Monthly Archives: December 2007

The Story of My First Time Investing

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Story Time

It’s funny to me when I think back to the first day I opened an account with Ameritrade and bought my first shares of stock. I knew so little about investing, the stock market, and economics at the time. But I couldn’t care less; I was so enthralled by my fascination for the stock market that I ignored all rationale and dove head first into the stock market like a man into a sea of hungry great white sharks. This is the pathetically humorous story of my introduction to the stock market.

How it started…

It started in late 2005 when during a conversation with my girlfriend she mentioned that she owned some shares of Coca-Cola. I remember thinking it was interesting, but didn’t give it much thought and our conversation quickly turned to other subjects (because I’m a random topics kinda guy). After a short period of time though I began thinking about the stock market and it reminded me of an online video game I used to play that had an economy in it. And of course when I played that game I was incredibly diligent at having the best items and most gold, so I quickly learned the ins and outs of that video game’s economy. So with this in mind, I thought it would be amazing to see what it would be like if I applied that passion to the real economy and stock market.

So I went to the Ameritrade’s website and opened up a brokerage account with them and funded it with the bare minimum. I remember thinking how overwhelming everything was. I was switching between tabs and asking things like “What is a market order?”, “What is volume?”, “What should I buy?” as if I had any idea what I was doing. I played around with the web site for about fifteen minutes and somehow concluded that I was ready to buy my first shares.

Want a free a song? My first shares…

I chose the incredibly successful company known as Napster for my first stock purchase. I really can’t remember why I chose Napster; I never used their paid service, and never thought it was anything worthwhile. Nonetheless I felt like a proud owner, joking with my friends that “I own 0.000017% of Napster, want a free song?”. Of course I didn’t even own that small percentage, because I was doing my calculation based on the daily volume instead of the stock’s market capitalization (not understanding the difference).

I had bought about $800 worth of stock, and became incredibly excited when I saw the share price rise a few cents. I didn’t understand the concept of percentages and was only concerned with the immediate dollar value changes. I eventually went on to sell the stock for a gain of nine dollars.

The bottom line…

I can’t believe how naive I once was and how ridiculous my thought process used to be when it came to deciding what companies to invest in. I would sit and think “Which company will come out with the next iPod?” and then go out and invest in stocks like Nike for no real arguable reason. But I can’t say I regret this since it all got me started on my path to investing properly and investing successfully.

You can take some lessons from this story of my start into the stock market if you are a non-investor thinking about getting into it. If you want to dive head first into investing, trading, and the stock market, just remember there is an incredible amount of ideas, concepts, and terminology that you need to learn. In my story alone I didn’t understand

  • Volume
  • Order types
  • Market Capitalization
  • Percentages over Dollar values

And that’s all while not investing without any sort of plan or strategy. If I had to do it all again, I would’ve read all those stock market books before I started buying stock, not while I was already buying stock. The only good part of all of this is that I invested with a very small amount of money that I could afford to lose. So even if I lost every cent I wouldn’t be living out on the streets, and would atleast have gotten an education if I failed.

How did you get started?

How did you start out investing or trading in the stock market and what inspired you? I’d love to hear from everyone what got them started and what rookie mistakes they made. Don’t be shy, leave a comment and tell us your story! It can’t be any worse than me buying shares of Napster (I was being sarcastic earlier about it being an incredibly successful company if you didn’t notice).

“The Market” versus “The Stock Market”

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A commonly used phrase throughout the financial media is “the market”. While it seems like “The Market” and “The Stock Market” are the same thing, they actually share little in common and represent two entirely different things. Because of this common misunderstanding, many novice investors often can interpret news incorrectly. So I’m going to clearly define the two and explain the difference.

“The Market”

“The Stock Market”
This phrase refers to all of the individuals who make up the investing industry. Private investors, Hedge Funds, Mutual Funds, etc. all make up what is referred to as “The Market”. Which direction stock prices go to is determined by the aggregate opinion of “the market”. This literally refers to the entity in which shares are issued and exchanged, known as the Stock Market. Sometimes referred to the equity market as well.

As an example: A financial news reporter states “We’re seeing prices head higer as the market believes the Federal Reserve will help ease lending issues. On the whole however the Stock Market has experienced some wild volatility as the market has struggled to find direction”.

In this example, the financial news reporter is saying that stock prices are rising because the majority opinion (“the market”) is that the Federal Reserve’s actions will help the Stock Market. In the second sentence, the reporter is stating that the stock market has experienced volatility because the majority opinion (“the market”) continued to switch it’s mind on whether to be positive or negative about the future of the Stock Market.

But why does the majority opinion matter?

The majority opinion matters because it is a collective reflection on whether we want to be buying or selling stocks. This goes back to basic economics; More buyers than sellers will cause prices to go higher, and more sellers than buyers will cause prices to go lower. So the majority opinion matters because it determines which direction stock prices will go.

Gift Ideas for Stock Market Junkies

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If you’re really into the stock market or know someone who is, then you know how hard it is to find good stock market gifts during the holidays. So hopefully I can give you some ideas with some products I really enjoy myself. Here’s my list of stock market gift ideas:

Wall Street Warriors: Season 1 DVD

This documentary/reality TV show follows the lives of ten upcoming and successful stock market players, giving you an inside look of what it’s like to control millions of dollars everyday in the stock market. The show really does an excellent job of capturing the essence of what Wall Street is all about, and what it takes to be successful. I found myself relating to many of the aspects talked about on the show, and it helped me realize I’m not the only one who sometimes goes insane in the stock market.

Confessions of a Street Addict by Jim Cramer

The only word to describe Jim Cramer’s tell-all biography of his life and work as a hedge fund manager would be “enthralling”. I read this book front to back in about three days and I was loving every minute of it. Jim Cramer of course is the successful former hedge fund manager now hosting the very popular “Mad Money” show on CNBC. In Cramer’s book “Confessions of a Street Addict”, no details are spared as you read all of Jim’s terrible and lucky events that took place throughout his life such as living in his car to successfully avoiding a major stock market crash. This is a book that offers no real investing information, but it is a great read because Jim Cramer has led such an interesting life and gives you an inside look at how hedge funds work.

Wall Street (20th Anniversary Edition DVD)

The masterpiece movie by Oliver Stone is set in the fast paced 1980’s where a struggling stock broker named Bud Fox has aspirations to become a real player in the game. His only chance to reach that goal is to work under Gordon Gekko, a heartless but brilliant stock broker who will do anything to make a profit. Starring Michael Douglas as Gorgon Gekko and Charlie Sheen as Bud Fox, the movie has won countless awards for it’s amazing performance of the criminal acts of insider trading that were prevalent in the 1980’s stock market.

Bronze Finish Bull Statue Wall Street

This gift isn’t anything spectacular, but it is awfully cool since it is similar to the real bronze bull statue in New York. Good for anyone who’s got an empty desk and wants some Wall Street spice. You can use it as a fun paper weight or as a weapon for those angry stock market days! .

StockCast – Digital Stock Market Watcher

Stockcast is a digital stock market watching device, displaying real time information on the major stock market indexes, all without needing to log onto your computer or any financial website. This item is more of a novelty gift than a serious tool used by those in the stock market industry, but it’s a neat way of keeping up with the market, providing a sort of “at-home” stock market ticker. The Stockcast can be tweaked to follow your entire portfolio, or just the major indexes such as the DOW Jones, S&P, etc.

Rich Dad Poor Dad

Rich Dad Poor Dad
Buy now from Amazon

Rich Dad Poor Dad is not just about investing, it’s about developing a different mindset when it comes to money, and financial independence. It’s an excellent book for young investors, or anyone who you feel could use an improvement financially. The book in no way teaches you how to make large sums of money (be it the stock the market or other investing ventures), but it does open your mind to the possibility of investing for a better future. It’s a simple book, but it’s a powerful one that I highly recommend for any young financial/investor minded individual.

Introduction to Short Selling

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There is saying that no matter what is going on with the stock market, you can always make money somewhere. But what if the stock market is crashing or prices are on the decline? How then can you make money? This is where the need for short selling becomes apparent. With the ability to both buy long and short sell the market, you are now capable of making money regardless of which direction the market heads towards. But what is short selling and how does it work? Let’s take a look into the less appreciated form of making money in the stock market known as short selling.

What is Short Selling?

Short selling is the method by which investors and traders profit only if the price of a stock goes down. It is the opposite of buying long, which is the process of buying stocks and profiting only when they go higher in price. It is a risky strategy with limited upside, but it does enable you to make money if stock market prices are on the decline.

How does it Work?

The process of short selling stock works by first borrowing stock that you do not own. This can be considered the “buying” (or acquiring your shares) part of short selling. When you wish to no longer keep your borrowed shares, it is known as ‘buy to cover’ as you are buying the shares to cover the shares you borrowed. When you buy to cover, you purchase the shares at their new price versus the original price you short sold them at. If the new price is lower than the original short sell price, you’ve made a profit.

Here’s an example of short selling in action:

Suppose you short sell 100 shares of XYZ stock at $10 per share. You now are borrowing 100 shares of XYZ stock. Then XYZ drops in price to $95 per share, and you want to cash out and take your profits. So you ‘buy to cover’, which means you buy XYZ stock at $95 per share, and returned the shares to the lender of the XYZ stock who you orignally borrowed from. You then profitted $5 per share.

Downside of Short Selling

The biggest issue with short selling is the maximum return on your investment is 100 percent. This is because the most a stock price can go down is 100 percent. This is a problematic restriction to short selling by comparison to buying long. This is because when you buy long a stock you can theoritically make an unlimited percentage gain on your investment since stock prices have no rising limit. That’s just stock market mathematics for you.

Further, short selling only works as a short term strategy. History tells us that the stock market is always going higher in terms of prices, so short selling the stock market definitely wouldn’t be a smart idea if you are a long term investor. If you wish to be profitable with short selling, you need to be more focused on the short term, which means being more actively involved with your portfolio.