How to buy stock

Investors most commonly buy and trade stock through brokers.

You can set up an account by depositing cash or stocks in a brokerage account. Firms like Charles Schwab and Citigroup’s Smith Barney unit offer brokerage accounts that can be managed online or with a broker in person. If you prefer buying and selling stocks online, you can use sites like E-Trade or Ameritrade. Those are just two of the most well-known electronic brokerages, but many large firms have online options as well.

Once you open an account you will tell your broker how many and what types of stocks you’d like to purchase. The broker executes the trade on the your behalf. In turn, he or she earns a commission, normally several cents per share. Online trading sites typically charge lower commission fees, because most of the trading is done electronically.

After selecting the stocks that you want to purchase, you can either make a “market order” or a “limit order.” A market order is one in which you request a stock purchase at the prevailing market price. A limit order is when you request to buy a stock at a limited price. For example, if you want to buy stock in Dell at $60 a share, and the stock is currently trading at $70, then the broker would wait to acquire the shares until the price meets your limit.

While purchasing stocks through a broker has its advantages, there are other ways to buy stock. You can purchase stocks directly through the company. Sites like DRIPInvestor.com will show a list of companies that allow direct-buy of stocks.

Buyout definition and potash

Considering the recent interest in potash and the proposed buyout from bhp then it is worthwhile to actually review the definition.

Definition 1

Purchase of the controlling stock or shares of a firm by its own management. If borrowed funds are used in the buyout, it is called a 'leveraged buyout.'

Definition 2

Purchase by a publicly traded firm of its outstanding (held by the public) stock to thwart a takeover attempt, or to take the firm off the stockmarket for converting it into a private company.
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Potash corp waiting for highest bidder?

What final share price will satisfy the execs at potash? Some skeptics are thinking that china will become a primary player in this bidding war to win potash.

I'm hoping that the potash stock price will be above 185 per share.

Would you sell as the price climbs or would you just sit back until the battle to win potash is done?
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Questrade's new tax free trading account

Why Questrade's tax free trading account is making investment noise.

Questrade took the government's tax-free savings account (TFSA). Amped it up a few decibels by adding our unique trading tools and services. And you get their no-fee tax-free TRADING account – an ideal opportunity to do more with your money.

With tax free savings accounts in their second year, you get an additional $5000 to invest and you can carry over any unused contribution room from the previous year. Open a Questrade tax-free TRADING account and see how much your TFSA can really grow.

Start with Questrade's unique trading services for a tax-free TRADING account:

• No fees: no annual fee, no fee to open, no inactivity fees.
• Only $1000 to open an account.
• The lowest commissions: stock trades at 1¢ per share, $4.95 minimum / $9.95 maximum.
• Gold bullion trading: real gold bought and sold on the U.S. spot market.
• Hold and trade both U.S. and Canadian dollars in any registered account and pay no forced currency conversion fees.

And add all the benefits of a TFSA:

• Invest up to $5,000 each year and every year.
• Accumulate faster by never paying tax on your investment income, interest, dividends and capital gains.
• Withdraw funds any time and for any purpose without paying any taxes.

Interesting financial definitions

Asset-backed commercial paper (ABCP) is a form of short-term debt created when an issuing party (usually a bank or other financial institution) agrees to pay a given sum of money to a recipient, typically a company in need of immediate cash or other liquid assets, in exchange for the recipient's sale of certain assets to the issuer as collateral, in addition to the recipient's promise to pay back the sum in between 90-270 days.

The issuing party, after purchasing receivables from the company desiring to issue ABCP and thus obtaining rights to the cash flows they create, then channel those cash flows into the ABCP it eventually sells to private investors.

A benchmark is a proxy for a market, economy, class of equity, or sector, generally setting a standard against which the performance of a stock, bond, mutual fund, commodity, or other security is measured.

Benchmarks are also used to gauge the health of a market, sector, or entire economy.

Call price is the price, specified at issuance, at which a bond or preferred stock can be redeemed by the issuer. It is also referred to as the "redemption price".

Forex (FX) is short for foreign exchange and refers to the trading of one currency for another. Unlike stocks or futures, currency trading is an over-the-counter market with no central exchange.

Currencies typically trade in pairs such as the EUR/USD or USD/JPY. Currencies common to Forex tend to be the most liquid currencies such as the U.S. Dollar (USD), Japanese Yen (JPY), Euro (EUR), British Pound (GBP), Swiss Franc (CHF), Canadian Dollar (CAD), and Australian Dollar (AUD).

Margin is a term given to borrowed money (and associated accounts) used to purchase securities. When an investor buys stocks, bonds, futures contracts, currencies, or other equities with this borrowed money, she is said to do so "on margin".

Functionally, margin can be thought of as a simple loan from a broker to augment one's position in a security. This requires, however, that a certain minimum of the investor's own money be available either in the investment or simply inactively held in the account. This minimum amount is generally some percentage of the loan total issued by the brokerage and is called the "margin requirement" or "minimum margin requirement". If the value of the investor's stake in the security falls below the minimum margin requirement, the brokerage will typically issue a #Margin Call or, in some cases, automatically sell off the security to recoup or prevent further losses.

Though each exchange sets the limits for margin transactions, brokerages offer margin buying to their clients at varying rates beyond the brokerage mandated limits, though never in violation of them. For example, an exchange may have a minimum margin requirement of 25%, but a brokerage might instead impose a 30% minimum margin requirement on its clients.

The size of the initial loan made by a brokerage is some percentage of the original money the investor puts up and is called the "initial margin requirement" or "initial margin limit". Typically the maximum balance a broker will allow to remain outstanding with such a loan is 50%. The reasons why this is common practice have their roots in the Great Depression, as excessive amounts of land-speculative margin debt (typically around 90% of the total value of the speculated land) combined with manifold concurrent margin calls have been cited as major causes Black Friday in 1929 and consequently the Great Depression. As such, somewhat more conservative margin limits have been imposed to prevent a similar catastrophe from reoccurring.

Margin debt is usually incurred with either the hope or expectation that subsequent increases in the stock's value will cover the remainder of what is owed to the broker, thus eliminating the buyer's debt (and possibly creating a profit).

The Price to Book Ratio (alternately Price to Book, Price to Book Value, Price/Book, P/B, or P to B) is a financial metric used to compare a company's book value to the share price at which it is currently trading. It is generally calculated by dividing the share price by the book value per share, though it can also be calculated by dividing the company's market capitalization by the total book value listed on the balance sheet.

The Price to Book Ratio varies dramatically between industries. A company that requires more assets (e.g. a manufacturing company with factory space and machinery) will generally post a drastically lower price to book than a company whose earnings come from the provision of a service (e.g. a consulting firm).

Price to Book is often used to gauge a stock's relative value. A company trading at a low price to book, particularly when compared to other companies in its industry, is thought to be undervalued relative to its share price. However, a low price to book could also be an indication of negative forward looking investor confidence (e.g. poor earnings projections) or a disproportionate amount of Intangible assets on the books, depending on which version of the calculation is used (see below section on tangible vs intangible). As such, when used for security analysis, price to book is often coupled with metrics such as P/E, PEG, Return on Equity, and the Current Ratio to get a better snapshot of the company as a whole.

Unsecured Loans are loans that are not backed by collateral. This is in contrast to secured loans, wherein the borrower must pledge some asset (e.g. real estate, personal property, investment securities) to the lender should he default on the loan.

Unsecured loans are sometimes called "signature loans" because the bank has nothing but your signature. If the borrower goes into default they cannot posses any of your belongings; rather, they can report you to credit reporting companies and taint your credit.

Typically, unsecured loans are issued on the basis of the borrower's credit rating, though it should be noted that all loans lacking a collateral pledge (including informal loans between friends) are technically unsecured loans. For borrowers who don't have any collateral to pledge, these unsecured loans may seem attractive. However, since there is an increased risk for the bank, most of the times the interest rates are higher.

Commercial Paper is a notable unsecured loan.

Assessing stock

The following is adapted from “The Complete Money and Investing Guidebook” by Dave Kansas.

In assessing investments such as stock, investors consider the stock’s valuation, strategy, plans for diversification and appetite for risk. Stocks are evaluated in many ways, and most of the common measuring sticks are easily available online or in the print and online versions of The Wall Street Journal.

The most basic measure of a stock’s worth involves that company’s earnings. When you buy a stock, you’re acquiring a piece of the company, so profitability is an important consideration. Imagine buying a store. Before deciding how much to spend, you want to know how much money that store makes. If it makes a lot, you’ll have to pay more to acquire it. Now imagine dividing the store into a thousand ownership pieces. These pieces are similar to stock shares, in the sense that you are acquiring a piece of the business, rather than the whole thing.

The business can pay you for your ownership stake in several ways. It can give you a portion of the profits, which for shareholders comes in the form of a periodic dividend. It can continue to expand the business, reinvesting money earned to increase profitability and raise the overall value of the business. In such cases, a more valuable business makes each piece, or share, of the business more valuable. In such a scenario, the more valuable share merits a higher price, giving the share’s owner capital appreciation, also known as a rising stock price.

Not every company pays a dividend. In fact, many fast-growing companies prefer to reinvest their cash rather than pay a dividend. Large, steadier companies are more likely to pay a dividend than are their smaller, more volatile counterparts.

The most common measure for stocks is the price to earnings ratio, known as the P/E. This measure, available in stock tables, takes the share price and divides it by a company’s annual net income. So a stock trading for $20 and boasting annual net income of $2 a share would have a price/earnings ratio, or P/E, of 10. Market experts disagree about what constitutes a cheap or expensive stock. Historically, stocks have averaged a P/E in the mid teens, though in recent years, the market P/E has been higher, often nearer to 20. As a general rule of thumb, stocks with P/Es higher than the broader market P/E are considered expensive, while stocks with a below-market P/E are considered cheaper.

But P/Es aren’t a perfect measure. A company that is small and growing fast may have a very high P/E, because it may earns little but has a high stock price. If the company can maintain a strong growth rate and rapidly increase its earnings, a stock that looks expensive on a P/E basis can quickly seem like a bargain. Conversely, a company may have a low P/E because its stock has been slammed in anticipation of poor future earnings. Thus, what looks like a “cheap” stock may be cheap because most people have decided that it’s a bad investment. Such a temptingly low P/E related to a bad company is called a “value trap.”

Other popular measures include the dividend yield, price-to-book and, sometimes, price-to-sales. These are simple ratios that examine the stock price against the second figure, and these measures can also be easily found by studying stock tables.

Investors seeking better value seek out stocks paying higher yields than the overall market, but that’s just one consideration for an investor when deciding whether or not to purchase a stock.

Picking stocks is much like evaluating any business or company you might consider buying. After all, when you buy a stock, you’re essentially purchasing a stake in a business.


Tips
o The most common measure of a stock is the price/earnings, or P/E ratio, which takes the share price and divides it by a company's annual net income.
o Generally, stocks with P/Es higher than the broader market P/E are considered expensive, while lower-P/E stocks are considered not so expensive.
o Don't automatically go for stocks with low P/Es simply because they are cheaper. Cheap stocks aren't always good stocks.

BP speculation

What is your comfort level with speculating on the share price BP? Is the
strock price going to continually drop until the work is completed on creating
the relieve valves? I believe that this is still several weeks away. Do you
buy short on the stock now or are you going to follow the fear mongering of BP
going bankrupt. Obviously they are not an ideal stock from an ethics point of
view but as a dragon on dragons den always says, "I'm just a little man looking
for profit."

Does your financial analysis or global citizenship take the lead in your
decision? Either way its a good stock to watch even as an armchair investor.