book

Stock Investing For Dummies®, 3rd Edition

Name: Stock Investing For Dummies®, 3rd Edition
Author: Paul Mladjenovic
ISBN: 9780470401149

by Paul Mladjenovic

January 2009

Beginner

384 pages

8h 38m

English

For Dummies

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Copyright
About the Author
Author's Acknowledgments
Publisher's Acknowledgments
Introduction
About This BookConventions Used in This BookWhat You're Not to ReadFoolish AssumptionsHow This Book Is OrganizedPart I: The Essentials of Stock InvestingPart II: Before You Start BuyingPart III: Picking WinnersPart IV: Investment Strategies and TacticsPart V: The Part of TensPart VI: AppendixesIcons Used in This BookWhere to Go from Here
I. The Essentials of Stock Investing
1. Welcome to the World of Stock Investing
1.1. Understanding the Basics1.2. Preparing to Buy Stocks1.3. Knowing How to Pick Winners1.3.1. Recognizing stock value1.3.2. Understanding how market capitalization affects stock value1.3.3. Sharpening your investment skills1.4. Boning Up on Strategies and Tactics
2. Taking Stock of Your Current Financial Situation and Goals
2.1. Establishing a Starting Point by Preparing a Balance Sheet2.1.1. Step 1: Make sure you have an emergency fund2.1.2. Step 2: List your assets in decreasing order of liquidity2.1.3. Step 3: List your liabilities2.1.4. Step 4: Calculate your net worth2.1.5. Step 5: Analyze your balance sheet2.2. Funding Your Stock Program2.2.1. Step 1: Tally up your income2.2.2. Step 2: Add up your outgo2.2.3. Step 3: Create a cash flow statement2.2.4. Step 4: Analyze your cash flow2.2.5. Another option: Finding investment money in tax savings2.3. Setting Your Sights on Your Financial Goals
3. Defining Common Approaches to Stock Investing
3.1. Matching Stocks and Strategies with Your Goals3.2. Investing for the Future3.2.1. Focusing on the short term3.2.2. Considering intermediate-term goals3.2.3. Preparing for the long term3.3. Investing for a Purpose3.3.1. Making loads of money quickly: Growth investing3.3.2. Steadily making money: Income investing3.3.2.1. Distinguishing between dividends and interest3.3.2.2. Recognizing the importance of an income stock's yield3.4. Investing for Your Personal Style3.4.1. Conservative investing3.4.2. Aggressive investing
4. Recognizing the Risks
4.1. Exploring Different Kinds of Risk4.1.1. Financial risk4.1.2. Interest rate risk4.1.2.1. Hurting a company's financial condition4.1.2.2. Affecting a company's customers4.1.2.3. Impacting investors' decision-making considerations4.1.2.4. Hurting stock prices indirectly4.1.3. Market risk4.1.4. Inflation risk4.1.5. Tax risk4.1.6. Political and governmental risks4.1.7. Personal risks4.1.8. Emotional risk4.1.8.1. Paying the price for greed4.1.8.2. Recognizing the role of fear4.1.8.3. Looking for love in all the wrong places4.2. Minimizing Your Risk4.2.1. Gaining knowledge4.2.2. Staying out until you get a little practice4.2.3. Putting your financial house in order4.2.4. Diversifying your investments4.3. Weighing Risk against Return

5. Say Cheese: Getting a Snapshot of the Market with Indexes
5.1. Knowing How Indexes Are Measured5.2. Checking Out the Indexes5.2.1. The Dow Jones Industrial Average5.2.1.1. The companies of the Dow5.2.1.2. The drawbacks of the Dow5.2.2. Standard & Poor's 5005.2.3. Wilshire Total Market Index5.2.4. Nasdaq indexes5.2.5. Russell 3000 Index5.2.6. International indexes5.3. Using the Indexes Effectively5.3.1. Tracking the indexes5.3.2. Investing in indexes
II. Before You Start Buying
6. Gathering Information
6.1. Looking to Stock Exchanges for Answers6.2. Understanding Stocks and the Companies They Represent6.2.1. Accounting for taste and a whole lot more6.2.2. Understanding how economics affects stocks6.2.2.1. Getting the hang of the basic concepts6.2.2.2. Gaining insight from past mistakes6.3. Staying on Top of Financial News6.3.1. Figuring out what a company's up to6.3.2. Discovering what's new with an industry6.3.3. Knowing what's happening with the economy6.3.4. Seeing what politicians and government bureaucrats are doing6.3.5. Checking for trends in society, culture, and entertainment6.4. Reading (And Understanding) Stock Tables6.4.1. 52-week high6.4.2. 52-week low6.4.3. Name and symbol6.4.4. Dividend6.4.5. Volume6.4.6. Yield6.4.7. P/E6.4.8. Day last6.4.9. Net change6.5. Using News about Dividends6.5.1. Looking at important dates6.5.2. Understanding why these dates matter6.6. Evaluating Investment Tips
7. Going for Brokers
7.1. Defining the Broker's Role7.2. Distinguishing between Full-Service and Discount Brokers7.2.1. Full-service brokers7.2.1.1. What they can do for you7.2.1.2. What to watch out for7.2.2. Discount brokers7.2.2.1. What they can do for you7.2.2.2. What to watch out for7.3. Choosing a Broker7.4. Discovering Various Types of Brokerage Accounts7.4.1. Cash accounts7.4.2. Margin accounts7.4.3. Option accounts7.5. Judging Brokers' Recommendations7.5.1. Understanding basic recommendations7.5.2. Asking a few important questions
8. Investing for Growth
8.1. Becoming a Value-Oriented Growth Investor8.2. Choosing Growth Stocks with a Few Handy Tips8.2.1. Looking for leaders in megatrends8.2.2. Comparing a company's growth to an industry's growth8.2.3. Considering a company with a strong niche8.2.4. Checking out a company's fundamentals8.2.5. Evaluating a company's management8.2.5.1. Return on equity8.2.5.2. Equity and earnings growth8.2.5.3. Insider buying8.2.6. Noticing who's buying and/or recommending a company's stock8.2.7. Making sure a company continues to do well8.2.8. Heeding investing lessons from history8.3. Exploring Small Caps and Speculative Stocks8.3.1. Know when to avoid IPOs8.3.2. Make sure a small cap stock is making money8.3.3. Analyze small cap stocks before you invest
9. Investing for Income
9.1. Understanding the Basics of Income Stocks9.1.1. Getting a grip on dividends and dividend rates9.1.2. Recognizing who's well-suited for income stocks9.1.3. Checking out the advantages of income stocks9.1.4. Watching out for the disadvantages of income stocks9.1.4.1. What goes up . . .9.1.4.2. Interest-rate sensitivity9.1.4.3. The effect of inflation9.1.4.4. Uncle Sam's cut9.2. Analyzing Income Stocks9.2.1. Pinpointing your needs first9.2.2. Checking out yield9.2.2.1. Examining changes in yield9.2.2.2. Comparing yield between different stocks9.2.3. Looking at a stock's payout ratio9.2.4. Examining a company's bond rating9.2.5. Diversifying your stocks9.3. Exploring Some Typical Income Stocks9.3.1. Utilities9.3.2. Real estate investment trusts (REITs)9.3.3. Royalty trusts
10. Getting a Grip on Economics
10.1. Breaking Down Microeconomics versus Macroeconomics10.1.1. Microeconomics10.1.2. Macroeconomics10.2. Understanding Important Concepts in Economic Logic10.2.1. Supply and demand10.2.2. Wants and needs10.2.3. Dynamic analysis versus static analysis10.2.4. Cause and effect10.3. Surveying a Few Schools of Economic Thought10.3.1. The Marx school10.3.2. The Keynes school10.3.3. The Austrian school10.4. Understanding Some Current Economic Issues That Face Stock Investors10.4.1. Inflation10.4.2. Government intervention
III. Picking Winners
11. Using Basic Accounting to Choose Winning Stocks
11.1. Recognizing Value When You See It11.1.1. Understanding different types of value11.1.1.1. Market value11.1.1.2. Book value11.1.1.3. Sales and earnings value11.1.2. Putting the pieces together11.2. Accounting for Value11.2.1. Breaking down the balance sheet11.2.1.1. Answering a few balance sheet questions11.2.1.2. Assessing a company's financial strength over time11.2.2. Looking at the income statement11.2.2.1. Sales11.2.2.2. Expenses11.2.2.3. Profit11.2.3. Tooling around with ratios11.2.3.1. The P/E ratio11.2.3.2. The PSR
12. Decoding Company Documents
12.1. Getting a Message from the Bigwigs: The Annual Report12.1.1. Analyzing the annual report's anatomy12.1.1.1. The letter from the chairman of the board12.1.1.2. The company's offerings12.1.1.3. Financial statements12.1.1.4. Summary of past financial figures12.1.1.5. Management issues12.1.1.6. CPA opinion letter12.1.1.7. Company identity data12.1.1.8. Stock data12.1.2. Going through the proxy materials12.2. Getting a Second Opinion12.2.1. Company documents filed with the SEC12.2.1.1. Form 10K12.2.1.2. Form 10Q12.2.1.3. Insider reports12.2.2. Value Line12.2.3. Standard & Poor's12.2.4. Moody's Investment Service12.2.5. Brokerage reports: The good, the bad, and the ugly12.2.5.1. The good12.2.5.2. The bad12.2.5.3. The ugly12.3. Compiling Your Own Research Department
13. Analyzing Industries
13.1. Interrogating the Industries13.1.1. Which category does the industry fall into?13.1.1.1. Cyclical industries13.1.1.2. Defensive industries13.1.2. Is the industry growing?13.1.3. Are the industry's products or services in demand?13.1.4. What does the industry's growth rely on?13.1.5. Is the industry dependent on another industry?13.1.6. Who are the leading companies in the industry?13.1.7. Is the industry a target of government action?13.2. Outlining Key Industries13.2.1. Moving in: Real estate13.2.2. Driving it home: Automotive13.2.3. Talking tech: Computers and related electronics13.2.4. Banking on it: Financials
14. Emerging Sector Opportunities
14.1. Bullish Opportunities14.1.1. Commodities14.1.2. Oil and gas14.1.3. Alternative energy14.1.4. Gold and other precious metals14.1.5. Healthcare14.1.6. Defending the nation14.2. A Bearish Outlook14.2.1. Avoiding consumer discretionary sectors14.2.2. A warning on real estate14.2.3. The great credit monster14.2.4. Cyclical stocks14.3. Important Considerations for Bulls and Bears14.3.1. Conservative and bullish14.3.2. Aggressive and bullish14.3.3. Conservative and bearish14.3.4. Aggressive and bearish
15. Money, Mayhem, and Votes
15.1. Tying Together Politics and Stocks15.1.1. Seeing the general effects of politics on stock investing15.1.2. Ascertaining the political climate15.1.3. Distinguishing between nonsystemic and systemic effects15.1.3.1. Nonsystemic15.1.3.2. Systemic15.1.4. Understanding price controls15.2. Poking into Political Resources15.2.1. Government reports to watch out for15.2.1.1. GDP15.2.1.2. Unemployment15.2.1.3. The Consumer Price Index15.2.2. Web sites to surf
IV. Investment Strategies and Tactics
16. Choosing between Investing and Trading
16.1. The Differences between Investing and Trading16.1.1. The time factor16.1.2. The psychology factor16.1.3. Checking out an example16.2. Tools of the Trader16.2.1. Technical analysis16.2.2. Brokerage orders16.2.3. Advisory services16.3. The Basic Rules of Trading
17. Selecting a Strategy That's Just Right for You
17.1. Laying Out Your Plans17.1.1. Living the bachelor life: Young single with no dependents17.1.2. Going together like a horse and carriage: Married with children17.1.3. Getting ready for retirement: Over 40 and either single or married17.1.4. Kicking back in the hammock: Already retired17.2. Allocating Your Assets17.2.1. Investors with less than $10,00017.2.2. Investors with $10,000 to $50,00017.2.3. Investors with $50,000 or more17.3. Knowing When to Sell
18. Understanding Brokerage Orders and Trading Techniques
18.1. Checking Out Brokerage Orders18.1.1. On the clock: Time-related orders18.1.1.1. Day order18.1.1.2. Good-till-canceled (GTC) order18.1.2. At your command: Condition-related orders18.1.2.1. Market orders18.1.2.2. Stop-loss orders (also known as stop orders)18.1.2.2.1. Trailing stops18.1.2.2.2. Using beta measurement18.1.2.3. Limit orders18.1.3. The joys of technology: Advanced orders18.2. Buying on Margin18.2.1. Examining marginal outcomes18.2.1.1. If the stock price goes up18.2.1.2. If the stock price fails to rise18.2.2. Maintaining your balance18.2.3. Striving for success on margin18.3. Going Short and Coming Out Ahead18.3.1. Setting up a short sale18.3.2. Oops! Going short when prices grow taller18.3.3. Feeling the squeeze
19. Getting a Handle on DPPs, DRPs, and DCA . . . PDQ
19.1. Being Direct with DPPs19.1.1. Investing in a DPP19.1.2. Finding DPP alternatives19.1.2.1. Buy your first share through a broker to qualify for DRPs19.1.2.2. Get started in a DRP directly through a broker19.1.2.3. Purchase shares via alternate buying services19.1.3. Recognizing the drawbacks19.2. Dipping into DRPs19.2.1. Getting a clue about compounding19.2.2. Building wealth with optional cash payments19.2.3. Checking out the cost advantages19.2.4. Weighing the pros with the cons19.3. The One-Two Punch: Dollar Cost Averaging and DRPs
20. Corporate Skullduggery: Looking at Insider Activity
20.1. Tracking Insider Trading20.2. Looking at Insider Transactions20.2.1. Breaking down insider buying20.2.2. Picking up tips from insider selling20.3. Considering Corporate Stock Buybacks20.3.1. Understanding why a company buys back shares20.3.1.1. Boosting earnings per share20.3.1.2. Beating back a takeover bid20.3.2. Exploring the downside of buybacks20.4. Stock Splits: Nothing to Go Bananas Over20.4.1. Ordinary stock splits20.4.2. Reverse stock splits
21. Keeping More of Your Money from the Taxman
21.1. Paying through the Nose: The Tax Treatment of Different Investments21.1.1. Understanding ordinary income and capital gains21.1.2. Minimizing the tax on your capital gains21.1.3. Coping with capital losses21.1.4. Evaluating gains and losses scenarios21.2. Sharing Your Gains with the IRS21.2.1. Filling out forms21.2.2. Playing by the rules21.3. Discovering the Softer Side of the IRS: Tax Deductions for Investors21.3.1. Investment interest21.3.2. Miscellaneous expenses21.3.3. Donations of stock to charity21.3.4. Knowing what you can't deduct21.4. Taking Advantage of Tax-Advantaged Retirement Investing21.4.1. IRAs21.4.1.1. Traditional IRA21.4.1.2. Roth IRA21.4.2. 401(k) plans
V. The Part of Tens
22. Ten Ways to Profit before the Crowd Does
22.1. Use Your Instincts22.2. Take Notice of Praise from Consumer Groups22.3. Check Out Powerful Demographics22.4. Look for a Rise in Earnings22.5. Analyze Industries22.6. Stay Aware of Positive Publicity for Industries22.7. Watch Megatrends22.8. Keep Track of Politics22.9. Recognize Heavy Insider or Corporate Buying22.10. Follow Institutional Investors
23. Ten (Or So) Ways to Protect Your Stock Market Profits
23.1. Accrue Cash23.2. Spread Your Money across Several Stocks23.3. Buy More of a Down (Yet Solid) Stock23.4. Apply Long-Term Logic23.5. Use the Almighty Stop-Loss Order23.6. Use the Almighty Trailing Stop Order23.7. Place a Limit Order23.8. Set Up Broker Triggers23.9. Consider the Put Option23.10. Check Out the Covered Call Option23.11. When All Else Fails, Sell
24. Ten Red Flags for Stock Investors
24.1. Earnings Slow Down or Head South24.2. Sales Slow Down24.3. Debt Is Too High or Unsustainable24.4. Analysts Are Exuberant Despite Logic24.5. Insider Selling24.6. A Bond Rating Cut24.7. Increased Negative Coverage24.8. Industry Problems24.9. Political Problems24.10. Funny Accounting: No Laughing Here!
25. Ten Challenges and Opportunities for Stock Investors
25.1. Debt, Debt, and More Debt25.2. Derivatives25.3. Real Estate25.4. Inflation25.5. Pensions and Unfunded Liabilities25.6. The Growth of Government25.7. Recession/Depression25.8. Commodities25.9. Energy25.10. Dangers from Left Field
VI. Appendixes
A. Resources for Stock Investors
A.1. Financial Planning SourcesA.2. The Language of InvestingA.3. Textual Investment ResourcesA.3.1. Periodicals and magazinesA.3.2. Books and pamphletsA.3.3. Special books of interest to stock investorsA.4. Investing Web SitesA.4.1. General investing Web sitesA.4.2. Stock investing Web sitesA.5. Investor Associations and OrganizationsA.6. Stock ExchangesA.7. Finding BrokersA.7.1. Choosing brokersA.7.2. BrokersA.8. Fee-Based Investment SourcesA.9. Dividend Reinvestment PlansA.10. Sources for AnalysisA.10.1. Earnings and earnings estimatesA.10.2. Industry analysisA.10.3. Factors that affect market valueA.10.3.1. Economics and politicsA.10.3.2. Federal lawsA.10.4. Technical analysisA.10.5. Insider tradingA.11. Tax Benefits and ObligationsA.12. Fraud
B. Financial Ratios
B.1. Liquidity RatiosB.1.1. Current ratioB.1.2. Quick ratioB.2. Operating RatiosB.2.1. Return on equity (ROE)B.2.2. Return on assets (ROA)B.2.3. Sales to receivables ratio (SR)B.3. Solvency RatiosB.3.1. Debt to net equity ratioB.3.2. Working capitalB.4. Common Size RatiosB.5. Valuation RatiosB.5.1. Price-to-earnings ratio (P/E)B.5.2. Price to sales ratio (PSR)B.5.3. Price to book ratio (PBR)

Content preview from Stock Investing For Dummies®, 3rd Edition

Chapter 21. Keeping More of Your Money from the Taxman

In This Chapter

Checking out the tax implications of your investments
Paying taxes on your investments
Taking your tax deductions
Investing for your retirement

After conquering the world of making money with stocks, now you have another hurdle — keeping your money. Some people may tell you that taxes are brutal, complicated, and counterproductive. Others may tell you that they're a form of legalized thievery, and still others may say that they're a necessary evil. And then there are the pessimists. In any case, this chapter shows you how to keep more of the fruits from your hard-earned labor.

Keep in mind that this chapter isn't meant to be comprehensive. For a fuller treatment of personal taxes, refer to the latest edition of Taxes For Dummies (published by Wiley). You should also check with your personal tax advisor and get the publications referenced in this chapter by either visiting the IRS Web site at www.irs.gov or calling the IRS publications department at 800-829-3676.

However, in this chapter, I cover the most relevant points for stock investors, such as the tax treatment for dividends and capital gains and losses, common tax deductions for investors, some simple tax-reduction strategies, and pointers for retirement investing.

Tip

Tax laws can be very hairy and perplexing, and at press time, the rumblings in Washington, DC, are for the potential expiration of tax cuts. Higher (and more complicated) taxes generally aren't good ...

Become an O’Reilly member and get unlimited access to this title plus top books and audiobooks from O’Reilly and nearly 200 top publishers, thousands of courses curated by job role, 150+ live events each month,
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Stock Investing For Dummies®, 3rd Edition

by Paul Mladjenovic

Chapter 21. Keeping More of Your Money from the Taxman

Tip

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