Date: Sun, 7 Nov 2004 05:49:38 CST
From: ttroberts@aol.com (TTRoberts)
Newsgroups: misc.invest.financial-plan
Subject: Re: How do I make money on stocks??
iQBVAwUAQY4L1Pl/I4+O31e5AQHz/wH/T2+WftsYN8REQLh/V7QKrTnfNH80UYNt
ODui9gr3Es4X5952VSo5/k7Z/jS7QWpxUwgYwPg9epsp6QR1caU1vQ==
=pRmp
"mandg" gscanga@email.uophx.edu, you asked:
<< OK- I have another dumb question. I knew enough to invest in stock at my
age
(31)so I joined Scottrade and bought 100 shares of MSFT. The price at the
time was $25.68 and as everyone can see it's above $28 today. Logic tells me
that if I sell those 100 shares I'll make money on the difference in these
prices- simple enough.
Now however I'm wondering if there's any other way to make money on owning
stocks. Something like get a quarterly or annual payout of a percentage of
revenue to all stockholders or something like that. >>
As was mentioned previously, different companies pay dividends and many don't.
Whether they do or not is at the discretion of the company. Some companies try
to pay dividends regularly and many never have and don't plan to. MSFT has
been one of those companies that tend not to. Though this year I believe MSFT
has declared a dividend payout for the first time.
Also as previously mentioned, when one owns stock as you do one can "sell" a
call option contracts (known and selling a Covered Call). When done properly
this is done to reduce some of your risk AND give you some income from the
stock you own that you don't plan on selling. But you DO need to know what
you're doing to do it right. It's really not all that risky IF it's done
right. When done correctly the Call expires worthless to the buying of the
Call, you keep the stock as is and you've received a little income from the
sale of that Call. At the time of that sale, the money simply goes into your
account as cash.
<< I know I'm showing my
ignorance because I dove head first into something that I knew little about.
Being 31 I'd like to sit and watch the stock price climb exponentially over
the next 20 years but, with MSFT, that doesn't seem plausible since it's
only gone up $2 in about 1 year. If there's no other way to make money at
owning stock I should just invest my money into an interest bearing CD or
something, right? >>
Well, as of closing this Friday, MSFT closed at 29.31. So, if you had sold it
at that price you would have made $3.63 per share. That's a return of over 14%
. . . . which is certainly better than what you might get on any interest
bearing account or CD. But, such return comes at some risk that interest
bearing accounts don't have. So, you simply need to be well aware of that
risk.
There are indeed other ways to make good returns in the stock market on that
same MSFT stock. But it DOES require some good knowledge . . . .and I might
add, to do so with limited risk is something you can't just "sit and watch."
You'd need be an active trader rather than a long-term investor. For example,
you can trade Call and Put contracts. Calls increase in value with the stock
goes up and Puts increase in value when the value of the stock goes down. So
one can make money if on buys and sells either at the right time no matter
which way the stock might go. Again, let me emphasize that investing/trading
Calls and Puts requires a very good understanding how it all works and I might
point out that it's not rocket science either.
Buying Calls can actually reduce your market risk since you don't need to put
all your capital at risk to realize the same earnings. As in your case, you
bought 100 shares of MSFT. Well, you could have bought 1 Call contract (which
equals the same 100 shares) at a much lower price, like maybe $2.50 per share.
So instead of tying up $2,568 in 100 shares of stock, you might have only tied
up $250. As the stock moved up to its current price the share price for the
Call may have moved to $4.00 per share. So, if you sold the Call at $4, you'd
have made $1.50 per share . . . . or a profit of 60%. The balance of your
$2,568 you could leave in you cash account earning a safe interest rate or
investing more in the same or other investments. The point of what I'm trying
to illustrate how a Call might reduce your investment risk.
Once one has the knowledge and the tools, trading Calls and Puts doesn't have
to be all that much of a risk, as many people believe. But let me point out
too that this kind of investing/trading is not a passive activity as you
suggest you're interested in. So, I doubt that this kind of thing would be
your cup of tea. Currently, you're probably best suited to long term investing
in mutual funds until you get enough mass and knowledge to work with stock and
more advanced techniques.
I just wanted to answer your questions and let you know that there ARE other
things out here for making good returns. It all goes back to that old axiom
that knowledge is power. And it takes some time and effort to acquire that
knowledge. So, don't be too anxious to jump the gun on things, as doing so can
be very costly.
Six months ago I started my 12 yr. and 17 yr old sons in short term trading and
helping him understand how to go about it. I gave them $1,000 to trade with
and to date my 12 yr old is up almost 42% on active trading over this time
period. My older son has not be anywhere near as active (likes to buy and hold
more) and is up about 10%. They often ask me for advice, but I don't give them
any as I'm making them make their own decisions so they'll learn. As long as
they use the tools I gave them they'll do ok. As I've said, it's really not
anything like rocket science.
|