Your Questions About Money Making Stocks

Laura asks…

How do stocks make money?

like, how do you keep making money just letting it set there? how many do you need to make a lot of money? how long do i let them set?

John answers:

If you ‘just let it sit there’ in a bank you will make money off of your money.

Unfortunately making money in the stock market is not the arithmetic thing of putting the cash in your pocket, under the mattress, or in those tin cans you buried in the back yard to the bank instead.

There are two primary ways to make money in stocks.

First, if you find a company that you see has made money, is making money, and is likely to continue to make money, then you are in the ballpark to make some money by owning a piece of that. This can be anything from the trash haulers at Waste Managment (WMI) to Air Products and Chemical (APD).

Waste Management did $13 billion in business in the last reported year (2007, new info later) and out of that made over $1 billion in profit. If you were a stockholder in that company, then you made money with it just sitting there (as in you paid someone else for the shares and the shares are just sitting there). The company would have doled out a teaspoon of those profits in dividends (which not every company does or even could if they wanted to), so for every share you would get 27 cents to, whatever, take the mrs. Out for a taco.

The second way comes to what the stock does in the marketplace. About this time last year the price was pretty similar, where you could buy a share for around $32 (don’t forget the extra for commission charges). In the meanwhile it went a little over $39 per share and fell to a little below $30 per share. Suppose you whipped out $32,000 (don’t forget the commission) and bought a thousand this time last year. Then around the third week of June you felt like selling it at $39. Subtracting 32k from 39k still gives you something like a $7 thousand dollar profit (darned commissions in there, though). But what was that money going to be making for you just lounging around in a savings account those five or six months?

Now Air Products (APD) tells a little different tale. Sure, in 2007 they did $9 billion in business and earned $1 billion in profit. The 2008 numbers are out and they did just shy of $10 and a half billion in business in 2008 and only made some 900 million in profit. But if you bought it about this time last year, you would have paid upwards of $90 per share, and it is only selling at about $56 or 57 today. Think if you had bought a thousand shares of that one instead. To be fair, you could have sold that 92 or 93 thousand dollars worth of APD in the first week of last June and got around $106 thousand, again, if you just happened to guess it right. But if you waited about three weeks later, you would have watched that triple-digit price drop to a little below $42 just before the Thanksgiving holiday.

So, you can play with numbers and watch what is flying in the marketplace, and what is tanking, Or you can find a company that makes a decent profit and simply hold on.

If you bought waste management ten years ago, then something like $26 or 27 thousand would have grown to about $32 or 33 thousand without you giving it a second thought. Would you have done so well in the bank? Well, the piddly dividend they now pay is something like 3% return on your money, which is on top of the value of your principle. (Fairly, the dividend was pretty inconsequential until about 2004). If you bought a thousand shares of Air Products ten years ago, you would have shelled out something around $37 thousand and today it would be worth close to $57 thousand. Or if you sold it this summer, you might have got upward of $100 thousand. The dividends, meanwhile, are considerably more substantial. While it may not seem like much (control your greed) it started at 19 cents per share, per quarter, and has risen faily steadily to some 44 cents, which still earns slightly over 3%. How much was your bank paying over the last ten years?

Ken asks…

How can I make money with stocks?

How much money will I have to invest in the stock market to make $100 dollars a month from the investmet?

John answers:

The way the stock market works is you purchase a stock at a given price, and then over a period of time, the value of that stock (the price) will either go up or down – which means your investment appreciated or depreciated.

Lets say you held a stock for at leas a year, and over that time, the stock went up. You wouldn’t “realize” or receive that gain, until you sold your stock. So any gain you make is a paper gain not an actual gain. So you wouldn’t receive monthly payments.

However, there are stocks that pay a dividend (yearly), and what that means is that in addition to the stock you purchased, you receive a percentage of your investment paid back to you in the form of a cash dividend (which is paid yearly).

You could either take that cash and spend it, or you could have it automatically reinvested (to buy more stock). If you own a good dividend paying stock, then the best returns come from dividend reinvestment plans.

Here is a list of the top 10 dividend companies I think will do very well over the next year or more.

Http://stocksbuyorsell.com/stocks-buy-sell/353-dividend-stocks-will-perform-well-during-recession.html

Lizzie asks…

What do you think about the various T.V. informercials that claim you can make money trading stocks?

One recent one says you make money trading options on stocks, even when the market drops or goes sideways. They want you to attend a seminar.
Mr. Galager…I’ve been with Schwab over twenty years. Done all my homework. Chart stocks daily. Had some spectacular gains, and some sorry losses. Learned a lot.

No one publication or institution knows for sure what stocks will do.

Mutual Funds have hidden fees.

Best to go with your employer’s 401K maxed out…but beware investing too much in one thing…like an Enron…because there probably are more Enrons waiting to be discovered.

This question is directed to those who may feel that some folks have a handle on the stock market, and can time it right with mere red and green arrows.

I don’t believe the entire market is as simple as that, but one thing I’ve learned, the stock market constantly changes…maybe like a woman’s mind(pardon). It’s the sum total of many minds acting on impulse.

I’ve learned to try and find characteristics of how certain stocks trade. I’ve watched carefully their volume and tried to interpret news information.

John answers:

As someone who has also successfully invested over the years, and spent 5 years as a successful full time daytrader (where no position was held more than 10 minutes), I may be able to offer you a point of view from a different perspective.

Your question related specifically to the infomercials/seminars. Those companies make their money from the products they sell. The free seminars are usually nothing more than sales pitches, aimed at getting you to buy their programs, sometimes at exhorbitant fees. I attended a free seminar once where they were pitching a two day paid seminar at the cost of $3,500. Ridiculous.

The free seminars are sales pitches. The paid seminars, although some do provide reasonable information, are only providing information that you can essentially get elsewhere for free or low cost at the bookstore or library.

Now, as a full time successful daytrader for 5 years, I can tell you a few things I learned. First, the firm at which I traded required all prospective traders to take a class, which was expensive. I refused to pay because I preferred to learn on my own, but they let me trade anyway without taking the class. There were approximately 50 traders from that class who started the same time I did and after 1 1/2 years, only 3 were still trading. After 2 years, I was the only one remaining. I tell you this story to illustrate that self taught can be just as effective as a seminar. In fact, some of the primary reasons that I was successful was due to non-emotional, extremely controlled and disciplined trading. And no matter where you go, you cannot learn self control if you do not already have it. Similary, at the end of the 5 years there were changes to the market that made the type of trading I did no longer feasible. I quit and left with my account intact. Those without discipline continued to trade and left broke. You cannot teach self discipline. You can learn it, but it cannot be taught. There was a lot of hype about daytrading at the time….and some of it was true. It was possible to make money….it was just that most people couldn’t. Just my opinion.

So if you’re interested in some of the areas that a seminar teaches and want to learn the basics, read, use the internet, find a mentor and study. But completely ignore the get rich quick scenarios.

I also agree that the 401k is a great idea for most people. However, if someone is extremely disciplined, I am not a huge fan of it. Essentially, you lock up your money on the hopes that you will be in a lower tax bracket when you retire. I hope to be in a higher tax bracket when I retire. Furthermore, I find it valuable to be able to access that money if it becomes necessary. This only works though, if you can be absolutely disciplined in saving and growing the money, which most people can’t. The ROTH IRA is a different story as it is tax free forever, so they are a great deal for anyone who qualifies.

As for mutual funds, I am not a big fan of those either….ETF index funds to me are a much better deal. More liquidity, huge diversification and low cost. Most mutual funds measure their success against index funds and most don’t beat them. Why not just buy the index fund instead?

Mandy asks…

How do you actually make money from stocks,index funds etc?

For stocks, do you just buy them and hope that they go up in value? I heard that some stocks pay you money annually just so you have them. What about index/mutual funds? Also, could you give examples of such stocks/funds.

John answers:

Essentially, yes, you just buy them and hope they go up in value. In the long run, the stock market goes up a bit each year, so eventually your stocks are quite likely to be worth more. There are other ways, plenty of other ways, to make money in the stock market, but it gets complicated. You can also try to be a day trader, but it takes serious dedication and a fanatical devotion to financial news to try to discover stocks that are about to swing up or swing down, and it’s dangerous and easy to lose your money.

Index funds just buy a selection of stocks that correspond to whatever that index has in it – say, the Dow Jones or the S&P. Those indexes track a certain number of stocks, and index funds spread your money across those same stocks. They generally do pretty decently. Again, though, you may have to play the long game to make a lot of money.

Some stocks do pay dividends quarterly or monthly. They’re usually larger companies. Don’t expect to get rich that way, but it’s a nice little bonus. Most of the oil companies pay dividends, as do the railroads. There’s a few stocks that are specifically tailored for dividends, like HYI.

Mark asks…

How do I make money from stocks & bonds?

I understand how money is made buying low and selling high. I dont understand how an investor can have “cash in their pocket” from having money in stocks & bonds.

John answers:

For stocks, you make money two main ways. There is capital gain, where if you buy 100 shares of stock for $10 each and sell it later for $20 each, you get to pocket $1000 minus the brokerage fee (say, $10) for a net of $990. This money is typically credited to your brokerage account but you can turn it into cash just like any banking account.

Some stocks also pay a dividend, so if you own the stock when the dividend is paid, you will get money that way. If you buy 100 shares of stock and the quarterly dividend is $0.40, then $40 will appear in your brokerage account when the dividend is paid.

There are other ways to make money from stocks that are for more experienced investors (options, shorting, etc.)

For bonds, it’s about the same. The primary way to make money from bonds is the interest paid, but the bond’s value will fluctuate and you can sell the bond for more (or less) than you paid for it.

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