Make Money In Stocks

Everyone talks about stocks and everyone thinks that people in the stocks business are always getting rich, that they are stealing from other people and that stocks are just something really mean. But what are stocks really? I will try to answer this question in this article.

Stocks are pieces of paper. But not just regular ones. Every piece of paper is actually a part of the company. For example a company that has one hotel has 1 million euros worth of capital, because this is how much one hotel costs. Now there aren’t many people in this world that would be able to afford to give one million euros to be the owner of this kind of a company. That is why we invented stocks. Let’s say we split this 1 mil company into 1.000 parts. That would mean that this company can have 1.000 owners, each one owning 1.000 euros worth of the hotel. This is more or less the explanation of the stocks. Stocks are these parts of the company.

Each stock would be worth 1.000 euros in our case and there could potentially be 1.000 owners of this company. Of course usually people own more than on share and there are way less stockholders than there are stocks. But you understand the idea now.

If this is all there is about stocks, how come some people are making lots of money out of it?

There are two ways to earn money from stocks. First one are dividends and second one are capital gains. You can read more about these two in other articles on MakeMoneyInStocks.net because here we’ll just give a very short description of both.

Dividends

Dividends are nothing else but profits. If our hotel made 10.000 EUR of profit last year, this could be payed out to the owners. So if we split 10.000 EUR of profits between 1.000 stocks, then each stock would make 10 EUR. That’s not a lot since people are usually looking for 5-25 % return in stocks, but that’s not the only way to get money out of stocks.

Capital gains

Capitals gains are usually the ones that help people make these huge profits. What are capital gains? Well stocks aren’t always worth their nominal value. In our case, stocks have a nominal value of 1.000 euros, but they will usually be sold at a higher price. Why? Well because this hotel has a good brand, it makes profit and people are willing to pay for that profit. But stocks can also be worth less than a nominal value, if hotel has a “bad name” and investors don’t think it will make any profits. This speculations about profits are always changing and as they change, so does the price. Now if you can anticipate these changes you can make lots of money. Let’s give an example.

Today people think our hotel will not earn any money. That’s why the stock is worth only 500 EUR. But you believe that the company will make lots of profit next year and you buy 10 stocks. Next year, this actually happens. Hotel starts making profit and price of these stocks goes to 1.500 EUR. You now sell them at this price, because you think the hotel will stop making profit next year. You just sold 10 stocks with a total profit of 10.000 euros. This is how the capital gains work.

I hope you now understand better what are stocks and how you can make money out of them.

Economic indicators are confusing. On the same day, some of them are positive and show a growing economy while others are negative and reflect a declining economy. How can anyone know where the economy is headed?

The key to understanding economic indicators is whether the indicator is leading, coincident, or lagging.

All Indicators are Not Created Equal

Economic indicators are like driving in your car. Leading indicators are like looking through the front windshield to see where you’re going, Coincident indicators are like looking out the side mirror to show you where you are, and Lagging indicators are like looking in the rearview mirror to see where you have been. The problem comes when you look at all three images and don’t know which is forward, sideways, or backwards. Trying to drive with the views garbled would be difficult indeed.

As investors, leading indicators are the most important to us because the stock market is also a leading indicator. We want to find the earliest leading indicators that we can and notice the co-incident indicators to confirm what the leading indicators are telling us. That will help us invest at the right time – when stocks are going up or about to go up. Stock prices follow corporate profits, so we want to find economic indicators that rise before corporate profits.

Leading indicators include Hourly Earnings, Consumer Spending, and the Consumer Price Index or CPI.

Average Hourly Wages show the wages that employees earn. Many employees will spend all they make, so as this number goes up there is more money being spent and the economy grows.

Consumer Spending, known officially as Personal Consumption Expenditures or PCE, is similar to hourly wages. As consumers spend more, the economy improves soon after. Corporate profits tend to follow average hourly wages and consumer spending up and down.

The Consumer Price Index or CPI is a broad measure of inflation. It breaks down inflation into many different categories that give a solid understanding of where inflation is coming from – if it is across the board or just a temporary reading in one sector.

This leading indicator is a huge danger signal to warn against coming bear markets. When inflation gets too high, the Federal Reserve raises interest rates. All companies with debt are forced to pay higher rates, cutting directly into profits, not to mention consumers. When the Fed continues to raise rates, a bear market is sure to follow.

The best coincident indicator to watch is the GDP or Gross Domestic Product of the most recent quarter. That is the ultimate indication of how well an economy has done without showing where it is heading. Seeing the trend of GDP gives some indication to help in our analysis of the economy.

The most important Lagging Indicator is Unemployment – it is important to ignore. The Unemployment rate is one of the most commonly reported indicators on the evening news. Most people look at it (especially if they are among the unemployed) and think that is where the economy is headed, but that is incorrect. The truth is that companies hire after their financial situations improve, but by then stock prices have already climbed to reflect this rise in profits. In August 2010, the stock market has been in a bull market for 18 months while the national unemployment rate has not improved much over the same period. This shows unemployment is a lagging indicator.

Keep an eye on the Leading Indicators to drive the vehicle of your investments and you will improve where you want to go.