Feb
28
How do you make money in the stock market?
Investing is a hobby for me. I don't know why I enjoy it so much but I do. It's cool to think that I can own a little piece of these gigantic companies like IBM and Johnson & Johnson. It's also an excellent way to grow your wealth. Historically speaking the stock market has out performed every other investment out there. Sure you might find that golden real estate investment that turns $2,000.00 into $1,000,000.00 but the chances of that happening are about like winning the lottery. Stocks offer a much more reliable return and by simply investing in an index fund you don't have to put that much effort into getting a good return (a bit more than 10% annually).
This brings us to the question though of how exactly do people make money on the stock market? Unfortunately the answer is not so simple as there are lots of ways one can try to make money. Here's a run down of the options:
1) Price appreciation
This is by far the most common and time tested way money is made with stocks. The basic premise is that over time good companies should become more valuable as they build their business and as a result the price each one of their shares will command appreciates. This may sound like a boring way to invest but it can result in some high octane, roller coaster investments, depending on which companies you choose.
Some people approach it from the standpoint of trying to find companies that have excellent future growth prospects. These companies can be really exciting to get into and can make millions for investors but there is also inherent risk betting on these companies because you are basically betting that they will appreciate in value because some product they offer will make lots of money. Some examples of these "growth" stocks that have done very well in the last 20 years include: Microsoft, Starbucks, Apple Computer, etc.
The alternative to growth investing is value investing. This style still relies on price appreciation as the method for generating profit but it tries to find companies that are trading below what the investor believes their current intrinsic value is. Of course, the investor believes this is just a temporary mispricing by the market and eventually the market will realize the mistake it has made and the price should appreciate to it's true fair market value. This style is not nearly as exciting but it can make investors a lot of money too. This was the way that the legendary investor Ben Graham taught people to invest.
Obviously there are companies that can be growth companies that are also temporarily under-valued and there any number of combinations investors can take between the two styles.
2) Profit sharing
Profit sharing is the second way investors can make money by purchasing stocks. These are sometimes referred to as dividend stocks. What happens here is that companies have decided to distribute some of their earnings to the owners of the company (shareholders) in the form of a dividend. This often happens on a quarterly or annual basis. This method of making money with stock market can produce very reliable results as the companies who typically distribute dividends are ones with solid, profitable, businesses. It's also important to note that this is not mutually exclusive to price appreciation; in fact, investors in dividend stocks also benefit from price appreciation.
3) Price depreciation (Short selling)
Price depreciation is somewhat different from the previous two methods discussed. It relies on investors finding stocks that are currently overvalued by the market. What happens is an investor finds a stock he believes is currently selling for more than the company is worth. He then agrees to sell shares of the company he does not own at the current price with a committent to actually purchase the shares he sold at a later date. If the stock has declined in price from when the investor sold the stock then he has made money, if it has appreciated then the investor has lost moeny. This is known as short selling. Of the 3 methods discussed this is by far the friskiest method of investing but that's not to say that it cannot produce good results because many people have made sizeable fortunes doing just this.
Feb
13
A Note on Stock Brokers
I enjoy investing, but I hate paying trade commissions. For a number of years I used Ameritrade as my primary broker; but a little over a year ago I switched to Firstrade. They had cheaper commissions at 6.95 a trade and free mutual fund investing for all funds they offered. Ameritrade had a better trading platform but Firstrade was passable and they were about half the price.
Firstrade has been an interesting experience. They are a small brokerage and you can often tell as they are not very good about doing exactly what they say. For example they advertise a flat fee of 6.95 for unlimited shares. This seems pretty straight-forward, right? But, it's not what it seems because if you read the fine print you'll see that when they say unlimited they actually mean up-to 5,000 shares. They're website isn't great either. I've seen far worse but for the most part it comes up pretty mediocre. Navigation is simple but there are still too many tasks that require you to send in a paper form like automatic transfers, periodic mutual fund investment, etc. Recently, Firstrade has decided to get rid of their free mutual fund investing program and they have decided to charge 9.95 per transaction for No-load fund that are not on their no transaction fee list. The list is pretty limited so even though Firstrade still offers some of the lowest commissions in the industry there are other options that may be better.
Continue reading "A Note on Stock Brokers" »
Feb
08
Learning to debug problems
I am a computer programmer and as a result I have to be pretty good at tracking down problems in things and successfully debugging them. When debugging it's imperative that a concrete methodology is applied. Here are some tips for debugging (these can apply to more than just computer programs!)
1) Assume the problem lies in something you have changed.
I find a good first assumption that you created the problem if you are debugging something you have written. It's not likely that the operating system or the tools that have been used by many other people have the most obvious flaws. It's much more common for errors to be in your newly developed code. It's also much easier to find flaws in code you wrote than in the millions of lines of code the comprise the tools programmers use every day.
2) Start simple and work your way up from there.
It's an uncertain world and there could be any number of things wrong when you are debugging a problem but everyone has to start somewhere and it's the simplest things that give us the most progress.
3) Debugging is always a process of elimination
My third rule of thumb is that debugging is never readily obvious. You always have to start with an assumption, make a hypothesis and prove it right or wrong. Then repeat until you actually find the problem.
These are simple rules but they will take you far down the path of debugging and it's amazing how many people I know that don't apply them!
Feb
06
Visually navigating information with Grokker
My roommate told me about a new search service calle Grokker that allows you to visually browse the information. I didn't quite understand what he meant when he was telling me about it but I checked it out and it's actually really cool. It's basically a search engine that automatically categorizes information in groups and allows you to visually navigate the "map." I could see something like this being really useful for research. It's always interesting to see new ways that people are visualizing data. I believe over the next 10 years visualization will be some of the biggest challenges that we will face in the computing and scientific communities.
Try it out at: www.grokker.com
Make sure you click on the map tab when the search results come up.
Feb
06
A personal history of investing
I am a firm believer in investing for the long term--it makes sense. I've been investing for nearly 6 years now with my first foray into the adventure in early 2001, not the greatest time to be getting into the market. I had been watching the markets soar for the last 5 years and listening to the general wisdom that investing was a good way to build wealth, and boy did I want to build wealth. Problem was that although I understood the stock market could be a good avenue for building wealth I did not understand exactly how that happened. So, I enetered into the world of investing with $2,000.00 (I was pretty fortunate in college to have a decent job and a bit of a savings) and opened an account with Ameritrade. I can't remember exactly why I chose them; but I think at the time I pretty much only knew about E*Trade and Ameritrade. Ameritrade was cheaper so I went with them. After filling out all the forms and mailing them back the signed contract I was ready to go, all I needed to do was decide what to invest in. That was my first problem. I barely knew anything about investing so I simply chose some companies that seemed good. Just like now I was fascinated by technology then so I decided to buy 10 shares of IBM at about $100. To round things off I'd heard good things about Wal-Mart and Home Depot so I bought 10 shares of each of those as well. I can remember checking what the price of each stock was on a daily basis and wondering when a good time to sell was. For the moment I was pretty happy as the value of my shares was going up and things seemed to be going well. After IBM hit $115 I'm not sure why but I figured that was a pretty good price and decided to sell taking my $100.00 and pretty happy. When you think about it, it wasn't all that bad 10% in about 3 months time! I also decided to sell my shares of Home Depot for about the same price I bought them at. After trading fees I ended up slightly down. And I was now back on the market looking for ways to increase my returns. Mind you I had now idea exactly how that might happen.
Continue reading "A personal history of investing" »
Feb
01
Amusing Stories from 2006
A friend sent me these stories of the top idiots of 2006. They're pretty amusing so I thought I would share them all with you, enjoy!
Number One Idiot of 2006
I am a medical student currently doing a rotation in toxicology at the poison control center. Today, this woman called in very upset because she caught her little daughter eating ants. I quickly reassured her that the ants are not harmful and there would be no need to bring her daughter into the hospital. She calmed down and at the end of the conversation happened to mention that she gave her daughter some ant poison to eat in order to kill the ants. I told her that she better bring her daughter into the emergency room right away.
Number Two Idiot of 2006
Early this year, some Boeing employees on the airfield decided to steal a life raft from one of the 747s. They were successful in getting it out of the plane and home. Shortly after they took it for a float on the river, they noticed a Coast Guard helicopter coming towards them. It turned out that the chopper was homing in on the emergency locator beacon that activated when the raft was inflated. They are no longer employed at Boeing.
Number Three Idiot of 2006
A man, wanting to rob a downtown Bank of America, walked into the Branch and wrote "this iz a stikkup. Put all your muny in this bag." While standing in line, waiting to give his note to the teller, he began to worry that someone had seen him write the note and might call the police before he reached the teller's window. So he left the Bank of America and crossed the street to the Wells Fargo Bank.
After waiting a few minutes in line, he handed his note to the Wells Fargo teller. She read it and, surmising from his spelling errors that he wasn't the brightest light in the harbor, told him that she could not accept his stickup note because it was written on a Bank of America deposit slip and that he would either have to fill out a Wells Fargo deposit slip or go back to Bank of America. Looking somewhat defeated, the man said, "OK" and left. He was arrested a few minutes later, as he was waiting in line back at Bank of America.
Number Four Idiot of 2006
A motorist was unknowingly caught in an automated speed trap that measured his speed using radar and photographed his car. He later received in the mail a ticket for $40 and a photo of his car. Instead of payment, he sent the police department a photograph of $40. Several days later, he received a letter from the police that contained another picture, this time of handcuffs. He immediately mailed in his $40.
Number Five Idiot of 2006
A guy walked into a little corner store with a shotgun and demanded all of the cash from the cash drawer. After the cashier put the cash in a bag, the robber saw a bottle of Scotch that he wanted behind the counter on the shelf. He told the cashier to put it in the bag as well, but the cashier refused and said, "Because I don't believe you are over 21." The robber said he was, but the clerk still refused to give it to him because she didn't believe him. At this point, the robber took his driver's license out of his wallet and gave it to the clerk. The clerk looked it over and agreed that the man was in fact over 21 and she put the Scotch in the bag. The robber then ran from the store with his loot. The cashier promptly called the police and gave the name and address of the robber that he got off the license. They arrested t he robber two hours later.
Idiot Number Six of 2006
A pair of Michigan robbers entered a record shop nervously waving revolvers. The first one shouted, "Nobody move!" When his partner moved, the startled first bandit shot him.
Idiot Number Seven of 2006
Arkansas: Seems this guy wanted some beer pretty badly. He decided that he'd just throw a cinder block through a liquor store window, grab some booze, and run. So he lifted the cinder block and heaved it over his head at the window. The cinder block bounced back knocking him unconscious.
It seems the liquor store window was made of Plexi-Glass. The whole event was caught on videotape.
