Don't Buy All At Once!

It's weeks like these that remind me not to buy a stock all at once, and to focus on the long term and not to panic driven short term. You can get burned badly, especially when the market takes a dive right after you buy. Here is the proper way to buy a stock...

Let's say you have $1000 to invest in a stock that is trading at $100 per share, you should put in half or less of your investment and then if it drops to $90... it's a gift! Now you can purchase those same shares at a discount to what you paid earlier for them. If you would have put all your money in at once you would be down a quick 10%... ouch!

Now, of course this can work in the opposite fashion as well were a stock goes from $100 to $110, but all you are doing there is not making as much money as you could have if you would have thrown it all in at once. Buying in increments is the safest and most intelligent way to build a position in a stock. This rule will help you become a better more disciplined investor. Another thing that buying in increments can do for you is to lower your cost basis. Cost basis is basically your break-even price on a stock. Think of it this way, if you buy that same $100 stock and it drops to $90 like above, you can buy it again at $90 and bam! You just lowered your cost basis to $95. This means when the stock goes back up to $95 you have already broke even on your investment. This can be a great thing to consider when you have your stock takes a big unjustified hit, you just invest again at a lower cost and in turn lower your cost basis. This makes it easier for your stock to get back to the green, even if your stock never climbs back to the price you first bought it for!

Tough week, but I think things will begin to turn around next week... Remember when the market has a correction like this it brings out some fantastic buying opportunities. Stocks I think will do well next week are Goog, VDSI (calling a bottom), CECE (reports on Monday), and BA $94.21!

Good luck to all... and stay tuned to stock picky for more stock picks and tips!

The Importance Of A Good Dividend

While a lot of people are in the market just for growth stocks, there is a safer, less exciting way to build your fortune. Just look for stocks that pay a hefty dividend and that have consistently raised their dividend over the years.

A dividend is simply a payment that is issued to stockholders normally every three months. Most brokerages allow you to either take the dividend in cash or you can re-invest your dividends directly back into the stock. My favorite personally, is to re-invest those dividend payments. Think of it this way, you put $1000 into a stock that pays a 4% dividend. Three months or less later you get your first dividend of $40. As I stated above, you can take this in cash or simply re-invest it automatically.

This way you are technically buying stock every three months automatically without even raising your finger! As you can imagine this will really end up paying off in the long run. Plus, if a company is raising it's dividend it is always a sign that business is good so stocks like this tend to go up naturally as well! It is a win-win situation!

For me though, the idea is to eventually have so much stock that you can simply live off of the dividends as well. This way no matter if a stock goes up or down you still receive that dividend.

Yet another advantage of dividends is that in a market like we had on Friday, which was terrible in case you missed it, stocks that have high dividends tend to not be hit as bad as ones that do not. So while it is great to have growth stocks that shoot straight up there is nothing wrong with a good steady stock that pays a nice dividend. A couple that I would suggest looking at include Royal Bank of Canada (ry), Yum Brands (yum) or any other stock that has been increasing it's dividend consistently.

Find out more about why I like Yum brands here, or you can learn even more valuable information about the stock market here!

Some Basic Information About Stocks

You may think it is very hard to try and put a price tag on a stock and it is even harder to tell which direction that stock should be going, but there is a basic underline way to determine how to price any stock out there.

The first and most important thing to consider is a stock's PE or Price To Earnings Ratio. Now sure that may sound complicated, but it's really not. All you do is take this price of any stock, let's say for instance Royal Bank Of Canada (ry) which is trading at $57.56 a share and divide it by it's earnings per share which is $4.19. ($57.56/$4.19 = 13.61 PE) It is just that simple, Royal Bank Of Canada has a 13.61 PE or Price To Earnings Ratio!

So, all we do is apply this same logic to future earnings. Let's say Royal Bank Of Canada earns $6.25 next year and the market is willing to pay the same multiple 13.61 for the stock it would be at $85.06 per share. ($6.25 EPS * 13.61 PE = $85.06)

Basically, if a stock can continue to grow it's earnings and the market is willing to pay the same multiple or more for the stock it will go up naturally. Now, if earnings decrease the price will generally go down and so may the multiple that the market is willing to pay for the stock which is a double whammy.

Another thing to consider is that the higher the multiple the more "expensive" the stock is.... that is investors are paying more for future growth. Sometimes this can really pay off if the earnings are growing quick enough, but stocks with a high multiple that missed their earnings estimates can get hammered. Take Akamai (akam) for example, their recent earnings missed just made their stock drop like a rock due to the fact that their multiple was already so high that any kind of a miss would be ugly and it certainly was if you look at the 3 month chart.

Therefore, in general the stocks with the lower multiples can be much safer, but sometimes it can be worth it to pay up for growth. It all depends on what kind of an investor you are and how much risk you are willing to take on.

One last thing, the multiplies can be a good measure of comparing similar stocks, for instance Google and Yahoo. Google (goog) trades at $637.39 and has a PE of 54.18 while Yahoo (yhoo) trades at $28.48 with a PE of 55.55. So technical Yahoo is more expensive than Google! Yes that's right, even though Google is a $637 stock it is still cheaper than Yahoo at 28 smackers! Amazing really, especially since Google is growing faster than Yahoo which is what the multiple is really based on.

So next time you are trying to hunt for a stock, make sure to keep the multiple in mind and don't be afraid to compare it to it's peers. Let me know if you have any questions or comments and good luck to everyone this earnings season!