Buying Stocks

If you follow the link below, I am going to share one of the great secrets of buying stocks. See if you can find it as you read.

What are stocks? When a person starts a company, the value of the assets that the owner contributes to the company is called owner’s equity. If the owner decides to sell ownership to others, he may have an IPO (Initial Public Offering). The public buys shares of the equity called stocks. There are more than 9,000 publicly traded companies today.

What drives the value of a stock? Most professional investors would say that the collective expectations of future earnings available to investors discounted to the present gives the price of a stock. It sounds complicated, doesn’t it?

An investor has to look at some measure of company earnings available to investors such as dividends or free cash flow, decide given the macro economic forecast, competition and demand how fast that measure will grow. Then, the investor needs to discount that earnings stream back to the present using an appropriate discount rate. Then he has to compare the figure he arrives at to the current price of the stock in the market and decide if the company is expensive or cheap. This style of investing is called fundamental or bottom-up analysis. It requires knowledge of accounting, macro-economics, industry dynamics, etc.

Since very few investors, relatively speaking, have those qualifications, most investors depend on professional analysts to do the work. They find the analyst research through their brokers, in libraries or online from various sources. When they have identified 20 or 30 companies in different industries that seem to have good prospects and are cheap to the market the assemble a diversified portfolio of equities. To have a diversified portfolio, it probably takes 20 or 30 different companies in a wide variety of industries.

Even with access to research reports, it is still a lot of work to build a stock portfolio this way. Fortunately, there are easier ways that don’t require you give up much or any return to achieve the same result. These include Mutual Funds and ETF’s or Exchange Traded Funds. I’ll explain both of these.

To find the secret of buying Stocks, click here and go to the Mutual Fund Page .

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