Stock exchange success stories

Earning money from stocks - myth or reality. I have put together few success stories of stocks that qualified under bargain buy formula and performance of their prices over the period with return calculated.

15 stock terminologies you must know

Ask

: The lowest price a seller is willing to accept when selling a security (stock).

Bear: An investor who believes the market as a whole or a particular stock will decline. A bear is the opposite of a Bull.

Bid: The highest price a buyer is willing to accept when purchasing a security.

Blue Chip: A company that has a history of solid earnings, regular and increasing dividends, and an impeccable balance sheet. Examples: Coca-Cola, Berkshire Hathaway, & Gillette. We have an entire subject area dedicated to Blue Chip stocks! Go Here.

Book Value: The value of the company if all liabilities were subtracted from assets and common stock equity. The book value has very little relation to the market value. In industries in the technology sector, this number is almost always miniscule compared to market capitalization.

Broker: A person that buys or sells an investment vehicle for you (securities, bonds, commodities, etc.,) in exchange for a fee which is called a commission.

Bull: An investor who believes the general market or a particular stock is going to increase in price.

Dividend: A portion of a company's income that is paid out to shareholders on a quarterly or annual basis. Dividends are declared by the Board of Directors.

Dow Jones Industrial Average: The Dow Jones Industrial Average (or DJIA for short) is by far the most popular and widely used gauge of the U.S. Stock Market. It consists of a price-weighted list of 30 highly-traded Blue Chip companies.

Market Capitalization: A company's market capitalization (or "market cap" as it s frequently called) is calculated by taking the number of outstanding shares of stock multiplied by the current price-per-share.

NASDAQ: A stock exchange where mostly shares of technology companies such as Microsoft and Cisco are traded. An exchange is a place where options, futures, and shares in stocks, bonds, indexes, and commodities are traded. The most famous in the United States is the New York Stock Exchange.

P/E Ratio: How much money you are paying for $1 of the company's earnings. In other words, if a company is reporting a profit of $2 per share, and the stock is selling for $20 per share, the P/E ratio is 10 because you are paying ten-times earnings ($20 per share divided by $2 per share earnings = 10 P/E.)

Spread: The difference between the Ask and the Bid.

Stock: Stock is ownership. A business is divided up into shares of stock and parts of the company (the shares) are sold to investors to raise money. For more information, check out the investing lessons.

Yield: When a company pays a dividend the yield is the percentage of the stock price in relation to the dividend paid. In other words, if a stock is trading for $10 and pays a dividend of $0.50, the yield is 5%, because for every $10 you invest, you would receive 5% back annually in the form of a fifty-cent dividend.

Is there a secret formula to pick good stocks?

Is There a Secret Formula to Pick Good Stocks?

The only reliable way to make money sustainably in the stock market is to buy low and sell high. For that to work, you need to answer a couple of questions: what does low mean and what stock prices will go up and what does high mean? With tens of thousands of stocks to choose from, you need some way to weed out everything that's not currently on sale and everything that won't go up sufficiently in the future.

If you had infinite time, you could analyze each stock and its underlying business one by one, but who has that time? If only there were a way to analyze every possible stock every day to figure out the best bargain stock of the day.

Can a Computer Pick Good Stocks?

One of the benefits of the Internet is that copious amounts of financial information is available online. (Indeed, that's much of the value of online stock trading; you don't have to pay broker fees to do basic research for you.

Beyond having information available via your computer, you can often find spreadsheets and other programs to analyze stocks for you. That implies something very important: that, given sufficient sources of information about stocks, it's possible to design computer programs to analyze those stocks and suggest good stocks to buy.

Joe Ponzio's F Wall Street tells the story of the Enron corporation. On paper, to a naïve analysis, the company's financial information looked great. It reported bigger and better revenues each year. Yet if you looked at the amount of money pumped into the company every year, it was actually losing increasing billions of dollars every year. It wasn't a money-printing machine. It was a money pit hurtling toward bankruptcy.

Sure, it's easy to see that in retrospect, but if you invested based on a simple formula which only looked at revenue, you'd have been in danger of losing your investment on a bankrupt stock.

What Can't a Formula Do?

A computer can't apply human judgment to factors beyond its understanding. All a computer can do is measure and analyze the data it's told to measure. These are often financial information (cash yield, free cash flow) and derived ratios (P/E ratio, current ratio). For these to mean anything, they have to be reported correctly as well as put in the context of similar companies also reporting their financial information correctly.

Put another way, comparing the international conglomerate of Coca-Cola to a small organic soda company from Canada makes little sense. Even though they're both nominally in the same business (selling soft drinks), they're at different stages in the lifecycle of a business and they have different concerns (rapid growth versus sustainable revenue). Similarly, a young biotechnology company does not necessarily compare to the Canadian soda company even though they have the same number of employees and the same amount of revenue. The amount of competition in the market as well as the nature of customers make the two businesses difficult to compare.

A company may have a good intrinsic value when compared to other companies with similar characteristics, but are those other companies similar enough in the ways that matter most to mean that you absolutely should buy one stock over another?

Even if you could answer that question unequivocally "yes", do you trust that the formula doesn't have a bug in it? That the source of data is completely internally consistent? That the interpretation you're putting on the result of the formula is supported by the formula itself?

What Can a Formula Do?

You might think that this is a strange disclaimer for a site such as Trendshare to explore. After all, the goal of the site are to encourage individual investors to take control of their own portfolios by educating them about how the market works and giving them free tools to help identify good stocks to explore further.

Yet rather than promising that every number on the site is the last word in investment, we've always claimed that the value investing formulas we use to analyze stocks exist to give you information. If you go through the thousands of stocks we track every day, you'll find that most of those stocks aren't objectively on sale. That doesn't mean they're bad stocks—many of them are worth owning—but instead that they're not bargains to buy right now.

In our mind, that's one of the biggest benefits of our analysis here at Trendshare. We can help you rule out most of the stocks right now. Based on your knowledge and interests, we can help you identify a handful of stocks to analyze further, on your own, with all of your human intellect and intuition. When and if those stocks make sense—when you can tell a story about the underlying companies, where they've been and where they're going—then you know enough to decide whether to invest now or ever.

No formula can tell you that.

Is There Any Hope for an Investing Formula?

The best formula for investing is one you already know: buy low, sell high. Buy things you understand, when they make sense. Avoid things you don't understand. By all means, use the tools at your disposal (investment websites, financial information, stock screeners, Trendshare's stock guides) to winnow the field down to a few good candidates for further research. Yet never let adherence to any specific formula override your own judgment. It's your money. It's your investment. Take charge and use your mind most of all.

Why does the Dow change stocks it tracks?

Why Does the Dow Change the Stocks it Tracks?

On September 23, 2013, the Dow Jones Industrial Average changed for the 53rd time in 128 years. The DJIA (or Dow) is one of the most popular measurements of stock market and economic activity, even though it's changed more often than you might think.

The Dow tracks the prices of 30 large American corporations and the value of the Dow represents a weighted average of those stock prices.

When the Dow changes the companies it tracks—as it does every few years—it does so in an attempt to reflect the behavior of the American economy and the stock market more effectively. What's the true state of American business? Which industries are growing? Which are shrinking? Which companies are truly the core of American corporate business? When the Dow member companies change, pay attention.

Why Did the Dow Drop Hewlett-Packard?

Hewlett-Packard was one of the original Silicon Valley success stories. Its founders built a high technology equipment company from humble roots in a garage into a globe-spanning company in diverse technology areas.

HP has struggled in the past several years, with a fight on the board of directors which has culminated in a steady stream of troubled CEOs. The company isn't sure where it's going or what it's doing, and its stock price has reflected that. The Dow is replacing HP with Visa.

Why Did the Dow Drop Alcoa?

Unless you follow the aluminum market, you may have never have heard of Alcoa. When manufacturing and heavy industry dominated the American market, the raw materials sector (things like steel and, in Alcoa's case, aluminum) was a powerhouse. Alcoa's stock rode high, soaring to huge valuations.

That hasn't been the case for a long time, and Alcoa's valuation is tiny (between $8 and $9 billion dollars) compared to other stocks. Nike, its replacement, has a market capitalization of almost $60 billion.

Why Did the Dow Drop Bank of America?

Dropping Bank of America in favor of Goldman Sachs doesn't make much sense, when you compare market capitalization. Bank of America has twice the capitalization of Goldman Sachs—over $150 billion compared to about $75 billion.

Keep in mind that the Dow tracks the absolute dollar values of stock prices alone, without weighting the size of the company (market capitalization), earnings, or anything else. In that sense, it wants companies with higher stock prices companies even though they're not necessarily better. Bank of America's stock price of $15 or so looks worse than Goldman Sachs with a stock price of over $160 per share. (However, you're probably better off owning Nike over the long term than Alcoa.)

Why Did the Dow Add Nike?

Nike's huge and growing. Alcoa isn't. The aluminum industry has been on the decline as a share of American business for a long time. It's surprising Alcoa has been in the Dow as long as it has.

Why Did the Dow Add Visa?

The Dow classifies Visa as an information technology company, just like HP. (Seriously, the Dow Jones reorganization press release says so). Swapping one industry leader for another makes a lot of sense.

More than that, HP's being penalized for its lost decade and a half. The company hasn't gone anywhere since the disastrous days of Carly Fiorina (think of all of the acquisitions that haven't turned out at all well), and there's little hope for a dramatic turnaround. Visa, on the other hand, is like many other companies in the financial services industry: making lots and lots of money.

Why Did the Dow Add Goldman Sachs?

No one can explain this. Goldman Sachs specializes in investment banking—high end services. Bank of America has a much broader focus that includes consumer banking. This swap may be solely based on share price, which is a silly measurement anyhow. (See The Dow Jones Industrial Average is Ridiculous for more details.)

Should Value Investors Care about the Dow Jones Changes?

Keep in mind that the Dow Jones Industrial Average is just a measurement. It doesn't change the worth of its member companies. It may give a temporary boost to some share prices (Goldman Sachs, Nike, Visa) and penalize others (Alcoa, Bank of America, Hewlett-Packard), but that's short-lived.

What's still important—and what hasn't changed—is that the long term value of a company still depends on how much money it can generate for its owners. The presence or absence of a stock in any index is irrelevant to the running of the business. Focus on that and buy good companies.

Why companies pay dividend?

Suppose you own a share of stock in Canada's Best Lemonade Company. Your grandparents bought it for you when you were born, and you've held it ever since. It's a good company. It's made money every year. Four times a year—once a quarter—it sends you a check. At first it was 10 cents a check. Then it went up to 11 cents and then 12 and now that you're 21 years old and out on your own, you're making a whopping 31 cents every quarter from the single share of stock you own.

Why?

What is a Dividend?

As explained in What is a Stock Dividend, this tiny check is your portion of the company's profits. You own one share,so you're entitled to that tiny percentage of whatever the company earned.

Suppose your grandparents on the other side bought you a share of stock in Europe's Best Bagel Company when you were born, but that company has never ever ever sent you a dividend check. It might not. It doesn't have to. (Some companies never pay dividends.)

Why does your friendly Canadian lemonade company pay a dividend? For any of several reasons.

A Company Might Not Have Anything Better to do with the Money

A company can do a lot of things with its profits. It can reinvest them in the business by expanding into new markets or geographic areas. Perhaps it makes sense to lease retail space in malls from Prince Edward Island to the wilds of Vancover, BC to put up lemonade kiosks, but maybe it doesn't make sense this year (mall space is too expensive this year or the market's currently hotter for bubble tea and lemonade would be too confusing). Instead, the directors of the company might decide to return some of those profits to shareholders.

A company could also decide to buy other companies with its profits. Maybe the bubble tea fad burst and all of the bubble tea shops are going out of business, but you could buy one of them at a huge discount and sell bubble tea to people who really love it (the market isn't entirely going away). Then again, maybe there are no good acquisition targets, so it makes sense to return some of those profits to shareholders.

A company could invest the money in other financial instruments, such as bonds or, well, other stocks. That's risky, though, and how does the board of directors know that it'll make better investments than shareholders could make on their own?

A Company Might Distinguish Itself By Its Dividend

To pay a dividend regularly, a company must have a consistent business model. It can't be in the habit of losing buckets of money every year. It has to bring in money, and it has to make a profit. If everything else is equal, it's better to own shares of a company that reliably makes money than a company that doesn't.

Paying a dividend reliably is a sign of strength of a company.

A Company Might Be Attractive Only to Dividend Investors

Some people—especially retirees or people otherwise living off of investment income—rely on quarterly dividend checks the way workers rely on paychecks. They don't mind giving up a few points of possible returns from companies that might have huge growth in favor of companies that grow more slowly but always pay dividends. Paying a dividend can attract a different type of investor, one less interested in speculation and quick turnaround. (That might lead to less volatility of the stock's price, but that's hard to measure.)

In this case, a truly successful company will often raise its dividend payout regularly, as in the case of the Canadian Lemonade stock. Sure, going from 10 cents per share to 12 cents per share over a couple of years doesn't sound like much if you only own one share, but a company that can return 20% more profit to its investors over a couple of years is doing something very, very right.

A Failing Company Might Attract More Investors

There's one danger sign to look out for. A company that's having trouble might suddenly pay out a very attractive dividend to try to attract new investors and increase its stock price. (If the company wants to issue more stock, this could be a mechanism to improve the expected amount of money raised by issuing that stock.) You can spot this case pretty easily, however: a company that's never paid much out in regular dividends suddenly offers an attractive dividend. What's the catch?

Dividends are Nice, But They're Not Essential

Dividends aren't the only reason to hold stock. Sometimes it makes sense for an up and coming company to invest all of its profits back into the business. Other times it makes sense to grow by acquiring other companies. Yet holding bushels of cash (in the case of Apple Computers, for example, billions of dollars in reserve) makes investors wonder why they're not getting their cut of the profits.

Investors expect their investments to grow, and the companies they hold need to continue to make money. Whether the profits they make get reinvested in the business or returned to shareholders as dividends, those profits belong to the shareholders. Why do companies pay dividends? Because the board of directors believes the best way to return this money to the shareholders is in those nice quarterly checks.

How to make real money from penny stocks

New investors often think that cheap stocks—those with low share prices—are bargains. New investors sometimes fall into the trap of thinking that the lowest prices have the greatest potential to make them money. After all, a stock worth $1 per share only has to gain $1 to double your money, while one worth $100 per share has to gain $100 to double your money. (That math is true, but it's misleading. The secret of making money in the stock market is patience.) This math often leads investors to consider penny stocks (also called microcap or smallcap stocks).

What are penny stocks? They're generally stocks which sell for less than a dollar per share. (They're also generally sold on the over the counter exchange, OTC, rather than on the NYSE or NASDAQ.) Because they're so cheap, they seem appealing: $1000 can buy you a lot of shares, and a move of ten cents one way or another can make you a lot of money, percentage-wise. This seems like a secret way to get rich quick by investing!

Are penny stocks worth it? In a word, no. These smallcaps aren't that easy to buy. They're not listed on any major stock exchange. Even if you have a good online broker, you may have to jump through hoops to buy them (see How to Buy Penny Stocks). Yet any normal online broker will let you trade them, though you may need to sign some kind of waiver.

Then again, if you believe the ads plastered all over the Internet, people are making money—crazy money—with penny stocks every day. While it's true that that can happen, you're not likely to get rich if you buy penny stocks. You're more likely to lose money.

How To Make Money With Penny Stocks

There are three obvious ways how to make money from penny stocks. None of them are easy. (It's less risky and a lot easier to build wealth with value investing, but you'll have to be patient.)

Pump and Dump

Perhaps the most popular way to profit from a smallcap is to buy it cheap, convince other people that it's worth far more than you paid for it, then sell it at the inflated price. Unfortunately, this is hugely unethical and quite possibly illegal where you live. It's also difficult to make work.

You've probably received spam email telling you about this great hot tip about a really cheap penny stock to buy. The message promises you the moon. The price is about to explode! You'd better buy it now to lock in your profit! Step back and think about that for a second.

If the stock is really going to go up in value soon, it'll do so for a reason. Perhaps the underlying business has improved. Perhaps the company's about to be acquired. Perhaps there's going to be a huge order that only that company can fill. If that's the case (and if your anonymous correspondent knows why the price is about to go up), ask yourself two questions. First, why is that person encouraging you to buy now (thus driving up the price, because prices go up when there are more buyers than sellers) instead of buying more him or her self? Second, how does that person know the price will go up? (At least without falling afoul of insider trading laws.)

What's more likely is that your anonymous friend bought shares at 25 cents and wants to get a lot of people to buy shares at 50 cents and is trying to pump up excitement for the stock to attract more buyers. Nothing about the business has changed; it's still worth 25 cents per share. This appears to be how something like 900 Percent Stocks works. They're not interested in helping you. They don't want to teach you how to invest in penny stocks and make money. 900PercentStocks.com may just be a scam, with its clients more interested in finding suckers to make money from than than in helping you make money.

Get Lucky

It's far more ethical to buy a stock because it belongs to a valuable company and then hold onto it until the price reaches the point where you can sell it for a profit (or take a loss out of disgust). Unfortunately, you can't predict luck. There's no simple way to find a list of all of the good, cheap stocks to invest in. Not all good stocks are cheap and by no means are all cheap stocks good: a company financially battered and bruised could easily go out of business, selling off everything to creditors, and pay you a fraction of what you put into the stock.

Sure, the company could turn things around, but a company with a really low stock price has a really low stock price for a reason. You owe it to yourself to figure that out (unless you like the odds of gambling). At least in Las Vegas or Atlantic City, you know what the odds of winning are before you put down your money. Penny stocks offer no such guarantee. (Unlike a casino, you won't end up owing money in the stock market unless you chase more exotic investments like futures, options, and derivatives.)

Find a Turnaround Company

Once in a while, a company will go through a horrible bankruptcy and end up restructuring (or getting bought out) at a great value. Perhaps it can get out from under huge amounts of debt or it has a lot of inventory or capital equipment or real estate or patents or other valuable assets that are worth something to an acquirer.

Maybe it just needs some extra love and attention to get the business back in order.

These investments are extremely rare and still risky. It's not easy to predict when an airline will turn around or when a Canadian plutonium mine will find a new vein—but it can happen.

If you're careful and do your value analysis, sometimes you can find companies with the potential to turn themselves around and get listed on a top exchange again. Sometimes the market is irrational and undervalues a business. It's unfair, but it happens and it represents a real opportunity.

Unfortunately, most penny stocks do not represent this opportunity.

How Can You Tell if a Penny Stock is Worth Buying?

You can't just look at a stock price and see if it's a bargain. You have to figure out what the company is worth. A company that makes money is valuable, and a company that loses money isn't worth your investment. Of course there are secondary concerns, like the value of any other assets the company holds. Keep in mind that a company in financial trouble probably has creditors who have a claim on those assets that you as a stockholder can't ignore. Great penny stocks may truly exist, but the odds are against them.

How Can You Find Penny Stocks to Buy?

One of the worst parts about trying to buy penny stocks is that obscurity works against you. You want to find a stock that's undervalued. That means you can't have lots of people looking at it and valuing it fairly. It has to be a decent company with good financials and an improving outlook.

Before you can buy a stock, other people must be willing to sell it to you at that bargain price. If the company's really going to turn around, why wouldn't they just hold onto it until it gets more attention? Maybe you can luck out and find someone willing to sell a lot of shares at a fire sale price, but now you're relying on even more luck.

Worse yet, now that you've found that bargain basement price and you've actually bought that great penny stock, you're going to have to try to sell it somehow. Remember—it's unpopular for a reason. People aren't looking at it. People don't want to buy it. Now how are you going to unload it?

Your best hope is to hold it until the company completely turns around and gets back on a normal stock market listing again. That can happen—but the risks are high.

Are Penny Stocks Worth Investing In?

Even if a stock has a great price, and if it seems like 25 cents per share should be easy to double or triple your investment, be calm and careful. Do your research. You're probably not going to get rich on penny stocks, but you can make good money by sticking to value investing to find great stocks and good prices, not risky ones at cheap prices.

How to make real money from stocks

If you’ve spent a lot of time on the site, you see that we provide resources on some pretty advanced topics – financial statement analysis, financial ratios, capital gains tax strategies, and more. Our focus, however, is on the new investor. I receive emails from readers that ask some pretty basic and straightforward questions. One of the perennial favorites is, “How do I actually make money from a stock?” If you’ve ever wondered how the mechanics actually work, grab a hot cup of coffee, get comfortable in your favorite reading chair, and prepare to learn the basics of common stock.

When you buy a share of stock , you are buying a piece of a company. Imagine that Harrison Fudge Company, a fictional business, has sales of $10,000,000 and net income of $1,000,000. To raise money for expansion, the company’s founders approached a Wall Street underwriting firm (an investment banker) and had them sell stock to the public. They might have said, “Okay, we don’t think your growth rate is great so we are going to price this so that future investors will earn 9% on their investment plus whatever growth you generate … that works out to around $11,000,000+ value for the whole company ($11 million divided by $1 million net income = 9% return on initial investment.)” Now, we’re going to assume that the founders sold out completely instead of issuing stock to the public (for an explanation of the difference, see Investing Lesson 1: Introduction to Wall Street .)

The underwriters may say, “You know, we want the stock to sell for $25 per share because that seems affordable so we are going to cut the company into 440,000 pieces, or shares of stock (440,000 shares x $25 = $11,000,000.) That means that each “piece” or share of stock is entitled to $2.72 of the profit ($1,000,000 profit ÷ 440,000 shares outstanding = $2.72 per share.) This figure is known as Basic EPS (short for earnings per share.) In other words, when you buy a share of Harrison Fudge Company, you are buying the right to your pro-rata profits. Were you to acquire 100 shares for $2,500, you would be buying $272 in annual profit plus whatever future growth (or losses) the company generated. If you thought that a new management could cause fudge sales to explode so that your pro-rata profits would be 5x higher in a few years, then this would be an extremely attractive investment.

What muddies up the situation is that you don’t actually see that $2.72 in profit that belongs to you. Instead, management and the Board of Directors have a few options available to them, which will to a large degree determine the success of your holdings:

It can send you a cash dividend for some portion or the entirety of your profit. This is one way to “return capital to shareholders.” You could either use this cash to buy more shares or go spend it any way you see fit.

It can repurchase shares on the open market and destroy them. For a great explanation of how this can make you very, very rich in the long-run, read Stock Buy Backs: The Golden Egg of Shareholder Value.

It can reinvest the funds into future growth by building more factories, stores, hiring more employees, increasing advertising, or any number of additional capital expenditures that are expected to increase profits. Sometimes, this may include seeking out acquisitions and mergers.

It can strengthen the balance sheet by reducing debt or building up liquid assets.

Which way is best for you? That depends entirely upon the rate of return management can earn by reinvesting your money. If you have a phenomenal business – think Microsoft or Wal-Mart in the early days when they were both a tiny fraction of their current size, paying out any cash dividend is likely to be a mistake because those funds could be reinvested at a high rate. There were actually times during the first decade after Wal-Mart went public that it earned more than 60% on shareholder equity. That’s unbelievable. (Check out the DuPont desegregation of ROE for a simple way to understand what this means.) Those kinds of returns typically only exist in fairy tales yet, under the direction of Sam Walton, the Bentonville-based retailer was able to pull it off and make a lot of associates and stockholders rich in the process.

Berkshire Hathaway pays out no cash dividends while U.S. Bancorp has resolved to return more 80% of capital to shareholders in the form of dividends and stock buy backs each year. Despite these differences, they both have the potential to be very attractive holdings at the right price (and particularly if you pay attention to asset placement) provided they trade at the right price. Personally, I own both of these companies as of the time this article was published and I’d be upset if USB started following the same capital allocation practices as Berkshire because it doesn’t have the same opportunities available to it as a result of the prohibition in place for bank holding companies.

The Two Ways You Make Money

Now that you see this, it’s easy to understand that your wealth is built in two distinct ways:

An increase in share price. Over the long-term, this is the result of the market valuing the increased profits as a result of expansion in the business or share repurchases, which make each share represent greater ownership in the business as a percentage of total equity. In other words, if a business with a $10 stock price grew 20% for 10 years through a combination of expansion and share repurchases, it should be nearly $620 per share within a decade as a result of these forces assuming Wall Street maintains the same price-to-earnings ratio.

Dividends. When earnings are paid out to you, these funds are now your property in that you can either use them to buy more stock or go to Vegas and blow it all at the craps table.

Occasionally, during market bubbles, you may have the opportunity to make a profit by selling to someone for more than the company is worth. In the long-run, however, the investor’s returns are inextricably bound to the underlying profits generated by the operations of the businesses which he or she owns.

For more information, read our Investing in Stocks guide.