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investments for dummies

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									                            Guide to Investing
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Overview

Interested in investing but haven’t the foggiest idea as to where to begin?
If you’re like the average person, your understanding of the market is
tenuous at best.     And the technical “know-how” (including all that
seemingly nebulous business/investor jargon) necessary to successfully
select and follow a company, eludes and frustrates you only further. But
you needn’t worry. The following provides the general procedure of steps
required to get you on the road to success and financial security. And in
time, alongside enthusiasm, investor prowess will naturally evolve.


Note: There are three distinct markets in which one may choose to invest:
      stocks, bonds, & commodities. For the sake of simplicity and
      popularity, this Guide to Investing will focus on the stock market.




Procedure

1. “Which company should I invest in?”
2. Getting information on companies
3. Understanding financial statements




1. “Which company should I invest in?” (the 5 i’s)

        a. Industry

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                                 Guide to Investing
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In the world of investing, you’ll often hear, “Stay away from what you don’t
understand.” Therefore, don’t get in over your head, pouring your time and money into
a business whose inner workings are alien to you. The less you understand what drives
a company and its competitors, the less you should be inclined to invest in it.
Conversely, if your grasp of a business (its product & services, competition, profits,
losses, prospects etc.) is fair and has room to develop, feel free to cheerfully commit
yourself.

So how might you avoid the common mistake of selecting a company through blind
bias? Exploit the environment you’re already in! Bet on that!

If you work in a local pharmacy, scour the myriad pharmaceutical companies (the
majority of them in NJ), from Johnson & Johnson to Bristol Myers Squibb to Novartis
to Colgate and the like. If you’re waiting tables in a restaurant, go online & get a hold
of that restaurant’s financial statements (assuming they’re publicly traded) and those of
their competitors. So how might you begin to invest? By considering your own
industry!

             b. Interest

It may very well be the case that the industry in which you work isn’t as inspiring as
what you do off the job – your own private interests and pastimes. Peter Lynch, the
renowned investment banker, is a strong believer in investing according to your
enthusiasm of the company product.

So if you’re an aviation aficionado, perhaps Boeing is the pick for you. With the
coming of the first all-composite aircraft, Boeing stands to gain huge, so why shouldn’t
you? Or if you’ve an embarrassing case of halitosis and find that those delectable
Altoids mints truly do help to combat your not-so trifling ailment, you might consider
Wrigley, the 105 yr. old confectionary company which recently bought Lifesavers and
the Altoids candy lines.

It’d be foolish to dismiss such an investment simply because of the underestimated
perception of the product. Hey, it may be just chewing gum, but for every stick of gum
sold, it’s a 50/50 chance they’re chewing Wrigley’s. That’s a fact. Invest in what
interests you, and you’re that much more likely to be involved, and subsequently,
successful.

             c. Insight

Observe for yourself the overall health of the economy. What’s going on today? What are
various industries up to? What’s the latest craze? What’s the buzz?

For instance, Microsoft’s supposedly poised to deliver their latest operating system, Vista,
at the start of next year. Sony intends to unveil their latest video game system, PS3, in the
coming months. Celera Genomics is working to decode the human genome. Imagine the
effects.

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                                       Guide to Investing
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  Learning to intuitively put two & two together and reap the rewards is quite the gift few
  possess. So just keep your eyes peeled, your ears open, and deduce the possibilities.

                 d. Investigation

  Acquaint yourself with a financial daily, specifically its earnings page. Although some
  publications like the Wall Street Journal or the New York Times have weight to their
  names, a more preferable newspaper would be the Investor’s Business Daily (IBD).
  Why?

  The IBD offers more useful financial data and displays it in such a way that assists the
  reader in locating growth and income stocks while weeding out weaker ones. For
  example, the IBD’s earnings page divides itself into two groups, the “Ups” and the
  “Downs.” The former indicates positive earnings growth as compared to its previous
  year, and the latter indicates - you guessed it - negative earnings growth as compared to
  its previous year.

  Simply making it a habit to peruse the earnings page on a daily basis will turn up a
  number of qualified companies new to the market.

                 e. Integrity

  Succinctly put, “Know thy company.” After doing all the research it is up to you, in the
  final analysis, to assess the integrity of the firm. At the core of all lucrative business is
  good management. Are you (the principal) willing to entrust your money to
  management (the agent)?


        2. Getting information on companies

                 a. Investor relation’s department

A fine point at which to begin would be to call up the company itself and get in
touch with the investor relations department. Ask them to send you an investor
information packet.

Included in the packet is the annual report, the 10-K, the 10-Q, all recent press
releases, financial statements, and possibly analysts’ reports.


Note: If the analysts’ reports are not available (they’re often reserved for clients
      alone) you may have to visit multex.com and pay for the reports.




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                                     Guide to Investing
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               b. SEC filings

Every quarter (3 months) U.S. companies file a report with the SEC (Securities &
Exchange Commission). As seen above, this is the 10-Q report. Furthermore, at the end
of the business year comes the 10-K report, which is much more comprehensive in scope.

These documents provide a break-down of the company, including such things as a
description of operations, competition, internal compensation, and business risks. Often
times, you can find these SEC filings on the company’s website or from the SEC at
freeedgar.com


               c. Online

The internet has revolutionized the business world, serving as a more efficient tool at a
more becoming cost than the near-antiquated, traditional financial publications. Why pay
more and get less? Nowadays, much of what you would normally do in person, can be
accomplished with a few keystrokes over your computer. So visit the company website!
Unless they’re living in the stone-age, they’ll be found online.


       3. Making sense of financial statements

Upon obtaining the information packet from either the investor relations department or
online, you’ll want to review the financial statements within.

A financial statement is a summary of all a business’s transactions that have taken place
over a period of time. Essentially, it tells a story about a firm’s health and stability.

For this reason, stockholders, bondholders, banks, the IRS, and naturally, the company
itself, are all very much interested in the company’s financial statements. And so, you, as
a potential investor, should be too.

The three key financial statements are as follows: Income statement, Balance sheet, and
Cash flow statement.

      Note: The financial statements can be found on the web at Yahoo.com. (See Figure 1 & 2)
                           o In the upper left hand corner, click Finance
                           o Type in the company’s ticker (its abbreviated textual symbol)
                           o Press enter and scroll down to the bottom left
                           o Beneath Financials are listed the three statements

      Warning: It is imperative that you not only compare the data in the financials to the firm’s
              previous years, but that you compare it to other firms within the same industry.



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                          Guide to Investing
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            Click “Finance.”                           These are a
                                                       company’s 3
                                                       financial statements!




       Figure 1                                   Figure 2




a. Income statement

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                                    Guide to Investing
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   This shows the firm’s net income after costs, operating expenses, and taxes are
   deducted. .

   Keep this following in mind when evaluating a company at the end of its fiscal year:
   The top shows revenue (the top line) & the bottom shows net income (the bottom
   line).
   Well managed companies grow BOTH their top line and their bottom line!
   The following shows the mathematical flow of the income statement:

Revenue – Cost = Profits
Profits – Op. Expenses = NI before taxes
NI before Taxes –Taxes = Net Income




                                                      Notice the
                                                      growth of the top
                                                      line (revenue)
                                                      over past 3
                                                      years!




                                                      Notice the growth
                                                      of the bottom line
                                                      (NI) over past 3
                                                      years!




                                           Figure 3




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                                Guide to Investing
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b. Balance sheet

This shows a firm’s financial condition on a specific date. It’s comprised of three
parts: assets, liabilities, and owner’s equity. Assets = Liabilities + Owner’s Equity.

Make sure the company’s assets exceed its liabilities! Otherwise they’re in debt!




                                                                             The total assets
                                                                             exceeds the total
                                                                             liabilities. Good
                                                                             things!




                                                                             To reiterate, the
                                                                             total liabilities
                                                                             fall short of the
                                                                             total assets. So
                                                                             they’re not in
                                                                             debt!




                                           Figure 4

Note: Assets are what the firm OWNS. Liabilities are what the firm OWES.
      And, therefore, Owner’s Equity is the NET WORTH of the firm.
      So by rearranging the above equation, you compute the net worth of the firm.


c. Cash flow statements


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                                     Guide to Investing
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       Cash flow is the difference between cash coming in and cash going out of a business.
       Positive cash flow is good! Negative cash flow is bad! This reports cash receipts and
       disbursements related to a firm’s 3 major activities: operations, investments, and
       financing.




                                                                                    Cash
                                                                                    transactions
                                                                                    associated with
                                                                                    running the
                                                                                    business




                                                                                    Cash used in or
                                                                                    provided by the
                                                                                    firm’s
                                                                                    investment
                                                                                    activities


                                                                            Cash raised from the
                                                                            issuance of stocks and
                                                                            bonds or cash used to
                                                                            pay business expenses,
                                                                            debt, or dividends




                                          Figure 5

The following are some questions the Cash flow statement helps to answer:

 o How much cash did the business take in from operations (from buying & selling goods & services)?
 o How much cash, if any, was used to buy stocks, bonds, or other investments?
 o Were any investments sold that brought in cash?
 o How much cash did the company take in from issuing stock?




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