I'm an egoist. Like a half-baked Hobbes, I'm the first to admit self-interested desire is the motivating force behind most of my waking hours. The only reason to consider investing--hell, the only reason to consider doing anything--is to get what you want. I know, it sounds vicious, which is why most brokers talk more about goals than greed. Semantics aside, there's no way to reach your goals without having them. So ask yourself the simple question, What do I want?
While you might not know exactly what you want, you can bet that in the capitalist carnival called America, money will get you there. Whether your goals involve retirement, a family or just a better apartment, you're going to need to invest some money in stocks over the next few decades. You know the drill: Over the long haul, stocks are the highest-returning asset class. They beat cash, bonds, even Beanie Babies. But if you're going to buy stocks (or stock mutual funds), you need to know what they are.
One way for a company to raise capital is to borrow. When you buy a stock, you own a tiny portion of that particular company. Buy one share of Dell Computer (OTC:DELL), for example, and you own a piece of the pie. Granted, with more than 2 billion shares outstanding, it's a mighty small piece, so don't expect Michael Dell to return your calls just yet.
There are two roads to riches in the stock market. One is capital gains. This is the difference between the price at which you buy and the price at which you sell. Buy a share of Apple Computer (OTC: AAPL) at $40 and sell it at $60, and boom, you've made 20 bucks. Of course, you'll pay a commission; most online brokers charge about $10 per trade.
The other way to make money in stocks is through dividends. A dividend is the quarterly cash payout from a company's earnings. Not all companies pay dividends; those that do tend to be larger, well-established "blue chips" like Johnson & Johnson (NYSE:JNJ), AT&T (NYSE:T) and Chase Manhattan (NYSE:CMB). Companies can raise, lower or eliminate their dividends at any time.
At press time, 3M (NYSE:MMM) stock was paying a dividend of $2.24 percent share. If you do the math, you'll find that with the stock trading at $102 7/8 per share, this represents a yield of 2.4 percent. If you buy the stock, you'll make 2.4 percent just for holding it.
I know 2 percent seems like chump change compared to the 20 percent annual returns investors have enjoyed over the past few years, but don't dis dividends just yet. Over time, the stock market has returned about 11 percent. Take dividends out of that mix, however, and the return sinks to a sucky 6.2 percent.
How do you make money on Wall Street? Buy low, sell high. But how to tell if a stock is headed higher, lower or nowhere fast? Bob Barker has built a career attempting to discern product prices. As a stock investor, you will attempt to do the same. Ultimately, a stock's price is based on a company's underlying economic fundamentals. In the short term, however, stocks are traded like baseball cards. A stock is worth only what someone else is willing to pay, and just because you like a company doesn't mean you should buy its stock.
As a stockholder, you'll receive annual reports and period statements on the company's financial health. Skip the pretty pictures and flip to the financials. Companies worth buying have demonstrated the ability to grow their earnings per share (EPS) consistently over time. Also check search engines like Yahoo! (http://www.yahoo.com) or message boards like Ragingbull.com (http://www.ragingbull.com) for quotes, facts and opinions.
The first rule of capitalism is that it is always better to own than to be owned. Buying stock puts you in the sweet situation of being part owner of a corporation without the hassle of doing much of anything. When it comes to returns, the road is up--but it's a rocky one. That's why it's so important to have realistic expectations and a long-term outlook.
Why am I so bullish on stocks? Investing in the stock market means expecting our country's prosperity, quality of life and innovative drive to continue. If the past is any indication of the future, I have no doubt the stock market will continue to move higher in years to come.
Jonathan Hoenig is portfolio manager at Capitalistpig Asset Management in Chicago.