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Stocks

Before buying

If you have decided to go ahead and buy and sell your own stocks, but where do you begin? Thanks to in Internet you can find out a lot by just logging on. 

It is suggested by many financial experts that before you lay down any hard-earned money, you need to first research a few stocks to see if they are sound companies that have the potential to earn money and grow over time. 

One of the best sources of information about a public company is in its financial reports, like an annual report, a quarterly report, or a special filing with the Securities and Exchange Commission. And luckily for everyone, these reports are usually available online at each company's web site, or at the SEC’s EDGAR database online (which is also free). 

Perusing the annual report or looking at a company’s earnings report can tell you a lot about how the company is doing and, in some cases, what they have in the pipeline that will help it in the future. 

And there is some quick math you can do to test a company’s health. You may have heard of “earnings per share” or “profit margins” or “price-to-earnings ratios”--and you should familiarize yourself with a few of these terms. Visit the glossary to find out more about those terms. 

Another good source to find out more about a company are Wall Street analysts and stock brokers. Analysts and brokers are usually employed by a bank to give their opinions on a stock. Some say you should buy, or hold, accumulate a particular stock, but if you look beyond the opinion there is sometimes hard numbers and much research to read up on. 

A good strategy is to use analysts and brokers to get information about a stock and then to check some of the numbers for yourself before investing. 

Keep abreast of what analysts are saying and how it affects a stock. Some analysts carry a lot of weight and what they say can move a stock significantly, within minutes of giving an opinion. And others are just dead wrong about a stock again and again. 

Also, if you are investing for the first time, look for a company that has been out for a while and is paying dividends and has a low price-to-earnings ratio. Older, more solid companies tend to have some history of excellent earnings and you can learn a lot by studying a company that has a good track record. 

And although history shouldn’t be heavily-weighed when making a stock pick, looking at what a company has done in the past can help you see how it might react to changes in the future.

Risks

You will also want to learn what risks are involved when investing in stocks especially if you plan on buying and selling them often. Although some people trade stocks for a living, it is not for everyone and can really be a dangerous endeavor that will eat up your savings in a jiffy. And there are arguments as to who makes more money over time--the active trader or the buy-and-hold types. 

Make realistic goals about how much you may make on a stock over time. Some think that since they have been making 20 percent gains or more in the past couple of years, that this will always be the case. That is not very realistic if the market slows down and it is more difficult for companies to make profits. Do not take on more risk than you are comfortable with just to hope for above-average returns. 

Diversifying your stock portfolio, or investing in different stocks with different revenue streams is really key. Make sure you spend a lot of time looking at the forest as well as the trees. And stock splits and other factors can really effect how your stock portfolio is weighed so set aside time to revisit your goals. 

And remember that everyone is in it for the money--not just you. Brokers, exchanges, fund mangers, etc. Use your broker or fund manager to find out exactly what you are getting into. Really find out how a broker or fund manager makes money off of you and what fees are involved. Go to the various stock exchange web sites or SEC's web site and read up on regulations and risks. 

This is especially true when it comes to margin accounts--or an account that is set up by a broker who lets you borrow money, pay interest on that money, and trade it as well. Margin accounts can be very risky, so know the risks before signing up. 

The key to successful stock picking is that you must do your homework and find out as much as you can about the company behind the stock. Really dig and don't give up. There's tons of free information out there and the more you know the more you will be rewarded. 

It's a big job, which is why many rely of mutual fund managers, brokers and others to do the stock picking for them. But if you have the knack, the time and the money, nothing is standing in your way to do it yourself.

Corporate filings with the SEC

One of the best ways to begin researching a company’s financial health and history is through corporate filings with the Securities and Exchange Commission.

Reports filed most frequently by companies with the SEC include, annual and quarterly reports, insider transaction documents, IPO- related documents and other registration statements. 

The following provides a brief description of the most frequently filed documents with the SEC (for a full description visit the agency’s description of SEC forms  ): 

Typical information provided in an annual or quarterly report includes, financial data, results from continuing operations, market segment information, new product plans, subsidiary activities and research and development activities on future programs. 

Insider transactions are among the most common corporate filings with the SEC. Every director officer or owner of more than a 10 percent stake in a company must disclose their holdings with the SEC. These filings are made on Forms 3, 4 and 5.

Registration statements filed most often by companies include S-1 and S-3 documents. An S-1 is a basic registration form filed when a company’s planning an IPO. After a company has been publicly traded for a year, any subsequent plan to offer securities, which may include common stock, preferred shares or debt securities, must be filed through an S-3 registration statement. 

Visit MarketWatch.com’s column, which provides daily coverage of the latest in SEC Filings. Also, visit the SEC’s free online database of filings, EDGAR.

Stocks

Bulls and Bears

All this talk about bull and bear markets means that it’s a zoo out there, when it comes to investing. And, like any zoo, there are quite a few species to be found down on Wall Street. 

Most investors’ favorite animal is clearly the bull. The term is used in several ways. Referring to the stock market, it describes a period in which prices rise for a lengthy period of time. When it comes to people, bullish describes one who is optimistic. 

How this usage came about is not entirely clear. A bullish investor is one who buys a stock in the expectation that its price will rise. This could be compared with bulls charging ahead, stampeding prices higher. Or it could simply reflect the fact that bulls habitually toss their heads upward. 

To be considered a bull market, prices need not rise continuously. There can be days, weeks and even months in which prices fall. What matters is the long-term trend.

Bears

The Street’s least favorite animal is the bear. This term is used to describe downers — both stock prices and individuals. It originated from the old days, when traders used to sell bearskins before the bears were actually caught. In the stock market, it applies to people who expect prices to decline. 

As for how much of a price decline constitutes a bear market, the rule of thumb seems to be at least 20 percent. However, a lot depends on how long the drop lasts. The quicker the rebound, the less likely that investor psychology will turn from optimism to the pessimism that usually accompanies a bear market. 

You can find other animals down on Wall Street. For example, there are dogs, as in Dogs of the Dow. This is an investment strategy that calls for buying the 10 stocks with the highest yield among the Dow, altering the portfolio annually as needed. 

In the feline family, remember CATS (Certificates of Accrual on Treasury Securities), LYONS (Liquid Yield Option Notes) and TIGRS (Treasury Interest Growth Receipts)?

Arachnids

A recent addition to the Street’s menagerie is SPDRS (pronounced spiders), which enable investors to participate in the price performance and dividend yield of the Standard & Poor's 500 Index by purchasing shares at a price equal to roughly 10 percent of the value of this index. 

While buying and selling stock, investors must be on the lookout for donkeys and elephants, representing, of course, the two major political parties. The government certainly plays a big role in Wall Streeters’ lives. Sometimes Washington even makes monkeys out of traders by changing the rules in the middle of the game. 

There are two other animals to keep watch for. Ostriches are investors who stick to their old strategies, oblivious to changes in the world around them. And then there are the hogs — as in the expression, bulls can make money, bears can make money, but hogs, investors who are too greedy, usually get slaughtered.

--Contributed by Dr. Irwin Kellner