What do I need to know about stocks?
These tips and topics should be a good foundation for stock market education. They aren’t everything you need to know and they don’t guarantee success, but they are a good starting point for any investor.
1) Buy low, sell high
Sounds so simple, right? And yet investing is a rare part of our financial life, where we relate that stocks that lower their values, are going bad. Few consumers are lamenting cheaper prices amid the collapse of oil prices over the past year and a half, but a moderate market slump is treated as the death knell for the bull market.
These are facts that are not mutually exclusive: the current bull market will end, and over almost any long-term horizon stocks have proven to be beneficial investments that are generally higher.
2) Think long term
Taxes aren’t the only reason short-term trading is a loser’s game for most investors. Trying to buy or sell stocks based on a quarterly earnings report or one economic data point is a game for auto trading platforms, not the average investor.
Better opportunities arise when a stock or sector is dumped by the market and languishes despite stable economic results that will produce a long stream of profits. Transportation stocks such as airlines and rail have gone through long stretches of fashion, only to generate sizable gains when economic conditions and industry dynamics align.
Years of mismanagement in the airline industry led to a series of bankruptcies in the 2000s, but the resulting wave of mergers left American Airlines, United Continental and Delta Air Lines DAL+0% more competitive and ready to benefit. of trends such as falling fuel costs.
3) Dividends are your friend
Apple’s AAPL + 0% share price dropped from $110.38 to $105.26 in 2015. That’s an 11% decline, but investors who held the stock all year lost just 3%. Why? Because Apple paid out $2.03 in dividends over the year.
Dividend-paying stocks aren’t immune to declines, but they do offer a degree of insulation that other stocks don’t. A word of warning, though – rich dividends that seem too good to last often don’t. Just ask the owners of Kinder Morgan KMI +0%, which cut its quarterly pay by 75% in December.
Shark Tank investor Kevin O’Leary likes a statistic that shows the bulk of the S&P 500’s returns over the years came from dividends, not appreciation. That’s why he says he will never own a stock that doesn’t pay at least part of its profits to shareholders.
4) There is no perfect metric in stocks
Professional and amateur investors alike have their favorite measures of growth and value, from price-to-earnings ratio to dividend yield and profit margins. But there is no single number that divides good stocks from bad ones. A stock that looks cheap at 10x earnings can go up to 5x in a flash, and a flashy tech startup that looks expensive at 3x sales time can easily jump to 6x in the blink of an eye.
5) Beware of taxes
FANG stocks – Facebook FB, Amazon.com AMZN, Netflix NFLX and Google GOOGL – had a great run in 2015, with returns ranging from 34% to 134%, but from a tax perspective any investor who bought last year and keeping an eye on the exits wants them to keep going up. That’s because the one year mark is a demarcation line for the tax man.
The sale of stock you’ve owned for less than a year triggers a short-term capital gain, taxed as ordinary income. That could mean going back from 25% to 39.6% for Uncle Sam. But, hold those same shares for at least 12 months and the tax rate drops to 15% for most tax brackets.
