Part 1 - Common Stock

This blog will be continued over multiple entries. Please comment with your questions, what topics you would like addressed, and concerns over the content so I can make adjustments.

Common Stock
Contrary to popular belief, buying stock is not difficult. To do so, you will need to open a brokerage account with a firm like Fidelity, Ameritrade, E*Trade, Charles Schwab, or a similar discount broker. A broker is simply an intermediary that executes your buy or sell order on your behalf, retaining a small transaction fee, typically $10 or $15 dollars per trade. Anyone can open a brokerage account, though there may be minimum balance or trading activity requirements.

Common stock is an equity security issued by corporations. Stock is sold in shares, and shareholders are partial owners of the corporation. As a shareholder, you have the right to vote in major corporate decisions, are entitled to a dividend, as well as capital appreciation on the security itself. Dividends are regular payments made to shareholders, while capital appreciation is a rise in the value of the stock itself.

Nonfiction: Getting Emotional
At a very basic level, you buy stock in companies you believe will do well in the future. This can range from telecommunications companies such as Verizon (NYSE: VZ) to video game developers such as Microsoft (NASDAQ: MSFT). I bought some stock in NYSE: MVL) years ago on the belief that the firm was due for a comeback, having an as-yet unexploited line of characters from which to frachise films and consumer goods. Their balance sheet and income statements, documents used to report a company's financial solvability, were relatively free of debt and it seemed they were poised to grow. I did okay, but did not hold onto the stock long enough, selling early at just over $8 per share.

Buying stock can become an emotional game, as it did for me. I bought Marvel due to its attractive valuation and significant cache of assets in the form of its characters. DC was already licensing its characters like crazy for Batman: The Animated Series, movies, and other licensing deals, and the cash was rolling in; it still is. Marvel had not yet done so, so I bought $500 in stock at $6. The stock dipped to $4, but rose to $8.50 after a few months for a tidy profit. Had I held on, I would have seen even bigger gains (it was over $26 on July 9).

The moral: don't get emotionally involved in your stock.

Picking a stock
There are two ways to pick a stock. One I subscribe to, and the other I do not:
1 - Fundamental Analysis - You research the fundamental value of the common stock you are interested in to determine what you believe to be its true value, rather that its market value (the price it currently trades at). You buy or sell the stock based on your findings.
2 - Technical Analysis - You predict future stock movements based on historical price fluctuations via trend analysis. The assumption is that historical trading patterns will repeat themselves.
Technical analysis is crystal ball hocus pocus, in my opinion, and to be avoided unless you have no problem with treating your investments as a gamble.

I subscribe to fundamental analysis. Through careful review of public company information made available through regulatory documents such as its annual and quarterly reports, you can gain an understanding of how the firm operates, its financial condition, and what type of foundation is in place for future success. While there is some quantitative analysis, there are equal parts qualitative analysis. Who sits on the board of directors? What are their personalities? Who are the firm's competitors? What is the viability of their product line? The list is as long as you want to make it.

To be continued: Conducting fundamental analysis. The annual report, balance sheets, statement of cash flows, and income statements.

Disclaimer: Investing in common stock (equity securities) can be dangerous. I advise most people to consider a diversified, professionally managed or indexed mutual fund before buying individual equity securities. More information on mutual funds can be found by clicking here. The following is my own opinion and is not necessarily a recommendation for your particular investment situation. Equities carry significant risks, including possible loss of principal.