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StockInvestingFORDUMmIES2ND‰EDITIONby Paul Mladjenovic

StockInvestingFORDUMmIES2ND‰EDITION

StockInvestingFORDUMmIES2ND‰EDITIONby Paul Mladjenovic

Stock Investing For Dummies , 2nd EditionPublished byWiley Publishing, Inc.111 River St.Hoboken, NJ 07030-5774www.wiley.comCopyright 2006 by Wiley Publishing, Inc., Indianapolis, IndianaPublished simultaneously in CanadaNo part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form orby any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Sections 107 or 108 of the 1976 United States Copyright Act, without either the prior writtenpermission of the Publisher, or authorization through payment of the appropriate per-copy fee tothe Copyright Clearance Center, 222 Rosewood Drive, Danvers, MA 01923, 978-750-8400, fax 978-646-8600.Requests to the Publisher for permission should be addressed to the Legal Department, Wiley Publishing,Inc., 10475 Crosspoint Blvd., Indianapolis, IN 46256, 317-572-3447, fax 317-572-4355, or online athttp://www.wiley.com/go/permissions.Trademarks: Wiley, the Wiley Publishing logo, For Dummies, the Dummies Man logo, A Reference for theRest of Us!, The Dummies Way, Dummies Daily, The Fun and Easy Way, Dummies.com and related tradedress are trademarks or registered trademarks of John Wiley & Sons, Inc. and/or its affiliates in the UnitedStates and other countries, and may not be used without written permission. All other trademarks are theproperty of their respective owners. Wiley Publishing, Inc., is not associated with any product or vendormentioned in this book.LIMIT OF LIABILITY/DISCLAIMER OF WARRANTY: THE PUBLISHER AND THE AUTHOR MAKE NO REPRESENTATIONS OR WARRANTIES WITH RESPECT TO THE ACCURACY OR COMPLETENESS OF THECONTENTS OF THIS WORK AND SPECIFICALLY DISCLAIM ALL WARRANTIES, INCLUDING WITHOUTLIMITATION WARRANTIES OF FITNESS FOR A PARTICULAR PURPOSE. NO WARRANTY MAY BE CREATEDOR EXTENDED BY SALES OR PROMOTIONAL MATERIALS. THE ADVICE AND STRATEGIES CONTAINEDHEREIN MAY NOT BE SUITABLE FOR EVERY SITUATION. THIS WORK IS SOLD WITH THE UNDERSTANDING THAT THE PUBLISHER IS NOT ENGAGED IN RENDERING LEGAL, ACCOUNTING, OR OTHERPROFESSIONAL SERVICES. IF PROFESSIONAL ASSISTANCE IS REQUIRED, THE SERVICES OF A COMPETENT PROFESSIONAL PERSON SHOULD BE SOUGHT. NEITHER THE PUBLISHER NOR THE AUTHORSHALL BE LIABLE FOR DAMAGES ARISING HEREFROM. THE FACT THAT AN ORGANIZATION ORWEBSITE IS REFERRED TO IN THIS WORK AS A CITATION AND/OR A POTENTIAL SOURCE OF FURTHERINFORMATION DOES NOT MEAN THAT THE AUTHOR OR THE PUBLISHER ENDORSES THE INFORMATION THE ORGANIZATION OR WEBSITE MAY PROVIDE OR RECOMMENDATIONS IT MAY MAKE.FURTHER, READERS SHOULD BE AWARE THAT INTERNET WEBSITES LISTED IN THIS WORK MAY HAVECHANGED OR DISAPPEARED BETWEEN WHEN THIS WORK WAS WRITTEN AND WHEN IT IS READ.For general information on our other products and services, please contact our Customer CareDepartment within the U.S. at 800-762-2974, outside the U.S. at 317-572-3993, or fax 317-572-4002.For technical support, please visit www.wiley.com/techsupport.Wiley also publishes its books in a variety of electronic formats. Some content that appears in print maynot be available in electronic books.Library of Congress Control Number: 2005935151ISBN-13: 978-0-7645-9903-3ISBN-10: 0-7645-9903-8Manufactured in the United States of America10 9 8 7 6 5 4 3 2 12O/QZ/RS/QV/IN

About the AuthorPaul Mladjenovic is a certified financial planner practitioner, writer, andpublic speaker who has a Web site at www.mladjenovic.com. His business,PM Financial Services, has helped people with financial and business concernssince 1981. In 1985 he achieved his CFP designation. Since 1983, Paul has taughtthousands of budding investors through popular national seminars such as“The 50 Wealthbuilder” and “Stock Investing Like a Pro.” Paul has been quotedor referenced by many media outlets such as Bloomberg, MarketWatch, CNBC,and many financial and business publications and Web sites. As an author,he has written the books The Unofficial Guide to Picking Stocks (Wiley, 2000)and Zero-Cost Marketing (Todd Publications, 1995). In 2002, the first edition ofStock Investing For Dummies was ranked in the top 10 out of 300 books reviewedby Barron’s. In recent years, Paul accurately forecasted many economic events,such as the rise of gold and the decline of the U.S. dollar. At press time he hasbeen warning his students and clients about the coming decline in housing.He maintains a financial database for his readers and students at www.supermoneylinks.com

DedicationFor my beloved Fran, Adam, Joshua, and a loving, supportive family, I thankGod for you.I also dedicate this book to the millions of investors who deserve moreknowledge and information to achieve lasting prosperity.Author’s AcknowledgmentsFirst and foremost, I offer my appreciation and gratitude to the wonderfulpeople at Wiley. It has been a pleasure to work with such a top-notch organization that works so hard to create products that offer readers tremendousvalue and information. I wish all of you continued success! There are somenotables there whom I want to single out.The first person is Jennifer Connolly (my project editor). She is a true publishing and writing professional who has been extremely helpful, understanding,and patient. Those words are not enough to express my thanks for her fantasticguidance. May God bless her growing family! (Jennifer took over in mid-streamfor the wonderful Sherri Pfouts.)Sarah Faulkner (my copy editor) has made sure my mish-mash of contentis readable and professional (no small feat). I thank her sincerely and I amgrateful she worked on this book with her impressive editing skills.The technical editor Steven Dolvin is a superb financial pro. His expertise andinsights have helped me improve the content for you and have helped melearn as well. I wish him continued success.My gratitude goes out to the acquisitions editor Stacy Kennedy for makingthis For Dummies book happen. For Dummies books don’t magically appearat the bookstore, they happen due to the foresight and efforts of people likeStacy. Wiley is fortunate to have her (and the others also mentioned)!Fran, Lipa Zyenska, you helped make those late nights at the computer moretolerable, and you helped me focus on the important things. Te amo andI thank God that you are by my side. With you and the rest of my lovingfamily, I know that the future will be bright.Lastly, I want to acknowledge you, the reader. Over the years, you have madethe For Dummies books what they are today. Your devotion to these wonderful books created a foundation that played a big part in the creation of thisbook and many more yet to come. Thank you!

Publisher’s AcknowledgmentsWe’re proud of this book; please send us your comments through our Dummies online registrationform located at www.dummies.com/register.Some of the people who helped bring this book to market include the following:Acquisitions, Editorial, andMedia DevelopmentProject Editor: Jennifer ConnollyAcquisitions Editor: Stacy KennedyCopy Editor: Sarah FaulknerTechnical Editor: Steven Dolvin, PhD, CFAEditorial Managers: Christine Meloy Beck,Michelle HackerComposition ServicesProject Coordinator: Adrienne MartinezLayout and Graphics: Carl Byers, Andrea Dahl,Stephanie D. Jumper, Heather RyanProofreaders: Carl Pierce,TECHBOOKS Production ServicesIndexer: TECHBOOKS Production ServicesEditorial Supervisor: Carmen KrikorianEditorial Assistants: Hanna K. Scott, Nadine BellCartoons: Rich Tennant (www.the5thwave.com)Publishing and Editorial for Consumer DummiesDiane Graves Steele, Vice President and Publisher, Consumer DummiesJoyce Pepple, Acquisitions Director, Consumer DummiesKristin A. Cocks, Product Development Director, Consumer DummiesMichael Spring, Vice President and Publisher, TravelKelly Regan, Editorial Director, TravelPublishing for Technology DummiesAndy Cummings, Vice President and Publisher, Dummies Technology/General UserComposition ServicesGerry Fahey, Vice President of Production ServicesDebbie Stailey, Director of Composition Services

Contents at a GlanceIntroduction .1Part I: The Essentials of Stock Investing .7Chapter 1: Exploring the Basics .9Chapter 2: Taking Stock of Your Current Financial Situation and Goals .17Chapter 3: Defining Common Approaches to Stock Investing.35Chapter 4: Recognizing the Risks .45Chapter 5: Say Cheese: Getting a Snapshot of the Market .59Part II: Before You Start Buying .69Chapter 6: Gathering Information .71Chapter 7: Going for Brokers .89Chapter 8: Investing for Growth .101Chapter 9: Investing for Income .115Chapter 10: Using Basic Accounting to Choose Winning Stocks .127Part III: Picking Winners .143Chapter 11: Decoding Company Documents .145Chapter 12: Analyzing Industries .157Chapter 13: Emerging Sector Opportunities.167Chapter 14: Money, Mayhem, and Votes .181Part IV: Investment Strategies and Tactics .195Chapter 15: Taking the Bull (Or Bear) by the Horns.197Chapter 16: Choosing a Strategy That’s Just Right for You .209Chapter 17: Understanding Brokerage Orders and Trading Techniques .217Chapter 18: Getting a Handle on DPPs, DRPs, and DCA . . . PDQ .233Chapter 19: Looking at What the Insiders Do: Corporate Hijinks .243Chapter 20: Tax Benefits and Obligations .255Part V: The Part of Tens .267Chapter 21: Ten Warning Signs of a Stock’s Decline .269Chapter 22: Ten Signals of a Stock Price Increase.275Chapter 23: Ten Ways to Protect Yourself from Fraud .281Chapter 24: Ten Challenges and Opportunities for Stock Investors.289

Part VI: Appendixes .295Appendix A: Resources for Stock Investors.297Appendix B: Financial Ratios .311Index .319

Table of ContentsIntroduction.1About This Book.1Conventions Used in This Book .2What You’re Not to Read.2Foolish Assumptions .3How This Book Is Organized.3Part I: The Essentials of Stock Investing .3Part II: Before You Start Buying .4Part III: Picking Winners .4Part IV: Investment Strategies and Tactics .5Part V: The Part of Tens.5Part VI: Appendixes.6Icons Used in This Book.6Where to Go from Here.6Part I: The Essentials of Stock Investing.7Chapter 1: Exploring the Basics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .9Understanding the Basics .9Getting Prepared before You Get Started.10Knowing How to Pick Winners .10Recognizing stock value .10Understanding how market capitalization affects stock value .11Sharpening your investment skills.12Boning Up on Strategies and Tactics .14Getting Some Good Tips.14Chapter 2: Taking Stock of Your CurrentFinancial Situation and Goals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .17Establishing a Starting Point.18Step 1: Making sure you have an emergency fund .19Step 2: Listing your assets in decreasing order of liquidity.19Step 3: Listing your liabilities.22Step 4: Calculating your net worth.23Step 5: Analyzing your balance sheet .24