Thursday, July 31, 2014

Growth Stocks Vs. Value Stocks

Growth vs. Value:

Growth companies are companies that are expected to or have experienced periods of high growth, such as technology companies or smaller companies that have increased revenue and profits at very high rates.

Value companies, such as Blue Chip companies, are very large and diversified, with revenue and earnings growing at a stable rate. For example, Proctor & Gamble would be considered a value company, whereas, Tesla would be considered a growth company.


Investing Vs. Trading

Long-term Investing vs. Short-term Trading:

There is a large difference between investing and trading. As Warren Buffett says, when you buy a share of stock think of it as if you are buying the whole company. Is this investment so great that you would like to own the whole company? Investing is a long-term approach that uses analyses of the company's financials, such as the balance sheet. Aside from looking at the financials, an investor should always research the risk and growth potentials of a company and the current management of the company.

Long-term investing is an approach that focuses on the fundamentals of a company and not the price movement of a stock. Long-term investing can be less risky, dependent on what you are invested in, while also having lower brokerage fees, since you are not buying and selling as much.

Trading on the other hand is short-term. Rather than purchasing a stock because of the company’s fundamentals, trading places a focus on the movement of a stock’s price within a short time period, from a day to a month. Market trends, trading volatility, stock volume, moving averages, and technical analyses are some fundamental tools used to determine short-term trading opportunities. Short-term traders commonly use alternative investment tools, such as stock shorts and derivatives.

Short-term traders can range from day traders who buy and then liquidate all positions at the close of the market to traders that purchase companies for a few weeks. Short-term trading can also be risky because you are buying into market trends, not investing in the fundamentals of the company. This means that if you have a short-term investment horizon and a stock experiences volatility, (Large movements in the price of the stock) your investment horizon does not allow the stock the opportunity to regain losses. Stocks tend to move in a cyclical nature, moving up and down, like a roller coaster. Short-term investing can also be costlier due to a larger amount of brokerage fees.

Friday, July 18, 2014

Book Review: The Third Industrial Revolution by Jeremy Rifkin

The Third Industrial Revolution, by Jeremy Rifkin, is one of the most intriguing books that I have ever read. In this book, Jeremy Rifkin describes the revolutionary economic and social changes that are occurring due to a new information system, the Internet, and a new energy system, renewable energy, merging. These changes are coined The Third Industrial Revolution.

The Internet has created a new way of sharing and creating information that has never been scene before. People are able to instantly interact with each other around the globe, access an infinite amount of information on any desirable topic, and influence society no matter how poor or young they may be. The Internet will increasingly make our world more efficient and interconnected by allowing devices to communicate with one another, such home appliances or medical records, furthering the use of efficient manufacturing processes, such as 3-D, and developing a smart grid for energy. The Internet has also fostered a way of thinking that democratizes power and fosters creative disruption. The Internet has allowed everyone the opportunity and ability to develop and create what they wish, transferring the power from the select to the masses. Anyone who has access to the Internet has the ability to take Harvard classes online, start a movement, build an app, or rent a couch in a stranger’s apartment for the night. The Internet has become a platform for disruption within every part of our lives, by allowing anyone to explore and redefine the limits

Renewable energies will become more proliferous as improved storage mechanisms are developed, reigning over fossil fuels. The shift to renewable energies in conjuncture with the Internet will allow for a monumental shift in the way our society produces energy. For example, each home will have the capacity to become a small power plant, generating enough electricity to power itself and sell to other homes through virtual markets. Energy monitoring programs will enable appliances within a home to be switched on and off remotely, according to the energy demands of the grid, and turn off unused lights or lower the heat when the home is vacant.

The Third Industrial Revolution is lateralizing power among the world. The Internet has already changed and democratized many industries, such as the hotel and wedding dress industry by embracing human’s desire to share. Renewable energies will empower the homeowners by allowing them to produce their own energy, ending our society’s reliance on large and monopolistic energy companies. These changes are all around us, in every possible form.

I highly recommend reading The Third Industrial Revolution, as it has changed my view on current changes within our world and opened my eyes to the possibility of the future.

Wednesday, July 9, 2014

The Basics of Stocks

A share of stock is a small piece of ownership in a company, just like a piece of pie. By owning a piece of a company, you are entitled to a share of the profits, through dividends, and voting rights on substantial changes in the corporation. As a shareholder of a public company, you do not hold any legal obligation to the company. This means that you cannot be held liable if a company’s product results in deaths or injuries, or be sued if a company that you hold stock in is sued.

A company that has shares of stock and is traded on a public exchange such as the New York Stock Exchange, or the NASDAQ, is called a public company. Private companies may have shares of stock, but they are not traded on a public market. For example, Ford Motor Inc. is considered a public company while the local ice cream shop in your town is probably a private company. The stock exchanges create a place to buy and sell shares of stock, which creates a more efficient market by increasing the liquidity of assets.

If you buy a share of stock in XYZ Corporation at $10 and it rises to $15 in a week, the stock has appreciated $5. This does not mean you have made a profit. You can only make a profit from dividends and the money that you receive after you have sold the stock. When you sell your stock of XYZ Corporation, at $15, then you will have made a $5 profit. If you held onto your share of XYZ Corporation for another week and the price decreased to $5 and you sold it, you would have lost $5. The price of the stock will appreciate, as more people want to own the stock, usually because the business is growing and becoming more profitable and vice versa.

The laws of supply and demand fundamentally determine the price of a share of stock. There are a finite number of shares, meaning that stocks that are in higher demand will be more valuable. The opposite also holds true. If a company is under performing, the demand for the stock will decrease and so will the price. Just because the price of a stock is low does not mean that the company is a poor investment, maybe the company just missed their quarterly earnings or a tsunami in Asia disrupted their supply chain. The company may still have sound fundamentals and a strong management team. There are a lot of factors that go into play to determine the price of a stock. When buying a stock there is always one idea that is necessary to keep in mind, there is always someone that thinks it’s time to sell and someone that thinks it’s time to buy.

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Tuesday, July 1, 2014

Time Value of Money

Time Value of Money is a concept that is essential to investing. Time Value of Money or TVM states that money in the present is worth more than the same amount in the future, because that money can be invested and earn a return. For example, if you were to receive $100 today, or in two years, you would choose to receive $100 today. Why? If treasury bills have a theoretical yield of 4%, then the $100 that is received today could be invested and earn $8 over two years. (Interest is not compounded in Treasury Bills) This mean that $100 today is worth $108 in two years.