Broken Broker

What are stocks? Why do we own them?

Well, I’m glad you asked!

Here at BrokenBroker.com, we like to think of stocks as tiny pieces of a company. We find it beneficial to think of it this way for many different reasons:

1. It will stop you from buying. If you envision buying a small piece of a company to be like buying a brick in a building, it’s much more likely you will inspect that brick many times over before actually buying it. Doubly so for a brick that costs $100 or more. Many times people will buy stocks on a whim, hearing “hot tips” on the subway or in the breakroom at work. If you’re going to pour (often extensive amounts of) money into a stock, you should really do your homework.
2. It makes it harder to sell. Often times wiggles and waggles in the market cause investors to get very jumpy. This can cause a good investor to want to sell all of their shares of a stock because of one quarter of lousy results, news that a CEO is moving on or worst, a rumor. Oftentimes this will all reach the investors ears over a weekend when they finally have time to read the financial papers, and can sometimes be seen in early morning Monday selloffs (causing the market to drop).
3. It will make you care about what the company does. Granted, this will not always be necessary, but it helps for staying interested in a company, and that can be the difference between an investor and a chump who throws his or her money away. Also, it can improve your general outlook on investing AND help your profits. Investing in a company that makes safety products for firefighters might not be the most exciting industry, but it’s a consistent one and you’ll feel better than if you invest in a company that pelts and skins baby seals.
4. You will be proud of your investment and tell others about it. Some people may think that keeping a good investment to yourself is a good idea, but people at BrokenBroker.com think the opposite. Why not tell your investing buddies your newest find? Imagine what they can tell you after they have done the research. If they find a relevant reason to sell, they may tell you to also, at which point you can research it. Having more eyes and ears on a company can only help you as an investor. Plus, it can’t hurt to have more people investing in the same companies you’re invested in. More people interested = higher price offered for a stock!

There are tons of other great reasons to envision your investments as small pieces of a company, and these are only some of them. Check back to BrokenBroker.com for more tips, advice and more and more ways to break your broker (ok, just get rid of him…but he’s already broken!)

• Leave a comment... (0)

What are stocks?

 Stocks, in their simplest definition, are tiny pieces of a company. Stock owners are guaranteed a share in the companies fortunes (or misfortunes) and must pay to obtain these pieces of a company. If a single person or entity owns a majority of these stocks, they control the company. The more stocks that a company has, the smaller amount of control that stock has over the entire company. Additionally, if a company has a very good year it sometimes decides to give some of the money it made back to the shareholders, called a dividend. The more stocks that a company has the smaller amount of money will be returned to a shareholder, when compared to a smaller company. Here’s an example:

Company A has 100 shares outstanding (”total number available in the world”). They decide after a very profitable year that they will return $1000 to shareholders as a reward for holding on to their stock and having faith in their company.  The dividend for Company A is $10/share. If you owned 2 shares of Company A, you would now be $20 richer (minus taxes). Wahoo!

 Company B has 100,000 shares outstanding. They too have a profitable year and decide to give a dividend; however, they had a much more profitable year as they are a much larger company. They decide they will split $500,000 among shareholders, giving a dividend of $5 per share.

 Here it is easy to see that even though Company A is smaller than Company B, there is a difference in ownership. Owning a stock in a small company will give you more influence and rewards than owning stock in a large company, though with small companies there is always risk they will make little or no money for the stockholder. The idea to come away with in this article is that owning a stock is a small piece of a company and that the size of the company will influence the characteristics of that stock.

 Remember to check back in with BrokenBroker.com for more updates and information about stocks, investing and generally ridding your life of those pesky brokers. See you soon!

• Leave a comment... (0)

So what is a hedge fund?

A hedge fund is an investment vehicle that allows the proprietors to make investments counter to other investments. Simply said, the owner or manager of a hedge fund “bets with both sides”. This can be done in many ways.

One of the simplest ways to do this is to buy a stock, but in a few ways. Our hedge fund manager, Mr. Shrub decides he likes a stock named Allie’s Audacious Apples (AAA) , a new apple company from Oregon. He buys 1000 shares of stock for the long term, appropriately called “buying long”. The initial share price of this stock is $10. This means that he simply pays his $10,000 ($10 x 1000 shares) and he receives his 1000 stock certificates (mostly electronic these days unless you specifically request a paper copy). Mr. Shrub had decided to buy this stock in the first place because he thought that over the long term–say 10 years–this stock would go up in value and price and would generally be a good buy.

Next, our brilliant fund manager Mr. Shrub decides that he can take advantage of some short term fluctuations in the market. Perhaps he thinks that this company will do well over the long term, but also thinks that when the CEO of Allie’s Audacious Apples makes the next quarterly announcement, people will find out about the particularly bad apple season in Oregon and will want to sell their shares of AAA. Since there are more sellers than there are buyers, the buyers will be able to find better deals and the price will go down. So how does Mr. Shrub take advantage of this?

Mr. Shrub does what is known as “selling short” and this is slightly more intricate than buying shares long. This is when you “borrow” shares of stock from your broker (either a person who sells you shares, or much more commonly these days, an electronic service that acts in a similar manner). After “borrowing” shares, you immediately sell them to the market for whatever price is being offered. In our example we’ll say he borrows the same 1000 shares and sell them at $10 for an immediate $10,000 in his bank account. What Mr. Shrub is hoping for is that the share price will fall on the news of the poor apple season. If the share price drops to $5, he then buys his “borrowed” shares back to give back to his broker and he gets to keep the rest of the money, in this case $5000.

So why do both?

For a few reasons actually. One is that you can try and make more money on an investment than if you simply (sell) short or (buy) long. Another, and probably the most cited reason, is that you can protect your investment. Say Mr. Shrub was buying AAA long thinking that the stock price would go up in 1 year instead of 10. This is less likely to happen because there will be less time for the company to grow. In fact, the the period of a year, AAA might only go down. In our example, he is safe because whatever shares he bought long, he also sold short. However, most hedge fund managers probably won’t do this because any gain will be offset by a loss. A much more likely approach will be that Mr. Shrub will weigh the chances that a stock will go up and if he is pretty sure it will go up he’ll buy mostly long and sell a few shares short. Although it’s true that his gains will not be as big as they could be, he will protect himself from huge losses if he sells some shares short.

This is only one of many many different ways that hedge funds work, but we think that it is the simplest to comprehend at the beginning. Keep tuning back into BrokenBroker.com for tips on how to invest the right way and see long term gains that many hedge fund managers can never obtain.

• Leave a comment... (0)