Home     Forum     401k     401k Rollovers
    Register   Login   Members   Search   FAQs     Recent Posts    




I don't get it - Stock Market

Reply to topic
Money Talk > Investing, Stocks and Bonds

Author Thread
zlotowa
New Member


Cash: $ 0.85

Posts: 4
Joined: 14 Dec 2015

I don't get it - Stock Market  Reply with quote  

Hi there,

I've been hoping to find someone who could help me understand how the stock market works so i can start investing. I have a very basic understanding of it and i'm not even sure if what i know is right.

So it seems to me this is the basic premise:

A person starts his own business. He decides to expand but needs money to do so. So he goes through the process and makes his business a publicly traded company. People buy shares of his company and he uses the money to expand. Whereas the people who bought his stock now own a piece of his company.

Here's just one of the many things i don't understand:

I have read that most companies don't pay dividends these days. So why would anyone want to buy stocks to begin with? Seems to me like the only time a stock is worth anything to you is when you sell it for much much higher than what you paid for it.

But when the whole point is to buy low and sell high, why would anyone want to buy my stock when i'm selling it for a super high price? Isn't everyone else trying to buy the low cost stocks and then hold them until they become more valuable so that they too can sell them for a super high price?

I guess i just don't understand why anyone would want to shell out lots of money for an expensive stock that doesn't pay dividends. The only explanation i see is that they might hope that it will become even more valuable as time goes on and then try to sell it, but now we're back full circle. Then what if the stock has reached its peak value and it won't appreciate any more? What is the advantage to the person buying?

It's like buying a car (stock) that you can't drive (no dividends) and just keeping it in your garage, hoping that as time goes on it will gain value and eventually become a classic, sought after car so you can finally sell it and profit.
Post Mon Dec 14, 2015 11:39 pm
 View user's profile Send private message
oldguy
Senior Member


Cash: $ 722.20

Posts: 3513
Joined: 21 May 2006
Location: arizona
 Reply with quote  

quote:
Seems to me like the only time a stock is worth anything to you is when you sell it for much much higher than what you paid for it.

But when the whole point is to buy low and sell high, why would anyone want to buy my stock when i'm selling it for a super high price? Isn't everyone else trying to buy the low cost stocks and then hold them until they become more valuable so that they too can sell them for a super high price?


You have a pretty good understanding of it. In general, the major S & P 500 companies represent about 80% of the US business capital. And they have a longterm average of doubling about every 7 years - but in fits and starts.

Some investors buy/accumulate when they are young and never sell. So over a 30 year career, they 'double' 4 or 5 times. Ie, $25k > $50k > $100k > $200k > $400k.

Some buyers buy low, wait for a double, and sell high. That 'high' is the next guy's 'low', he waits 7 years for a double and sells high. And that is the next guy's 'low' - and so on.

But there are still quite a few stocks that pay dividends but not like it was 40 and 50 years ago. The reason is that most buyers prefer capital growth rather than dividend income. During your working years you really don't want more taxable income, you would rather 'grow' your money until retirement and then sell (and take advantage of the favorable capital gains tax rate). So, since buyers prefer growth stocks, corporations began putting their money into growth rather than paying it out in dividends.
But, like I say, there quite a few dividend paying stocks, usually owned by retirees who want income, not growth. Some would be GE, GM, Ford, IBM, etc.
Post Tue Dec 15, 2015 2:15 am
 View user's profile Send private message
zlotowa
New Member


Cash: $ 0.85

Posts: 4
Joined: 14 Dec 2015

 Reply with quote  

Thank you for the reply. The whole reason i'm here is because i want to buy an index fund of the S&P 500 and am currently saving enough money to do so. There's still so much i don't understand.

It's like i get the general idea of it but don't get the nuts and bolts of it. If i could ask some more questions:

What does a company do in order for its stock to grow and become valuable? Is it as simple as - the company runs a great business and they keep making more and more profits as time goes on?

And then, how does an index fund based on the S&P 500 mimic growth of those 500 companies?

How does my index fund profit from the growth of those 500 companies?

How does one pay taxes on the gains made from these funds?

I'm a 30 year old guy and really slow on the uptake (dumb) but my saving grace is that i realize i need to learn about this stuff and do more than just squirrel away my money in a savings account all my life.

Therefore i've decided to buy an index fund as soon as i can and learn as i go with the help of these forums.
Post Wed Dec 16, 2015 10:02 pm
 View user's profile Send private message
oldguy
Senior Member


Cash: $ 722.20

Posts: 3513
Joined: 21 May 2006
Location: arizona
 Reply with quote  

quote:
What does a company do in order for its stock to grow and become valuable? Is it as simple as - the company runs a great business and they keep making more and more profits as time goes on?


Yes, it's that simple. In general, investors are willing to pay about 15X annual profit for a company, eg, if a company earns about $2/yr per share, investors pay about $30. And if the annual earning climb up to $4, investors are willing to pay about $60.

quote:
And then, how does an index fund based on the S&P 500 mimic growth of those 500 companies?


Same as above, except all 500 companies are added together.

quote:
How does one pay taxes on the gains made from these funds?


When you sell some of your SP500 Index Fund, you will pay capital gains tax (15%) on your profit. If you don't sell, that tax is deferred.

quote:
Therefore i've decided to buy an index fund as soon as i can and learn as i go with the help of these forums.


IMO, that's the best thing to do. Here's a website -
http://politicalcalculations.blogspot.com/2006/12/sp-500-at-your-fingertips.html#.VnHi7r_iM3h

Check a few 30-year blocks of time, you'll see that the SP500 index has a longterm average return of about 11%/yr. If you invest $10k and wait 30 years it will be about $230,000. If you invest $10,000 every year for the next 30 years ($300,000 in) it will be about $2,200,000. (By comparison, a 1% savings account with $10,000/yr ($300,000) it will be about $351,000) As you can see, a wage earner cannot "save" their way to wealth - but you can easily "invest" your way to wealth with that same $300,000.
Post Wed Dec 16, 2015 10:26 pm
 View user's profile Send private message
oldguy
Senior Member


Cash: $ 722.20

Posts: 3513
Joined: 21 May 2006
Location: arizona
 Reply with quote  

quote:
Yes, it's that simple.


I should add - I wasn't being flip.
At age 30, you're asking exactly the right questions. You can put $5000/yr into a 401k and have $1,100,000 in 30 years. It really IS simple. - and I'm always surprised at how few people do it. Before I retired (in 1998) I invested in the sp500 Index every year, put it in my 401k account. And it was about a million when I retired. (And that was before the "match" was invented). Probably 3/4 of my co-workers didn't invest in the 401k for whatever reason - and since then I've read that less than 35% of the workers in this country have a 401k - it's hard to believe, it just isn't that hard to do.
Post Thu Dec 17, 2015 12:23 am
 View user's profile Send private message
zlotowa
New Member


Cash: $ 0.85

Posts: 4
Joined: 14 Dec 2015

 Reply with quote  

Funny, i was just thinking about how to gather up the initial $3k or even $10k as fast as possible in order to buy an index fund and i remembered, i have about $7k laying in the bank from my previous 401k.

At my previous job i signed up for the company's 401k plan and after a short time i switched jobs. Soon after a check for seven thousand bucks came in the mail. I'm not too keen on 401ks and IRAs either but i decided not to cash the check and avoid a massive tax hit. Instead i let the local bank hold it in what i can only assume is an IRA until i decide what to do with it.

If i could ask for your advice, oldguy.

What would you do if you had $7k from a old 401k that's just laying around doing nothing?

Cash it out and end up with 3 maybe 4 grand after taxes, and then use that to buy an index fund?

There's also the new 401k plan i'm currently enrolled in that takes 3% out of my paychecks. Looking at the balance statements, it's really earning me very little.

Is there some way i can take charge of that 3% that's being taken out of my paychecks and redirect it somewhere where it'll make me more money? Like an index fund? I assume not because one is not to be touched until retirement and the other doesn't have that stipulation.

Should i just get rid of the 401k all together and redirect those contributions to an index fund?

I'm all over the place with these questions i know, but if there's any advice you could give me i would much appreciate it!
Post Thu Dec 17, 2015 1:36 am
 View user's profile Send private message
oldguy
Senior Member


Cash: $ 722.20

Posts: 3513
Joined: 21 May 2006
Location: arizona
 Reply with quote  

quote:
Soon after a check for seven thousand bucks came in the mail. I'm not too keen on 401ks and IRAs either but i decided not to cash the check and avoid a massive tax hit. Instead i let the local bank hold it in what i can only assume is an IRA until i decide what to do with it.


You'll probably have to pay the taxes on the $7000, the bank would have no reason to roll it into an IRA if you didn't instruct them to. After you accepted the check you had 60 days to roll it into an IRA - if it has been longer, you'll need to pay the taxes.

quote:
There's also the new 401k plan i'm currently enrolled in that takes 3% out of my paychecks. Looking at the balance statements, it's really earning me very little.


The 401k plans all have several choices that you can invest it. Almost all have a SP500 Index choice, so you can have your 3% placed there. And you can move your current balance there too. Is there a match? Ie, does the company add another 3% for free?
I'll think you'll like the 401k plans once you understand it better. If you invest $5000/yr into the plan, you'll get about a $1500 tax refund - so your actual out-of-pocket cost is only $3500/yr. For that $3500, you'll get $5000 added to your Index plus whatever match they give you.
Post Thu Dec 17, 2015 2:31 am
 View user's profile Send private message
zlotowa
New Member


Cash: $ 0.85

Posts: 4
Joined: 14 Dec 2015

 Reply with quote  

Yup looks like I did put it into an IRA. So then I'll have to pay taxes and a penalty to take it out.

Unfortunately my company doesn't match any of my contributions. I'll call up the institution that manages my 401k and try to invest in the SP 500.

Thanks oldguy
Post Fri Dec 18, 2015 12:19 pm
 View user's profile Send private message
oldguy
Senior Member


Cash: $ 722.20

Posts: 3513
Joined: 21 May 2006
Location: arizona
 Reply with quote  

quote:
Yup looks like I did put it into an IRA. So then I'll have to pay taxes and a penalty to take it out.


No, don't pay the taxes. Just roll the IRA from the bank to Vanguard or Fidelity - and then buy the SP500 Index inside your new account.
Post Fri Dec 18, 2015 1:53 pm
 View user's profile Send private message
DayTradingDynamix
New Poster


Cash: $ 0.40

Posts: 2
Joined: 01 Jan 2016
Location: Redwood City, CA
Re: I don't get it - Stock Market  Reply with quote  

quote:
Originally posted by zlotowa
Hi there,

I've been hoping to find someone who could help me understand how the stock market works so i can start investing. I have a very basic understanding of it and i'm not even sure if what i know is right.

So it seems to me this is the basic premise:

A person starts his own business. He decides to expand but needs money to do so. So he goes through the process and makes his business a publicly traded company. People buy shares of his company and he uses the money to expand. Whereas the people who bought his stock now own a piece of his company.

Here's just one of the many things i don't understand:

I have read that most companies don't pay dividends these days. So why would anyone want to buy stocks to begin with? Seems to me like the only time a stock is worth anything to you is when you sell it for much much higher than what you paid for it.

But when the whole point is to buy low and sell high, why would anyone want to buy my stock when i'm selling it for a super high price? Isn't everyone else trying to buy the low cost stocks and then hold them until they become more valuable so that they too can sell them for a super high price?

I guess i just don't understand why anyone would want to shell out lots of money for an expensive stock that doesn't pay dividends. The only explanation i see is that they might hope that it will become even more valuable as time goes on and then try to sell it, but now we're back full circle. Then what if the stock has reached its peak value and it won't appreciate any more? What is the advantage to the person buying?

It's like buying a car (stock) that you can't drive (no dividends) and just keeping it in your garage, hoping that as time goes on it will gain value and eventually become a classic, sought after car so you can finally sell it and profit.


----------

Use caution with overthinking the markets. Remember friend, all markets are governed by the same underlying drivers. The key is to devote your attention to the primary variables that are going to make you money on the time frame of your choice. As a Professional Trader, I can tell you with absolute certainty that there is more information surrounding the markets than needed. As a matter of fact, you'd be safe throwing out a conservative 60%.

There are few reliable resources where an Independent Professional can go to receive correct training that will ensure them of life-long wealth building through all markets. This truth is what gave birth to Day Trading Dynamix. All charts move in three directions; up, down and sideways. All markets are governed by people - whether you're an algo trader or retail.

KC Powers, Director
Day Trading Dynamix
Post Sat Jan 02, 2016 12:19 am
 View user's profile Send private message Send e-mail
dozulu
Preferred Member


Cash: $ 40.15

Posts: 198
Joined: 30 Jun 2015
Location: Eastern Oregon
 Reply with quote  

I would say that Oldguy and the index funds over at Vanguard or Fidelity are your best bet.

There are some day traders making money, but every time you buy or sell, they take a cut, providing they have made any profit versus loss.

The safest, most reliable, less costly route is the long term buy and hold of index funds like at Vanguard and Fidelity.

Get rich quick schemes are the fastest way to go broke! Nope wealth takes time. But ildguy is right. $5000 a year over a 30 year period will get you there.

You might want to go visit MrMoneyMustache.com and read how people are increasing their saving rates to achieve FIRE (Financial Independence/Retirement) decades ahead of the non saving herd.

I have learned quite a few things over there. But Oldguy told you the best answer for your money.
Regular investment, held long term is the answer. Compounding interest is your best friend. Just ignore the up and down of the market. It really does not matter to the long term investor.
Post Sat Jan 02, 2016 7:16 pm
 View user's profile Send private message

Reply to topic
Forum Jump:
Jump to:  
  Display posts from previous:      





Money Talk © 2003-2016