We Make Money Easy Episode 10 – Stock Trading

Phil and Andre talk about the ins and outs of stock trading.

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Show Notes:

Owning stock is a risky, but potentially lucrative addition to your portfolio.

Voting Rights

When you own stock, you usually get a vote (which is proportional your ownership stake) in what the company does. This makes more of a difference in small companies, and you’ll unlikely have much of a say in a company like Microsoft.

Worth of a Stock

The worth of a stock is what someone else will pay for it. Stocks rise and fall as demand for ownership in the company increases or decreases. Experts spend a lot of time analyzing what the value should be, but often are wrong. Confusing things occur, such as a company being extremely profitable, but failing to meet analysts expectations. The future growth of a company is often “priced in” to a stock.

Price of a Stock

A stock selling for $20 isn’t necessarily equal to another stock selling for $20. Look at the Market Capitalization to understand what the price per share means. A company with a billion dollar capitalization will take a lot more to move a single dollar compared to a company with a market cap of $100 million dollars. Andre recommends looking at the P/E ratio (price to earnings), a high P/E ratio is a heavily optimistic valuation compared one with a low ratio. More stable, blue chip stocks will have lower P/E ratios, while fast growing startups will have a high one.

Dividends

Some (not all) stocks pay dividends, which is a return of cash to investors. If you own stock that pays dividends, this income is treated favorably tax-wise, and can contribute to an income stream aside from the appreciation of the stock itself. The cash distributed in a dividend is usually priced into the stock, so a dividend announcement may cause an increase in stock price, and the distribution of a dividend should cause a decrease in the price.

Risk

Stocks have a wide variety of risk, but no stock should be considered low risk or risk free. Although there is a chance of high gains with stocks, there is also a higher chance you will be wiped out. Diversification is key to balance out dips in certain sectors and types of stock.

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