Stock Investing: What The Dummies Are Doing!

The stock market is one of the best things that you could earn a lot of money from, especially when you want to get a very high profit on something that requires less effort. Let your stocks grow and watch out for the highest point of value that it has reached to be able to earn a big profit from it. The game on the stock market is really an exciting thing do. This is one of those investments that you could really get your money be worth all the effort that you exert.

Take for instance, if you had bought Apple’s stock back around 2002, you would be sitting here reading this as a very wealthy individual. But not all investments work out like that. For every winner there are a whole bunch of losers.

Planning ahead of time for any of those stock market trades that you are about to get into, you must try to learn everything from scratch. The stock market for dummies tips will provide you a systematic procedure of techniques and methods to use to succeed well in this kind of business.

stock-investing-for-dummiesOther stock investors may have suggested that you get a stockbroker who could trail you on your decisions toward the stock market. Sometimes, it is better if you are adept with all the information that is involved so that you may know how to easily on things encountered. The stock trading for dummies will surely give you a sure watch that all the investments that you have indulged in would be earning a profit. The main agenda that you must set to yourself is the goal that you want to attain. If you have that instilled in your mind, then it is easy for you to handle any kind of stock transactions or dealings as you start off you stock trading for dummies journey.

It is very easy to learn the stock market for dummies since it is equipped with all the most important stock details and tips that would help you start whatever you find interesting to invest. Remember, the more information that you will acquire, the better that you will become in this kind of business. If you would notice, the variety of stocks really depends on how it performs in the market. It is not only the simple steps that the stock market for dummies deliver, but also the terminologies that are used is introduced in the first parts as you learn it and eventually understand everything that is involved in this very profitable kind of business investment.

Dividend Investing and Earnings Yield on Stocks

Dividend investing is for people seeking income from their investments, who are also willing to take on a little more market risk than bonds offer in order to try to achieve growth in both their principal and the dividend income provided by their dividend stocks, not just by chasing the highest dividend stocks. A successful dividend investor knows that this strategy can help them stay ahead of inflation.

One of the first steps in dividend investing is identifying companies that are in a position to not only maintain the dividend that they are paying out to their dividend investor base, but can also as a dividend growth stock opportunity. A good way to determine if a stock fits this criteria is to look at it’s dividend payout ratio.
Dividend Payout Ratio

The dividend payout ratio can be calculated in a number of ways, so we’ll look at two of them and let you decide which one to use for your dividend investing screens (my favorite dividend payout ratio calculation is the second one).

The most popular way is calculated by dividing the annual dividend a company pays out per share by it’s annual earnings per share.

Dividend Payout Ratio = Annual Dividend Per Share / Annual Earnings Per Share

These numbers are readily available at most popular financial web sites, and can be included in dividend investing screens at sites like MSN Money. Using this version of dividend payout ratio calculation, a level of 50% or lower is considered good. So, this calculation is pretty easy, and the data is readily available, but for good dividend investing principals, it has a flaw…

The problem with the above calculation is that EPS has some noise embedded in it that can mis-lead a dividend investor into buying a company that is not a dividend growth stock candidate. In my view, good dividend investing stocks’ dividends need to be paid out of the ongoing cash operating profits a company generates, and due to GAAP accounting rules, EPS contains more than this. For dividend investing, it is better to use annual free cash flow (FCF) instead of EPS in the dividend payout ratio calculation.

Since free cash flow takes into account both expenses and capital outlays, it shows how much cash is left over from company operations to apply to dividend payouts. With the inherent noise in EPS taken out of the dividend payout ratio calculation, a level of 60% – 65% or lower can be considered good for dividend investing (obviously lower is better in either method of calculating dividend payout ratio).

Earnings Yield

Earnings yield can help value stocks investors in their quest to find good solid companies that are currently relatively cheap. Using indicators like return on invested capital (learn how to calculate ROIC), can be helpful in finding a list solid companies, and once you’ve identified this list, earnings yield can help you determine if the company is cheap enough to buy right now, after all, that is what value stock investing is all about. Earnings yield does this by dividing a company’s annual earnings per share (you can use a trailing 4 quarters view of EPS for this if you’d like) by the company’s current market price per share. This number is expressed as a percentage, which makes it easy to compare with bond yields.
How to Calculate Earnings Yield

There are a couple of ways to calculate earnings yield. Since you don’t find this number in a lot of free online stock screeners, I’ll cover both methods, and you can decide which one you want to use.

The first way to calculate earnings yield is to take the inverse (1/x) of the P/E ratio. Since P/E ratios can be found in most financial publications, web sites, and stock screening tools, it is very easy to find this number, and invert it on a calculator or in a spreadsheet, to give you the earnings yield. This method is very simple to use, and gives you a quick view of how cheap (or expensive) a stock is.

The other way to calculate earnings yield is a little more involved, but gives you a better understanding of how a company is valued relative to it’s earnings. This form of earnings yield was written about by Joel Greenblatt in his book, “The Little Book That Beats the Market”. The earnings yield he created is useful in comparing companies with different tax rates and levels of debt. Greenblatt’s earnings yield formula is:

Earnings yield = pre-tax operating profit (EBIT) / Enterprise Value

So, in this case, the numerator (EBIT) comes from the income statement, and the denominator (Enterprise Value) is calculated by adding the market value of all equity – both common and preferred – to the value of all interest bearing debt that the company owes. The value of equity is just the shares outstanding multiplied by the price of the stock, and interest bearing debt can be found on the company’s balance sheet.

I like Greenblatt’s method of calculating earnings yield better than the more popular E/P method, since it gives a more accurate view of what is happening inside of a company, and also gives a more balanced view when comparing multiple companies to each other.

Stocks That Pay Monthly Dividends

While you have probably heard about stocks that pay dividends every quarter, did you know that there are many stocks that pay monthly dividends? When many income investors think about investing for dividends, they naturally look at safe, stable companies like McDonald’s(MCD), Proctor & Gamble(PG), and IBM (IBM), which have a long history of paying quarterly dividends. These types of dividend stocks are usually financially stable, have a lot of liquidity so they are easy to buy and sell, and have enough income and cash reserves to cover their dividend payouts to investors every three months.

There are a couple of issues that investors in these type of quarterly dividend stocks should consider. First, the investors income stream is exposed to a single company for each stock that they own, and second, depending on the mix of stocks in the investors portfolio, the dividend income can be very lumpy (i.e. most of the dividend money arrives in one month of the quarter, leaving the remaining two months with very little cash coming in.

Stocks that pay monthly dividends are an alternative that can provide regular, consistent, income to investors, and overcome the two main issues highlighted above.

First, monthly dividend stocks are typically traded on regular stock exchanges, and have enough liquidity for investors to easily buy and sell them. Stocks that pay monthly dividends are usually trusts, closed end mutual funds, and other investment vehicles that actually own a portfolio of income producing assets. This benefits investors because they get the diversification of the underlying portfolio owned by these companies, so investors are not as exposed to single company risk as they would be if they owned a single company that paid a quarterly dividend.

Second, since the income stream from stocks that pay monthly dividends comes three times as often as the cash flow from their quarterly brethren, the income is not going to be as lumpy. This is a significant benefit for investors that need regular income, like retirees that need a passive source of retirement income to meet their monthly needs.

One of the obvious items that investors considering purchasing stocks that pay monthly dividends over a company that pays a quarterly dividend is understanding the assets that are held by the monthly dividend company. While this adds an extra research item, it is very easy to find this information in the standard government filings that publicly traded companies have to file with the SEC.

Getting On The Right Side of Covered Calls on Your Stocks

Stock covered calls are a technique use by stock market investors to generate additional income from stocks that they already own in their investment portfolios. While options trading may sound scary, this technique for generating income is actually so conservative that most brokers will even let you utilize this technique in your online Individual Retirement Account (IRA).

A call option gives the buyer the right to buy a pre-determined quantity of an asset, usually a stock or commodity, at a specified price (strike price), on or before the expiration date of the option contract. A covered call option is a standard call option that the seller is covering with securities that are already owned in his trading account. Stock covered calls are merely standardized call options that are secured by the shares of stock that are already owned in the sellers trading account. Since each option contract represents 100 shares of stock, these covered option calls can only be sold (also known as writing a call option) based on full 100 share increments of the underlying stock that the option is being written against. For example, if an investor holds 670 shares of Cisco Systems (CSCO) in their account, they would be able to write (or sell) 6 stock covered calls.

Now that we’ve gone over what stock covered calls are, lets look at how to use them. Lets continue with the example of the investor with 670 shares of CSCO in their stock market investing account. Since CSCO does not pay a dividend, and the investor wants income without having to sell his stock, he decides to sell call options that will expire in two months, for a price that is above todays stock price for CSCO. In return for this option, the investor gets $1 per share, or $100 per covered option calls contract, times 6 contracts equals $600. This cash is deposited directly into the investors trading account, and can be used for whatever purpose the investor chooses. The investor is now obligated to sell the contract holder 600 shares of stock at the price specified in the contract, on or before the expiration date of the contract.

Now if the stock price does not go above the contract strike price, the investor who sold the option contracts keeps his stock, and the cash he got from selling the stock covered calls, and can do it all over again on the trading day after the contract expires. This is a very powerful concept, since it means that the investor can generate income multiple times per year by selling these call options.

If the stock closes above the price specified in the contract, usually around the date the contract expires, the contract will be exercised by the option holder, and the investor will have to sell him the 600 shares of CSCO at the price specified in the option contract. Since the contract price is above the price that the stock was trading at when the options were sold, the investor gets that capital gain profit, plus the cash that he was paid for selling the options.

While stock covered calls may seem a little complicated at first, in the end they provide you with a relatively easy way to generate cash flow on stocks that would otherwise just be sitting in your investment account.

Covered option calls are a popular way to generate recurring investment income in an investment portfolio, even in retirement portfolios like Individual Retirement Accounts (IRA‘s). This income can be generated on any stock in your portfolio that has actively traded options associated with it, the caveat being that you need to own at least 100 shares of the stock you are going to sell covered option calls against in order to take advantage of this money making strategy.

Let’s start by looking at what a call option is. A call option contract gives the buyer the right, but not the obligation, to buy 100 shares of stock at the price defined in the contract (strike price), on or before the date the contract expires (expiration date). One of the key concepts here is that the buyer of the covered option call contract would lose money if they exercised their right to buy the stock, if the stock is trading below the strike price of the contract. This is simply because they could buy the stock for a lower price on the open market, so there would be no point in exercising the call option contract under these circumstances.

In order to implement this income producing strategy, an investor will have to do a couple of simple tasks. First, the investor would have to ask their broker to set up their trading account to allow options trading. This usually involves reading a short pamphlet on the risks associated with standardized options trading, and signing a form indicating that you understand the risks. The investor will probably also have to tell the broker what options trades they want to be approved for, and their risk tolerance for these types of trades. As I indicated earlier, this strategy is so conservative, most stock brokers will even let you do it in your IRA account.

Next, the investor must identify which stocks they would like to sell options against. These stocks can have options sold against them in 100 share multiples, since each contract represents 100 shares. For example, if you own 230 shares of Apple (AAPL) in your account, you could write 2 covered option calls contracts against 200 shares of the Apple computer stock in your account. Finally, the investor needs to determine what price they would be like to write the contract for, and how long they would like the contract to be in place.

Once the investor has completed these steps, they merely need to call their broker (or login to their online trading account), and place the order to sell the covered option calls from their account. Once the sale is complete, the investor will receive cash in their account for the call options that they sold – this cash is theirs to keep.

If, at the end of the contract period, the price of the stock is below the call option strike price, then the investor keeps their stock, and can write new covered option calls against their shares of stock. However, if the stock price has risen above the strike price of the option contract, then the investor will have to sell his shares to the contract holder at the strike price specified in the agreement.

What Are Covered LEAPS In Option Trading?

Selling covered LEAPS (Long Term Equity Anticipation Securities) is a popular way for stock market investors to generate income with their stock portfolios, without necessarily having to sell their stock.

Covered Leaps are very similar to covered calls. What sets leaps apart from regular options is primarily the length of time until they expire – a leap has a much longer time before it expires, vs. standard options you may already be trading. This gives the option seller the advantage of receiving more premium money up front when the option is sold, due to the relatively long time to expiration.

The way investors use covered LEAPS to make money is by selling a leap option contract, using stock already held in their trading account as collateral. If this sounds familiar, it is just like writing a covered call. Thats right, LEAPS represent 100 shares of stock, just like a regular call or put option. The main difference between a regular options contract and a LEAPS contract is the length of time to expiration.

There are several advantages that covered leaps have over normal stock covered calls. First, you receive a larger premium up front. This is due to the longer time to the option expiration date. Next, if you are executing a covered call strategy where you sell a new call contract against your stock when the old one expires, you will have lower trading commissions with LEAPS. Finally, with the longer time horizon associated with LEAPs, an individual investor has a longer time period to plan out with a known risk/reward factor.

LEAPS covered calls are much like other stock covered call options that investors can use to generate cash income in their stock brokerage accounts, but with one important difference. The difference is that LEAPS, or Long Term Equity AnticiPation Securities, have expiration dates longer than one year. An example might help to explain how to use LEAPS covered calls to your advantage.

First, if you are not familiar with options trading, a call option gives the buyer the right, but not the obligation, to buy a pre-determined quantity of an asset, usually a stock or commodity, at the specified price (strike price), on or before the expiration date of the option contract. A covered call option is just a standard call option where the seller is covering the contract with securities that are already owned in their brokerage account. LEAPS covered calls are standardized call option contracts with expiration dates over one year away, that are secured by the shares of stock that are already owned in the sellers trading account. Since each LEAP option contract represents 100 shares of stock, these covered options can only be sold (also known as writing a call option) based on full 100 share increments of the underlying stock that the option is being written against. For example, if an investor holds 200 shares of General Electric (GE) in their brokerage account, they would be able to write (or sell) 2 LEAPS covered calls.

The longer expiration dates that LEAPs possess give long term investors the ability to get exposure to long term price changes, with no need for a combination of shorter-term option contracts. Also, the premiums (price) for LEAPs are higher than for standard options in the same stock because the increased expiration date gives the underlying stock more time to make a large price move and for the investors to make a good profits. Conversely, for the investor writing LEAPS covered calls, they get a higher cash payment up front for taking on the risk that they may be called out of their stock over the longer time frame contained in the covered LEAP contract.

One other characteristic that an investor considering writing LEAPS covered calls should consider is that the price decay of a LEAP call option is much slower than an option with a much nearer term expiration date. For instance, if a call option with a strike price equal to the underlying stocks current price only has a month to expiration, and the underlying stock price stays flat, the price of the call option will decline to nothing over the final month of the contract. However, a leap contract will register a very minimal reduction in price over the same month, due to it’s longer time to expiration.

Mutual Funds, Annuities and Structured Settlements: Understanding the Differences

In the financial world, it is important to be able to know the differences between various types of financial terms. Mutual funds, annuities and structured settlements are among some of the most confused, so here are the differences between the three.

Mutual Funds

This a way for which you are able to branch out for a minute amount of cash that could not have been otherwise possible. Small investors are the ones that typically invest in these funds. Whenever you purchase mutual funds, what you actually do is get stake rights in an investment organization. There are fund managers in these firms that invests the funds on your behalf. Besides investing, they purchase and sell also whenever they deem it to be profitable.

There are other investors also that have stake rights in the exact same firm. The reason as to why such investments are viable is because cash from a huge group of individuals is accumulated and then invested. Normally, the cash investors with all that accumulated funds invest the cash by buying different stocks and bonds. It suits a lot of investors since a mutual fund is a very simple investment that offers a sizable diversity. What is great regarding mutual funds is the fact that you just need to keep an eye on a solitary investment; instead of various multiple investments. You will get quarterly or annually net profits, or might even need to payout net losses during an awful year.

Annuities

This is basically an agreement normally between a client and an insurance firm. It makes for an exceptional way to obtain payouts for a set period of time or an entire lifetime of a person. An annuity can be purchased by either paying in small installments or in one lump amount. The profit advantage of annuities can be maximized immediately or perhaps deferred up until you reach retirement and is an excellent way of receiving profits in long term. A lot of individuals do not know how to properly manage investments as well as taxes and hence they resort to employing insurance firms.

The insurance firms have trained employees with the apt skills needed when it comes to knowing how and when to make a smart investment. After a preset time, the sum you used in buying the annuity will be reimbursed by your insurance firm with the aid of standard payments. The payments can be on a monthly basis, quarterly basis or yearly basis, and what is good is that, you will continue to receive the payments for the rest of your life. The insurance firm collects annuities from various individuals in order to spend in gainful ventures. The payouts to the customers are paid through the amount that is made out of the profit.

Structured Settlements

This is sort of like an insurance or financial agreement that entails regular payments referred to as intermittent payments that a person accepts out of some type of injury claim or other payout compulsion. A structured settlement is an excellent option to lump sum payment. A lot of victims of accidental injury prefer getting these settlements as opposed to a lump sum amount since it makes for a suitable way of getting compensation for an extended duration of time or possibly even for an entire lifetime.

Top 5 Money Management Tips for Individuals

Every individual should learn how to manage money before you become stuck in some financial emergencies because saving money becomes even more difficult when you are in bad economic score. Here are some money management tips that may help you:

Master in budgeting: First know all your incomes and expenses, track a sheet of it. This helps in making your financial future. Spend less money, ensure the difference between wants and needs in your life. Always give priority to needs and then wants. Study your cash flow analysis, if your expenses are more than your earnings then try to find the ways to earn more money and if you find your earnings are more than your spending then plan in the right way to save your money for future needs.

Set financial goals: With strong determination make yourself a financially responsible person. Make saving as your habit, the money that you save can be used when you need cash in emergency situations. There are many alternatives to earn extra cash, go for it when you are in financial crisis; this goal helps in achieving your position financially. Plan a way to save your money, if you think that you are deviating from plan then make some adjustments in your budget plan

Try paying bills on time: This will not let you to enter into bad credit score. Go for a payday loans if you are unable to pay when bill comes due and clear the amount immediately after you receive your next payday, this is the best way to get you out of debt. Ensure that you pay off all credit card and debit card debt as soon as possible; if possible try to reduce unnecessary bills and save money on them.

Plan properly for your retirement: It may seem like a tough job for young entrepreneurs to manage their personal finances in a recession. It is essential that you start thinking about the future and properly plan for your retirement; contribute some amount to your retirement plan regularly. Make sure you achieve financial independence by a certain age.

Seek advice of professionals: If you are unable to come out from financial problem, even after implementing several plans, it means you are going wrong somewhere. To overcome this asks for advice from many professionals, they will give you some management tips on thorough analysis. You can even take suggestions from other business analysts; they provide you with tips and tools to develop a budget and help to put you in control of your personal finances.