02 May 2013

Stock Market Primer Session - Your questions answered online!

Posted in Investing

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Talk about a fun morning!  I was recently invited to be a guest speaker at a Saturday morning Christian Ministry small group meeting.  The focus of the meeting was to introduce the attendees to the US stock market and investing concepts.  After getting the invite, I was so honored and responded that I would love to play a part in this opportunity to encourage others to expand their financial knowledge.

If you haven't been introduced to the small group ministry concept, it is simply the way that large church ministries accomplish the small church / "everybody is connected" atmosphere. A leader with a specific passion creates a single focused group and opens it up to any members of the large church that may be interested. This group has meetings, events and they study, grow, pray together and serve each other through the trials, challenges and celebrations that are a part of normal life.

The small group that I was invited to attend is the Strategic Business Relationships and Career Transition group that is lead by Carlyn Davis. This group is birthed from Covenant Church in Carrollton, Texas.

The goal that I had was that at the end of the meeting the ladies that were attending would:
1. Have scripture references that confirm that Christian financial principles encourage investing.
2. Know what a stock security is and be able to read a stock quote
3. Have an understanding of our key US Stock Markets (Dow, NASDAQ and S&P 500) including what they represent and their all time high values.
4. Be able to follow market / investing conversations on financial
TV shows by having knowledge of Bears and Bulls, Insiders, Market Capitalization, Market Sentiment, SEC and other US Stock Market terms and concepts.

To accomplish these lofty goals in a 45 minute period of time I asked everyone to act as baseball game back catcher - ready and expecting that something will be delivered to you at a fast pace and be ready to catch and control it. Each individual was given blank paper slips to use to jot questions that came to mind and throughout the session I took the time to answer some of these questions on scheduled intervals. From the feedback, I am very happy to report that everyone in the session noted that they learned (not just heard but learned) a lot about our US markets during this illustrated introduction.

As I promised, here on Money reVerse I'm reviewing the scriptural references that encourages us to invest along with posting the answers to the questions that I did not get a chance to answer in the session. If you were not a part of this meeting you can also benefit by getting answers to these excellent questions that were presented by the group that was in attendance.

Biblical Scriptures that Encourage Investing

"Cast your bread upon the water, for you will find it after many days." Ecclesiastes 11:1 NKJV

This wisdom note, is presented to us by Solomon, son of King David. This principle encourages me to not consume everything that I have but instead, send some away with an expectation that I will see it again. I'd like to affectionately refer to this as the "now and later" theory. In the Christian Holy Bible, bread is metaphorically used to reference any food or other necessities required to sustain life. With this information in mind, this scripture invites all of us to purposefully take what we could clearly use for life now and (I'll introduce the word "invest" here) invest it for a return that is to come at a later time in life.

Now here's a clear biblical example of investing - the parable of the talents.

“For the kingdom of heaven is like a man traveling to a far country, who called his own servants and delivered his goods to them. And to one he gave five talents, to another two, and to another one, to each according to his own ability; and immediately he went on a journey.

Then he who had received the five talents went and traded with them, and made another five talents. And likewise he who had received two gained two more also. But he who had received one went and dug in the ground, and hid his lord’s money. After a long time the lord of those servants came and settled accounts with them.

“So he who had received five talents came and brought five other talents, saying, ‘Lord, you delivered to me five talents; look, I have gained five more talents besides them.’ His lord said to him, ‘Well done, good and faithful servant; you were faithful over a few things, I will make you ruler over many things. Enter into the joy of your lord.’ He also who had received two talents came and said, ‘Lord, you delivered to me two talents; look, I have gained two more talents besides them.’ His lord said to him, ‘Well done, good and faithful servant; you have been faithful over a few things, I will make you ruler over many things. Enter into the joy of your lord.’

“Then he who had received the one talent came and said, ‘Lord, I knew you to be a hard man, reaping where you have not sown, and gathering where you have not scattered seed. And I was afraid, and went and hid your talent in the ground. Look, there you have what is yours.’

“But his lord answered and said to him, ‘You wicked and lazy servant, you knew that I reap where I have not sown, and gather where I have not scattered seed. So you ought to have deposited my money with the bankers, and at my coming I would have received back my own with interest. Therefore take the talent from him, and give it to him who has ten talents.

‘For to everyone who has, more will be given, and he will have abundance; but from him who does not have, even what he has will be taken away. And cast the unprofitable servant into the outer darkness. There will be weeping and gnashing of teeth.’

Matthew 25:14-30 NKJV

From this parable, let me define a few things to help to make this more relevant to us today. The word kingdom can be defined as the area of influence or rule. Think of heaven as the place or the way that God has set aside for those that profess to be Christians. Pulling that all together, let's say that the Kingdom of Heaven can be defined as God's perscribed way of doing things in the place that is set aside for us. Heaven is what Christians are striving for.

In this parable the ruler was going on a journey but clearly expected that his money was going to continue to grow while he was away. He called his trusted servants that knew him and knew his expectations to manage the money in his absence. Scripture states that he knew what their abilities were and in reading between the lines, I'm stating that he didn't put them in a situation where they could fail miserably.

Let's define a talent. In the ancient Green and Roman times, a talent was a weight and unit of currency. Think of this as referring to money as an ounce of silver, an ounce of gold, an ounce of copper or other medium of exchange. For them during the the time that this scripture was written, the talent was the money.

Our takeaway from this parable should be the understanding that we are expected to use what we have in our hands and our wisdom and tenacity to be the best managers possible. The best managers expect- not hope but expect - to prosper in all things. In this parable, this was not negotiable. All three servants understood this clearly. Two of the three servants took this seriously and invested what was entrusted to them. This took courage, faith and commitment to doing what was expected of them. Christian biblical scripture clearly outlines that it is expected that we are prosperous - in all areas of life (click here to see my earlier blog post on this topic). Make a special note of the principle introduced in this parable that what is made available to us is in line with our current management abilities. Improve your money management skills, learn to profit with what you have and get ready for the promotion of being entrusted with more!

General Stock Market and Investing Questions

Q: Can you explain your statement to understand how a company makes their money before you invest in their stock?
A: Ahh... good question! In my opinion, this should be modus operandi for any and everyone that is looking to invest in stock - actually I'd like to pass along this concept as one that you should adopt when considering investments of any kind. There should be a single solitary goal of an investment you're considering - to make money. Period. The question that should be asked before you invest is "how are we expecting this investment to make money?". If the answer doesn't make sense to you I'd advise against putting money in it. Before investing in a company stock, I'd advise that you review the company's quarterly (10Q) and annual (10k) reports. Buried in there should be the answer to the question you should be asking of the company - "How are you expecting to make money?". If you can't buy into the money making plan, don't buy into the stock.

Q: How does a company decide how many stocks to make available for sale on the open market?
A: Determining the number of stocks to make available for sale to the general public is one of many steps in the process of filing for an IPO (Initial Public Offering) with the SEC (Securities and Exchange Commission). Key players in the IPO process include the investment bankers that serve as the underwriters. It is through underwriting that a very though evaluation of the business strategies and current and future earnings potential of the company are taken into account. From there, the value of the IPO is proposed. This IPO value is based on the number of shares available multiplied by the proposed price per share. The short answer is the number of company stock shares made available for sale is determined by the investment bankers based on the value of the company.

Q: How do companies pull shares off the market?
A: Pulling shares of a company stock off the market thus making them unavailable to be purchased by the general public is accomplished through a stock buyback activity. A company will purchase their own stock - either in the open market (stock available for anyone to purchase) or by making an offer to existing stock holders to purchase their stock from them. The result of a company owning more of its own stock, is that there is less of the company stock available for others to purchase. We see this in cases where the company would like to lessen the threat of a single individual or interest group purchasing enough stock that could put them in a controlling position within the organization.

Q: What are the proper steps in researching a company?
A: Now, that is a great question to ask!! I think the most important thing to note is that when you buy a stock you're buying a piece of the company. It is important to know what you're buying!! Just like you would not pay good money for a black box with no label or information about it's contents, you should not buy a stock without learning about and agreeing with the current and future activities of the company. We didn't cover this in the session but here are a few questions that I never fail to answer about a company before I buy their stock.

  • What is the company's financial status (are they making a profit?)
  • What is the company's Business model (how do they make money?)
  • What is the company's competition standing (how do they compare to their competitors?)
  • How is the associated industry performing in today's market?
With any investment, you've got to look at the numbers. Remember, the primary reason that we're investing is to make money. Even if it's your grandfather's company - if the numbers don't look right, don't invest! When I say look at the numbers here's a few things that I must know as I consider investing in a stock:
Volume - Is this stock a darling in the market? Are a lot of people interested in this stock?

Stock Price - how is this stock priced in relation to it's all time high? It's all time low? It's competitors?

Patterns / Trends - What is this stock doing? Going up? Going down? Staying the same? I look at these trends over the last 1 year and last 3 years

Historical numbers - If I had looked at these numbers this time last year what would I have seen?

My favorite site for getting this research information iswww.marketwatch.com. This is a free site that is sponsored by the Wall Street Journal. I introduced you this site in the stock market primer session - this is the one that I projected during the demo. If you were not at the session and are interested in researching stocks give this site a try. It's simple to navigate and has a wealth of pre-investment information!

Getting the basic information about a company is called Fundamental Analysis. Looking at the numbers for investment purposes is known as Technical Analysis. When you get serious about investing in stocks make it a point to get some education on these two types of analysis prior to making stock trades.

Wall Street Journal

Q: Don't most wealthy people own or trade stocks?
A: I'd guess yes. Defining wealthy as having a great deal of money, resources or assets, it is more than likely the wealth is not the result of only working on a job. Many wealthy individuals received their wealth from wages, investment and/or inheritance. Because the stock market is a proven way to invest, many well-to-do folks have stocks as a part of their investment portfolio.

Q: What do I use to buy and sell my stock?
A: To buy and sell stock you will need to have a brokerage account. This is a special type of bank account in which you deposit the funds that you'd like to use to invest and you would place "orders" for stocks and other securities against those funds by using this particular account. When you deposit funds in this account, the funds are yours to manage as you see fit but the bank or brokerage firm actually completes the stock trade on your behalf. Many firms charge you a commission - a per transaction fee that is added onto the cost of placing each security purchase. This actually sounds more complicated than it really is. Don't be intimidated by all of the new terms introduced here. Managing your investment securities by using a brokerage account is actually quite simple!

Q: How do I pick a brokerage account?
A: That is a very good question! The best advice that I can give is that you pick a brokerage account the same way that you pick any other bank account. Look at the services, tools, minimal account balance requirements, costs and fees and pick an account that works best for you when it comes to these items. Shop around and make sure that the brokerage services line up with how you think you will trade. If you think that you will make lots of trades, look for the lowest commission rate that you can find. This may be at a cost of having fewer research tools available to you as a part of the account services. If you think that you will not make a lot of trades, make sure that the service does not penalize you with a fee for dormant accounts. If buying stocks and options are in your future, ensure that the account that you get is priced right for both of these securities. Again, get an idea of what you think you'd like to do within the account and go with the firm that has the best prices and services match your planned investment activities! Shopping for brokerage accounts is the fun part. Google the phrase "brokerage account comparison" and start window shopping for a brokerage account today. No harm in looking!

Q: Please clarify what the SEC is and what it does.
A: The Securities and Exchange Commission (SEC) is a government entity that was created by congress for the specific purpose of protecting investors through regulation of the securities markets. A key way that this protection is accomplished is by promoting full public disclosure of the financial activities of all public companies. These financial activities are detailed in the mandatory quarterly and annual reports that public companies must file with the SEC in addition to narratives of company officers. For us as investors, the SEC is our friend because companies that make their stock available for sale on the open market are required to remain in good standing with the SEC reporting regulations. These are the reports that we use for our pre-investment research activities. All reports submitted by companies to the SEC are available for viewing by the general public. That's you, that's me and any others interested in investing in any securities market. Praise God for the SEC!

SEC Plaque

Q: How do you use stock purchases and transactions to make money?
A: I can't say this enough - there should be one objective to investing - to make money. Period.
Making money through stock purchases center around purchasing a stock at a low price, holding the stock while the price rises and selling the stock while it is at the high price. The difference in the price in which you purchased the stock and the price in which you sold it is your profit from that particular stock trade. The goal is to have multiple instances of selling a stock at a higher price than what you paid to purchase it. This is the primary strategy of making money from stock purchases. Simply said - buy low, sell high!

That's it for now but since I've got even more of your questions to answer, stay tuned for part 2!!


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