Ten Things You Absolutely Need To Know About Stocks

Steve Schaefer, Contributor, Forbes

January 20, 2016

Are you a Wall Street whiz? Snacking on 50 shares of Twitter for breakfast and out of the stock by lunch? This post is not for you.

This post is for the average Joe, trying to put a few dollars to work in the market or take more control over his or her investments. These ten ideas, tips and topics should be a good primer for your stock market education. They aren’t all you need to know, and won’t guarantee success, but they’re a good starting point for any investor.

1) Buy Low, Sell High

Sounds so simple right? And yet investing is a rare part of our financial lives where a thing getting cheaper feels like a bad thing. Few consumers are lamenting cheaper prices at the pump amid the collapse in oil prices over the last year and a half, yet a moderate market fall is treated as the death knell for the bull market.

These are facts that are not mutually exclusive: the current bull market will end, and over almost any long-term horizon stocks have proven to be beneficial investments that generally grind higher.

2) There Is No Such Thing As A Sure Thing

Oil prices at $100 a barrel are here for the long haul; Alibaba is a world-beating juggernaut that can’t be stopped; ESPN is immune to the shifting sands of the cable business and its ability to mint money for Disney will never be in doubt. Just three examples of story lines once taken as gospel that have been shot full of holes.

A word to the wise: the conventional wisdom isn’t always wrong, but it frequently has terrible timing. Some of the stock market’s best investors over the long term –Warren BuffettCarl Icahn and their ilk – have placed their biggest bets on companies out of favor or during times of market stress.

While long-term gains for stocks at large have historically been a safe bet, individual companies are inherently riskier.

3) Get Familiar With Filings

While some investors might think they have a sixth sense for finding good companies, the rest of us have to do our homework. There’s no better starting point than the regular filings public companies make with the SEC, which are required to detail everything from company finances to potential conflicts and risk factors.

The annual 10-K includes the most information, ranging from quarterly and annual financial numbers to descriptions of business lines and management commentary on growth opportunities and costs. Regulatory filings will also detail any senior management changes, acquisitions, and stock transactions by executives or board members.

All filings for U.S. public companies, and foreign companies that list on U.S. exchanges, can be found online through the SEC’s EDGAR system.

4) Think Long-Term

Taxes aren’t the only reason short-term trading is a loser’s game for most investors. Trying to buy or sell shares based on a quarterly earnings report or an economic data point is a game for automated trading platforms, not the average Joe.

Better opportunities come when a stock or sector is dismissed by the market and languishes despite steady economic results that will produce a long stream of profits. Transportation stocks like airlines and railroads have gone through long out-of-favor stretches, only to churn out considerable gains when economic conditions and industry dynamics align.

Years of mismanagement in the airline industry led to a string of bankruptcies in the 2000s, but the resulting merger wave made American Airlines, United Continental and Delta Air Lines more competitive and poised to benefit from trends like plunging fuel costs.

5) Dividends Are Your Friend

Apple's share price dropped from $110.38 to $105.26 in 2015. That’s a five percent decline, but investors who owned the stock all year lost just three percent. Why? Because Apple paid out $2.03 in dividends over the course of the year.

Dividend-paying stocks aren’t immune from declines, but they do offer a degree of insulation that others don’t. A word of warning though – rich dividends that look too good to last often don’t. Just ask owners of Kinder Morgan, which slashed its quarterly payout by 75% in December.

Shark Tank investor Kevin O’Leary is fond of a statistic that shows the bulk of the S&P 500′s returns over the years have come from dividends, not price appreciation. That’s why he says he’ll never own a stock that doesn’t pay at least some of its profits out to shareholders.

6) There Is No Perfect Metric

Professional and amateur investors alike have their favorite measures of growth and value, from price-earnings ratios to dividend yields and profit margins. But there is no single number that divides good stocks from bad ones. A stock that looks cheap at ten times earnings can go to five times in a flash, and a flashy tech startup that looks pricey at three time sales can easily jump to 6 in a heartbeat.

7) A $100 Stock Isn’t Expensive And A $5 Stock Isn’t Cheap

The price of a single share is not the right number to evaluate when deciding if a stock is a good buy or not. While triple-digit price tags might cost too much for a new investor with limited funds, loading up on 100 $1 stocks isn’t necessarily a better strategy. Think of investing like grocery shopping — there’s a reason you go to the store with a list instead of just deciding what to buy based on price tags.

8) Taxes Can Take A Bite Out Of Your Profits

The FANG stocks – Facebook, Amazon.com, Netflix and Google (Alphabet) — had a great run in 2015, with returns ranging from 34% to 134%, but from a tax perspective any investor who bought last year and eyeing the exits wants them to keep climbing. That’s because the one-year mark is a line of demarcation for the tax man.

Selling stocks you’ve held for less than a year triggers a short-term capital gain, taxed as ordinary income. That could mean kicking back anywhere from 25% to 39.6% to Uncle Sam. But hold those same stocks for at least 12 months and the tax rate drops to 15% for most tax brackets.

9) Know What You Need, And What You’re Paying For

The evolving brokerage industry is a beehive of competition to offer the latest and greatest trading options, but for most investors the basic essentials can be found anywhere.

Make sure you know the type of buy or sell order you’re entering. A market order, for instance, will be executed as soon as possible, whatever the prevailing market price; a limit order by contrast will only complete the transaction within price parameters you’ve established.

10) Take Market “News” With A Whole Shaker Of Salt

The first trading day of 2016 had not shortage of headlines, from a plummeting Chinese stock market to GM’s investment in Uber rival Lyft and the severing of relations between Saudi Arabia and Iran. But is that any reason for U.S. stocks to plunge more than 2.5% (as they did before bouncing off their lows)?

As an investor, the news flow driving day-to-day gyrations in the market should be taken as interesting reading rather than a reason to make or change strategy.

This article was written by Steve Schaefer from Forbes and was legally licensed through the NewsCred publisher network.

The views of the author of this article do not necessarily represent the views of First Republic Bank or First Republic Private Wealth Management and its underlying entities.

This article is for information purposes only and is not intended as an offer or solicitation, or as the basis for any contract to purchase or sell any security, or other instrument, or to enter into or arrange any type of transaction as a consequence of any information contained herein. 

Investors should seek financial advice regarding the appropriateness of investing in any securities, other investment or investment strategies discussed or recommended in this report and should understand that statements regarding future prospects may not be realized.

Although information in this document has been obtained from sources believed to be reliable, we do not guarantee its accuracy, completeness or fairness, and it should not be relied upon as such.

First Republic Private Wealth Management includes First Republic Investment Management, Inc. (“FRIM”), an SEC-registered investment advisor, First Republic Securities Company, LLC (“FRSC”), Member FINRA/SIPC, First Republic Trust Company (“FRTC”) and First Republic Trust Company of Delaware LLC (“FRTC-DE”). 

Investments are:  Not FDIC Insured, Not Bank Deposits, May Lose Money