Judgment Free - Ask Anything Financial Thread

[james.hendrickson]

Okay - for all the lurkers out there who have a money related question but are afraid to ask because of sounding silly, this is the thread for you.

Feel free to throw out any question you think is silly or are a bit embarassed to ask.

The mods will ensure that your question is taken seriously.

A big THANK YOU to the many Forum members who take their time to answer other people's questions.

[TexasHusker]

Just make sure you ask anything real estate related within the real estate forum.

[Dahlia]

I do not understand how you make money in the stock market!
ok. This is what I do understand:

I buy a stock, which is a tiny fraction of a company. Stock goes up: it is worth more. So on paper, at that moment, I made some money if I sell it right then. Because the value is higher than when I purchased.

It goes down; I lose money if I decide to sell.

But what about the buy and hold people?? This I don't understand.

Hypothetical:
Today I buy $300 in 3 shares of stock ($100 each share). Stock goes down to $50 a share of stock. My $300 investment turned into $150. But I hold on. Stock goes up. It goes down. Years later...the advice is that it will overall appreciate over a long term period. Why? How?

Isn't there some step where the stock divides itself and you suddenly have two shares, though you only bought one share?

I understand buying in "at the bottom", so buying as stock decreases is good.

I ask because I have a lot invested in the market from an inheritance. But I'm barely contributing right now. I'm just watching the account flex up and down. The inheritance has been in the market about 10 years now, and it's gone up...but I cant picture what is really happening in the process.

[Petunia 100]

I think this is an EXCELLENT thread.

[Singuy]

Some other experts can chime in but here's my take on the market.


1. If you invest 1000 dollars into a company, the most you can lose is 1000 dollars. The max you can earn is the sky.

2. The reason why generally a stock will go up over time is because these things.
-1. Growth of the company with good earnings that constantly beat expectations (providing a good product/service today and the future).
-2. Potential growth because investors believe in the technology and management(think Tesla here).
-3. As a company is profiting, you are earning a dividend.
-4. Once the company stops growing, you'll be earning even more dividend. Since dividends are paid out in $$/share, the more share you have, the more dividend you earn.

When it comes to individual stock investing..value investing is perhaps the most predictable. Invest something you understand, with possible growth potential, and has good management. This is the Warren's way of investing.

3. Now for the lower risk takers, there are the index funds/mutual that has all the major stocks all combined into one. Historically speaking, these funds should yield 7-8% over 30+ years despite crashes and corrections. You should expect good solid companies to grow over time with population and gdp. Index funds usually consist of the better stable companies.
Penny stock companies that are traded over the counter are gamblers which has more of a casino effect.

[Dahlia]

please explain the dividend. That is the part I do not understand.

I do not understand why a company pays a dividend. I do not understand how much dividend is determined. And what happens to the dividend? If I have a bunch of stocks paying a dividend...why don't I have a bunch of cash growing every month? Does it get reinvested in the company? And is that how I wind up with multiple shares after just buying one?

[Petunia 100]

I do not understand how you make money in the stock market!
ok. This is what I do understand:

I buy a stock, which is a tiny fraction of a company. Stock goes up: it is worth more. So on paper, at that moment, I made some money if I sell it right then. Because the value is higher than when I purchased.

It goes down; I lose money if I decide to sell.

But what about the buy and hold people?? This I don't understand.

Hypothetical:
Today I buy $300 in 3 shares of stock ($100 each share). Stock goes down to $50 a share of stock. My $300 investment turned into $150. But I hold on. Stock goes up. It goes down. Years later...the advice is that it will overall appreciate over a long term period. Why? How?

Isn't there some step where the stock divides itself and you suddenly have two shares, though you only bought one share?

I understand buying in "at the bottom", so buying as stock decreases is good.

I ask because I have a lot invested in the market from an inheritance. But I'm barely contributing right now. I'm just watching the account flex up and down. The inheritance has been in the market about 10 years now, and it's gone up...but I cant picture what is really happening in the process.

Companies are owned by someone. That's all a stock is; a tiny bit of ownership in a corporation. When a company makes a profit, the profits belong to the owner(s). Some of the money is typically retained, and some is typically passed along to the owners. That's what dividends are.

So that is one way buying and holding can be profitable. You get a share of the profit this year, next year, and every year as long as you own the stock.

Here is another way: Suppose a single share of ABC stock earns $4 per share in profits per year. How much would you pay to own a share? Let's assume investors are willing to pay $50. Now suppose ABC introduces a new product and begins selling it. Customers love the new product and profits rise to $5 per share. As a result, investors are willing to pay more than $50 per share and the price rises.

So that is another way buying and holding can be profitable. Your stock rises in value because the company is earning more.

It is important to remember that in the short-term, anything at all can happen to stock valuations. But in the long-term, it is all about profits.

[Petunia 100]

please explain the dividend. That is the part I do not understand.

I do not understand why a company pays a dividend. I do not understand how much dividend is determined. And what happens to the dividend? If I have a bunch of stocks paying a dividend...why don't I have a bunch of cash growing every month? Does it get reinvested in the company? And is that how I wind up with multiple shares after just buying one?

Dividends can be paid in cash or re-invested. Where do you own these stocks, are they in a brokerage account? Check with the custodian.

Yes, if you own more shares than you purchased, that could be exactly why.

If you would prefer to receive the dividends in cash, tell the custodian.

[Dahlia]

ok, you guys made some good points.

The max you lose is the money invested, the max you earn can be way beyond the original investment.

The company makes money, the owner gets a piece of that profit.

I have the stocks in an inherited IRA through an advisor. I'm not going to make changes, he knows more about this than I do.

I also contribute to a 401k.

I log into my accounts nearly every day and track the change in value. It feels like "found net worth" to me. I might have a financially crappy day spending $500 in auto repairs....but then my stock accounts are up a total of $800 and I am suddenly coming out ahead!

Its the dividend part that was eluding me. That is why buying and holding is good- because investors are collecting a type of interest on their investment (as long as it is up).

...but what about when stock goes down? If stock decreases by $50 a share...is the dividend smaller or does it stop completely? Does the dividend depend upon your initial buy in purchase price? If you buy $100/share ...and every time it's value goes below $100- does the dividend stop for you? But other people that purchased at $20/share....to them, the stock is still more valuable than when they bought it...so do they get dividends while the other investors do not? That couldn't be fair. (So that is probably how it works.)

[disneysteve]

...but what about when stock goes down? If stock decreases by $50 a share...is the dividend smaller or does it stop completely? Does the dividend depend upon your initial buy in purchase price? If you buy $100/share ...and every time it's value goes below $100- does the dividend stop for you? But other people that purchased at $20/share....to them, the stock is still more valuable than when they bought it...so do they get dividends while the other investors do not? That couldn't be fair. (So that is probably how it works.)

The dividend is a flat amount set by the company. All shareholders as of the date the dividend is declared receive the same dividend per share that they own. So there aren't shareholders who get a dividend when others don't.

The dividend can change over time, up or down. Remember, the dividend is a distribution of profits. If the company falls on hard times, they may cut the dividend. On the other hand, if the company does very well, they may increase the dividend. If you do a search, you can find a list of companies that have a long track record of increasing their dividend every year. Some investors use that as a guide for which companies to invest in.

[Jluke]

I have the stocks in an inherited IRA through an advisor. I'm not going to make changes, he knows more about this than I do.

You need to be careful having an advisor (aka salesman).

You should check how much you are paying in fees. Look for terms like expense rate (ER) and Assets Under Management (AUM).

I will bet you are being charged excessively.

[disneysteve]

I have the stocks in an inherited IRA through an advisor. I'm not going to make changes, he knows more about this than I do.

Don't be so sure about that. Most advisers are crap. They charge high fees and don't do any better than you could do on your own at a much lower cost.

Do you know how much you pay this adviser to manage that money for you? If you don't know the answer to that question, you need to find out. There are a number of ways that advisers get paid. They often get commissions on the securities that you purchase, so if you buy stock through them, you pay the cost of the stock plus a commission to the broker. They may get a management fee on a recurring basis for taking care of your account. So, for example, your adviser may be charging you 1% of assets under management. If you have $100,000 in your account, every year he gets $1,000, often for doing absolutely nothing beyond sending you a statement every quarter.

If there are mutual funds involved, odds are they are "load" funds, meaning there was a fee charged to purchase them. That fee is typically in the 6% range. Most of us (probably all of us) around here only deal with "no load" funds that charge nothing to buy them.

Then there are also expense ratios for mutual funds. That is money deducted from your account each year to pay the company that runs the fund. Some funds have ultra low expense ratios, like 0.2% while others have pretty high expenses, like 1.5% or even more. Paying high expenses cuts into your returns so your account earns less money over time.

I'd recommend looking into this account. Find out what it is costing you to have it where it is. You may learn that it would save you hundreds or even thousands of dollars per year to move that money elsewhere.

[Dahlia]

My advisor charges 1%. We have an annual meeting and I authorize any transactions he recommends. This year there was only the selling of part of 1 stock and buying something else with it.

I am aware that every transaction costs me money (by paying him) generally. I accept that.

I am aware that many advisors do not do much more than the common man. And advisors that are making you MORE than the common man might be in a pyramid scheme of some sort so watch out for that!

However, I'm sticking with this system. It has appreciated and I do trust their knowledge a lot more than I trust my own.

I had this account with these guys since 2007. I was fresh when the stocks and economy started plummeting. I was scared. I told my advisor to put 60% in cash. He tried to talk me out of it but I was blindly panicked. I cant even remember now what we did to compromise but he did make moves so my free fall was lessened. And then my upswings were lessened too I guess. But over the 10 years I've come to trust him. And I learned a lot about my own psychology. And I think I need a little buffer or advisor to manage me when I feel I am drowning or panicking and probably making a bad decision because it's MY money and I cant stay objective.

I am playing stock god with my 401k. I make the moves and watch how it works out.

So far, I am a little less productive than my advisor. But that could be attributed to so many factors.

PLUS- annual reporting to him keeps my level of accountability up. If I buy a car- he knows about it. If I plan a $200k vacation (no- never happened)- he would know about that too. And I would judge myself. And then go super frugal to make up for it, or maybe not buy the item knowing I'd be explaining it to my advisor.

[disneysteve]

PLUS- annual reporting to him keeps my level of accountability up. If I buy a car- he knows about it.

Why does he need to know where you choose to spend your money? What does that have to do with him managing that account?

[Dahlia]

It's a state of the union type of call. Are you still living wherever? Still at the same job? What big purchases have you made? Family size change? That way he can kind of see where I am heading and what I am doing. Makes me feel accountable.