High Level Investing For Dummies

Paul Mladjenovic

• Publisher: For Dummies
• Year: 2015
• Print ISBN: 9781119140818
• eBook ISBN: 9781119140832
• Edition: 1
• Topic: Personal Development
• Subtopic: Personal Finance

Enhance your investment portfolio and take your investments to the next level!

Do you have an investment portfolio set up, but want to take your knowledge of investing a step further? High-Level Investing For Dummies is the resource you need to achieve a more advanced understanding of investment strategies—and to maximize your portfolio's profits. Build upon your current knowledge of investment, particularly with regard to the stock market, in order to reach a higher level of understanding and ability when manipulating your assets on the market. This approachable resource pinpoints key pitfalls to avoid and explains how to time your investments in a way that maximizes your profits.

Investing can be intimidating—but it can also be fun! By building upon your basic understanding of investment strategies you can take your portfolio to the next level, both in terms of the diversity of your investments and the profits that they bring in. Who doesn't want that?

• Up your investment game with proven strategies that help increase profits and minimize risks
• Avoid common pitfalls of stock speculating to make your investment strategy more impactful
• Understand how to time the market to maximize returns and improve your portfolio's performance
• Uncover hidden opportunities in niche markets that can bring welcome diversity to your portfolio

High-Level Investing For Dummies is the perfect follow-up to Stock Investing For Dummies, and is a wonderful resource that guides you through the process of beefing up your portfolio and bringing home a higher level of profits!

Part I

Getting Started with High-Level Investing

Visit www.dummies.com for great (and free!) Dummies content online.

In this part …

• Find out what you must do before you invest your first dollar in stocks. Know what steps are necessary so your stock investing is successful.
• Understand the risks and how to minimize them so you’ll have more winners than losers in your portfolio.
• Get the scoop on diversification and allocation so your stock investing is consistently profitable regardless of what’s happening with the economy and financial markets.
• Find great companies to invest in and pay as little as possible for their stocks. Check out what successful investors look for when they analyze a company.
• Use brokerage orders and services to maximize your profits while minimizing your losses.
• See how markets are interrelated. Know which investments can perform well while others are doing poorly so you can choose the right stocks in the right markets.

Chapter 1

Taking Stock before You Invest at a Higher Level

In This Chapter

Describing the basics of stocks

Delving into stocks’ dual nature

Selecting stocks and measuring their performance

Moving beyond stocks with ETFs, options, and high-level techniques

The beginning stock investor does what he or she can to choose a good stock. The higher-level stock investor knows a good stock but uses tools and resources to find either a better stock (with higher earnings and the like) or a good stock with more profit potential.

In addition, beginning and intermediate stock investors usually only go long in finding a stock to buy. But a higher-level stock investor can see profit in bad stocks and choose to profit by going short. A beginning investor sees that Sector A is good while Sector B has terrible prospects, and she buys a stock in Sector A. The higher-level stock investor may buy that same stock in Sector A but also considers getting an inverse ETF for Sector B.

When you add the strategies and resources in this book, you’ll definitely have what you need to take your stock investing to greater (more profitable) heights.

The basics of stock investing are covered in my book Stock Investing For Dummies (published by Wiley). This chapter really serves to highlight important points as you up your gain in the world of stocks.

The Basics: Defining and Categorizing Stocks

In our economy, companies in the private sector produce goods and services. As the economy grows, the companies that do a good job of providing goods and services that the general public consumes grow along with it.

Companies may be private or public:

• Private: A private company is one of the hundreds of thousands of proprietors and other business organizations that you transact with but typically cannot invest in conveniently.
• Public: Public companies, on the other hand, are business entities that are organized so that you can participate as an investor without needing to participate in the daily operations of the companies.

An investor can profit along with public companies by buying and holding their stocks. In the following sections, I provide a refresher on the definition of stocks and different stock categories.

Defining stock

Stock is a security that indicates limited ownership of a public corporation and represents a claim on a part of that corporation’s net assets and earnings. Stock may be common or preferred:

• Common: In this book, I primarily cover common stock, which entitles the stockholder (or stock owner) to vote at shareholder meetings (either in person or by mail or email communication) and receive any dividends that may be issued.
• Preferred: Preferred stock usually doesn’t give the holder voting rights, but it does provide some preferential treatment over common-stock holders, such as priority treatment in receiving dividends. Additionally, in the extreme event of the company’s bankruptcy, preferred-stock holders rank ahead of common-stock holders (and after creditors) in recouping money from liquidation.

To invest, you buy shares of the stock through a stock brokerage account (find out more about brokerage tools and tactics in Chapter 5). The minimum ownership amount is one share. When you buy or sell shares of stock, you pay a transaction fee (the commission).

Obviously, you buy stock because you expect the stock to rise (appreciate) in value as the rest of the investing public is attracted to the company and subsequently buys the stock, too. If all goes to plan, you’ll eventually be able to sell your stock for a gain (referred to as capital gain). In addition, many stocks provide income in the form of dividends, which are typically paid quarterly and have the potential to grow as well.

Checking out market capitalization

You often hear about stocks being large cap, mid cap, or small cap. In the world of stock investing, size (in terms of market value) does matter. A portfolio of large-cap stocks, for example, tends to be safer than a portfolio of small-cap stocks.

Market cap, which is short for market capitalization, is a reference to a stock’s market value. Calculating the market cap is easy; you multiply the company’s total number of shares outstanding by the share price. If Company X has 2 million shares outstanding and its stock is $10 per share, then the market capitalization is $20 million (2 million times $10). Although $20 million may sound like a lot, this stock is actually a micro-cap stock.

Here are the five basic levels of market capitalization:

• Micro cap (up to $250 million): These stocks are the smallest stocks and, all things being equal, are considered the riskiest (flip to Chapter 2 for details on assessing risk). Some of these stocks are also referred to as penny stocks.
• Small cap ($250 million to $1 billion): Small-cap stocks are the bulwark for people seeking aggressive gains, especially in bull markets, but they come with greater risk. I go into detail on small-cap stocks in Chapter 7.
• Mid cap ($1 billion to $10 billion): For long-term investors, this category provides great potential compromise between the small caps and the larger companies. Mid caps are less risky than small caps but have more room to grow than larger companies.
• Large cap ($10 billion to $50 billion): This category is appropriate for conservative, long-term investors. This category may not have the growth potential of the lower cap levels, but these stocks are more reliable and tend to be the leaders in their marketplace.
• Mega cap or ultra cap (more than $50 billion): These stocks represent pieces of the biggest companies not only in their sectors but in the world. Mega-cap stocks tend to be in most portfolios and are the most widely held. They may not hold much growth potential versus other cap levels, but they’re certainly more predictable holdings.

Don’t choose a stock exclusively due to its size or market valuation. Do your due diligence in terms of choosing a stock for investment, and base your decision primarily on the company’s fundamentals (sales, earnings, market potential, and so on; see Chapter 4 for details). Let market cap be a factor if you’re down to two choices and you prefer either safety (higher market cap) or growth potential (lower cap).

Investigating the Dual Nature of Stock Investing

Stocks and their underlying companies are together, yet they have different personalities:

• The company: On one hand, you have the company itself. It’s the physical entity involved with sales and expenses, products, services, personnel, budgets, and a thousand other moving parts. It succeeds by providing for the wants and/or needs of customers in a competitive marketplace against other companies seeking to do the same and hopefully makes a profit doing so.
• The stock: On the other hand, you have the company’s stock. The price of the stock rises or falls on a given market day based on the cumulative buying and selling of its shares in the stock market.

Here’s where the dual nature of stock investing kicks in: The performance of the company and the performance of the stock are frequently at variance. In the short term, the discrepancy can make you scratch your head. The stock may go up even though the company isn’t having a good day. Or maybe the company is doing well, yet the stock isn’t. Sometimes you see the stock of a total-loser company go up, and you see the stock of a great company go down.

In the short term, the stock can rise or fall seemingly without any cause-and-effect relationship with the underlying company. But over time, the reality of the company and the value of the stock tend to move in the same direction. Long term, the stock prices of good companies go up. Long term, the stock prices of bad companies go down.

Both the seasoned investor and the serious speculator understand this concept if they’re truly analy...

Table of contents

• Cover
• Title Page
• Table of Contents
• Introduction
• Part I: Getting Started with High-Level Investing
• Part II: Choosing High-Potential Stocks and Exchange-Traded Funds
• Part III: All about Options
• Part IV: Strategies from the Greats
• Part V: The Part of Tens
• Part VI: Appendixes
• About the Author
• Cheat Sheet
• Connect with Dummies
• End User License Agreement