognise the need to pay dividends to keep fund managers happy, they would then introduced Dividend Reinvestment Plan where you can choose to take div as cash or as new shares.

So why do people buy shares when it pays no dividends? Because they think the company ought to keep what profit it has in the company and grow the business, expand, make it more valuable.... this mean the owner do not have to pay income tax from dividends, the company can grow and only pay 30% tax on profits, and if it grows and become more valuable later, the investor can then sell at a high price and pay a much lower capital gains tax than they would if they're already rich, too busy to know what to do with the dividends, and prefer to not pay tax from that income just to reinvest it (less of it).

2. Higher and increasing share price mean management can get to keep their job, haha. That and it's better to raise money if they want to - just print more shares, get more cash.

The ASX is what they call a secondary market. It's where shareholders (and also the company if it so chooses) trade shares - the company have no direct play in its pricing. So at IPOs, the original owner, be it the gov't privatising Medibank, or founders or privateers... they sold their ownership in the company and the new investors than trade it on the market... since there's usually millions of new ownership, it appear like they're constantly buy/sell when it could be just a small percentage that does that.

Often, the original investor/owner does not sell all their stakes. They sold enough to suit their needs, and so hope the price goes higher in case they want to sell more, or higher so their remaining holding...

 

[Julia]

we don't get none of those profits, just gains from the share price rising, ie from what people think about it's worth . but why are we all buying it ?

I don't know why you'd dismiss the value of capital gain.

If you'd bought CBA, e.g., when the market returned to uptrend after the GFC you could have paid around $30. Today it's at almost $83. Not that far off tripling your investment.

If you'd bought $20,000 worth, that would have turned into almost $55,000 now.

 

[herzy]

Re: more beginner questions.

Well said Luutzu. And Julia.

I would just add that companies don't necessarily want to keep their share price up. In fact, sometimes companies want to reduce their share price, and so will split shares, to increase liquidity or access to small players (e.g. Apple).

What everybody wants is for the share price to increase, not for it to 'stay up'. The reason for this is that ideally a share price should reflect the inherent value of a company, which should always be going up.

 

[luutzu]

Re: more beginner questions.

Well said Luutzu. And Julia.

I would just add that companies don't necessarily want to keep their share price up. In fact, sometimes companies want to reduce their share price, and so will split shares, to increase liquidity or access to small players (e.g. Apple).

What everybody wants is for the share price to increase, not for it to 'stay up'. The reason for this is that ideally a share price should reflect the inherent value of a company, which should always be going up.

Yea that's a good point.

Companies also play that game to give the impression of their company's "value". If most of your peers are around $5 and your stock is $15, it seems expensive; or a stock that's $100 seems out of reach.

Best to look at the whole company, then divided by number of shares outstanding.

 

[grah33]

Re: more beginner questions.

i understand that capital grows and that's great but i'm still fundamentally unclear on why we buy shares in the first place.


example:
with antiques there are 2 reasons for buying them - buying them to sell them later because it's worth more, and buying them because a person might like them (in the case of a customer). but with shares, the first reason certainly applies (buy and sell at a higher price later), but the second reason dosn't exist really. that's what doesn't make sense to me. doesn't make sense why people buy them in the first place. or is it because people like to have a share in a company for image? still not getting the logic of buying them in the first place.

profits occur because there is a demand for somehting which raises it's price (cap gains), although it (the share) in itself is useless to everyone. while an antiques have a market of people who like them

get where i'm coming from?

 

[McLovin]

Re: more beginner questions.

profits occur because there is a demand for somehting which raises it's price (cap gains), although it (the share) in itself is useless to everyone. while an antiques have a market of people who like them

The shares represent an entitlement on the future cash flows of the business. Hardly useless.

I think you may be over thinking things.

 

[tech/a]

Re: more beginner questions.

i understand that capital grows and that's great but i'm still fundamentally unclear on why we buy shares in the first place.


example:
with antiques there are 2 reasons for buying them - buying them to sell them later because it's worth more, and buying them because a person might like them (in the case of a customer). but with shares, the first reason certainly applies (buy and sell at a higher price later), but the second reason dosn't exist really. that's what doesn't make sense to me. doesn't make sense why people buy them in the first place. or is it because people like to have a share in a company for image? still not getting the logic of buying them in the first place.

profits occur because there is a demand for somehting which raises it's price (cap gains), although it (the share) in itself is useless to everyone. while an antiques have a market of people who like them

get where i'm coming from?

Yes.

If you bought Westfield when they first listed.---1000 shares
Today you would be a millionaire many times over.

When the Commonwealth bank listed they were at $2.50 a share.
Today $82 a share
So $30,000 of them now $1 million.

They look attractive in your portfolio!

Your becoming a part owner of a company. Regardless of how small.
Some overtime invest so much that they own it.
Buffett for example.

 

[Julia]

Why do people buy shares? To make money. Via both capital gain and yield.
Doesn't have to be any sort of esoteric, high minded principle involved such as the beauty of antiques.
No need to complicate it.

 

[burglar]

Re: more beginner questions.

... get where i'm coming from?

Before I buy into a company, I will do some homework on them.
What do they do?
Where do they do it?

What do they make, if anything?

Cochlear implants or bacteria that clean oil pipelines, ...
it doesn't need to be boring!

I find an it enjoyable pastime of itself.

 

[luutzu]

Re: more beginner questions.

i understand that capital grows and that's great but i'm still fundamentally unclear on why we buy shares in the first place.


example:
with antiques there are 2 reasons for buying them - buying them to sell them later because it's worth more, and buying them because a person might like them (in the case of a customer). but with shares, the first reason certainly applies (buy and sell at a higher price later), but the second reason dosn't exist really. that's what doesn't make sense to me. doesn't make sense why people buy them in the first place. or is it because people like to have a share in a company for image? still not getting the logic of buying them in the first place.

profits occur because there is a demand for somehting which raises it's price (cap gains), although it (the share) in itself is useless to everyone. while an antiques have a market of people who like them

get where i'm coming from?

It's quite fun to walk along Westfields or take a drive and point out that I own that, and that. Yes, I own 0.000000000000001% of it, but I still own it.

 

[grah33]

i think i'm getting it now. a valuable stock is worth something that others will eventually recognise if they hvaen't already. it's a part of a business, if that business brings in more profits than you have more value to your 'part' in it. you can sell it as there will always be share buyers out there and they will know that the business is eg a good one and pay you more for it. i think my confusion had something to do with me not being able to see that owning parts of a business is another thing to trade and there is a need for it. a lack of clarity... thank you all

 

[herzy]

Perhaps a slightly different perspective will help.

Privately, all property is owned in 'shares'. So your house is potentially owned in equal shares between you and your spouse. Companies are the same. There may be two shares in the company, one owned by you, the other by your spouse. There may be 100, each held by different people.

These companies may wish to raise capital to expand. To do this, they decide to sell a portion of their shares in exchange for money, which goes into the company. The original shareholders benefit, because the company (which they still partly own) now is more valuable - it has money, which is needed to expand.

One way of selling shares to raise money is via a market, or exchange. One of these is the Australian Stock Exchange (ASX). So a private company seeking to sell some of its shares ('equity') may decide to do so on the ASX, and so they will 'float' their shares there and hope somebody buys them.

Thereafter, the owners are free to sell their shares on the market / ASX whenever they choose, so you can end up with many owners, and shares changing hands multiple times.

Why do people do this? To own a company they think will be worth more in future (and either keep it and collect dividends, or sell those shares - now more valuable - to someone else later). Some would call this entitlement to future cash flows.

Other people are less interested in company ownership, and buy shares in companies because they think the share price will increase. This is more Julia's view. They do this purely hoping to sell later at a higher price.

Others people are even less interested in the underlying company, and buy purely because they believe (based on patterns or whatever) that the share price will go up, and they can sell it at a higher price than they bought it.

People tend to be somewhere on that scale. 'Value' investors tend to see themselves more as company owners; 'traders' see shares as something that can be traded based on price, like commodities, currency etc.

 

[Julia]

Perhaps a slightly different perspective will help.

Privately, all property is owned in 'shares'. So your house is potentially owned in equal shares between you and your spouse. Companies are the same. There may be two shares in the company, one owned by you, the other by your spouse. There may be 100, each held by different people.

These companies may wish to raise capital to expand. To do this, they decide to sell a portion of their shares in exchange for money, which goes into the company. The original shareholders benefit, because the company (which they still partly own) now is more valuable - it has money, which is needed to expand.

One way of selling shares to raise money is via a market, or exchange. One of these is the Australian Stock Exchange (ASX). So a private company seeking to sell some of its shares ('equity') may decide to do so on the ASX, and so they will 'float' their shares there and hope somebody buys them.

Thereafter, the owners are free to sell their shares on the market / ASX whenever they choose, so you can end up with many owners, and shares changing hands multiple times.

Why do people do this? To own a company they think will be worth more in future (and either keep it and collect dividends, or sell those shares - now more valuable - to someone else later). Some would call this entitlement to future cash flows.

Other people are less interested in company ownership, and buy shares in companies because they think the share price will increase. This is more Julia's view. They do this purely hoping to sell later at a higher price.

Others people are even less interested in the underlying company, and buy purely because they believe (based on patterns or whatever) that the share price will go up, and they can sell it at a higher price than they bought it.

People tend to be somewhere on that scale. 'Value' investors tend to see themselves more as company owners; 'traders' see shares as something that can be traded based on price, like commodities, currency etc.

Herzy, that's a comprehensive response which will be very helpful to grah, I'm sure.

On this

Other people are less interested in company ownership, and buy shares in companies because they think the share price will increase. This is more Julia's view. They do this purely hoping to sell later at a higher price.

I'd just like to clarify that, before buying any share, I have a narrow universe of sound companies with many years of increasing profits, dividends, ROE etc, low or no debt. This is very different from those who trade purely on price. I'm just a simple trend follower, ie climb on to rising trend, and get out when it reverses.

Then, separately, from that same universe I have a small p/f which represents an alternative to money at call, ie chosen for grossed up yield, which I'm prepared to hold through dips.

 

[herzy]

I'd just like to clarify that, before buying any share, I have a narrow universe of sound companies with many years of increasing profits, dividends, ROE etc, low or no debt. This is very different from those who trade purely on price. I'm just a simple trend follower, ie climb on to rising trend, and get out when it reverses.

Then, separately, from that same universe I have a small p/f which represents an alternative to money at call, ie chosen for grossed up yield, which I'm prepared to hold through dips.

It's a good example of not entirely choosing either side of the spectrum, and probably very helpful to grah in deciding which style he wants to develop. I had always thought you were more of a trader (being such a proponent of trend-following), but now that I think back I think your main motivation was capital preservation. Nevermind!

I more used your comment above (even if not representative of your actual approach) as an example to grah as to how one can look at shares: To make money. Via both capital gain and yield.
Doesn't have to be any sort of esoteric, high minded principle involved such as the beauty of antiques.
No need to complicate it.

Your approach describes a filter to select for 'good' companies, but that's more to ensure that your investment is safe, logical, and will provide good returns, - and then buy at the right time (trend following): which is a good example of being less focussed on the 'story' of the company itself and seeing yourself as an owner, but rather seeing the stock market as a place to get capital gains and dividends.

It may seem like semantics (and it is, as the result is the same - increased assets) but hopefully it helps grah and others to conceptualise the different way shares are used.

 

[grah33]

hi
i have a few more beginner like questions. I've read lots of stuff but need some practical basic knowledge to fill the gaps.

1) i take it if another GFC happened again overnight, a person can have some kind of automatic exit sale order (eg. “sell shares when price drops to X”), which could protect them from disaster. correct? i'm thinking my shares would sell automatically and i'd get the money going to my bank account safely. no drama.

2) i assume one can sell their shares if they are going down hill (say a bear market occurs) and then later on re-buy them if they increase again in share-price and things are looking good again ?


3) i've read lots of info, but not an example for me. what can i do with eg 20k? i want to avoid great risk and build it up gradually over many years . what money percentage would i put into income/blue chip stocks? and what for the remaining percentage into growth stocks? Is there another group of shares I need too?

4) to be diversified and protected enough, how many companies do i need for my 20k investment?

5) should i incorporate a fund, and how much of that 20k? it's an easy way to diversify. and will i be losing lots of money to the fund manager so that it's not worth it?


6) what's a good exit percentage for blue chips? i mean, for eg. cba or other blue-chips, if they go down, how much down until i sell them off to avoid disaster? Their current stationary high shareprice is never guaranteed. i would probably just use the money and buy other blue chip shares. I'm thinking I would have automatic sell orders going so they sell when the price goes down a certain amount. Those shares are meant to be stable for me, so i'll get rid of them if they go down too much.


7) what could i monitor (apart from share price) to discern that a company is losing value? I want to look at such indications regularly and so be prepared if I need to sell my shares in some company.

8) my impression is that a bear market is when the all ordinaries drops in value 20% over at least 2 months. thus, if it's at eg. 5500 points currently, it must drop at least 20% of that number of points. if that happens the economy is afflicted and i should look at selling off my shares into defensive shares or just selling it all off and keeping it in the bank.


Thanks everyone. Hope I don't come across irritating.

 

[Julia]

Just to look at one of your points:

if that happens the economy is afflicted and i should look at selling off my shares into defensive shares

1. What would you consider examples of defensive shares?

2. Why wouldn't you be buying these as your first choice anyway?

 

[luutzu]

hi
i have a few more beginner like questions. I've read lots of stuff but need some practical basic knowledge to fill the gaps.

1) i take it if another GFC happened again overnight, a person can have some kind of automatic exit sale order (eg. “sell shares when price drops to X”), which could protect them from disaster. correct? i'm thinking my shares would sell automatically and i'd get the money going to my bank account safely. no drama.

2) i assume one can sell their shares if they are going down hill (say a bear market occurs) and then later on re-buy them if they increase again in share-price and things are looking good again ?


3) i've read lots of info, but not an example for me. what can i do with eg 20k? i want to avoid great risk and build it up gradually over many years . what money percentage would i put into income/blue chip stocks? and what for the remaining percentage into growth stocks? Is there another group of shares I need too?

4) to be diversified and protected enough, how many companies do i need for my 20k investment?

5) should i incorporate a fund, and how much of that 20k? it's an easy way to diversify. and will i be losing lots of money to the fund manager so that it's not worth it?


6) what's a good exit percentage for blue chips? i mean, for eg. cba or other blue-chips, if they go down, how much down until i sell them off to avoid disaster? Their current stationary high shareprice is never guaranteed. i would probably just use the money and buy other blue chip shares. I'm thinking I would have automatic sell orders going so they sell when the price goes down a certain amount. Those shares are meant to be stable for me, so i'll get rid of them if they go down too much.


7) what could i monitor (apart from share price) to discern that a company is losing value? I want to look at such indications regularly and so be prepared if I need to sell my shares in some company.

8) my impression is that a bear market is when the all ordinaries drops in value 20% over at least 2 months. thus, if it's at eg. 5500 points currently, it must drop at least 20% of that number of points. if that happens the economy is afflicted and i should look at selling off my shares into defensive shares or just selling it all off and keeping it in the bank.


Thanks everyone. Hope I don't come across irritating.

Your questions aim to help reduce losses, right?

None of those strategies would help, if they could, the effort to track them would better be used on getting to know the business. To use "stop loss" strategies like that could actually lock in your losses, especially during times like these.

There is only two approaches to buying stocks: one is market-based, the other is business-based.

Within the market-based approach, there's technical analysis (charting) as well as, yes hard to believe but the fundamental approach as practised by most professionals are also market-based because it based too many of its decisions on market variables - such as market cap, share prices and its variations against a representative index of stocks; that and stop loss if the price dropped x% from when you bought it.

In my opinion, you ought to approach this as you do a business. And your business is buying other businesses on the stock market (or privately off market)... since $20K won't buy you any business to speak of privately, you're buying a share of a public business, a part of it, sold through the stock/share market.

Don't let the frequent share price movements and other fancy works get in the way of this basic fact.

There are those who can play the market, who have access to databases and who knows when to get in and out... while you and I can play that game, chances are we're not resourceful enough and stop-loss strategies ain't going to help our profits, just lock in a loss at an "acceptable" level.