“Back when my oldest daughter was in 4th grade, she had a “bring a parent to school” event to talk about what they did for a living. Other Dads had the careers you would expect: there was a firefighter, a police officer, and similar. The kids had some sense of what those jobs were through exposure or cartoons or movies & TV. But a stock trader??? I was looking at a whole bunch of cute little faces with that totally confused stare.
The challenge was to try to help 9- and 10-year-olds understand my job as a stock trader. That was difficult considering they did not know anything about stocks. So- to help them first relate to that concept- I asked them if they had a chance to work for any company in the world or to own a business what would that be? Obviously, that got MANY answers from the roles a typical 4th grader would know to the whimsical that is still beyond where we are today.
But one student said he wanted to own a Chocolate Factory. I said fantastic! Have you ever heard of Hershey chocolates? That pepped them up. The whole class exclaimed “Yes!” So, I said, “You could own the Hershey chocolate company or at least a piece of it if you bought something called stock. You would be one of the owners of Hershey.
From there, I seemed to have their fullest attention and I am pretty sure they at least got some sense of the relationship between stocks and company ownership and that I just might own some of Hershey myself. Or perhaps they were just hoping for the latter and that I might pass out free samples?”
If you buy a stock, you own a piece of that company. If there were 100 total shares of stock and you bought 10 shares of that company, you would own 10% of the company. In a case like Hershey stock, there are many more than 100 shares: millions of shares outstanding. If you bought 1, 2, 100, or 1000 shares of stock you would own a proportional amount of that particular company. For example, if there are:
1,000 shares available and you want to own 10% of that company, you will need to buy 100 shares,
1,000,000 shares, you would need to buy 100,000 shares,
and so on.
How is the value of stock determined? That was explained in the prior lesson called What are markets?
If you own shares in a company as company earnings grow (meaning it is making more money), the stock value should increase in price. The value of that company should continually increase if the earnings of that company increase. As an owner, your share of the company would be increasing in value.
Also, a stock may have a dividend. A dividend is a payment to shareholders of a portion of the profit that that company makes. Stockholders are paid a fixed amount of money- the dividend- for each share they hold. For example, if a company pays a dividend of 50¢ per share and you own 1 share, they will pay you 50¢ for possessing that share. If you own 10,000 shares at the time the dividend is paid, they will pay you $5,000.
Over time the earnings and dividends of a successful company should increase. If so, you would get bigger and bigger dividend payments for owning those shares. Some investors assemble a portfolio of stocks that pay good dividends and then enjoy that regular income. If you pile up enough stocks that pay a regular dividend, it can replace a typical income… which leads to an interesting concept…
I do not have to start my own company; I can invest in a company that is already established and profit from its success.
You can also trade your shares in that company, AKA buy and sell for short-term profits. Think of this like buying & selling a home or a car, except it is far easier and cheaper to buy & sell stock. You buy an asset with an expectation that the value will go up and then you sell it for a profit. Perhaps you buy another asset with the same expectation- and profit plan- again and do the same.
Stock prices fluctuate up or down over the course of minutes to days to weeks to months. Whether someone is a
day trader (in and out the same day),
swing trader (in and out over a few days to a few weeks) or
position trader (in and out over a few months),
they all aim to profit from the price movements of stock (or futures, commodities, funds, options, etc.). While they own it, they want its value to rise. When they sell it, they think it has gone up about as far as it can go and they want the cash for something else, which might include another investment with greater potential.
STOCK SPLITS
Occasionally a stock will be “split.” What does that mean? The easiest analogy is to think about it like making change when one breaks a bigger (money) bill into smaller bills. For example, suppose you have $10 and want to “split” it into two fives. The value of one piece of paper- $10- becoming 2 pieces of paper- two $5 bills- is still the same: you still have $10. But now you have 2 bills instead of 1…
If a stock is split 2 for 1, each share of stock becomes 2 shares of stock. If they were valued at $100/share before the split, the 2 shares are valued at $50/share afterward. The value is still the same but now there are twice as many shares available as before. If the total number of shares available was 5 million before, now there are 10 million shares.
Stocks can split like this in many ways: 3 for 1, 4 for 1, 5 for 1, etc. Let us use money again to illustrate a 5 for 1 split: you have a hundred-dollar bill, and you would like to break it into FIVE twenty-dollar bills. The value is the same- $100- but- post “split”- you now have 5 pieces of paper instead of 1 piece of paper representing that value.
Stocks can emerge from more shares to fewer shares too. This is called a reverse stock split. In money analogy terms, suppose you want to thin down that load in the wallet, so you turn those five 20s into one 100-dollar bill. You still have the same $100 in your wallet, but now 5 pieces of paper is 1 piece of paper.
In a reverse stock split, the company is looking to reduce the total number of shares from X to Y. If it is a 1 for 2 reverse split and you have 1000 shares of the stock before the split valued at $10,000, you have 500 shares after the split valued at $10,000. A 1-for-4 reverse split would convert 4 shares of stock into 1 share of stock now valued at 4X more than the 4 shares before the split.
Why do companies bother with splits & reverse splits? A common reason is that sometimes the price of shares gets so high, that they become less affordable, so splitting them 2 for 1 cuts the share price in half, or 4 for 1 cuts it to 25%.
Why would a company do a reverse split? Among other reasons, sometimes a share price gets too low, so a reverse split reduces the number of shares outstanding and doubles or triples or quadruples, etc., the price of each share.
In both cases, the driver of a split or reverse split is managing the price of the stock, reflecting an interest in keeping it in a desirable zone for investors. On a net basis, those holding the stock are usually a beneficiary of this management, as the drivers behind the split are typically stimulating more buying, which drives the price up. Does this work every time? No, sometimes the company orchestrates a split or reverse split, and it negatively affects the value of the stock. But the core idea is that you still own the same amount of value in both kinds of splits- only the number of shares you own changes.
Q: So how do I pick the right stocks?
There are over 8000 stocks available to choose from. In Sal’s story, the simplicity of the 4th grader wanting to own Hershey stock was about choosing something they like. There were no business reasons in mind: just delicious candy.
One could choose a stock like that but even love for a particular company or their products does not mean the stock will go up in price. Just like with a home and almost always with a car, the perceived value of the asset can go DOWN too. If others mostly believe a stock price is too high, they will not be moved to pay that much for it. Others holding that stock may opt to sell because it seems to have run its growth course by this point. When there is more selling than buying, the price will usually go down.
So, the skill is in picking the right stocks- that’s stocks ready to grow in value- at the right time- right before they enjoy a period of such growth. That is not easy! Even the best traders in the world will miss some great stocks and invest in the wrong stocks, eventually bailing on a dog and taking a loss.
Sal teaches investors that stock picking success leans heavily on:
fundamental analysis +
technical analysis +
sentiment analysis,
along with some history of real experience to learn to spot the fake outs that otherwise look good AND
a dash of luck & hope too.
The best traders will apply #1-4 to work #5 down to the lowest possible impact on a trade… but there is always some random chance involved. There are too many variables to ever develop a perfect trade selection system… too many unknowns that can surprise and dramatically change the momentum of a stock. If anyone is ever pitching a “can’t lose” investment system, RUN… they are lying to you. Even the relative safety of putting your nest egg in a savings account is eroded by inflation over time… if not the bank themselves finding reasons to reach into your account and take service fees.
In our services, we work through MANY layers of analysis to zero in on a highly select FEW we consider ideal stocks, futures, options, and ETFs to share with our subscribers. To all of that foundational work, Sal applies nearly 40 years of real experience, ranging from 8 years in the pit at the American Stock Exchange (AMEX) to a long stretch in “profit every year or bust” mode as a professional trader.
Subscribers enjoy the benefit of all of that work & expertise applied, in the form of simple, “read them to your broker” recommendations even an investing novice can trade. Learn more about our recommendation services on the product overview page. Or download free samples to see how easy we can make it to trade some great recommendations.
From Sal’s history
“Back when my oldest daughter was in 4th grade, she had a “bring a parent to school” event to talk about what they did for a living. Other Dads had the careers you would expect: there was a firefighter, a police officer, and similar. The kids had some sense of what those jobs were through exposure or cartoons or movies & TV. But a stock trader??? I was looking at a whole bunch of cute little faces with that totally confused stare.
The challenge was to try to help 9- and 10-year-olds understand my job as a stock trader. That was difficult considering they did not know anything about stocks. So- to help them first relate to that concept- I asked them if they had a chance to work for any company in the world or to own a business what would that be? Obviously, that got MANY answers from the roles a typical 4th grader would know to the whimsical that is still beyond where we are today.
But one student said he wanted to own a Chocolate Factory. I said fantastic! Have you ever heard of Hershey chocolates? That pepped them up. The whole class exclaimed “Yes!” So, I said, “You could own the Hershey chocolate company or at least a piece of it if you bought something called stock. You would be one of the owners of Hershey.
From there, I seemed to have their fullest attention and I am pretty sure they at least got some sense of the relationship between stocks and company ownership and that I just might own some of Hershey myself. Or perhaps they were just hoping for the latter and that I might pass out free samples?”
If you buy a stock, you own a piece of that company. If there were 100 total shares of stock and you bought 10 shares of that company, you would own 10% of the company. In a case like Hershey stock, there are many more than 100 shares: millions of shares outstanding. If you bought 1, 2, 100, or 1000 shares of stock you would own a proportional amount of that particular company. For example, if there are:
How is the value of stock determined? That was explained in the prior lesson called What are markets?
If you own shares in a company as company earnings grow (meaning it is making more money), the stock value should increase in price. The value of that company should continually increase if the earnings of that company increase. As an owner, your share of the company would be increasing in value.
Also, a stock may have a dividend. A dividend is a payment to shareholders of a portion of the profit that that company makes. Stockholders are paid a fixed amount of money- the dividend- for each share they hold. For example, if a company pays a dividend of 50¢ per share and you own 1 share, they will pay you 50¢ for possessing that share. If you own 10,000 shares at the time the dividend is paid, they will pay you $5,000.
Over time the earnings and dividends of a successful company should increase. If so, you would get bigger and bigger dividend payments for owning those shares. Some investors assemble a portfolio of stocks that pay good dividends and then enjoy that regular income. If you pile up enough stocks that pay a regular dividend, it can replace a typical income… which leads to an interesting concept…
I do not have to start my own company; I can invest in a company that is already established and profit from its success.
You can also trade your shares in that company, AKA buy and sell for short-term profits. Think of this like buying & selling a home or a car, except it is far easier and cheaper to buy & sell stock. You buy an asset with an expectation that the value will go up and then you sell it for a profit. Perhaps you buy another asset with the same expectation- and profit plan- again and do the same.
Stock prices fluctuate up or down over the course of minutes to days to weeks to months. Whether someone is a
they all aim to profit from the price movements of stock (or futures, commodities, funds, options, etc.). While they own it, they want its value to rise. When they sell it, they think it has gone up about as far as it can go and they want the cash for something else, which might include another investment with greater potential.
STOCK SPLITS
Occasionally a stock will be “split.” What does that mean? The easiest analogy is to think about it like making change when one breaks a bigger (money) bill into smaller bills. For example, suppose you have $10 and want to “split” it into two fives. The value of one piece of paper- $10- becoming 2 pieces of paper- two $5 bills- is still the same: you still have $10. But now you have 2 bills instead of 1…
If a stock is split 2 for 1, each share of stock becomes 2 shares of stock. If they were valued at $100/share before the split, the 2 shares are valued at $50/share afterward. The value is still the same but now there are twice as many shares available as before. If the total number of shares available was 5 million before, now there are 10 million shares.
Stocks can split like this in many ways: 3 for 1, 4 for 1, 5 for 1, etc. Let us use money again to illustrate a 5 for 1 split: you have a hundred-dollar bill, and you would like to break it into FIVE twenty-dollar bills. The value is the same- $100- but- post “split”- you now have 5 pieces of paper instead of 1 piece of paper representing that value.
Stocks can emerge from more shares to fewer shares too. This is called a reverse stock split. In money analogy terms, suppose you want to thin down that load in the wallet, so you turn those five 20s into one 100-dollar bill. You still have the same $100 in your wallet, but now 5 pieces of paper is 1 piece of paper.
In a reverse stock split, the company is looking to reduce the total number of shares from X to Y. If it is a 1 for 2 reverse split and you have 1000 shares of the stock before the split valued at $10,000, you have 500 shares after the split valued at $10,000. A 1-for-4 reverse split would convert 4 shares of stock into 1 share of stock now valued at 4X more than the 4 shares before the split.
Why do companies bother with splits & reverse splits? A common reason is that sometimes the price of shares gets so high, that they become less affordable, so splitting them 2 for 1 cuts the share price in half, or 4 for 1 cuts it to 25%.
Why would a company do a reverse split? Among other reasons, sometimes a share price gets too low, so a reverse split reduces the number of shares outstanding and doubles or triples or quadruples, etc., the price of each share.
In both cases, the driver of a split or reverse split is managing the price of the stock, reflecting an interest in keeping it in a desirable zone for investors. On a net basis, those holding the stock are usually a beneficiary of this management, as the drivers behind the split are typically stimulating more buying, which drives the price up. Does this work every time? No, sometimes the company orchestrates a split or reverse split, and it negatively affects the value of the stock. But the core idea is that you still own the same amount of value in both kinds of splits- only the number of shares you own changes.
Q: So how do I pick the right stocks?
There are over 8000 stocks available to choose from. In Sal’s story, the simplicity of the 4th grader wanting to own Hershey stock was about choosing something they like. There were no business reasons in mind: just delicious candy.
One could choose a stock like that but even love for a particular company or their products does not mean the stock will go up in price. Just like with a home and almost always with a car, the perceived value of the asset can go DOWN too. If others mostly believe a stock price is too high, they will not be moved to pay that much for it. Others holding that stock may opt to sell because it seems to have run its growth course by this point. When there is more selling than buying, the price will usually go down.
So, the skill is in picking the right stocks- that’s stocks ready to grow in value- at the right time- right before they enjoy a period of such growth. That is not easy! Even the best traders in the world will miss some great stocks and invest in the wrong stocks, eventually bailing on a dog and taking a loss.
Sal teaches investors that stock picking success leans heavily on:
The best traders will apply #1-4 to work #5 down to the lowest possible impact on a trade… but there is always some random chance involved. There are too many variables to ever develop a perfect trade selection system… too many unknowns that can surprise and dramatically change the momentum of a stock. If anyone is ever pitching a “can’t lose” investment system, RUN… they are lying to you. Even the relative safety of putting your nest egg in a savings account is eroded by inflation over time… if not the bank themselves finding reasons to reach into your account and take service fees.
In our services, we work through MANY layers of analysis to zero in on a highly select FEW we consider ideal stocks, futures, options, and ETFs to share with our subscribers. To all of that foundational work, Sal applies nearly 40 years of real experience, ranging from 8 years in the pit at the American Stock Exchange (AMEX) to a long stretch in “profit every year or bust” mode as a professional trader.
Subscribers enjoy the benefit of all of that work & expertise applied, in the form of simple, “read them to your broker” recommendations even an investing novice can trade. Learn more about our recommendation services on the product overview page. Or download free samples to see how easy we can make it to trade some great recommendations.
Question or Comment?