Dividend Stocks For Invest

When you’re evaluating a dividend-paying stock, your primary focus has to be the viability and sustainability of the dividend itself. Not rain nor sleet nor dark of night should stand a chance of keeping that courier from delivering a payment to your account every year.

The clearest danger to a dividend is a lack of cash flow. When a company has weak cash flow, the dividend is among the first costs to be cut — because this at least allows the company to appear to be bolstering that key metric. But a dividend stock that stops paying its dividend is of little value to anyone’s portfolio.

For example, in the energy sector, companies such as Chesapeake Energy  (CHK) and Linn Energy (LINE) were forced to eliminate their dividends recently, while industry bellwethers, Chevron (CVX) and ExxonMobil  (XOM) have maintained, if not increased, payouts.

How do you find a “safe” dividend? Seek out companies whose operating earnings and cash flow can cover their annual payments at least two times over. It is possible, in the near term, to raise capital through debt or equity offerings to prop up dividends, but most companies would not sustain this practice for more than a quarter or two.
It also helps to take a look at a company’s dividend history. It’s impossible to predict the future from the past, but some companies have exhibited a strong tendency to raise their payouts annually. For example, Dover (DOV) and Procter & Gamble(PG) have each updated their quarterly dividends for 59 consecutive years.

It’s also wise to seek out yields that are trending toward the higher end of historical ranges.

Invest Basic Tips

Learning how to invest your money is one of the most important lessons in life. You don’t need to be college educated to start investing, in fact, you don’t even need to be a high school graduate. You just need to have a basic understanding of business and have the confidence to make a plan — consider it a business plan for your life. You can do it.

Why Investing Can Be Scary

For many of us, money and investments weren’t discussed at home. These subjects may even be taboo within certain households — quite possibly, in households that don’t have much money or investments.If your parents or loved-ones aren’t financially independent, they probably can’t give you good financial advice (despite their best intentions). And even if your family is well-off, there’s no guarantee that their financial advice makes sense for you. Plenty of parents encouraged their kids to buy a house during the peak of the housing bubble, because in their lifetimes, housing only went up.Having said all of this, the first investment that you make will probably be the hardest.

The Goal of Investing

Of course, everyone has different financial goals — and the more you learn, the more confident you’ll be in determining your own path. But here’s a basic financial goal to strive toward:

Over decades of hard work, I would like to make more money than I spend and invest the difference. By the time I retire, I would like my investments to throw off enough cash — through dividends or interest — that I can live on this income without having to sell my investments.

Notice the first part of this goal is about hard work. If you’re hoping to take a little bit of money and gamble it into a fortune in the stock market, you can stop reading now, this article isn’t written for you. But if you plan to work for a few decades, and want to make sure that you don’t have to work until life’s end, you’ll need to spend less than you make and invest the difference.Also, you’ll notice that this goal doesn’t recommend selling your investments. Rich people don’t sell-off their assets for spending money — if they did, they wouldn’t be rich for long. They stay rich because their assets provide enough cash flow to support their lifestyle. And these cash-producing assets, through careful estate planning, can be passed down from generation to generation.Enjoying your twilight years by living off your investment income — and having something left over for your loved ones or a charitable organization — is something that all investors should aspire to. It may not be possible for everyone, but it’s the right attitude.

What Should I Invest In?

The most common investments are stocks and bonds, which most financial advisers agree should be held in some proportion based upon your personal circumstances. Stocks represent partial ownership of a company and bonds are a form of “I owe you.” Mutual funds can own stocks or bonds or both on your behalf. (If you are unfamiliar with stocks, bonds or mutual funds, you should bookmark this article and return to it after you’ve learned more about each of these asset classes.)There are other ways to invest — for instance, real estate investment trusts (REITs) — and these types of investments have their place. But you needn’t focus on them if you are just starting out — sticking to stocks and bonds (and the funds that hold them) is just fine. But if you have debt — whether, it’s credit card debt, mortgage debt or student loans — it may not make sense for you to own bonds, or, to invest at all.

Should I Invest or Pay Down Debt?

It should go without saying that if you can’t make the minimum payments on your debts, you should not be investing at all. But if you have extra money left over from each paycheck, you have a few choices that can each have a positive impact on your finances:

1.) Use all of your extra money to pay down debts (mortgage, credit card, student loans).

If you have interest payments that are higher than 10%, you are almost certainly better off paying down debt than investing. The stock market has returned about 11% per year in the long-term ( far less if you consider taxes and fees), but there are no guarantees in stock investing. Your debt, however, is guaranteed — sometimes, even after bankruptcy.

2.) Use all of your extra money to buy investments (stocks, bonds, funds).

This only makes sense if your debts aren’t costing you much, in other words, if the interest rate that you’re paying is low. If your debts are costing less than 5% interest, you may be better served (in the long-term) by investing your extra money in carefully chosen stocks or stock funds. If your mortgage is costing you 5%, it makes no sense to buy a bond or bond fund that yields 2%. A bond that pays you less in interest than the interest payments on your personal debt is not worth buying. And even if a bond pays you higher interest than what you owe, that doesn’t mean it’s always a good investment.

3.) Use some of your extra money to buy investments and some to pay down debts.

Benjamin Graham — Warren Buffett’s teacher — once suggested that investors should hold no more than 75% of their investment money in a single asset class (he was referring to stocks vs. bonds). You can apply this same logic when deciding how much of your extra money should be used to make investments.If you treat your low-interest debt like a bond, then, at minimum, you’d use 25% of your extra income to pay this debt off — the remainder could be invested in stocks. If stocks or stock funds became too expensive (remember, the higher the stock market climbs, the more expensive it becomes), then you could use as much as 75% of your extra income to retire debt and the remaining 25% to buy stocks, despite their high prices.Ultimately, you should pay down your debts with the highest-interest rates first. For more complicated situations, it may be best to consult a fee-only financial adviserwho is familiar with your personal situation. A financial planner is only as good as the information that he or she is provided with, so if you consult an adviser, be sure to mention all of your debts as well as your investments and investment ideas.

Know the Difference Between Saving and Investing

There are a few steps before you can become a successful investor: you being employed, having essential insurance coverage, having your personal debts under control and having an emergency savings account in case you lose your job.Your investments and your savings are very different things. What if the stock market crashes and you lose your job? If you do not have a cash savings account — and your unemployment benefits do not cover your living expenses — you’ll probably have to sell your investments at the worst possible time. Don’t fall into this trap.

Two Strategies for Lifetime Investing

The two investing strategies below assume that you have a very long investment horizon — in other words, you plan on working for the next few decades. The first strategy requires minimal effort. The second strategy may seem to require minimal effort, but it requires far more investor education than you’ll find in this article alone.

1.) Investing in Mutual Funds With a Margin of Safety

Jack Bogle — founder of The Vanguard Group — has dedicated half-of his life to demonstrating how no-load low-cost index mutual funds (specifically, those that buy the entire stock market) are the best way for an investor to succeed. By dollar-cost averaging — the practice of buying the same dollar amount of a fund on a regular schedule — investors needn’t worry about timing their purchases. Their average purchase price will ultimately reflect a “fair” value.

2.) Buying and Holding Carefully Chosen Stocks

“To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks,” wrote Benjamin Graham in his classic book The Intelligent Investor.It’s true: If you buy a total stock market index fund at regular intervals over a long enough timeline, you will almost certainly have satisfactory results. Yet many investors forgo the financial rewards of simplified investing for the psychological reward of “stock picking.”For small- or beginning-investors, trading stocks is a fool’s game. If you buy $500 worth of stock, minus a $10 commission to your stock broker — then sell the stock after it rises 4%, again, minus a $10 commission, you’ve gained nothing. If you do make winning trades, transaction costs and taxes will eat away at your returns, not to mention you’ll be trading against PhD-level mathematicians and the computer programs they’ve written to pick your pockets.But there is long-term value to be had in buying the stocks of great companies and holding on to them for many years. Even more so if your stocks pay dividends (an actual cash payment of the company’s profits). The amount of wealth that reinvested dividends can create is simply amazing. What’s even more amazing is that many online stock brokers offer dividend reinvestment as a free service. This luxury gives the patient investor an even bigger advantage over the frenetic stock trader.

Stocks for the Long Run Invest Tips

There’s a fine line between the optimist and the masochist. Individual investors may be forgiven for wondering on which side of the line they reside.

Being an optimist myself, I don’t particularly like busting other people’s bubbles — we’ve had enough of those lately. Nonetheless, for my inaugural Long Run column, I have to begin on a negative note: Investing isn’t going to be easy the next few years.”For the long haul, we’re going to be in for a period of fairly tough markets,” says Ralph Wanger, manager of the ( ACRNX) Liberty Acorn fund since 1970. “You’re going to have to have substantial skill to prevail, because you can’t wait for the markets to bail you out.”If you’re still reading — indeed, if you’re still checking out TheStreet.com and other financial news publications — then the bear market hasn’t scared you away. That’s wise, because stocks remain investors’ best bet for the long haul. However, we are in a new era, only not the one people were touting a few years ago.From August 1982 to March 2000 — the greatest bull market in history — real returns averaged 15.6% a year, according to Jeremy Siegel in his book Stocks for the Long Run . That’s more than double the historical rate of equity returns. Regression to the mean hasn’t been fun.This doesn’t mean that you can’t make money. It simply means that the rules of the game have changed — and some tried-and-true rules have returned with a vengeance. Investors who adapt to the changes will fare better than those who are still using the old playbook. The Long Run aims to help long-term investors succeed in this new era, whether the market goes up, down or sideways.In the coming weeks we’ll discuss some smart investing ideas for the long run. But this week, let’s start out by revisiting the Rules of the Game.

Know Thyself

There are plenty of investing strategies out there — buy and hold, deep value, active trading, index investing. The first real step investors should take is determining exactly what type of investor he is.”For a long-term investor, you have to know yourself,” says Michael Mach, manager of ( EHSTX) Eaton Vance Large-Cap Value . “The key is to pair your personality with a logical investing approach. If you apply it consistently, you’ll prove successful.”If you don’t mind taking on a heaping portion of risk — and don’t lose your cool during periods of extreme volatility — you can probably embrace a more risky strategy. Since most investors fall into the uncool camp (myself included), the Long Run will often focus on strategies that avoid undue risk and market-timing, favoring fundamental analysis and longer time horizons.Also, you have to be honest with yourself about how much time you will devote to tracking your investments. It’s best not to take big stakes in a few companies in the rapidly evolving biotechnology industry, for example, if you don’t plan to keep up with sector developments.

Diversify

Diversification is probably the simplest truth in all of investing — and the most often misconstrued. In the 1990s, asset allocation for a lot of people meant 100% stocks, and about 90% of those stocks were large-cap growth.Virtually all investment vehicles have their ups and downs. However, too many individual portfolios consist of holdings that all move up at the same time and back down at the same time.”Investors need diversification, and by that I mean they need to diversify away from large-cap domestic equities,” says Louis Stanasolovich, founder and chief executive of Legend Financial Advisors in Pittsburgh. “Buying three Fidelity funds, two Janus funds, American Funds Growth Fund of America and an S&P 500 index fund is not diversification.”To achieve real diversification, investors need to build portfolios using investments with lower correlations to one another. For example, for your equity holdings, consider paring back your large-cap weighting and boosting exposure to emerging markets, international stocks, smaller-cap stocks and real estate investment trusts. (Using quantitative models, Stanasolovich has designed a well-diversified, “lower volatility portfolio” that returned 22.3% in 2000, a negative 2.2% in 2001 and negative 4.25% in 2002. In a forthcoming Long Run we’ll discuss diversification with him at greater length.)

Reinventing Do-It-Yourself Investing

One of the supposed hallmarks of the bull run of the 1990s was the rise of the do-it-yourself investor. The collapse of the stock-market bubble has led some pundits to declare the do-it-yourself movement dead.This is rich irony. One of the primary reasons why investors got so over their heads the past few years is that the notion of “do-it-yourself investing” was cast aside — or at least poorly redefined. D-I-Y investing doesn’t merely mean watching business news, reading The Wall Street Journal or TheStreet.com, listening to analysts or inside tips from your brokers; it means pulling up your shirtsleeves and doing your own additional research before making decisions. Doing it yourself isn’t buying the stock that a professional or CEO just mentioned on CNBC.To redefine do-it-yourself investing, I’ll defer to the original meaning of the phrase, succinctly put by Peter Lynch in One Up on Wall Street way back in 1989. “Stop listening to professionals! … Ignore the hot tips, the recommendations of brokerage houses and the latest ‘can’t miss’ suggestion from your favorite newsletter — in favor of your own research.”This isn’t to suggest that you disavow all mutual fund managers, stock analysts, business news pundits and all other professionals. There are plenty of intelligent and trustworthy folks who can help you be a better investor — and in the Internet age, you have plenty at your disposal. It simply means “trust, but verify.” Use these resources to supplement your research, not replace it.

US Invest Internationally

With the emergence of capitalism in China and explosive economic expansion in Latin America (to name just a few growing markets), if you only invest within the United States, you will limit your investment portfolio to only a small percentage of the global asset class of equities. However, international investing is for neither the faint of heart nor the inexperienced investor.

When it comes to global equity plays, there are several things that must be understood before making your first trade.Please note: The following is based on several years of equities work in Tokyo, Hong Kong and London, followed by ten years at Merrill Lynch managing the company’s equity swap business.

1. Local knowledge matters: To best understand the culture, customs, current events, fads and politics of a nation, you need to physically be in the country. Being local will provide the ultimate environment for research and better timing for investing.2. No two markets are alike: Different countries’ markets command different multiples, and investor demand varies. Here are some reasons for this:

  • Monetary and fiscal policy will vary from country to country.
  • Yield curves vary as well.
  • Investment activity is influenced by different groups. For example, in some countries, pension plans play a far greater role in the markets. In other countries, individual investors are a more prominent force.
  • The stage of economic growth (whether the economy is emerging, expanding, mature or contracting) affects the country’s growth and risk outlook. (See”Emerging Markets Are Not a Monolith”.)

2. Companies vary even within the same industry: An American retailer may be quite different from, say, a Japanese retailer. If you don’t believe that, then compare the shopping experience at Macy’s ( M) with that at Mitsukoshi.4. The impact of foreign exchange (FOREX): When you invest overseas you are investing in two assets: the underlying asset stock or bond and the country’s currency. The changing relationship between countries’ currencies will have an impact on direct investing in a foreign security. I will discuss this in greater detail a little later in this article.

Calculate Discounted Cash Flow Is Important

Discounted cash flows are used by pros in the finance world all the time to figure out what an investment is actually worth. And while calculating discounted cash flows can be an involved process, it can also be a lucrative one as well. Here’s a look at DCF valuation and how you can use it on your personal investments and finances.

What Are Discounted Cash Flows?

Think of discounted cash flows this way: they’re a way of taking a payoff from an investment in the future, and putting it in terms of today’s money. Discounted cash flows take into account the time value of money the fact that one dollar 10 years from now is worth less than $1 today.If I loan that dollar to someone, I’m costing myself all the interest or gains that I would earn if I saved or invested it. I’m also pitting 10 years of inflation against my dollar’s buying power. What that means is that when all is said and done, my dollar’s only worth around 51 cents (I’ll get to how I calculated that in a bit), which means that I’m losing about half of my money.Discounted cash flows take these factors into account to calculate what a reasonable valuation is today for a company’s success years down the road.

Why Use Discounted Cash Flows?

DCFs are omnipresent in the finance world — they’re used by everybody, from analysts to portfolio managers — even Warren Buffett is known to make decisions based on discounted cash flow calculations. But why?Discounted cash flows give investors a better picture of a company’s value todaybecause they account for what it might be worth tomorrow. You probably wouldn’t buy a car without knowing what it’s worth, so why would a stock be any different? Having a more relatable dollar value in front of you can help you make better-informed investment decisions.Discounting can actually be used for more than just cash flows. Historically, cash flows have been discounted because they represent cold hard tangible assets. They’re also devoid of income statement items like depreciation expenses that affect a company’s income without affecting the amount of money the company has.

How Do You Discount Cash Flows?

Word to the wise: discounting cash flows involves math — and a fair amount at that. One of the most basic formulas for discounted cash flows is a present value calculation:

The discount rate mentioned in the formula is the opportunity cost (time value of money) — in the case of my dollar loan, it’s the inflation and lost interest that made my dollar worth so much less 10 years after I lent it. In the case of stocks, the discount rate is typically the cost of the company’s capital.It gets a little trickier for multiple periods. But never fear, for those of us who aren’t “mathemagicians,” there are a plethora of online calculators (some of which you’ll find in the homework section of this article) that allow you to drop in your numbers in order to calculate the present value of your cash flows.

How to Avoid Common DCF Mistakes

Discounting cash flows can be tricky. Remember, you’re using estimates here forfuture numbers, so “bad” or unreasonable estimates can mean worthless numbers. According to Jim Troyer, a Principal at The Vanguard Group, these future projections are one of the biggest snags for investors new to DCF. “There are two main things people do,” Troyer says, “make assumptions at random, and project the past into the future.” Troyer describes these mistakes as “blind trend projection” and “inconsistent assumptions.”Troyer warns investors: “Most firms can’t grow faster than the economy forever. When you use discounted cash flows, it’s important not to project too strong of growth rate too far out. A very small change in something like the discount rate can have a huge affect on present value.”It’s also important to remember that numbers aren’t static — they change over time. Don’t put too much stock in DCF valuations that might be out of date. A perfectly valid valuation made three years ago might not be at all in line with a company’s present day value.DCF valuations represent long-term projections, so don’t fall into the trap of thinking that just because a company is supposedly overvalued it isn’t a good short-term investment. Discounting cash flows mainly deals with assessing a company’s fundamentals and doesn’t take into account the technical issues that might send a “bad” stock’s price soaring in the short run.

DCF Methods Vary

The methods used for discounting cash flows can vary depending on the type of investment you’re trying to value. Here are a few popular uses for DCF.Bonds. One of the central elements of bond valuation is the use of discounted cash flows. With the bonds, though, the numbers are a lot more concrete. Troyer says, “The bond market is essentially a giant DCF engine. It’s the same way with stocks, but the numbers aren’t as scientific.” Why? With a bond, variables like number of periods, future cash flow, and discount rate (coupon in the case of a bond), are all given and don’t change.Despite the fact that the discounting of bond cash flows are generally factored into the bond’s pricing, if you’re into bonds , then understanding DCF is a must.Stocks. Stocks are an area where DCF is a popular tool. The stock market is also a place where poorly thought-out DCFs can lose big money.Stocks have added elements of confusion when it comes to DCF since they don’t have the static numbers that bonds do. Because of this, calculating discounted cash flows for equities adds an extra element of risk that’s actually taken into account in more complex DCF equations.Real estate. Real estate is another area where DCF calculations are popular. If you’re a “flipper” (someone who buys properties to quickly fix up and sell for a profit), then you’re doing yourself a major disservice if DCF doesn’t come into your decision-making process.

No Institutional Memory Whatsoever is Better

We are conditioned to be fearful of a 10-year bond yield this low. We are way beyond thinking, “This could be good for our country,” or “This could spur more housing,” or “This could allow more refinancing where it is possible.”

At least today we recognized the value of the bond-equivalent stocks, which usually happens in one of these interest-rate plummets.

And, oh lord, wouldn’t it be fabulous if the federal government woke up and sold $500 billion in bonds at these prices to alleviate the shortage and make it so the deficit would be less onerous. But that would be too clever to expect from anyone in government. It seems as if they all have some sort of aversion to ever being clever or frugal when it comes to debt, hence all of the short-term issuance, which is so stupid as to be breathtaking.

What we think about now is that something must be dreadfully wrong, and that there is going to be the Lehman moment I mentioned earlier. We never think about how only a brain-dead rich person or institution would invest in any large country’s 10-year over in Europe. You know they do have money there. And they have money in the Middle East. Some even have to sell when a country is downgraded, as the U.K. was.

Nope, like with oil, when rates go down and oil goes down, it’s considered bad; and when oil goes up and rates go up, it is considered good. In this environment it’s better to have no institutional memory whatsoever lest you lose a huge amount of money remembering what used to be good and is now bad.

Data Will Soon Prove The Curve

I am going to take a victory lap here, because for this entire year I have been consistently bullish on stocks and telling you to fade the fear mongering and the hysteria and the panic. All along, I said that stocks would go to new all-time highs and beyond. So here we are.

This was not difficult for me to call.

What I look at are the fiscal flows (government spending), because that is what drives everything. The fiscal flows have not only been strong, they have been accelerating and are on track to hit a new, single-year high this year (FY ends Sep. 30), surpassing the 2009 stimulus-driven year that currently holds that record. We are on track to surpass that $4.59 trillion in total federal government spending and possibly even go as high as $4.9 trillion.

This is what is driving the rebound in stocks. It’s what’s driving the rebound in gold, commodities, and even emerging markets and emerging market currencies.

Moreover, this fiscal stimulus that I am referring to is not just a phenomenon of the U.S. We now see it in China, where government spending is at a six-year high (that’s why the yuan is falling) and we see it, too, in Japan where a fiscal stimulus was enacted a couple of months ago and where a new round of fiscal stimulus will be implemented in the Fall.

Look at the reaction in the yen since Prime Minister, Shinzo Abe’s election victory a couple of days ago. It’s tanking. That’s because Abe has been promising such measures.

By the way, you may recall that I wrote an article here on Real Money right after the Brexit vote where I said you shouldn’t be a Brexit bear, you should be a yen bear. I advised selling the yen; that trade was a big money maker trade if you listened.

So fiscal stimulus and the expansion of fiscal stimulus (it will come to the EU as well) will continue to drive stocks higher.

The most interesting thing in all of this is that you have the bond market and the Fed pretty much off in La La Land somewhere, thinking that rates have to remain low or even come down. It seems as if Janet Yellen has been swayed by all the irrational Brexit nonsense.

My feeling is that she and her colleagues on the FOMC can only hold on to this fantasy view for so long, because they’re about to run it a slew of data that will show them just how far behind the curve they really are.

You’d think it would be enough of a warning to them that industrial commodity markets like steel and coal and copper and tin and zinc and lead and nickel are all rising (along with sugar, lumber, cotton and more), but they’ll soon get evidence of a different kind. They’re going to see accelerating wage pressures bubbling to the surface, if that hasn’t started already.

When looking at the Daily Treasury Statement last night, I noticed that employment and withholding tax deposits to the Treasury are surging to all-time highs. Moreover, the positive gap over last year is now an astonishing $62 billion. That is the highest year-over-year gap that we have seen and it means that the wage rise cycle is accelerating.

Yet, amazingly, both the Fed and the bond market are still pretty much clueless to this. (Although the former is waking up today.) Bottom line is, Janet Yellen and her crew are in Fantasyland now, but that’s going to change real soon.

I have been saying for some months now that the sleeper trade this year was to short Treasuries. Mind you, I am not one of these bond bubble nuts. You know that I have explained many times that the Fed is the monopolist when it comes to rates (any price, really) and it can keep rates at zero for as long as it wants.

However, the Fed itself declared that it is in rate hike mode and it has been saying that it wants to raise rates. Therefore, I take it at its word. It’s going to happen; it’s just a matter of getting them convinced enough that it’s safe to do so. Janet, if you’re reading this, it’s not only safe to do so, you’re way behind the curve now.

In the next two weeks, the Fed will get a raft of data that is likely to show everything from stronger economic activity to rising wage pressures to higher inflation. A rate hike will be back on the table. And one after that, and one after that, and one after that.

The Cash Flow Statement Say

Cash is the lifeblood of most companies, and many a company has crumbled from a lack of it. Why is it then that the statement of cash flows is probably the least understood of the big three financial statements (“Getting Started: Fundamental Analysis” )? It’s time to get in the know about cash flow.

What Is Cash Flow?

Simply put, cash flow is the movement of cash into and out of a company. This is significant, because cash coming into a company during, for example, a given year isn’t necessarily the same thing as revenue. The statement of cash flows eliminates this difference, taking us back to the actual movement of cash.This difference is caused by accrual-basis accounting (in comparison, see cash-basis accounting). Under accrual accounting, revenue and expenses are recognized when the work has been performed — not when the cash is paid or received (for more on revenues and expenses, see “What Is an Income Statement”). Because of this, it’s not uncommon for companies to book revenuelong before the bank ever sees a single cent.

Classifying Cash Flows

The statement of cash flows divides these cash transactions into three different sections that tell investors what the transaction (known as an activity) was related to: operating, investing and financing.Each of these sections can tell you a story about how the company is doing, both from a cash standpoint and in terms of its overall health.

Operating activities:

The operating section of the statement of cash flows tells you how cash changed hands as a result of a company’s operations. Anything that’s involved in what a company does to make money (for example, a shirt manufacturer making shirts) is considered an operating activity.Unlike operating items on the income statement, the operating section includes things such as dividend income and gains or losses from the sale of investments. Even though such items are not part of operations per se, they’re included in this section because they’re part of the company’s income.As an investor, you’ll want to see two things in the operating section: Cash inflowsand cash outflows. Sure, a company that doesn’t have outflows sounds nice; lots of money coming in, none going out. But business is cyclical: Goods get sold, and materials get purchased to make more goods (and so on), so any healthy company should have a reasonable amount of both money coming in and money going out. Naturally, though, a positive net operating cash flow is a good sign.

Investing activities:

Like you, companies invest to make money. Unlike you, not all of these investments are in other entities; a company also has to reinvest in itself. For a company to grow, it has to spend money on upgrading things such as facilities, equipment and staffing — all of these cash flows are found under the investing section.Companies do often invest in stocks of other companies, and this also belongs in the investing section. But while the profit made from selling a stock might look like an investing activity, it’s not. The actual initial investment is an investing activity, but when the stock is sold, the gain is income, and it counts as an operating activity.The investing section of the statement of cash flow doesn’t necessarily have to have a positive net cash flow to be in good shape. Since spending money (cash outflow) helps the company in the long run, it’s perfectly acceptable to see a negative number at the bottom of the investing activities section.

Financing activities:

When companies need more money than they currently have, they raise it by engaging in financing activities. Financing generally comes in two forms: equity (stock) and debt (bonds). Each source of financing in any given period is listed in this section.Also included in the financing activities section are the dividends you receive from the company as a shareholder. Since you’ve taken a role in financing the company by buying stock, companies that pay dividends view their payment as a sort of cost to maintain your financing in the company.Generally speaking, you’ll see more financing inflows at newer companies that are growing at a faster pace than more-established ones.Remember, those investing activities may grow the company, but they also take a whole lot of cash — that’s why they’re often paid for through financing.

The important of fundamental analysis on your finance

When it comes time to make investment decisions, it’s a good idea to be guided by more than just your gut instincts. If used effectively, fundamental analysis is one of the most useful ways to determine whether a company is a good investment choice. Even if you don’t have a finance background, don’t let that stop you from becoming your own personal stock portfolio analyst.

Fundamental vs. Technical

When it comes to stock analysis, there are two main schools: Fundamental analysis and technical analysis. Fundamental analysis is all about using concrete information about a company’s business to try to find the real value of a stock, while technical analysis eschews all of that in favor of looking at the way pure market factors will affect a stock’s movement.They call it fundamental analysis for a reason: It can be fundamental to your ability to make money in the stock market. When you take a look at a company’s fundamentals, you’re judging its corporate health. After all, who wants to invest in an unhealthy company? This is a mantra that the likes of über-investor Warren Buffett uses, so why shouldn’t you?

Business Basics
Before you begin to analyze public companies for their investment potential, you’ll need to understand some business basics, particularly those relating to thecompany’s financial statements. Financial statements are to an analyst what a patient’s bloodwork might be to a doctor; they’re the main data points that can be used to assess overall health. There are three principal financial statements: Theincome statement, balance sheet, and statement of cash flows.The income statement subtracts expenses from revenue to get the company’s income or profit. The balance sheet compares a company’s assets against its liabilities and stockholders’ equity (they balance each other, hence the name of the statement). Lastly, the statement of cash flows breaks down money taken in and doled out by its purpose (for example, operating, financing, or investing activities).Financial statements are integral to fundamental analysis since they provide you with the numbers you’ll make use of in your analysis.But numbers aren’t everything in fundamental analysis. In addition to quantitative performance measures (like the numbers you’ll find in the statements), companies provide investors with a wealth of qualitative information as well. In every public company’s annual report, management has an opportunity to explain their performance (or lack thereof) over the past year as well as plans for the future.This management communication shouldn’t be taken lightly. It could provide you with an understanding of why numbers were the way they were and what to expect in the future (“Talking to Management, Part 1: The Big Questions , Part 2: Gleaning Financial Subtleties “).
What Is Performance?
When you hear about a company’s fundamental performance, its stock price doesn’t really enter into the equation. In the context of fundamental analysis, performance refers to the efficiency with which a company moves toward its goals. The degree of that performance is what we use to categorize a company as healthy (investment potential) or unhealthy (investment poison).Depending on what metric you’re looking at, performance can be measured in a number of different ways. If you want to look at a company as a whole, then its ability to generate a profit is a sensible measure to review (see earnings). However, if you want to be more specific in your assessment, you can be. For example, if you want to check the performance of certain assets, then you would want to look at a metric like return on assets (ROA).There are several numbers and ratios that can be used to gauge a company’s performance. Metrics like the price-to-earnings ratio ( “Booyah Breakdown: The Ratio King” ), earnings per share and gross margin are all useful in determining a company’s relative health.Compare Comparable CompaniesWhen comparing the performance of two companies, it is important to remember that comparisons aren’t absolute. For example, looking at a technology company like Google, whose P/E on any given day is almost four times as high as that ofU.S. Steel, won’t tell you as much as you’d think. While a lower P/E is generally more favorable (suggesting that a company with a given stock price takes in greater profits), U.S. Steel is in the basic materials sector, which as a group doesn’t trade with a P/E comparable to the tech sector.So how should you, the burgeoning analyst, approach metrics? Like this: Use ratios and comparisons only among comparable companies in comparable industries or sectors (” Industries vs. Sectors: What’s the Difference? “). For example, whileeBay’s fundamentals might make it look like a pig (a bloated and overvalued stock) compared to The Bank of New York’s fundamentals, the two aren’t in comparable fields, so the intrinsic value of each stock is no clearer for your comparative effort.(More suitable comparisons for eBay would be Amazon.com or Yahoo!, whileJPMorgan Chase or Bank of America would work for the Bank of New York.)
Analyze Like a Pro
One of the big ideas behind fundamental analysis is that you’re buying the stock to get the financial benefits of owning a prosperous company (see equity), not for the quick and dirty capital gains sought by daytraders.Fundamental analysts strive to find companies whose intrinsic value is greater than or will be greater than its market value (this market approach is commonly referred to as “value stock” investing).What’s the key to using fundamental analysis like a professional? Benchmarking. Benchmarking is essentially the process of observing standards against which you can measure the stock you’re analyzing. Unfortunately, there are no hard and fast rules for fundamental analysis, which is why even the professionals get things wrong every once in a while.The best way to strengthen your fundamental analysis skills is through practice. How? Benchmark stocks, develop opinions about them, and analyze the results. Benchmarking, specifically, takes work (no doubt) but it’s also the only way to get a feel for the way “good” fundamentals should look.Homework Time:Here are a few valuable activities you can do to hone your fundamentals skills:1. Track two stocks for three months. Pick one stock you like instinctively and one you don’t. Take a look at the fundamentals of each, and try to make an objective decision about each stock based on those fundamentals alone. Keep a record of how each pick progresses from selection to the three-month mark.2. Create a fundamental checklist. Take the ratios, numbers, and other information you use the most, and write them all down on a sheet of paper. Make copies, and use this checklist (or “cheat sheet”) whenever you analyze a stock. This will help you keep a handle on all the data you’ll be reviewing on a regular basis.3. Build your benchmarks. Every time you analyze a stock you’re interested in (using your handy new cheat sheet), take a look at no less than one other player in the same industry to use as a benchmark. As you build a larger mental library of benchmarks, you’ll likely find even greater success with fundamentals.

At the time of publication, Elmerraji had no positions in any of the stocks mentioned in this column, although positions may change at any time. Jonas Elmerraji is the founder and publisher of Growfolio.com, an online business magazine for young investors.

Stock Step Tips

Your first stock-trade-can-be intimidating not to mention confusing. You’ve done your stock homework, you think you’ve found a winner, and now you’re ready to put your–new brokerage account to good use and start trading but you’re not quite sure how to “execute” it.

Trade “execution” is just a fancy way of referring to a transaction. When you buy or sell stock, you’re executing a trade. To “trade,” in investing lingo, usually refers to a particular type of investing strategy, so qualifying your use of the term “trade” with the word “execute” lets other investors know that you’re talking about a specific transaction.

The actual time it takes to execute your trade can vary from broker to broker and market to market. Generally speaking, trades are, in essence, instant. As a typical investor, you won’t notice a particularly perceptible or painful price difference in the time between placing your order and its execution. (The SEC requires that all brokerage firms provide documentation quarterly to the public about the routing of their client orders. These reports are available from the SEC or from your broker.)

When you do place your order, your broker will most likely route your order through their complex trading computer network to get a hold of your shares. In some cases, your order will never leave the broker — your brokerage firm might want to clear out shares of the company you’re buying from its inventory.

How Do You Want to Trade?

You’ve got a few options when it comes to trading stocks. Buying and selling are the obvious choices. But there are other ways to trade, too: selling short and buying to cover.

Selling short can be done when you have a margin account with your broker. Essentially, you borrow shares of a particular stock and sell them, hoping that the stock will depreciate in value, leaving the difference between the selling price and eventual repurchase price in your pocket. Buying to cover is the term for that eventual repurchase; it closes out a “short position” in a stock.

But since we’re talking about your first trade here, it makes sense to focus on buying stocks. Selling short and buying to cover are more advanced investing topics that you’ll definitely want to avoid until you’re ready.

There are five different types of stock orders that your broker will likely let you use.

  1. Market Order
  2. Limit Order
  3. Stop Order
  4. Stop-Limit Order
  5. Trailing Stop Order

Market Order

A market order is a request to purchase or sell a stock at the current market price. Market orders are pretty much the standard stock purchase order. One thing to keep in mind with a market order is the fact that you don’t control how much you pay for your stock purchase or sale; the market does. This shortcoming can be met with a limit order.

Limit Order

This is an order that executes at a specific price that you set (or better) and can be open for a specific time period. While a limit order will prevent you from buying or selling your stock at a price that you don’t want, if the price is way off base, the order will never execute. It’s important to note that some brokers charge more for limit orders. Why? No execution means no commission.

Stop Order

This is a market order that is triggered once your stock reaches a specific target price, the stop price. Stop orders may also be called stop-loss orders, because they help investors put constraints on their losses.

Stop-Limit Order

This is identical to the stop order, except for the fact that a limit order is triggered once your stock reaches a specific target price. (Read more about stop-loss and stop-limit orders here.)

Trailing Stop

Basically, this is a stop order based on a percentage change in the market price.

When you put an order in to your broker, you can choose how long the order stays open. By default, orders are day orders, meaning that they are valid until the end of the trading day. Good-till-canceled orders remain open until you actually go in and cancel them.

How to Cancel an Order

There might come a time when you put in an order that you decide you don’t want to go through with. If the order has not yet been executed, canceling it is usually as simple as selecting the “cancel” option online or calling your broker. Remember that once the order does go through, if you’re not happy with your investment, you can’t take it back to the store it came from. So make sure that you seriously consider all of the implications involved in placing a stock order.

What About After-Hours Trading?

In recent years, after-hours trading has opened its doors to individual investors. With the lower trading volumes and different conditions that investors encounter in after-hours trading, it’s not advisable for you to fiddle with after-hours trading as a new investor until you really know what you’re doing.