Benefits and Drawbacks of Buying Stocks Directly from Companies

A lot of corporations are now “bypassing” brokers in the sense that they are offering stocks directly to the investors—the buying public. Those who approve of Direct-Stock Purchase Programs (DSPP) cite the low commissions that this form of stock-buying offers. Some companies also tout low or no initial deposits for as long as the investor commits to buying a certain amount of stock every month.

The problem is that while commissions are low, there are other fees that go along with it that can often equal how much you would spend if you had bought it from a broker. Sometimes, it can even exceed it. There are enrollment fees and fees for subsequent purchases. You also pay a fee if you want to sell your shares.

Then there’s the voluminous paper work that you have to go through if you want to apply DSPPs in various companies. You have to fill out each form separately and study the statements that each company will send to you. Finally, there’s that matter of diversification. You only have so much time and energy to study the different companies that you want to invest in so the chances are that you will be buying large numbers of stocks from a single company or few companies which will put your portfolio at risk in case things get rocky with these corporations.

Advantages and Disadvantages of Buying Stocks through a Broker

The other way to buy stocks is by setting up an account with a brokerage firm. Investors who are looking to save a few bucks shun brokers because of the fees to set up an account and the commissions that go along with it. However, if you look at the convenience and comprehensive service that these brokers give, you will find that you gain more when you get their services.

Before we explain further, it’s important to understand that there are two types of brokers—the full service brokers and the discount brokers. Full service brokers are those that go the whole nine yards when it comes to giving service to their clients. That is, they provide research and give advice on retirement planning, tax tips, and where to invest your stocks. The problem with full service brokers is that sometimes, their advice can be biased in favor of the companies they do business with. So if you want to just trade and do the researching on your own then you can go with the second type of broker—the discount broker.

Discount brokers are those that carry out buy and sell stock orders but do not give investment advice. Because they do not provide investment advice, they charge only small commissions. One of the advantages of going with a discount broker is that they give different avenues for investing—through the Internet, phone, or fax. They also give you access to a wide variety of investment options which help you diversify your stock portfolio. Most brokers also centralize purchasing and holding of stocks and consolidated tax-reporting which simplifies all the paper work for you.

When placing orders through a broker, just remember to buy larger shares so you can save on the commissions. At the very least, you can start with a hundred shares. In case this is not possible, it’s generally wiser to save for it first before buying the big chunk rather than buying a small number of shares at a time.

Finally, when it comes to putting your order with your broker, it is best to begin with market orders. You may have heard of limit orders but this form of stock-buying is best reserved for those who already have enough experience with the stock market. A market order is when you tell your broker to buy a number of shares of stock of a particular company at its current price. This is the most common method of buying stock.

When you place a limit order with your broker, you’re essentially telling him to buy a number of shares when the price reaches a particular amount or better. This kind of order is good until you cancel it and is usually used for highly-volatile or low-volume stocks. Again, if you are a neophyte in the world of stocks, it’s best to leave limit orders and stick with market orders.

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A Closer Look at Stock Quotes

How to Read Stock Quotes

If you want to invest in stocks, one of the first lessons that you need to learn is how to read stock quotes or stock prices. These are the numbers you usually see on the screens of television networks that report on the performance of the stock market. Stock quotes are also available online and on business newspapers.

To get a stock quote, all you need is just the trading symbol of the stock, which is also known as its ticker symbol (e.g. GOOG for Google, KO for the Coca-Cola Company, and WMT for Wal-Mart). If you’re getting a stock quote from an online site, you can also look up the ticker symbol by simply typing in the name of the company. A stock quote has various components. Here’s a screenshot of the stock quote of Google Inc., the giant global technology company. An explanation of the components follows:

As you can see, the ticker symbol for Google Inc. is GOOG and it trades on the NASDAQ, the stock market that trades mostly on technology stocks. The big bold number refers to the Last Trade. This is the recent trading price for the stock. In this case, Google stocks traded at US$641.33 at the close of the August 3 trading day. The other data are as follows:

1.       Range. This refers to the price range that the stock traded at during the trading day. The lowest price Google traded at was $636.14 and the highest was $643.72

2.       52-Week Range. This is the price range which indicates the high and low prices which the stock traded at during the last 52 weeks. In this time period, the lowest price which Google traded at was $480.60 and the highest was 670.25.

3.       Open. This is the trade price of the stock when the market opens. For this stock, the opening price on the next trading day is $640.

4.       Volume. This tells the average volume of stocks that traded on the latest trading day. The average volume, meanwhile, refers to the volume traded for the past 30 days.

5.       Market Capitalization or Mkt cap. This refers to the current value of all Google stocks. To arrive at this value, you multiply the current price per share with the total number of outstanding shares. Google’s market capitalization based on this stock quote is pegged at $209.74 billion.

6.       Price-to-Earnings Ratio or P/E. Calculated by dividing the share price by the annual earnings per share, this is one of the statistics that tell potential investors a lot about the performance of a stock. Google has a P/E of 19 which generally indicates that this stock has the potential to increase earnings substantially in the future.

7.       Dividend/Yield. This refers to the dividend that the company pays to its stockholders. For many companies, the dividend is paid out every three months. Google does not pay dividends to its stockholders.

8.       Earnings per Share or EPS. This refers to the net income of the company divided by the shares outstanding.

9.       Shares Outstanding. As its name suggests, the shares outstanding refer to the number of shares that the investors and company insiders hold.

10.   Beta. This is a measure of the risk or volatility of the particular stock relative to the market or a particular benchmark.

11.   Institutional Ownership. This refers to the percentage of the shares outstanding that is held by institutional investors like pension plans. The institutional ownership of Google’s stock is pegged at 67 percent.

Now that you know how to read stock quotes, you can start buying stocks. But not too fast! You have to decide whether you want to get it directly from the companies or do it through a brokerage firm. Here are the pros and cons of each.

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How to Choose the Right Investments

Before you plunge right ahead and start investing, you should first learn how to choose the right investments for your portfolio. Most financial advisers say that when you’re younger, most of your investments should be in ownership vehicles. These include stocks, real estate, and even running your own business. These might be volatile investment vehicles but the chances of growth are also high. Besides, in the event that your portfolio loses value, you still have time to recoup your investments.

How much of your portfolio should you put in ownership investments? The general guide is to subtract your age from 110 and answer is the percentage of your portfolio that you should allocate in ownership investments. So if you are 33 years old now and you subtract that from 110, the answer is 77. This means that 77 percent of your portfolio should be composed of the riskier ownership investments. The remainder can be placed in the “safer” investment vehicles like savings accounts and bonds.

As you may perhaps notice, the older you get, the less you are going to allocate for riskier accounts. This is because the nearer you are to retirement, the less time your investments are going to be able to recoup should their value plummet. Thus, you need to have more in safer investment havens. But since you can expect to live more years after you retire, you still need your portfolio to grow so you need to maintain some of your assets in ownership investments.

Aside from your age, you should also diversify your investments. This is has been the code practiced by many successful investors throughout the years. Allocating your assets in stocks, bonds, mutual funds, real estate, and small businesses will ensure that your portfolio remains relatively stable in case one part sustains a hard hit. The more diverse your portfolio is, the better your chances of having a restful sleep at night since you won’t have to worry that everything you have put in one asset class is in danger of going under.

Finally, you should make it a point to focus your investment on things that you know. While the importance of diversifying your investments cannot be underestimated, you should still invest more in vehicles that you are most knowledgeable about. For instance, if you have been exposed to stocks all your life then it only makes sense that you concentrate a lot here. However, if your parents have been running rental properties since you were little and they trained you early on how to run it—like asking you to get rent from the tenants—then you might be most comfortable investing in real estate. The whole idea is to put your money in businesses that you are most

comfortable with.

These are crucial steps you need to take before you start putting your money in any investment. When you’ve already set up an emergency fund, paid down your debts, start putting your money in retirement accounts, know the tax implications of investing, and chosen the right mix of investments, you are well on your way to investing successfully.

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Getting Financially Fit Before You Invest

Before you can even consider buying stocks, bonds, real estate, or even starting a small business, it’s important that you get financially fit first. You have to see to manage your finances and allocate money where necessary so that when you finally do begin to invest, you won’t have to suffer setbacks because you were ill-prepared.

Here are the things you need to do to ensure that you are financially fit before you start investing:

Set up your Emergency Fund

We all know that life can throw us lemons when we would rather that it gives us chocolates. Medical emergencies, the loss of a job, or a natural calamity that damages our homes—all these are possibilities that we must be prepared for. To tide you over for these eventualities, you should have at least three months of living expenses stashed in a very accessible account. You could put it in a regular savings account or better yet in a money market fund so that you get the benefit of higher returns. When you have this emergency fund in place, you have something to tide you over in the event of emergencies.

What happens if you don’t take care of this first and plunge right ahead into investing? You could be forced to sell your stocks, real estate, and even your business at a losing price. In addition, you also find yourself hit with sky high transaction costs and taxes when you let go of these items at such short notice. So the best way to ensure that you will continue reaping the benefits of your investments even when you are laid off is to ensure that you have three to six months of emergency money to tide you while you are looking for a new job.

Pay Down your Debts

Now that you have done your homework and educated yourself about investing, you’re probably itching to set up a meeting with a broker your friend recommended. Hold your horses for a minute and ask yourself: Do I have existing debts that I need to pay off? If you have high-interest consumer debts such as those that you have from credit cards, it would be a good idea to take care of these first.

Think about it: If you are slapped with as much as 20 percent (or more) in annual interest in your credit card and it keeps piling up because you can only pay the minimum each month then any potential earnings that your investments will gain will just be swallowed up by the interest rate of your credit card. It’s a losing proposition. Before you think about buying stocks or bonds, evaluate how much debt you have and settle it first.

Should you pay your mortgage earlier? This really depends on your personal circumstances and the type of mortgage you have acquired. If good money management habits have given you the extra money to pay your mortgage faster, you can certainly do so. However, you have to keep in mind that mortgages usually have lower interest rates than credit card debt and with fixed-rate mortgages they remain constant until you have paid off your loan. So there is no rush to pay mortgage payments.

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Managing your Student Loan

Managing your student loan starts the moment you apply for it. Aside from doing all the research on the types of loans available, the law also requires you to attend an entrance and exit counseling before and after you get your loan. You should pay attention to what your responsibilities and rights are regarding the money you borrowed and the terms of payment. You can contact your loan servicer any time as well if you have clarifications or questions about your loan terms.

If you are still pursuing graduate studies or are serving the military, you can also defer loan payments. Do keep in touch with your loan servicer so you can arrange payment when you’re done with school or are already out of duty. What if you become unemployed or got sick and cannot work? You can arrange to defer payment, too, under these circumstances. What’s important is that you talk to your loan provider right away if you find yourself in these situations.

But what if you are working but are not earning enough to sufficiently pay your student loan burden? Certain programs, like the “pay as you earn” plan allows you to pay only 10 percent your discretionary income based on how much you earn and your family size. If your repayment plan is “income based” meanwhile, your payment is 15 percent of your discretionary income. The “income contingent” repayment scheme is based on 20 percent of your discretionary income and is best suited for those with very low incomes. In this arrangement, any balance that remains unpaid after the loan term is forgiven.

Your loan may also be forgiven if you work in certain public service fields. Policemen and other law enforcers, teachers, doctors, nurses, healthcare personnel, and government employees can apply for the Public Service Loan Forgiveness Program or the Teacher Loan Forgiveness Program. In a nutshell, your balance is forgiven after you have made 120 payments on your loan. So make sure to check this out if you are working in education, public health, emergency management, the military, or the government.

You can also opt to extend your loan to take advantage of the lower monthly payments. So if your loan is scheduled to be fully paid in 10 years, you can change the payment schedule to 20 or 25 years so that you are not burdened with higher monthly dues. However, always remember that the longer you keep a loan, the more you will pay in interest. Most of the time, the interest paid on the student loan debt is even higher than the principal!

Don’t forget to deduct federal loan interest payments from your taxable income. Just make sure that you follow the IRS rules for doing so. Also, don’t forget that there are no penalties for paying your student loans early. Unlike home mortgages, prepayment penalties do not apply to student loans.

Student loans can help you get your college degree which will put you on track towards a higher paying job in the future. However, it can immediately turn into a burden if you don’t manage it wisely and pay it off on time. Don’t make the mistake of letting your student loan haunt you until you retire. Learn all you can about it, repay it as soon as possible, and don’t forget to talk with your loan provider right away as soon as you realize that you are going to have a hard time making the monthly payments. The sooner you talk to your provider, the earlier a solution can be found.

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Understanding Student Loans

Student loans, as the Federal Student Aid Office would put it, “are an investment in your future.” The statement that follows explains the correct attitude that students ought to have about it: “You should not be afraid to take out federal student loans, but you should be smart about it.” Unfortunately, many students only hear the first part of the explanation and neglect the second part. They are fearless when it comes to taking out student loans but pay dearly for the ways they manage it.

Many college students depend on loans to get their way through college, conveniently forgetting that there are other ways to spend for higher education. They also have the habit of loaning for more than what they really need. After all, it’s easy to forget about student loans when the due date is still very far away.

This report will give you the lowdown on student loans and steer you towards making wise decisions about this form of credit. We will also give you tips on how you can handle an existing loan now that you are already out of the university and climbing the corporate ladder (hopefully).

Ways to Fund College

Student loans are not the only way to get through college. There are actually many ways to prepare yourself and/or your child to financially spend for a bachelor’s degree. As much as possible, college loans should only be considered as the last resort since these need to be paid back. If you can find ways to meet your educational expenses without having to repay with interest then wouldn’t that be better?

First of all, there are college savings. Coverdell Education Savings Accounts (ESAs) and 529 Savings encourage parents and other well-meaning relatives to save for their child’s or other beneficiary’s college education because of the numerous tax breaks given. These college savings accounts allow money to grow tax-free for as long as the money is used to pay for qualified education expenses. For Coverdell ESAs, the distributions can even be given tax-free for as long as they are used for approved education expenses.  Try asking your parents if they had set up a college savings account for you so you can include this in your college war chest. If you’re a parent yourself, now would be a good time to start putting away money for your little one’s college education through these tax-advantaged accounts.

Second, look for scholarship opportunities. Most, if not all, institutions of higher learning have merit-based and need based scholarships for students. You will have to comply with all the requirements and impress the committee with your qualifications. But if you do get awarded scholarships, it’s virtually a free pass to college. Some even give a modest monthly stipend in addition to the tuition, board and lodging, and books so it’s a way to have extra money, too. The catch is, there are conditions that have to be maintained for the scholarship to be awarded so you have to meet these. Otherwise, your scholarship could get revoked.

Third, find work. You will have a lot of free time when you’re in college and you can make these productive by getting a job. Work will not only help you make ends meet, it also enhances your resume that will make you more valuable to your employers. As much as possible, try to find a part-time job that is related in some way to your course so your work experience will give you an edge over other applicants vying for the same position when you’re job hunting after college.

Before you Apply for a Student Loan

If the above-mentioned ways to fund for college are not available or just not enough, student loans are available. However, make sure that you know the answers to these questions before you accomplish that application form:

• What kind of student loan are you getting? In the world of credit, there are many different kinds. The same holds true for student loans. You have Stafford, Perkins, PLUS—what have you. It’s important that you get to know the features of each one so you can choose the one that’s best for your needs and circumstances. Researching on these is easier now with the Internet and it should be the first step towards getting a loan. If you know what kind of loan to apply for, it’s also easier to apply.

• How much do you need and can pay for based on your probably earning potential? See to it that you only borrow what you need and can actually afford to pay for based on your projected earnings when you start working. When we say projected earnings, we’re talking about how much your expected salary is in your first job, provided that you work in the profession you studied for. There are some majors that don’t pay as much and there are others that allow you to earn handsomely. So let’s say the entry-level salary in your field is $40,000 determine how much you can afford to pay for your student loan given your other obligations (e.g. credit card bills, food, utilities, etc.).

• What are the terms for your loan? Be sure to ask how much you will be paying for a particular loan, what the interest rate is, and how long the term is. Remember, a student loan is debt and debt can make you lose opportunities for saving and investing. The lesson? Strive to pay off your loan as early as possible.

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The Lowdown on Credit Cards

Credit cards are seen as wallet staples these days. It’s hard to find someone who does not own at least one card. But we also know that plastic money has its own pitfalls. As we have stated in the first part of this report, debt is not a tool. It can do more harm than good, and can be disastrous if you let it go out of hand.

That being said, most of us need credit cards in today’s economy. So in addition to preventing your balance from accumulating by not paying your dues on time, a crucial step that all potential card owners need to take is to try to get the right card for you. When we say “right card” we’re talking about the plastic that reduces your costs.

To do that, you need to examine your spending habits. If you are the type who sees to it that all debts are paid on time, the annual percentage rate would be the least of your considerations. After all, you won’t carry a balance anyway. What you are after would be a card that is willing to waive the annual fee and has lengthy grace periods. A “rewards card” will also allow you to reap the benefits of your prompt payments. This can be in the form of frequent flyer miles or other freebies.

However, if you are the type who would prefer the minimum payments—not really a good idea, though—then the interest rate matters big time. The lower it is the better. For those who have the tendency to go on a shopping spree when they have plastic in their hands, a secured card is better. With this card, the deposit you put in serves as your credit limit. So if you only have $500 there, then that’s all you have to spend. You also need to pay it off like a regular credit card and interest accrues if you don’t. This is also the recommended card for those who are trying to rebuild their credit.

Don’t fall for every credit card offers that come your way. At the most, you should only have two cards with you. The others only serve to tempt you to buy things which in reality you cannot really afford.

Habits to Nurture to Get Low Interest Rate Credit Cards

When looking for credit cards that charge low interest rates, you want to make sure that you nurture certain habits. Before, it used to be so easy for banks to offer low rate plastic in a highly-competitive market. But the bankruptcy filings which have increased over the years have also made them cautious and picky with those they give these cards to. So if you want to get the low rate cards, be sure to:

1. Show a history of punctual payment. Usually, they look at your bill paying habits in the last three to five years. If you have ever been late for one or two months (or more) in your bills, you’re lowering your chances of getting a lower interest rate.

2. Be employed for at least a year with your current employer. Aside from job stability, banks also want to see that you’ve been living in the same house for the same span of time (or longer) as well.

3. Show that you are not heavily in debt. They will look at your usage ratio or the ratio of your outstanding debt to your credit limits. The higher it is, the more difficult it will be to qualify.

Instead of you having to put the merchants on your account and arranging for the deductions, you can instead have the merchant automatically deduct their charges direct from your account on a certain date each month. For example, you can arrange with your cellphone company to directly deduct your bill from your checking account each month and they will do that for you. Just make sure that you are dealing with a reputable merchant. You should also still do the necessary checks that the merchant has only deducted the exact amount from your account. Reports of some merchants directly levying additional charges have made a lot of individuals wary of this mode of payment.

• Trusted Envelope System

If you would rather pay for things in cash, then the time-trusted envelope system works best. Put all the expenses and amounts in appropriately-labeled envelopes. When the “dinners out” envelope starts getting low, you know it’s time to do more home-cooking.

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