How Common Stocks Can Strengthen Your Investment

As might be expected, one of the most “common” types of stocks is also known as the “Common Stock”. Categorized by rate, income and growth, a common stock signifies ownership interest in a corporation. Therefore, a common stock might have an aggressive growth although it is categorized as low-income and vice versa.

Companies that are considered part and parcel of the high-growth stage, are the companies that issue commons stocks and at the same time, do not pay dividends. As an investor, you might have a growing stock (in terms of prices) even though you are getting no dividend income.

On the other hand, some companies might pay dividends of common stock to its shareholders. Such companies are usually old, established entities that have already gone through phases of major growth, hence, their capability to produce a steady flow of dividend income to the shareholders. Such issued stock, whether it is common or preferred, is known as the “blue chip stock”.

Thus, when you decide to invest in stocks, you must identify your investment objective at first, whether it is growth or income. This will help you to choose the right company in which you can invest your dollars.

What is Margin Trading

Almost all stock brokers offer margin trading, which is essentially borrowing money from them to purchase more stocks. Many investors do not understand margin trading or whether or not it is good for them.

Deciding whether or not to borrow on margin is a business decision like any other. When you borrow on margin, you are borrowing money to buy stocks, using the stocks you currently own as collateral. If you think the stocks you will buy will significantly outperform the margin rate you pay, then borrowing on margin may be good for you.

For example, let’s say you have a very large asset base, let’s call it $10 million. You believe the market is incredibly oversold, as it was a couple weeks ago. You want to borrow money to invest in the market. You decide to borrow $2 million, paying 5% interest. You believe that you can make 15-25% on the money you borrow, well above the interest rate you are paying. In this case, borrowing the money on margin looks like it will make a good payoff.

As you can see, the three key factors here are the margin rate you are paying, the amount you can make off of the money you borrow, and your risk tolerance. The above example, however, is a very optimistic one. Most of the time, for people with average or small asset base, margin rates are very high, generally 8.5% or more and can easily be 10% or more. Furthermore, the market returns about 10% a year on average, so most of the time, borrowing on margin mean taking on a lot of risk for potentially very little reward.

What exactly are the margin risks? Well, besides the fact that you are betting more money, so you can lose more money, you also risk a margin call. Let’s say you have $50k and borrow $50k on margin. The market gets pummeled, and your $100k in total investments ($50k yourself plus $50k you borrowed) drop down to $70k. At this point, there’s a very good chance you’ll receive a margin call. The broker will demand that you sell securities (or put up additional funds) so that you reach a certain level. For example, the federal government requires brokers to have at least a 25% maintenence requirement, though most brokers have a higher number.

Let’s say your broker has a 30% maintenence requirement. Since you borrowed 50k on margin, you will need to maintain an overall balance of about $71k or more before receiving a margin call. If you get a margin call, you will need to put up more money from your bank account or start selling securities.

Let’s say, in the $50k +$50k example that you’re somehow forced to sell all of your secuirites after your balance dropped to $50k. Now, all you have is $20k minus what you paid in margin interest. Even though the market only dropped down by about 30%, you ended up losing over 60% of your funds since you leveraged yourself.

As you can see, margin trading involves a lot of risk. It should only be done by expert investors who know what they are doing and can get access to a decent margin rate. For average investors, margin trading is generally a bad idea.

Mutual Fund Investing Tips

While this website is geared towards choosing stocks, in this article, I’m going to share a few tips on how to choose a good mutual fund.


What exactly is a good mutual fund. I’d define one as a mutual fund that outperforms its peers over a significant period of time. For example, a mutual fund that tends to invest broadly in large cap stocks is a good mutual fund if it beats the S&P 500. A good small cap fund would be one that consistently beats the Russell 2000 index. Remember, its relative performance, not absolute performance, that is the method to judge a mutual fund.

Finding a good mutual fund is the same as finding a good stock in the sense that it takes research and patience. Here are some things to look for when researching a good mutual fund:

1. Keep the fees low. Any fees you pay is less money in your pocket. Any good mutual fund should have a maintenence fee of 1.5% or less, 1% or less is preferable. Under no circumstances should you pay a load (upfront fee) to invest in a mutual fund.

2. Check out the asset base. Often, mutual funds become so bloated with investors money that they cannot invest as effectively. It is much easier for a fund to invest $1 billion in assets than $100 billion. As the fund gets larger, it has to invest in more and more stocks, and take larger positions in companies (which will often move the price of the stock).

3. Remember the sector the fund invests in. Just because the fund had a hot year last year doesn’t necessarily mean its a good fund to invest in. The sector that the fund focuses on may have just happened to have done well, so the fund got lucky.

4. Check out the fund manager. At the heart of mutual fund investing is the fund’s manager. This is the man or woman you are trusting with your money and believe will make the best investment decisions for you.

Investment Mistakes To Avoid

* Don’t invest without a plan! First and foremost, every investor must have investment plan and goals set firmly.

* Don’t hold on to stocks that are making losses. People do this in the hope that there will be a turn around in the price and then they can exit at the buying price.


* Not diversifying sufficiently. Diversification is the basic rule to observe if you desire success, at least desire to minimize risks associated with the stock market investment.

* Investing without studying the stock. You must study every aspect of the company that you wish to “buy” on the stock market. Details of the company’s financial aspects are available everywhere, but still it is found that people just rush in to buying a stock without proper investigation.

* Don’t get attached to the stock. Often people have “favorite” stocks and they hold that stock forever even when it is either not moving, or is going down! Review your portfolio regularly and take actions, even sell it, if a stock is showing negative trends or losses. Emotional investment is not a part of the successful stock market investor.

* Ignoring risks. Don’t ignore the risk factors in the investment.

* Using tips from friends and other sources without doing appropriate research and analysis.
Investing and finding the right stock is never an easy job. To become successful investor, you must do research and analysis of every stock that interests you. Even if you trust the friend, you must still do further analysis before buying the stock.

* Following the crowd. You should avoid crowd mentality in stock market investing. To quote Warren Buffet,” You are neither right nor wrong because the crowd disagrees with you. You are right because your data and reasoning are right.” He echoed the same thoughts while warning the investors against following the crowds. “Be fearful when others are greedy and greedy only when others are fearful,” he said.

*Frequent trading.

* Not listing your mistakes and failures. Even the great Warren Buffett, one of the richest man in the world who made his billions on the stock market, lists his mistakes and failures. He then vows not to repeat them. So, knowing your mistakes will make you cautious and will force you to take the right actions the next time a similar situation occurs.

* Focusing on earnings per share and not on return on equity. Earnings per share is a smokescreen, because usually the company retains earnings to increase their equity base.

* Buying a stock and not the business! Warren Buffett has advised investors to buy the business and not just its stock! He has good reasons to say so.

To quote Warren Buffett:
“An investor should only buy shares in a company which he would be willing to purchase outright if he had sufficient capital. From this perspective, an investor should look for a company with business operations that are understood, has favorable long-term prospects, is operated by honest and competent people and is available at an attractive price.

The decision to buy a business is based on:
Business tennets
Management tennets
Financial tennets
Market tenets.”

‘‘The market, like the Lord, helps those who help themselves. But unlike the Lord, the market does not forgive those who know not what they do.’’

Investments To Avoid

Whether its stocks, options, mutual funds, ETFs, etc., there are many investment vehicles out there to put your money in. For the beginner or intermediate investor though, some of these options should just flat out be avoided. Unfortunately, people with a financial motive often try to dupe beginner investors into using some of these investments when it is generally against the novice investor’s interest.

Options: While advanced investors may be able to successfully use options to hedge investments or as leverage, options are a suckers game for beginning investors. The appeal of options is that the investor can quickly turn a small amount of money into a large amount of money. However, most of the time, the investor just loses most of or his entire investment if he doesn’t know what he is doing. When you are buying or selling a stock option, you are betting against someone else (whoever is on the other side of the trade). Most likely, this is someone with a lot more information and experience than you, so options are generally best avoided.

Mutual Funds That Charge Loads: Some stock brokers or bankers will try to get you into a mutual fund that charges a load (an upfront fee). This fee generally is just used as an advertising expense; basically, it just goes towards someone else’s commission. These loads can be very hefty, often 5% of your initial investment. There’s little evidence that mutual funds that charge loads do any better than mutual funds that don’t charge loads. If you are going to invest in mutual funds, there’s absolutely no reason to put your money in one that charges a load.

Penny Stocks: This is another area where there is often a lot of fraud and stock manipulation. Penny stocks are often very risky. Many novices who invest in them do not really know what they are doing and may be buying a company at a lofty valuation, even though the stock looks ‘cheap’ at $.80 a share. Remember, it’s the P/E, P/S and other ratios that determine how ‘cheap’ a stock is, not the share price.