Stock Investing For Dummies - The Eye

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Stock Investing

Stock Investing5th editionby Paul Mladjenovic

Stock Investing For Dummies , 5th EditionPublished by: John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030-5774, www.wiley.comCopyright 2016 by John Wiley & Sons, Inc., Hoboken, New JerseyPublished simultaneously in CanadaNo part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by anymeans, electronic, mechanical, photocopying, recording, scanning or otherwise, except as permitted under Sections107 or 108 of the 1976 United States Copyright Act, without the prior written permission of the Publisher. Requests tothe Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 RiverStreet, Hoboken, NJ 07030, (201) 748-6011, fax (201) 748-6008, or online at http://www.wiley.com/go/permissions.Trademarks: Wiley, For Dummies, the Dummies Man logo, Dummies.com, Making Everything Easier, and relatedtrade dress are trademarks or registered trademarks of John Wiley & Sons, Inc., and may not be used without writtenpermission. All other trademarks are the property of their respective owners. John Wiley & Sons, Inc., is notassociated with any product or vendor mentioned in this book.LIMIT OF LIABILITY/DISCLAIMER OF WARRANTY: WHILE THE PUBLISHER AND AUTHOR HAVE USED THEIRBEST EFFORTS IN PREPARING THIS BOOK, THEY MAKE NO REPRESENTATIONS OR WARRANTIES WITH RESPECTTO THE ACCURACY OR COMPLETENESS OF THE CONTENTS OF THIS BOOK AND SPECIFICALLY DISCLAIM ANYIMPLIED WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE. NO WARRANTY MAYBE CREATED OR EXTENDED BY SALES REPRESENTATIVES OR WRITTEN SALES MATERIALS. THE ADVICE ANDSTRATEGIES CONTAINED HEREIN MAY NOT BE SUITABLE FOR YOUR SITUATION. YOU SHOULD CONSULT WITHA PROFESSIONAL WHERE APPROPRIATE. NEITHER THE PUBLISHER NOR THE AUTHOR SHALL BE LIABLE FORDAMAGES ARISING HEREFROM.For general information on our other products and services, please contact our Customer Care Department withinthe U.S. at 877-762-2974, outside the U.S. at 317-572-3993, or fax 317-572-4002. For technical support, please visitwww.wiley.com/techsupport.Wiley publishes in a variety of print and electronic formats and by print-on-demand. Some material included withstandard print versions of this book may not be included in e-books or in print-on-demand. If this book refers tomedia such as a CD or DVD that is not included in the version you purchased, you may download this material athttp://booksupport.wiley.com. For more information about Wiley products, visit www.wiley.com.Library of Congress Control Number: 2016935126ISBN 978-1-119-23928-4 (pbk); ISBN 978-1-119-23929-1 (ebk); ISBN 978-1-119-23930-7 (ebk)Manufactured in the United States of America10 9 8 7 6 5 4 3 2 1

Contents at a GlanceIntroduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1Part 1: The Essentials of Stock Investing . . . . . . . . . . . . . . . . . . . . . . . 5Surveying the World of Stock Investing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7CHAPTER 2: Taking Stock of Your Current Financial Situation and Goals. . . . . . . . . . . . 15CHAPTER 3: Defining Common Approaches to Stock Investing. . . . . . . . . . . . . . . . . . . . 33CHAPTER 4: Recognizing Risk and Volatility. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43CHAPTER 5: Stock Investing through Exchange-Traded Funds . . . . . . . . . . . . . . . . . . . . 61CHAPTER 1:Part 2: Before You Start Buying. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69Gathering Information. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71CHAPTER 7: Going for Brokers. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91CHAPTER 8: Investing for Long-Term Growth. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 103CHAPTER 9: Investing for Income: Dividend-Paying Stocks. . . . . . . . . . . . . . . . . . . . . . 115CHAPTER 10: Understanding Technical Analysis for Stock Investors. . . . . . . . . . . . . . 129CHAPTER 6:Part 3: Picking Winners. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .149Using Basic Accounting to Choose Winning Stocks . . . . . . . . . . . . . . . .CHAPTER 12: Decoding Company Documents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .CHAPTER 13: Emerging Sector and Industry Opportunities . . . . . . . . . . . . . . . . . . . . .CHAPTER 14: Small Cap Stocks, IPOs, and Motif Investing . . . . . . . . . . . . . . . . . . . . . .CHAPTER 15: The Big Economic and Political Picture. . . . . . . . . . . . . . . . . . . . . . . . . . .151169181193203Part 4: Investment Strategies and Tactics . . . . . . . . . . . . . . . . . .215Discovering Screening Tools. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .CHAPTER 17: Understanding Brokerage Orders and Trading Techniques. . . . . . . . .CHAPTER 18: Using Trade Triggers and Advanced Conditional Orders. . . . . . . . . . . .CHAPTER 19: Getting a Handle on DPPs, DRPs, and DCA . . . PDQ. . . . . . . . . . . . . . . .CHAPTER 20: Corporate and Government Skullduggery:Looking at Insider Activity. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .217229247255CHAPTER 11:CHAPTER 16:CHAPTER 21:265Keeping More of Your Money from the Taxman. . . . . . . . . . . . . . . . . . . 277Part 5: The Part of Tens. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .289Ten Indicators of a Great Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 291CHAPTER 23: Ten Ways to Profit in a Bear Market . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 299CHAPTER 24: Ten Investments and Strategies That Go Great with Stocks. . . . . . . . . 305CHAPTER 22:

Part 6: Appendixes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .313Resources for Stock Investors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 315APPENDIX B: Financial Ratios. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 329APPENDIX A:Index. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .viStock Investing For Dummies339

Table of ContentsINTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1About This Book. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Foolish Assumptions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Icons Used in This Book. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Beyond the Book. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Where to Go from Here . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .13344PART 1: THE ESSENTIALS OF STOCK INVESTING. . . . . . . . . . . . . . 5CHAPTER 1:Surveying the World of Stock Investing . . . . . . . . . . . . . . . 7Understanding the Basics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8Preparing to Buy Stocks. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9Knowing How to Pick Winners. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9Recognizing stock value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9Understanding how market capitalization affects stock value. . . . 10Sharpening your investment skills . . . . . . . . . . . . . . . . . . . . . . . . . . . 11CHAPTER 2:Taking Stock of Your Current FinancialSituation and Goals . . . . . . . . . . . . . . . . . . . . . . . 15 Establishing a Starting Point by Preparing a Balance Sheet. . . . . . . . .Step 1: Make sure you have an emergency fund . . . . . . . . . . . . . . .Step 2: List your assets in decreasing order of liquidity . . . . . . . . .Step 3: List your liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Step 4: Calculate your net worth. . . . . . . . . . . . . . . . . . . . . . . . . . . . .Step 5: Analyze your balance sheet . . . . . . . . . . . . . . . . . . . . . . . . . .Funding Your Stock Program. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Step 1: Tally up your income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Step 2: Add up your outgo. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Step 3: Create a cash flow statement. . . . . . . . . . . . . . . . . . . . . . . . .Step 4: Analyze your cash flow . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Another option: Finding investment money in tax savings. . . . . . .Setting Your Sights on Your Financial Goals . . . . . . . . . . . . . . . . . . . . . .16171820222324262728292930Defining Common Approaches toStock Investing. . . . . . . . . . . . . . . . . . . . . . . . . . . . .CHAPTER 3: 33Matching Stocks and Strategies with Your Goals. . . . . . . . . . . . . . . . . . 34Investing for the Future . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35Focusing on the short term . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35Considering intermediate-term goals . . . . . . . . . . . . . . . . . . . . . . . . 37Preparing for the long term. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37Table of Contentsvii

Investing for a Purpose. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38Making loads of money quickly: Growth investing. . . . . . . . . . . . . . 38Steadily making money: Income investing. . . . . . . . . . . . . . . . . . . . .39Investing for Your Personal Style . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41Conservative investing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41Aggressive investing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42CHAPTER 4:Recognizing Risk and Volatility. . . . . . . . . . . . . . . . . . . . . . . . . 43Exploring Different Kinds of Risk. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Financial risk. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Interest rate risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Market risk. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Inflation risk. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Tax risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Political and governmental risk. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Personal risk. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Emotional risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Getting the Scoop on Volatility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Minimizing Your Risk. . . . . . . . . .

viii Stock Investing For Dummies Investing for a Purpose . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 Making loads of money .