Learn The Stock Market And How to Trade

I personally believe the earlier you get your kids involved in money the more likely they will be to choose good investing habits.  If you pay your kids an allowance it’s not a bad practice to split a portion of it for the young one to save for the long term.  Once they are old enough to show interest (middle school?) you’ll want to show them the basics.  To the make the stock market for kids more accesible I have attempted playing “games” or fantasy investing in the past with my cousins, unfortunately for me I found out these games lead to a more of gambling mentality then a investing mentality.  Kids need to see a more immediate result then average investing can provide, so I now prefer to just pay them to help me.  Increase the chore as they mature from just being with me listening to why I chose stock x, y, or z to doing basic research, or look for patterns in charts (which  many kids are amazingly good at.) 

Most kids I know just want to spend time with someone they look up to.  Start them an IRA (which will help them out for retirement) and make them “earn” what you put in the account.  Besides, it may build character.

Wow, it’s been way too long since I’ve wrote anything, but it’s time for me to get back on the horse…er keyboard.

I’ve been listening a lot to Dave Ramsey, I seem to enjoy his no nonesense cut and dry, black and white views of personal finance.  He tends to reccomend splitting your investment into a couple of basic mutual fund groups all involving stocks and shares. 

At first I wondered what about bonds, money markets, basic portfolio allocation?  However, the target audience are people trying to come out of debt.  Lots of bad financial irresponsiblity, stock investing just keeps it simple, plus they need the growth.  These target audience really needs to learn their stock market 101.

From a average person stand point bonds and mutual funds really should only be used for money you have another plan for in the next 5 years.  Other than that your only reducing your growth potential without a worthwhile reduction in risk. 

I suggest you start your stock buying using a traditional or ROTH IRA unless your employer offers a contribution match.

Whoo, this post isn’t as long or detailed as my other ones, I’m going to have to get my post writing cardio back into shape!

Recently the US government converted its preferred shares which it acquired as part of the TARP fund (which was to pay a 5% dividend for the first 5 years and 9% dividend after the initial 5 years) to common stock.  If Citigroup held the shares for 10 years it would have paid out 17.5 billion in dividend payments.  However, before the first dividend payment they paid $3.25 per share for a common stock conversion.  This share dilution dropped the value of common stock below $1 before setting just over $1 by the end of this week (03-06-09).  C stock will have to rise by 18.64% per year for 10 years to break even with the preferred stock deal.  My hunch is this wasn’t a good investment for the share holders or the US citizens (tax payers.)

So you might be asking just what is the difference between preferred stock and common stock?

Common Stock

Common stock is the baseline proof of ownership in a  corporation.  When you are a common stock shareholder you have a right to vote, assets in a liquidation, and dividend payments as approved by the shareholders.  You also have the right (preemptive rights) to purchase new shares that are being released before the public in order to maintain your percent ownership.

Preferred Stock

Preferred stock is another form of ownership in the company.  The payout terms are prearranged - fixed dividend schedule etc.  Another perk is that you get paid before common stock holders in both dividend and asset liquidation.  This includes previously missed dividend payments.  You must be caught up in your agreed payments before the the common stock holders get any dividend payments.  The disadvantage is no voting right and virtually no capital appreciation over the long run.

If you listen to the radio, watch television, or read finance blogs someone has tried to sell you on gold.  They say it’s a safety net in troubled times, and it has never been worth 0, or it’s tripled in value since 2000 compare that to your stock market portfolio.  I just wanted to evaluate the investment in gold help you decide for yourself if it’s worth it.

Let’s start with what is gold.  It’s a chunk of metal mined from the earth that has some chemical resistance properties, good clean electrical conductivity, and found it’s way into peoples’ hearts as jewelry.  On it’s own it has no ability to make money, it’s only worth what the market say it is like any other commodity. 

Over the long haul gold has pretty much only adjusted with inflation.  Just over the last 40years has it increased in value at an average rate of approximately 9%.  When the money supply used to be linked to gold or nations long ago used to use gold as the unit of currency saving gold in tough economic times would have been a good idea just like saving money is.  However, now our no currency is linked to gold so it’s price is only measured by it’s need for production.  As I see it as the economy gets worse less jewelry will be purchased, as well as high end electronics and goods using gold as a conductor or protective layer.  This should drive the price of gold down not up.  The only other thing holding the price of gold up is the speculators which I suspect will have a similar end as the oil speculators.  That’s why they’re is so many commercials on TV trying to offload this overpriced gold on the average person.  The gold miners are loving this.

Perhaps some of the increase in gold could be due to the increased extraction cost - higher labor and fuel and what not.  However, in a free market the value of something can’t be changed by its cost - the demand will simply change.  Something that society has found worth a 3-4% increase per year for hundreds of years can’t simply now be worth 9% increase per year.  This is another bubble like real estate is now or stocks in the late 90s.

I wouldn’t be surprised to see gold fall back $250 per ounce over the next couple of years.  I understand the need to want to put your money somewhere safe - but unlike stocks or bonds which are cash producing assets - gold actually costs money just to hold.  There is security and storage fees with holding gold plus the verification that it is truly what you think it is.  The value of the gold has to increase enough just to overcome these costs.

My vote is if you’re scared and wanting to find an inflation fighter pick a big blue chip stock that is producing something boring that is needed even in tough times, like food or toothpase, that pays a decent dividend.  There’s some stocks out there paying 5 or 6% dividends that would rather take a beating then have to cut it.