Picking stocks essay

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Picking stocks essay

May 18, comments How to make Money in the Stock Market I must admit my title for this article sounds scandalous and scammy, like something a Las Vegas-based email spam company would send out.

Some of our readers are already advanced investors. Their opinions on the subject range throughout boredom, fear, mistrust, and if they are lucky, curiosity. Here are three real quotes I have heard from friends over time when discussing the stock market.

To start with the basics — What is a stock? This share of earnings is called a Dividend. In some companies, especially smaller or younger ones, the company elects with the permission of its shareholders to reinvest the dividends to help the company grow its earnings even faster.

In theory, this means you will get more dividends in the future. Thus, the real value behind any share in a company is the right to get a never-ending stream of dividends from it. For Example, the old, long-profitable company Lockheed Martin currently pays a 3.

Picking stocks essay

Why do stocks go up and down so much? The true value of a stock is based on the amount of dividends this stock will eventually pay you, the shareholder, over time. That dividend depends entirely on how much money the company will make.

But nobody actually knows in advance how much money companies will make — they just have a big host of differing opinions. Every day, millions of investors and analysts scurry around and worry about how much money each company will make in the future.

This will make the world have a shortage of oil, so prices will go up! Oil Companies are now worth more! This means people will drive LESS to the shopping mall and buy less gas! Oil demand will go down and oil companies will make less! If stocks are so crazy, how can I make money off of them?

Because in the LONG run, it turns out that all this speculation and volatility always cancels out to absolutely zero. The value of stocks will go up as the earnings of the underlying companies goes up.

A portion of the ongoing earnings will always flow to the shareholders as dividends.

By John Mauldin

So, stocks go up and pay dividends over time, and they have since the beginning of modern commerce. The total return has averaged a very lumpy but fairly dependable 10 percent per year before inflation, 7 percent after inflation.

This is the easy part. You buy ALL of them. Because there are millions of people, both smart and dumb, squabbling over the value of each stock, the Index Fund benefits and suffers from all the individual stock performances.

But overall, you get the average performance of all this squabbling. All you can predict is that your average performance if you buy enough of these funds will be equal to the return of the market as a whole, minus the amount of fees your mutual fund charges.

So by picking the index fund with the lowest fees, you automatically win. Endless statistical analysis proves this again and again.

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But my uncle bought some stocks once and sold at a big profit! Also, if index funds really are the statistically best bet, why are there still thousands of brand-name mutual funds and hotshot traders out there? Humans are irrational creatures and it is scientifically proven that we overestimate our own investment and gambling abilities, and no presentation of knowledge to the affected people can completely erase this.

The only tool you can truly use is statistical probability, and by buying the market average and lowering your investment costs, you are improving your statistical chances.

What Index fund do I want? There is one king index fund that makes the decision easy for you.

Headley Miscellany, Volume 1

Its expense ratio is 0. Some funds charge times higher fees. This is a collection of shares in the largest companies in the US, and therefore in most of the world.There was a pretty massive shift in the s and s when northern Democrats starting supporting the civil rights movement (among other things).

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Picking stocks essay

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