What are stocks? They’re nothing…

Posted on November 12th, 2007 in investing, stocks by Broken Broker

…without the marketplace.

We at BrokenBroker.com would be remiss to write article upon article about the stock market if we did not mention one of our favorite teachers, Benjamin Graham. He was known as “The Dean of Wall Street”, but living in our times, it’s much easier to think of him as a spectacular writer who penned “The Intelligent Investor” (not the most exciting read, but a compelling manual on how to invest).

Graham’s famous analogy is that of “Mr. Market”. As Graham described it, Mr. Market is a fictitious character representing all buyers and sellers in the stock market (and all smaller markets). The reason he personifies the market like this is because it becomes much much easier to visualize someone directly offering you money for the stocks that you hold. On any given day, the story goes, Mr. Market comes to your door and offers you money for the stocks that you hold; in a more modern sense of the word, Mr. Market sends you an IM every time you hit the refresh button while viewing an online stock trading page…

The idea is that some days, Mr. Market comes by and offers you wildly outrageous sums of money for what you have. Other days, he offers you very little. The worst thing though, is that he’s moody. The amount from one day to the next can change rapidly, and for very silly reasons. Perhaps one of the board members is selling some of their shares to help pay for a new home. They must report this thanks to the SEC, and a simple piece of news such as this can start a frenzy for no good reason.

So how do we suggest using the analogy here at BrokenBroker.com? In two ways:

  1. Use this as a psychological reference for how you look at stocks. Many people have trouble stomaching big swings in the market, both up and down. Once you realize it’s Mr. Market having a rough day–offering you wildly outrageous sums or mere pittances for your personal holdings–it often eases the mind and gastrointestinal tract. The idea that Benjamin Graham consistently stresses is that Mr. Market be damned, you should be interested in the overall value of a company, an idea we love at BrokenBroker.com. For instance, Mr. Graham never would have invested in the internet bubble sensation Pets.com, but on certain days in the late 90s, Mr. Market loved it!
  2. Thinking about Mr. Market in terms of a salesman, in addition to being a buyer, is not only helpful, it’s profitable. Remember, Mr. Market is going around to every other door in your neighborhood and offering those good people money for their stocks too. And on days when those people are spooked by housing woes or hedge fund mishaps, sometimes people will offer up their personal holdings for a bargain. These are the days when we swoop in and decide to buy some of our favorite companies from Mr. Market…but only the ones with great growth opportunities and solid fundamentals.

So hopefully Mr. Market gives you some great opportunities when he comes knocking on your door. Remember, in volatile markets, listen to him if you’re looking to add to your positions, ignore him if you’re holding stocks through the good times and bad (you should be). And if your Broker comes knocking, be sure to tell him he’s fired…

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What are stocks? Why do we own them?

Posted on October 30th, 2007 in investing, stocks by admin

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!)

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What are stocks? Definition

Posted on October 30th, 2007 in investing, stocks by admin

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!

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