Your Questions About Money Making Stocks

Donna asks…

How do you actually make money in stocks?

Let’s say you have $1000 in your account and bought 10 shares of a stock woth $40. In one month that stock would increase to $50. How much money would you have made?

John answers:

Buy ( or debt ): 10×40 = $400
Sell ( or credit ): 10×50 = $500
Fees: ~$20 per trade ( this can have a huge variance )

Net gain ~$60.

Pick up a book from amazon or the library on stocks to learn more.

Just a thought:
It’s all about ratios. If you are investing $1000 don’t pick up a stock that runs $40/share… Stick to the sub $20 stock. Don’t look for stocks to move $10/share… I look to make $2-$5/share… For example one I’m watching as I type this: WINN currently at $16.28… It had a high of ~$21 over the last month and $32 over the last 6 months.. This stock in my worthless opinion has bottomed out and should rise ( it could just as easily drop to $0 and you’d lose all $1000 of your dollars – the “fun” part of the market )…

Let’s play a little game: you invested all $1000… That would get you
$1000/16.28 = 61 shares
WINN rises to to $19 today and you sell by close
61(shares) * $19(sell price) = $1159
now subtract investment ( $1000 ) and fees ( ~$20 ) =

Net gain = $139US in one day… Not bad for $1000

Now let’s see what happens with a little more money to play with… Using a $10,000 dollar investment your one day earnings would be $1646US on one stock

At $100,000 you’d make ~$16,678 in one day. Not bad… But remember you can just as easily lose that much in one day. Do alot of research and “paper trade”… Pretend you have $1000 and “invest” by keeping track of your money in a notepad ( don’t actually call a broker or trade online yet ) and see how well you do. If you make alot of money… Maybe you will get brave and invest real money. Remember to never invest anything you can’t lose… Don’t invest the house payment, food money or retirement. Set a small amount of your monthly income aside for investing and play with that… If you do well that money will soon turn into a large amount.

Good luck and I hope this helped more than it confused…

One last tease: $10,000 invested in WINN only and it rises by Christmas to its high of ~$32… You’d make about $9600.. Not bad for 2 months “work” on a single stock… That’s how the rich get richer… And the rich get poorer

Susan asks…

Making Money with Stocks??? (Beginner)?

How does it even work? Like if I wanted to buy one share of Google for example, or Wal-mart, how do I even do that??? Its not like I can just go to walmart and ask for one. Also for a first time buyer, what stocks are “Safe”? Thanks!!!
Im thinking Investing with a Oil/Gas company, if the prices are so high, they have to be making a killing on consumers right???

John answers:

It’s not really possible to buy a single share of Google or WalMart – you generally need to buy in “round lots” of 100-1000 shares, which you can buy from any licensed stockbroker/securities dealer.
This usually isn’t a good idea for small (under $500,000 to invest) investors. You really need at least twenty different shares to get the best benefits from diversification.

For a first time buyer or for any small investor, I’d tend to recommend a low cost index fund – you’ll get both market returns and diversification at a low cost.
If you can participate in your employer’s 401k or 403b, that would be even better!
Stocks are not guaranteed investments, so they’re less safe than bonds or savings; however, they will also (over 20 years) provide a higher return, which you’ll need to participate in to beat inflation.

Most professional money managers, who actively seek to “beat the market,” fail about 70% or more of the time.

These are people with Ivy League degrees in economics, finance, and accounting, as well as the most current research, news, financial software, etc. And those 70% of asset managers are awfully tough to beat themselves.
Also, try to find a trustworthy, qualified investment advisor and consult them before you buy anything.

I’d focus more on investing than trading. Most traders lose their capital or don’t make much, particularly after commissions you need to pay brokers and taxes (20%) on any capital gains. (Dividends are taxed at the rates for “ordinary income” – one of the reasons why dividend paying stocks are in the minority.)

i,e., buy, hold, and monitor.

You could invest in energy stocks, but that ship may’ve sailed; this illustrates a central point in investing/trading/ speculating – a company that’s thriving, that has high earnings and strong growth potential, will already be trading at a high price. You don’t want to buy high and have to sell low!
It may not appreciate much (it may even decline in value) because all of the future earnings and eps growth are already priced in.
It’s not really about how well the firm does; it’s about how much you paid for the stock. No tree grows to the sky!!

Remember, too, there’s lots of people who’ll be more than happy to take your money – and in doing so, they won’t feel bad.
Some methods of investing to avoid are : “technical analysis” or “charting,” (largely discredited), “dollar cost averaging/averaging down,” or any magic or gimmicky method.

And to really understand investing and the capital markets, you MUST know about financial accounting and fundamental analysis. Take some classes, study for the CFA, or read up on it as much as you can.
It’s the only way you’ll know how to interpret financial statements (10-K’s and 10-Q’s), which are the primary sources of info for all investors.
Good intros are the books “The Number,” by Alex Berenson; and “The Intelligent Investor” by Benjamin Graham. (Graham was Warren Buffett’s business professor at Columbia and was a legendary analyst, investor, writer, and academic.)

Or you could simply buy a low cost index fund that tracks the S&P or the MSWCI and you won’t (at least) do much worse than the market as a whole.

Other writers, investors, and academics you should read include: Harry Markowitz; Abraham Brilloff; Modigliani; Miller; Scholes; Peter Bernstein; and Phil and Ken Fisher

Richard asks…

How does one “Short Stocks” and make money?

I’ve heard you can make money “Shorting Stocks“, but quite frankly the concept is quite confusing. I am new to Answers, and have been stumbling around in Google results trying to find how to make money when a stock goes down instead of up. Can someone, hopefully a savvy investor, let me know how this all works, if I need a special brokerage account, or what specific signs to look for when a stock is about to “Short”. Thanks for all your help.

John answers:

Shorting stock is selling stock that you don’t own, hoping that it falls so that you can buy it back at a cheaper price. You need a “margin account” to short stocks, since you will be borrowing from your broker.

Here is how shorting stock works:
1) JPM is at 33 . You think it will drop to at least 30
2) You own no JPM shares, so you place an order with your broker to “short sell 100 shares of JPM”
3) Your broker lends you 100 shares of JPM. They charge you interest (margin) maybe 7% APR.
4) Your broker than sells the 100 shares you borrowed and deposits $3300 cash in your account (100*$33) , minus the sales commission (typically $5-$20)

A. JPM drops to $30
5) You buy back 100 shares of JPM for $3000. You keep the $300 as profit , minus another commission charge and the accumulated margin interest.

B. JPM rises to $40
5) Your account had a little less than $3300 from the sale, but it would cost you $4000 to buy back the stock you shorted. The broker may make you add more money to the account or liquidate some of your other stocks. This is known as a “margin call.”

Keep in mind that when you buy stocks (you are “long” stocks), the most you can lose is 100% but you have noe ceiling on how much you can make. When you short stocks, the most you can make is 100%, but you can lose much more. For example, if you shorted 100 shares of a $1 stock that went up to $3 , you would have been paid $100, but you would need $200 more dollars to buy it back.

Anytime you want to investigate a new strategy, “paper trade” (make imaginary trades and keep track of how they do) your strategy for at least two months (preferably 6 months). Make sure you see how it behaves when the market moves in your favor and also against you.

Donald asks…

Can you make money by buying stocks of renewable energy companies?

since global warming and the need for more greener energy like wind power increases, is it really possible you can make lots of money by buying these companies now that are worth virtually nothing, and wait until the world gets the need of renewable energy? (buying shares of stocks). Thanks

John answers:

Nobody can predict the movement of any stocks whether going up or coming down. Many of the market professionals use fundamental analysis of companies along with technical analysis like chartology, option movements and relative price strength of stocks.

There might be many people who think the same logic as yours and made investment in renewable energy companies. Consequently, some of these companies’ shares have gone up significantly where you might have to find a good spot to buy at certain time.

What you need to do is to study the company’s performance (revenues and earnings and their growth) in relation to the stock price. Also, look into the company’s financial condition (does it have a lot of debts?), market share of its products, product leadership, and earnings browth rates vs. Its competitors.

Since you will be investing your hard earned income, be very careful in doing the preliminary studies before investing. I recommend you also read a couple of books on investment.

Robert asks…

Is it possible to make money in stocks in the short term without day trading?

Can you make like 5k a month trading stocks with like ameritrade or something? (without day trading) Just regular trading.

John answers:

First, study the market. Select a target company, find out who runs it – their history, management philosophy. Evaluate the company’s strengths and competition. Look at their cash to debt ratio, market capitalization, earnings, dividend history. Compare with other companies in the same business segment. Look at market trends and potential future earnings. Don’t invest in buggy whips. When you are comfortable with the company, purchase their stock. Then repeat. Diversify. If you are diligent and lucky (and don’t make any mistake about it, luck plays a large part in this; the market unfortunately is not rational), you could average upwards of 20% on your money. So to earn $5k a month, all you have to do is invest about $300k in the stock market and get really lucky.

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