Stock Investing For Dummies^®, 2nd Edition

by Paul Mladjenovic

• ISBN13: 9780764599033
• ISBN10: 0764599038
• Edition: 2nd
• Format: Paperback
• Copyright: 2006-01-01
• Publisher: For Dummies

Summary

The Dummies way to score big in the stock market Stock Investing For Dummies, Second Edition covers the basics of investing for individuals and households that want to watch their savings grow. Simple, straight-forward, and honest, this friendly guide covers all the categories of stocks, teaches readers how to analyze stocks, and offers invaluable resources for developing a portfolio. Investing consultant Paul Mladjenovic offers wise advice and proven tactics for beginners who want to get in the game without risking their shirts. Whether the market is up or down, readers will benefit from sound, practical investing strategies and insights that have helped generations of investors profit from the markets. Paul Mladjenovic (Englewood Cliffs, NJ) is the owner of PM Financial Services and a Certified Financial Planner and investing consultant with nineteen years of experience in investing.

Author Biography

Paul Mladjenovic is a certified financial planner practitioner, writer, and public speaker who has a Web site at www.mladjenovic.com. His business, PM Financial Services, has helped people with financial and business concerns since 1981. In 1985 he achieved his CFP designation. Since 1983, Paul has taught thousands of budding investors through popular national seminars such as “The $50 Wealthbuilder” and “Stock Investing Like a Pro.” Paul has been quoted or referenced by many media outlets such as Bloomberg, MarketWatch, CNBC, and many financial and business publications and Web sites. As an author, he has written the books The Unofficial Guide to Picking Stocks (Wiley, 2000) and Zero-Cost Marketing (Todd Publications, 1995). In 2002, the first edition of Stock Investing For Dummies was ranked in the top 10 out of 300 books reviewed by Barron’s. In recent years, Paul accurately forecasted many economic events, such as the rise of gold and the decline of the U.S. dollar. At press time he has been warning his students and clients about the coming decline in housing. He maintains a financial database for his readers and students at www.supermoneylinks.com

Table of Contents

Introduction	1	(1)
About This Book	1	(1)
Conventions Used in This Book	2	(1)
What You're Not to Read	2	(1)
Foolish Assumptions	3	(1)
How This Book Is Organized	3	(3)
Part I: The Essentials of Stock Investing	3	(1)
Part II: Before You Start Buying	4	(1)
Part III: Picking Winners	4	(1)
Part IV: Investment Strategies and Tactics	5	(1)
Part V: The Part of Tens	5	(1)
Part VI: Appendixes	6	(1)
Icons Used in This Book	6	(1)
Where to Go from Here	6	(1)
Part I: The Essentials of Stock Investing	7	(62)
Exploring the Basics	9	(8)
Understanding the Basics	9	(1)
Getting Prepared before You Get Started	10	(1)
Knowing How to Pick Winners	10	(4)
Recognizing stock value	10	(1)
Understanding how market capitalization affects stock value	11	(1)
Sharpening your investment skills	12	(2)
Boning Up on Strategies and Tactics	14	(1)
Getting Some Good Tips	14	(3)
Taking Stock of Your Current Financial Situation and Goals	17	(18)
Establishing a Starting Point	18	(8)
Step 1: Making sure you have an emergency fund	19	(1)
Step 2: Listing your assets in decreasing order of liquidity	19	(3)
Step 3: Listing your liabilities	22	(1)
Step 4: Calculating your net worth	23	(1)
Step 5: Analyzing your balance sheet	24	(2)
Funding Your Stock Program	26	(5)
Step 1: Tallying up your income	27	(1)
Step 2: Adding up your outgo	28	(1)
Step 3: Creating a cash flow statement	29	(1)
Step 4: Analyzing your cash flow	30	(1)
Finding investment money in tax savings	31	(1)
Setting Your Sights on Your Financial Goals	31	(4)
Defining Common Approaches to Stock Investing	35	(10)
Matching Stocks and Strategies with Your Goals	35	(2)
Investing for the Future	37	(2)
Focusing on the short term	37	(1)
Considering intermediate-term goals	38	(1)
Preparing for the long term	39	(1)
Investing for a Purpose	39	(3)
Making loads of money quickly: Growth investing	40	(1)
Steadily making money: Income investing	40	(2)
Investing for Your Personal Style	42	(3)
Conservative investing	42	(1)
Aggressive investing	43	(2)
Recognizing the Risks	45	(14)
Exploring Different Kinds of Risk	46	(9)
Financial risk	46	(1)
Interest rate risk	47	(1)
Understanding the adverse effects of rising interest rates	48	(2)
Market risk	50	(1)
Inflation risk	51	(1)
Tax risk	52	(1)
Political and governmental risks	52	(1)
Personal risks	52	(1)
Emotional risk	53	(2)
Minimizing Your Risk	55	(2)
Gaining knowledge	55	(1)
Staying out . . . for now	55	(1)
Getting your financial house in order	56	(1)
Diversifying your investments	56	(1)
Weighing Risk Against Return	57	(2)
Say Cheese: Getting a Snapshot of the Market	59	(10)
Knowing How Indexes Are Measured	59	(1)
Checking Out the Indexes	60	(7)
The Dow Jones Industrial Average	61	(3)
Nasdaq indexes	64	(1)
Standard & Poor's 500	64	(1)
Russell 3000 Index	65	(1)
Wilshire Total Market Index	65	(1)
International indexes	66	(1)
Using the Indexes	67	(2)
Tracking the indexes	67	(1)
Investing in indexes	67	(2)
Part II: Before You Start Buying	69	(74)
Gathering Information	71	(18)
Looking to Stock Exchanges for Answers	72	(1)
Understanding Stocks and the Companies They Represent	73	(4)
Accounting for taste and a whole lot more	73	(1)
Understanding how economics affects stocks	74	(3)
Staying on Top of Financial News	77	(3)
Figuring out what a company's up to	78	(1)
Discovering what's new with an industry	78	(1)
Knowing what's happening with the economy	78	(1)
Seeing what the politicians and government bureaucrats are doing	79	(1)
Checking for trends in society, culture, and entertainment	79	(1)
Reading (And Understanding) Stock Tables	80	(5)
52-week high	81	(1)
52-week low	81	(1)
Name and symbol	82	(1)
Dividend	82	(1)
Volume	82	(1)
Yield	83	(1)
P/E	84	(1)
Day last	84	(1)
Net change	85	(1)
Using News about Dividends	85	(2)
Looking at important dates	85	(2)
Understanding why these dates matter	87	(1)
Evaluating (Avoiding?) Investment Tips	87	(2)
Going for Brokers	89	(12)
Defining the Broker's Role	89	(2)
Distinguishing between Full-Service and Discount Brokers	91	(3)
Full-service brokers	91	(2)
Discount brokers	93	(1)
Choosing a Broker	94	(1)
Discovering Various Types of Brokerage Accounts	95	(2)
Cash accounts	95	(1)
Margin accounts	96	(1)
Option accounts	97	(1)
Judging Brokers' Recommendations	97	(4)
Investing for Growth	101	(14)
Becoming a Value-Oriented Growth Investor	102	(1)
Getting Tips for Choosing Growth Stocks	103	(7)
Making the right comparison	103	(1)
Checking out a company's fundamentals	104	(1)
Looking for leaders and megatrends	104	(1)
Considering a company with a strong niche	105	(1)
Noticing who's buying and/or recommending the stock	105	(1)
Learning investing lessons from history	106	(1)
Evaluating the management of a company	107	(3)
Making sure a company continues to do well	110	(1)
Exploring Small-caps and Speculative Stocks	110	(5)
Avoid IPOs, unless	111	(1)
If it's a small-cap stock, make sure it's making money	112	(1)
Investing in small-cap stocks requires analysis	112	(3)
Investing for Income	115	(12)
Understanding Income Stocks	116	(2)
Advantages of income stocks	116	(1)
Disadvantages of income stocks	117	(1)
Analyzing Income Stocks	118	(6)
Understanding your needs first	118	(2)
Checking out yield	120	(2)
Checking the stock's payout ratio	122	(1)
Diversifying your stocks	123	(1)
Examining the company's bond rating	123	(1)
Exploring Some Typical Income Stocks	124	(3)
Utilities	124	(1)
Real estate investment trusts (REITs)	124	(2)
Royalty trusts	126	(1)
Using Basic Accounting to Choose Winning Stocks	127	(16)
Recognizing Value When You See It	127	(4)
Understanding different types of value	129	(1)
Putting the pieces together	130	(1)
Accounting for Value	131	(12)
Walking on a wire: The balance sheet	132	(3)
Looking at the income statement	135	(3)
Tooling around with ratios	138	(5)
Part III: Picking Winners	143	(52)
Decoding Company Documents	145	(12)
Getting a Message from the Muckety-Muck: The Annual Report	145	(5)
Analyzing the annual report's anatomy	146	(3)
Going through the proxy materials	149	(1)
Getting a Second Opinion	150	(5)
Company documents filed with the SEC	150	(2)
Value Line	152	(1)
Standard & Poor's	152	(1)
Moody's Investment Service	153	(1)
Brokerage reports: The good, the bad, and the ugly	153	(2)
Compiling Your Own Research Department	155	(2)
Analyzing Industries	157	(10)
Badgering the Witness and Interrogating the Industries	158	(5)
Is the industry growing?	158	(1)
Are the industry's products or services in demand?	159	(1)
What does the industry's growth rely on?	160	(1)
Is this industry dependent on another industry?	160	(1)
Who are the leading companies in the industry?	161	(1)
Is the industry a target of government action?	161	(1)
Which category does the industry fall into?	162	(1)
Outlining Key Industries	163	(4)
For sale	164	(1)
Baby, you can drive my car	165	(1)
Thanking Mr. Roboto	165	(1)
Banking on it	165	(2)
Emerging Sector Opportunities	167	(14)
Bullish Opportunities	168	(6)
Commodities: Feeding and housing the world	168	(1)
Energy	169	(1)
Gold	170	(2)
Silver	172	(1)
Healthcare	173	(1)
National Security	173	(1)
Bearish Outlook	174	(3)
Warning on housing	174	(2)
The great credit monster	176	(1)
Cyclical stocks	177	(1)
Important for Bulls & Bears	177	(4)
Conservative and bullish	178	(1)
Aggressive and bullish	178	(1)
Conservative and bearish	179	(1)
Aggressive and bearish	179	(1)
Diversification	179	(2)
Money, Mayhem, and Votes	181	(14)
Avoiding the Bull When Elephants and Donkeys Talk Turkey	182	(5)
Understanding price controls	184	(1)
Ascertaining the political climate	184	(1)
Discovering systemic and nonsystemic effects	185	(2)
Poking into politics: Resources	187	(1)
Easing into Economics	187	(8)
Understanding economic impact	188	(5)
Inquiring about economics: Resources	193	(2)
Part IV: Investment Strategies and Tactics	195	(72)
Taking the Bull (Or Bear) by the Horns	197	(12)
Bulling Up	198	(4)
Recognizing the beast	198	(2)
Avoiding the horns of a bull market	200	(1)
Toro! Approaching a bull market	200	(2)
Bearing Down	202	(4)
Identifying the beast	202	(3)
Heading into the woods: Approaching a bear market	205	(1)
Straddling Bear and Bull: Uncertain Markets	206	(3)
Pinpointing uncertainty is tough	206	(1)
Deciding whether you want to approach an uncertain market	207	(2)
Choosing a Strategy That's Just Right for You	209	(8)
Laying Out Your Plans	209	(3)
Living the bachelor life: Young single with no dependents	210	(1)
Going together like a horse and carriage: Married with children	210	(1)
Getting ready for retirement: Over 40 and either single or married	211	(1)
Kicking back in the hammock: Already retired	212	(1)
Allocating Your Assets	212	(3)
Investors with less than $10,000	213	(1)
Investors with $10,000--$50,000	214	(1)
Investors with $50,000 or more	214	(1)
Knowing When to Sell	215	(2)
Understanding Brokerage Orders and Trading Techniques	217	(16)
Checking Out Brokerage Orders	218	(8)
Time-related orders	218	(2)
Condition-related orders	220	(6)
Buying on Margin	226	(2)
Examining marginal outcomes	226	(1)
Maintaining your balance	227	(1)
Going Short and Coming Out Ahead	228	(5)
Setting up a short sale	229	(1)
Oops! Going short when prices grow taller	230	(1)
Watching out for ticks	231	(1)
Feeling the squeeze	231	(2)
Getting a Handle on DPPs, DRPs, and DCA . . . PDQ	233	(10)
Being Direct with DPPs	233	(3)
Investing in a DPP	234	(1)
Finding DPP alternatives	235	(1)
Recognizing that every pro has a con	236	(1)
Dipping into DRPs	236	(4)
Getting a clue about compounding	237	(1)
Building wealth with optional cash payments (OCPs)	238	(1)
Checking out the cost advantages	238	(1)
Weighing the pros with the cons	239	(1)
The One-Two Punch: Dollar Cost Averaging and DRPs	240	(3)
Looking at What the Insiders Do: Corporate Hijinks	243	(12)
Tracking Insider Trading	244	(1)
Looking at Insider Transactions	245	(3)
Learning from insider buying	245	(2)
Picking up tips from insider selling	247	(1)
Considering Corporate Stock Buybacks	248	(3)
Boosting earnings per share	249	(1)
Beating back a takeover bid	250	(1)
Exploring the downside of buybacks	250	(1)
Stock Splits: Nothing to Go Bananas Over	251	(4)
Ordinary stock splits	252	(1)
Reverse stock splits	252	(3)
Tax Benefits and Obligations	255	(12)
Paying through the Nose	255	(5)
Understanding ordinary income and capital gains	256	(2)
Minimizing the tax on your capital gains	258	(1)
Coping with capital losses	258	(2)
Sharing Your Gains with the IRS	260	(2)
Filling out forms	260	(1)
Playing by the rules	261	(1)
Discovering the Softer Side of the IRS: Tax Deductions for Investors	262	(2)
Investment interest	262	(1)
Miscellaneous expenses	262	(1)
Givin' it away	263	(1)
Knowing what you can't deduct	263	(1)
Taking Advantage of Tax-Advantaged Retirement Investing	264	(3)
IRAs	264	(1)
401(k) plans	265	(2)
Part V: The Part of Tens	267	(28)
Ten Warning Signs of a Stock's Decline	269	(6)
Earnings Slow Down or Head South	269	(1)
Sales Slow Down	270	(1)
Exuberant Analysts Despite Logic	271	(1)
Insider Selling	271	(1)
Dividend Cuts	272	(1)
Increased Negative Coverage	272	(1)
Industry Problems	272	(1)
Political Problems	273	(1)
Debt Is Too High or Unsustainable	273	(1)
Funny Accounting: No Laughing Here!	273	(2)
Ten Signals of a Stock Price Increase	275	(6)
Rise in Earnings	275	(1)
Increase in Assets as Debts Are Stable or Decreasing	276	(1)
Positive Publicity for Industry	277	(1)
Heavy Insider or Corporate Buying	277	(1)
More Attention from Analysts	278	(1)
Rumors of Takeover Bids	278	(1)
Praise from Consumer Groups	279	(1)
Strong or Improving Bond Rating	279	(1)
Powerful Demographics	279	(1)
Low P/E Relative to Industry or Market	280	(1)
Ten Ways to Protect Yourself from Fraud	281	(8)
Be Wary of Unsolicited Calls and E-mails	281	(1)
Get to Know the SEC	282	(1)
Don't Invest If You Don't Understand	282	(1)
Question the Promise of Extraordinary Returns	283	(1)
Verify the Investment	283	(1)
Check Out the Broker	284	(1)
Beware of the Pump-and-Dump	284	(2)
Watch Out for Short-and-Abort	286	(1)
Remember That Talk Is Cheap (Until You Talk to an Expert)	286	(1)
Recovering (If You Do Get Scammed)	287	(2)
Ten Challenges and Opportunities for Stock Investors	289	(6)
Debt, Debt, and More Debt	289	(1)
Derivatives	290	(1)
Real Estate	290	(1)
Inflation	291	(1)
Pension Crisis	291	(1)
Government's Unfunded Liabilities	292	(1)
Recession/Depression	292	(1)
Commodities	293	(1)
Energy	293	(1)
Dangers from Left Field	294	(1)
Part VI: Appendixes	295	(2)
Appendix A: Resources for Stock Investors	297	(14)
Financial Planning Sources	297	(1)
The Language of Investing	298	(1)
Textual Investment Resources	298	(3)
Periodicals and magazines	298	(1)
Books and pamphlets	299	(1)
Special books of interest to stock investors	300	(1)
Investing Web sites	301	(1)
General investing Web sites	301	(1)
Stock investing Web sites	301	(1)
Investor Associations and Organizations	302	(1)
Stock Exchanges	302	(1)
Finding Brokers	303	(2)
Choosing Brokers	303	(1)
Brokers	303	(2)
Investment Sources	305	(1)
Dividend Reinvestment Plans	306	(1)
Sources for Analysis	306	(3)
Earnings and earnings estimates	306	(1)
Industry analysis	306	(1)
Factors that affect market value	307	(1)
Technical analysis	308	(1)
Insider trading	308	(1)
Tax Benefits and Obligations	309	(1)
Fraud	309	(2)
Appendix B: Financial Ratios	311	(8)
Liquidity Ratios	312	(1)
Current ratio	312	(1)
Quick ratio	312	(1)
Operating Ratios	313	(2)
Return on equity (ROE)	313	(1)
Return on assets (ROA)	314	(1)
Sales to receivables ratio (SR)	314	(1)
Solvency Ratios	315	(1)
Debt to net equity ratio	315	(1)
Working capital	315	(1)
Common Size Ratios	316	(1)
Valuation Ratios	316	(3)
Price-to-earnings ratio (P/E)	317	(1)
Price to sales ratio (PSR)	317	(1)
Price to book ratio (PBR)	318	(1)
Index	319