Stock Investing For Dummies®, 3rd Edition

Table of contents

1. Copyright
2. About the Author
3. Author's Acknowledgments
4. Publisher's Acknowledgments
5. Introduction
   1. About This Book
   2. Conventions Used in This Book
   3. What You're Not to Read
   4. Foolish Assumptions
   5. How This Book Is Organized
      1. Part I: The Essentials of Stock Investing
      2. Part II: Before You Start Buying
      3. Part III: Picking Winners
      4. Part IV: Investment Strategies and Tactics
      5. Part V: The Part of Tens
      6. Part VI: Appendixes
   6. Icons Used in This Book
   7. Where to Go from Here
6. I. The Essentials of Stock Investing
   1. 1. Welcome to the World of Stock Investing
      1. 1.1. Understanding the Basics
      2. 1.2. Preparing to Buy Stocks
      3. 1.3. Knowing How to Pick Winners
         1. 1.3.1. Recognizing stock value
         2. 1.3.2. Understanding how market capitalization affects stock value
         3. 1.3.3. Sharpening your investment skills
      4. 1.4. Boning Up on Strategies and Tactics
   2. 2. Taking Stock of Your Current Financial Situation and Goals
      1. 2.1. Establishing a Starting Point by Preparing a Balance Sheet
         1. 2.1.1. Step 1: Make sure you have an emergency fund
         2. 2.1.2. Step 2: List your assets in decreasing order of liquidity
         3. 2.1.3. Step 3: List your liabilities
         4. 2.1.4. Step 4: Calculate your net worth
         5. 2.1.5. Step 5: Analyze your balance sheet
      2. 2.2. Funding Your Stock Program
         1. 2.2.1. Step 1: Tally up your income
         2. 2.2.2. Step 2: Add up your outgo
         3. 2.2.3. Step 3: Create a cash flow statement
         4. 2.2.4. Step 4: Analyze your cash flow
         5. 2.2.5. Another option: Finding investment money in tax savings
      3. 2.3. Setting Your Sights on Your Financial Goals
   3. 3. Defining Common Approaches to Stock Investing
      1. 3.1. Matching Stocks and Strategies with Your Goals
      2. 3.2. Investing for the Future
         1. 3.2.1. Focusing on the short term
         2. 3.2.2. Considering intermediate-term goals
         3. 3.2.3. Preparing for the long term
      3. 3.3. Investing for a Purpose
         1. 3.3.1. Making loads of money quickly: Growth investing
         2. 3.3.2. Steadily making money: Income investing
            1. 3.3.2.1. Distinguishing between dividends and interest
            2. 3.3.2.2. Recognizing the importance of an income stock's yield
      4. 3.4. Investing for Your Personal Style
         1. 3.4.1. Conservative investing
         2. 3.4.2. Aggressive investing
   4. 4. Recognizing the Risks
      1. 4.1. Exploring Different Kinds of Risk
         1. 4.1.1. Financial risk
         2. 4.1.2. Interest rate risk
            1. 4.1.2.1. Hurting a company's financial condition
            2. 4.1.2.2. Affecting a company's customers
            3. 4.1.2.3. Impacting investors' decision-making considerations
            4. 4.1.2.4. Hurting stock prices indirectly
         3. 4.1.3. Market risk
         4. 4.1.4. Inflation risk
         5. 4.1.5. Tax risk
         6. 4.1.6. Political and governmental risks
         7. 4.1.7. Personal risks
         8. 4.1.8. Emotional risk
            1. 4.1.8.1. Paying the price for greed
            2. 4.1.8.2. Recognizing the role of fear
            3. 4.1.8.3. Looking for love in all the wrong places
      2. 4.2. Minimizing Your Risk
         1. 4.2.1. Gaining knowledge
         2. 4.2.2. Staying out until you get a little practice
         3. 4.2.3. Putting your financial house in order
         4. 4.2.4. Diversifying your investments
      3. 4.3. Weighing Risk against Return
   5. 5. Say Cheese: Getting a Snapshot of the Market with Indexes
      1. 5.1. Knowing How Indexes Are Measured
      2. 5.2. Checking Out the Indexes
         1. 5.2.1. The Dow Jones Industrial Average
            1. 5.2.1.1. The companies of the Dow
            2. 5.2.1.2. The drawbacks of the Dow
         2. 5.2.2. Standard & Poor's 500
         3. 5.2.3. Wilshire Total Market Index
         4. 5.2.4. Nasdaq indexes
         5. 5.2.5. Russell 3000 Index
         6. 5.2.6. International indexes
      3. 5.3. Using the Indexes Effectively
         1. 5.3.1. Tracking the indexes
         2. 5.3.2. Investing in indexes
7. II. Before You Start Buying
   1. 6. Gathering Information
      1. 6.1. Looking to Stock Exchanges for Answers
      2. 6.2. Understanding Stocks and the Companies They Represent
         1. 6.2.1. Accounting for taste and a whole lot more
         2. 6.2.2. Understanding how economics affects stocks
            1. 6.2.2.1. Getting the hang of the basic concepts
            2. 6.2.2.2. Gaining insight from past mistakes
      3. 6.3. Staying on Top of Financial News
         1. 6.3.1. Figuring out what a company's up to
         2. 6.3.2. Discovering what's new with an industry
         3. 6.3.3. Knowing what's happening with the economy
         4. 6.3.4. Seeing what politicians and government bureaucrats are doing
         5. 6.3.5. Checking for trends in society, culture, and entertainment
      4. 6.4. Reading (And Understanding) Stock Tables
         1. 6.4.1. 52-week high
         2. 6.4.2. 52-week low
         3. 6.4.3. Name and symbol
         4. 6.4.4. Dividend
         5. 6.4.5. Volume
         6. 6.4.6. Yield
         7. 6.4.7. P/E
         8. 6.4.8. Day last
         9. 6.4.9. Net change
      5. 6.5. Using News about Dividends
         1. 6.5.1. Looking at important dates
         2. 6.5.2. Understanding why these dates matter
      6. 6.6. Evaluating Investment Tips
   2. 7. Going for Brokers
      1. 7.1. Defining the Broker's Role
      2. 7.2. Distinguishing between Full-Service and Discount Brokers
         1. 7.2.1. Full-service brokers
            1. 7.2.1.1. What they can do for you
            2. 7.2.1.2. What to watch out for
         2. 7.2.2. Discount brokers
            1. 7.2.2.1. What they can do for you
            2. 7.2.2.2. What to watch out for
      3. 7.3. Choosing a Broker
      4. 7.4. Discovering Various Types of Brokerage Accounts
         1. 7.4.1. Cash accounts
         2. 7.4.2. Margin accounts
         3. 7.4.3. Option accounts
      5. 7.5. Judging Brokers' Recommendations
         1. 7.5.1. Understanding basic recommendations
         2. 7.5.2. Asking a few important questions
   3. 8. Investing for Growth
      1. 8.1. Becoming a Value-Oriented Growth Investor
      2. 8.2. Choosing Growth Stocks with a Few Handy Tips
         1. 8.2.1. Looking for leaders in megatrends
         2. 8.2.2. Comparing a company's growth to an industry's growth
         3. 8.2.3. Considering a company with a strong niche
         4. 8.2.4. Checking out a company's fundamentals
         5. 8.2.5. Evaluating a company's management
            1. 8.2.5.1. Return on equity
            2. 8.2.5.2. Equity and earnings growth
            3. 8.2.5.3. Insider buying
         6. 8.2.6. Noticing who's buying and/or recommending a company's stock
         7. 8.2.7. Making sure a company continues to do well
         8. 8.2.8. Heeding investing lessons from history
      3. 8.3. Exploring Small Caps and Speculative Stocks
         1. 8.3.1. Know when to avoid IPOs
         2. 8.3.2. Make sure a small cap stock is making money
         3. 8.3.3. Analyze small cap stocks before you invest
   4. 9. Investing for Income
      1. 9.1. Understanding the Basics of Income Stocks
         1. 9.1.1. Getting a grip on dividends and dividend rates
         2. 9.1.2. Recognizing who's well-suited for income stocks
         3. 9.1.3. Checking out the advantages of income stocks
         4. 9.1.4. Watching out for the disadvantages of income stocks
            1. 9.1.4.1. What goes up . . .
            2. 9.1.4.2. Interest-rate sensitivity
            3. 9.1.4.3. The effect of inflation
            4. 9.1.4.4. Uncle Sam's cut
      2. 9.2. Analyzing Income Stocks
         1. 9.2.1. Pinpointing your needs first
         2. 9.2.2. Checking out yield
            1. 9.2.2.1. Examining changes in yield
            2. 9.2.2.2. Comparing yield between different stocks
         3. 9.2.3. Looking at a stock's payout ratio
         4. 9.2.4. Examining a company's bond rating
         5. 9.2.5. Diversifying your stocks
      3. 9.3. Exploring Some Typical Income Stocks
         1. 9.3.1. Utilities
         2. 9.3.2. Real estate investment trusts (REITs)
         3. 9.3.3. Royalty trusts
   5. 10. Getting a Grip on Economics
      1. 10.1. Breaking Down Microeconomics versus Macroeconomics
         1. 10.1.1. Microeconomics
         2. 10.1.2. Macroeconomics
      2. 10.2. Understanding Important Concepts in Economic Logic
         1. 10.2.1. Supply and demand
         2. 10.2.2. Wants and needs
         3. 10.2.3. Dynamic analysis versus static analysis
         4. 10.2.4. Cause and effect
      3. 10.3. Surveying a Few Schools of Economic Thought
         1. 10.3.1. The Marx school
         2. 10.3.2. The Keynes school
         3. 10.3.3. The Austrian school
      4. 10.4. Understanding Some Current Economic Issues That Face Stock Investors
         1. 10.4.1. Inflation
         2. 10.4.2. Government intervention
8. III. Picking Winners
   1. 11. Using Basic Accounting to Choose Winning Stocks
      1. 11.1. Recognizing Value When You See It
         1. 11.1.1. Understanding different types of value
            1. 11.1.1.1. Market value
            2. 11.1.1.2. Book value
            3. 11.1.1.3. Sales and earnings value
         2. 11.1.2. Putting the pieces together
      2. 11.2. Accounting for Value
         1. 11.2.1. Breaking down the balance sheet
            1. 11.2.1.1. Answering a few balance sheet questions
            2. 11.2.1.2. Assessing a company's financial strength over time
         2. 11.2.2. Looking at the income statement
            1. 11.2.2.1. Sales
            2. 11.2.2.2. Expenses
            3. 11.2.2.3. Profit
         3. 11.2.3. Tooling around with ratios
            1. 11.2.3.1. The P/E ratio
            2. 11.2.3.2. The PSR
   2. 12. Decoding Company Documents
      1. 12.1. Getting a Message from the Bigwigs: The Annual Report
         1. 12.1.1. Analyzing the annual report's anatomy
            1. 12.1.1.1. The letter from the chairman of the board
            2. 12.1.1.2. The company's offerings
            3. 12.1.1.3. Financial statements
            4. 12.1.1.4. Summary of past financial figures
            5. 12.1.1.5. Management issues
            6. 12.1.1.6. CPA opinion letter
            7. 12.1.1.7. Company identity data
            8. 12.1.1.8. Stock data
         2. 12.1.2. Going through the proxy materials
      2. 12.2. Getting a Second Opinion
         1. 12.2.1. Company documents filed with the SEC
            1. 12.2.1.1. Form 10K
            2. 12.2.1.2. Form 10Q
            3. 12.2.1.3. Insider reports
         2. 12.2.2. Value Line
         3. 12.2.3. Standard & Poor's
         4. 12.2.4. Moody's Investment Service
         5. 12.2.5. Brokerage reports: The good, the bad, and the ugly
            1. 12.2.5.1. The good
            2. 12.2.5.2. The bad
            3. 12.2.5.3. The ugly
      3. 12.3. Compiling Your Own Research Department
   3. 13. Analyzing Industries
      1. 13.1. Interrogating the Industries
         1. 13.1.1. Which category does the industry fall into?
            1. 13.1.1.1. Cyclical industries
            2. 13.1.1.2. Defensive industries
         2. 13.1.2. Is the industry growing?
         3. 13.1.3. Are the industry's products or services in demand?
         4. 13.1.4. What does the industry's growth rely on?
         5. 13.1.5. Is the industry dependent on another industry?
         6. 13.1.6. Who are the leading companies in the industry?
         7. 13.1.7. Is the industry a target of government action?
      2. 13.2. Outlining Key Industries
         1. 13.2.1. Moving in: Real estate
         2. 13.2.2. Driving it home: Automotive
         3. 13.2.3. Talking tech: Computers and related electronics
         4. 13.2.4. Banking on it: Financials
   4. 14. Emerging Sector Opportunities
      1. 14.1. Bullish Opportunities
         1. 14.1.1. Commodities
         2. 14.1.2. Oil and gas
         3. 14.1.3. Alternative energy
         4. 14.1.4. Gold and other precious metals
         5. 14.1.5. Healthcare
         6. 14.1.6. Defending the nation
      2. 14.2. A Bearish Outlook
         1. 14.2.1. Avoiding consumer discretionary sectors
         2. 14.2.2. A warning on real estate
         3. 14.2.3. The great credit monster
         4. 14.2.4. Cyclical stocks
      3. 14.3. Important Considerations for Bulls and Bears
         1. 14.3.1. Conservative and bullish
         2. 14.3.2. Aggressive and bullish
         3. 14.3.3. Conservative and bearish
         4. 14.3.4. Aggressive and bearish
   5. 15. Money, Mayhem, and Votes
      1. 15.1. Tying Together Politics and Stocks
         1. 15.1.1. Seeing the general effects of politics on stock investing
         2. 15.1.2. Ascertaining the political climate
         3. 15.1.3. Distinguishing between nonsystemic and systemic effects
            1. 15.1.3.1. Nonsystemic
            2. 15.1.3.2. Systemic
         4. 15.1.4. Understanding price controls
      2. 15.2. Poking into Political Resources
         1. 15.2.1. Government reports to watch out for
            1. 15.2.1.1. GDP
            2. 15.2.1.2. Unemployment
            3. 15.2.1.3. The Consumer Price Index
         2. 15.2.2. Web sites to surf
9. IV. Investment Strategies and Tactics
   1. 16. Choosing between Investing and Trading
      1. 16.1. The Differences between Investing and Trading
         1. 16.1.1. The time factor
         2. 16.1.2. The psychology factor
         3. 16.1.3. Checking out an example
      2. 16.2. Tools of the Trader
         1. 16.2.1. Technical analysis
         2. 16.2.2. Brokerage orders
         3. 16.2.3. Advisory services
      3. 16.3. The Basic Rules of Trading
   2. 17. Selecting a Strategy That's Just Right for You
      1. 17.1. Laying Out Your Plans
         1. 17.1.1. Living the bachelor life: Young single with no dependents
         2. 17.1.2. Going together like a horse and carriage: Married with children
         3. 17.1.3. Getting ready for retirement: Over 40 and either single or married
         4. 17.1.4. Kicking back in the hammock: Already retired
      2. 17.2. Allocating Your Assets
         1. 17.2.1. Investors with less than $10,000
         2. 17.2.2. Investors with $10,000 to $50,000
         3. 17.2.3. Investors with $50,000 or more
      3. 17.3. Knowing When to Sell
   3. 18. Understanding Brokerage Orders and Trading Techniques
      1. 18.1. Checking Out Brokerage Orders
         1. 18.1.1. On the clock: Time-related orders
            1. 18.1.1.1. Day order
            2. 18.1.1.2. Good-till-canceled (GTC) order
         2. 18.1.2. At your command: Condition-related orders
            1. 18.1.2.1. Market orders
            2. 18.1.2.2. Stop-loss orders (also known as stop orders)
               1. 18.1.2.2.1. Trailing stops
               2. 18.1.2.2.2. Using beta measurement
            3. 18.1.2.3. Limit orders
         3. 18.1.3. The joys of technology: Advanced orders
      2. 18.2. Buying on Margin
         1. 18.2.1. Examining marginal outcomes
            1. 18.2.1.1. If the stock price goes up
            2. 18.2.1.2. If the stock price fails to rise
         2. 18.2.2. Maintaining your balance
         3. 18.2.3. Striving for success on margin
      3. 18.3. Going Short and Coming Out Ahead
         1. 18.3.1. Setting up a short sale
         2. 18.3.2. Oops! Going short when prices grow taller
         3. 18.3.3. Feeling the squeeze
   4. 19. Getting a Handle on DPPs, DRPs, and DCA . . . PDQ
      1. 19.1. Being Direct with DPPs
         1. 19.1.1. Investing in a DPP
         2. 19.1.2. Finding DPP alternatives
            1. 19.1.2.1. Buy your first share through a broker to qualify for DRPs
            2. 19.1.2.2. Get started in a DRP directly through a broker
            3. 19.1.2.3. Purchase shares via alternate buying services
         3. 19.1.3. Recognizing the drawbacks
      2. 19.2. Dipping into DRPs
         1. 19.2.1. Getting a clue about compounding
         2. 19.2.2. Building wealth with optional cash payments
         3. 19.2.3. Checking out the cost advantages
         4. 19.2.4. Weighing the pros with the cons
      3. 19.3. The One-Two Punch: Dollar Cost Averaging and DRPs
   5. 20. Corporate Skullduggery: Looking at Insider Activity
      1. 20.1. Tracking Insider Trading
      2. 20.2. Looking at Insider Transactions
         1. 20.2.1. Breaking down insider buying
         2. 20.2.2. Picking up tips from insider selling
      3. 20.3. Considering Corporate Stock Buybacks
         1. 20.3.1. Understanding why a company buys back shares
            1. 20.3.1.1. Boosting earnings per share
            2. 20.3.1.2. Beating back a takeover bid
         2. 20.3.2. Exploring the downside of buybacks
      4. 20.4. Stock Splits: Nothing to Go Bananas Over
         1. 20.4.1. Ordinary stock splits
         2. 20.4.2. Reverse stock splits
   6. 21. Keeping More of Your Money from the Taxman
      1. 21.1. Paying through the Nose: The Tax Treatment of Different Investments
         1. 21.1.1. Understanding ordinary income and capital gains
         2. 21.1.2. Minimizing the tax on your capital gains
         3. 21.1.3. Coping with capital losses
         4. 21.1.4. Evaluating gains and losses scenarios
      2. 21.2. Sharing Your Gains with the IRS
         1. 21.2.1. Filling out forms
         2. 21.2.2. Playing by the rules
      3. 21.3. Discovering the Softer Side of the IRS: Tax Deductions for Investors
         1. 21.3.1. Investment interest
         2. 21.3.2. Miscellaneous expenses
         3. 21.3.3. Donations of stock to charity
         4. 21.3.4. Knowing what you can't deduct
      4. 21.4. Taking Advantage of Tax-Advantaged Retirement Investing
         1. 21.4.1. IRAs
            1. 21.4.1.1. Traditional IRA
            2. 21.4.1.2. Roth IRA
         2. 21.4.2. 401(k) plans
10. V. The Part of Tens
    1. 22. Ten Ways to Profit before the Crowd Does
       1. 22.1. Use Your Instincts
       2. 22.2. Take Notice of Praise from Consumer Groups
       3. 22.3. Check Out Powerful Demographics
       4. 22.4. Look for a Rise in Earnings
       5. 22.5. Analyze Industries
       6. 22.6. Stay Aware of Positive Publicity for Industries
       7. 22.7. Watch Megatrends
       8. 22.8. Keep Track of Politics
       9. 22.9. Recognize Heavy Insider or Corporate Buying
       10. 22.10. Follow Institutional Investors
    2. 23. Ten (Or So) Ways to Protect Your Stock Market Profits
       1. 23.1. Accrue Cash
       2. 23.2. Spread Your Money across Several Stocks
       3. 23.3. Buy More of a Down (Yet Solid) Stock
       4. 23.4. Apply Long-Term Logic
       5. 23.5. Use the Almighty Stop-Loss Order
       6. 23.6. Use the Almighty Trailing Stop Order
       7. 23.7. Place a Limit Order
       8. 23.8. Set Up Broker Triggers
       9. 23.9. Consider the Put Option
       10. 23.10. Check Out the Covered Call Option
       11. 23.11. When All Else Fails, Sell
    3. 24. Ten Red Flags for Stock Investors
       1. 24.1. Earnings Slow Down or Head South
       2. 24.2. Sales Slow Down
       3. 24.3. Debt Is Too High or Unsustainable
       4. 24.4. Analysts Are Exuberant Despite Logic
       5. 24.5. Insider Selling
       6. 24.6. A Bond Rating Cut
       7. 24.7. Increased Negative Coverage
       8. 24.8. Industry Problems
       9. 24.9. Political Problems
       10. 24.10. Funny Accounting: No Laughing Here!
    4. 25. Ten Challenges and Opportunities for Stock Investors
       1. 25.1. Debt, Debt, and More Debt
       2. 25.2. Derivatives
       3. 25.3. Real Estate
       4. 25.4. Inflation
       5. 25.5. Pensions and Unfunded Liabilities
       6. 25.6. The Growth of Government
       7. 25.7. Recession/Depression
       8. 25.8. Commodities
       9. 25.9. Energy
       10. 25.10. Dangers from Left Field
11. VI. Appendixes
    1. A. Resources for Stock Investors
       1. A.1. Financial Planning Sources
       2. A.2. The Language of Investing
       3. A.3. Textual Investment Resources
          1. A.3.1. Periodicals and magazines
          2. A.3.2. Books and pamphlets
          3. A.3.3. Special books of interest to stock investors
       4. A.4. Investing Web Sites
          1. A.4.1. General investing Web sites
          2. A.4.2. Stock investing Web sites
       5. A.5. Investor Associations and Organizations
       6. A.6. Stock Exchanges
       7. A.7. Finding Brokers
          1. A.7.1. Choosing brokers
          2. A.7.2. Brokers
       8. A.8. Fee-Based Investment Sources
       9. A.9. Dividend Reinvestment Plans
       10. A.10. Sources for Analysis
           1. A.10.1. Earnings and earnings estimates
           2. A.10.2. Industry analysis
           3. A.10.3. Factors that affect market value
              1. A.10.3.1. Economics and politics
              2. A.10.3.2. Federal laws
           4. A.10.4. Technical analysis
           5. A.10.5. Insider trading
       11. A.11. Tax Benefits and Obligations
       12. A.12. Fraud
    2. B. Financial Ratios
       1. B.1. Liquidity Ratios
          1. B.1.1. Current ratio
          2. B.1.2. Quick ratio
       2. B.2. Operating Ratios
          1. B.2.1. Return on equity (ROE)
          2. B.2.2. Return on assets (ROA)
          3. B.2.3. Sales to receivables ratio (SR)
       3. B.3. Solvency Ratios
          1. B.3.1. Debt to net equity ratio
          2. B.3.2. Working capital
       4. B.4. Common Size Ratios
       5. B.5. Valuation Ratios
          1. B.5.1. Price-to-earnings ratio (P/E)
          2. B.5.2. Price to sales ratio (PSR)
          3. B.5.3. Price to book ratio (PBR)