With share splits, a company is simply cutting itself up into a number of pieces, without changing its fundamental value. It wants its stock to trade in a price-per-share range that seems reasonable to investors. This can affect stock market trading in more ways than one.
Stock market trading: How a share split works
Things haven’t changed in 2022: It’s still often the case that if a stock’s price rises much beyond $50 a share in Canada (or $100 a share in the U.S.), some investors may shun it, since it seems expensive. (Shopify, symbol SHOP on Toronto, was one of the most notable exceptions, trading above $665 in April 2022. Note, it is now planning a share split 10-for-1 share split in June 2022.) A company’s management may then opt for share split, or stock split, of two-for-one. This turns one “old” share into two “new” shares. If you owned 100 shares of a $60 stock, you now own 200 shares of a $30 stock. You don’t need to take any action.
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After conventional share splits, good news often follows. Companies mainly undertake share splits when they want to draw attention to themselves — because they expect earnings to rise faster than normal, say. At such times, they may also raise their dividends.
However, sometimes companies get overly optimistic. Their profits come in far below expectations, and they can’t keep paying the new, higher dividend. So a share split can be good or bad for your stock market trading, depending on the details.
Keep an eye open for spinoffs, not share splits
Some investors love share splits and rush to purchase them beforehand. While you may pick some winners by focusing on share splits, we feel that spinoffs are closer to a sure thing. A spinoff is when a division of a business is spun off into its own separate company. A number of studies have shown that after an initial adjustment period of a few months, spinoffs tend to outperform groups of comparable stocks for several years. For that matter, the parent companies also tend to outperform comparable firms for several years after a spinoff. That above-average performance makes sense for a couple of reasons.
First, company managers naturally prefer to acquire or expand their assets, not get rid of them. Getting rid of assets reduces a company’s total potential profit, which reduces the funds it has available to pay its managers. The management of a parent company will only hand out a subsidiary to its own investors if it’s fairly confident that the subsidiary, and the parent, will be better off after the spin-off than before it.
Second, spinoffs involve a lot of work and legal fees. The parent will only spin off the unwanted subsidiary if it can’t sell the stock for what it feels it’s worth. That’s why companies only have an incentive to do spin-offs under two sets of favourable conditions: When they feel it isn’t a good time to sell (which often means it’s a good time to buy); or, when they feel the assets they plan to spin off will be worth substantially more in the future, possibly within a few years.
Oddly enough, many investors who embrace share splits react to spinoffs as a nuisance, because they leave you with a tiny holding in a stock you didn’t choose and know little about. Again, that’s often contrary to how investors feel about share splits. Both share splits and spinoffs can help you increase your wealth. But in general, share splits and consolidations (see below) are a minor investing detail. Don’t let them distract you from more important matters, such as a company’s fundamental value and how well it suits your investment objectives.
Consolidations: share splits in reverse
If the value of a stock collapses to pennies a share, investors may think it is headed for zero. To bring its share price back up to more-respectable levels, the company may move in the opposite direction of share splits and decide to declare a reverse split: five, 10 or more “old” shares will then turn into one “new” share. This “reverse split” is also called a “share consolidation.” It’s what usually happens to penny mining companies that have spent all their money without finding any valuable mineral deposits.
After a reverse split, stock prices often fall back down again. Some investors sell because the stock seems more expensive than it was, even though a given holding represents the same percentage ownership of the company. Others sell because they fear the company will raise money by selling new shares, and this will drive down its stock price.
Our investing advice: Stock splits and consolidations are a minor stock market trading detail. Don’t let them distract you from more important matters, such as a company’s fundamental value and how well it suits your investment objectives.
Note: This article was originally published in 2011 and is regularly updated.
Letting unnecessary stock market worries take hold of your investment decisions can lead to much bigger problems than just finding stocks to buy
Our early ancestors had to be on guard against threats in their environment. They were under constant threat. At night, if you woke to every sound from the bushes, you lost some sleep, but you cut your risk of being eaten by a lion or killed by an enemy. Today we face much less risk from animal predators and human marauders. But many people still carry this hair-trigger fear response. We spend more time than we should worrying about things that will never happen. This includes stock market worries.
That’s especially true of investors, who generally think more about the future than other people. It’s true all the more of subscribers to our newsletters and members of my Inner Circle service.
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Understand stock market worries and risk so you can put everything in perspective
That’s because many of you are the kind of people who seek out investment information from a variety of written sources, where it’s much more extensive and detailed than what you get from a glance at the headlines, the evening news or cable TV. However, some of that information is biased, overblown or incorrect.
This doesn’t mean you should ignore potential threats. You just need to put them in perspective.
Learn what experienced investors do about common stock market worries
There is never a shortage of ways to ease your stock market worries. “You never go broke taking a profit,” is a favourite of brokers I’ve met over the years. They used them to spur their clients to do more trades, to boost their own commission income.
Our view now is that stocks are still a good place for your money, if you can afford to stay invested for several years. If you expect you will need to take money out of your portfolio, you should think about selling sooner than you need to.
Look beyond immediate stock market movements to help reduce your anxiety and stock market worries
Stock market trends are the general direction in which the stock market is heading. These market trends are dictated by a number of factors: what sector investors favour at the moment, economic and world news, interest rates and other trends from industries such as technology or resources, and so on. These trends could be positive or negative, and they could lead to a huge boom for a stock market. They could also lead to a big downturn.
It pays to keep in mind that the stock market anticipates changes, and no stock trend lasts forever. Stocks can go on lengthy downturns due to business and economic problems. However, the market typically starts to go back up long before the problems get solved.
We think that in general, long-term investors should be cautious optimists. Don’t let media sound bites and self-serving short-term predictions dictate your decisions when you’re investing in stocks.
Anxiety recedes with investment quality, diversification and portfolio balance
You’ll find that many of your worries concern things that are unlikely to happen; that are already largely discounted in current stock prices; and that probably won’t matter as much as you feared they would.
You get a much better return on time spent if you devote less of it to worrying about high risk investments, and more of it to an investing strategy. Create a strategy that is built upon analyzing the quality and diversification of your investments, and the structure and balance of your portfolio.
There’s another advantage as well. A calm investor is much less likely to react in haste and make sudden decisions that could prove to be damaging in the long run.
Use our three-part Successful Investor approach to find higher-quality investments and build a top portfolio
Invest mainly in well-established, dividend-paying companies, with a history of rising sales if not earnings and dividends.
Spread your money out across most if not all of the five main economic sectors: Manufacturing & Industry; Resources & Commodities; Consumer; Finance; Utilities.
Downplay or avoid stocks in the broker/media limelight.
What are your biggest worries with the stock market?
How confident are you that your investments will increase in value over time?
Use tax-loss selling to offset your taxable capital gains in Canada.
Tax-loss selling (or tax-loss harvesting) occurs when you deliberately sell a security at a loss in order to offset capital gains in Canada. You can then use these losses to offset your taxable capital gains.
In Canada, the last day in 2022 for tax-loss selling on the Toronto Stock Exchange is December 28, 2022. If you sell at a loss on or before that date, you are able to deduct your loss against your 2022 capital gains. However, you also carry your loss back for the previous three years to offset capital gains in Canada, or carry it forward indefinitely to offset future capital gains.
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As Canadian capital gains tax is lower than the tax on interest and on dividend income, capital gains is a very tax-advantaged form of income. However, since most investors have income of all three types, here are three strategies for structuring investment portfolios to minimize the tax burden.
It is usually best to hold any common shares outside of an RRSP (as dividend income and capital gains are taxed at a lower rate than interest income), and interest-paying investments in an RRSP. That’s because all income taken out of an RRSP is taxed at the rate on interest.
More speculative investments are best held outside of an RRSP. If investors hold them in an RRSP and they drop, investors not only lose money, but they can’t use the losses to offset any taxable gains from other investments.
Regarding mutual funds outside an RRSP, the main consideration is that mutual funds make annual capital gains distributions even if investors continue to hold the fund units. Investors then pay Canadian capital gains tax on half of any realized capital gains. So you are best to hold mutual funds in an RRSP and common stocks outside. You won’t realize capital gains on common stocks until you sell. (Note that common stocks are still okay to hold in an RRSP, especially if that’s all you hold in your portfolio.)
A properly structured investment portfolio can let you take advantage of the low tax rates on capital gains and dividend income while sheltering your higher-taxed interest income in your RRSP. If you make dividends or capital gains in an RRSP, you gain the tax shelter of the RRSP, but when you withdraw the funds from your RRSP they are taxed, as mentioned, at the same rate as interest income. This means you would lose out on the lower tax rates offered.
What to be aware of regarding capital gains tax in Canada
Whenever you’re considering making use of tax-loss selling to minimize capital gains in Canada, you should also be aware of the “superficial loss rule.” This rule states that if an investor, their spouse or a company they control, buys back a stock or mutual fund within 30 days of selling it, then they are not permitted to claim the capital loss for tax purposes. Failing to obey the 30-day rule will result in the capital loss being disallowed.
There are some ways to keep exposure to stocks during the 30-day period. For example, if you decide to sell your resource shares to realize a capital loss, but then you decide that resource stocks are poised for a rebound, you can buy a resource-heavy exchange-traded fund (ETF) to keep yourself exposed to that sector. Or you could buy shares in a company that is in a similar business as the one you sold (such as selling TC Energy and buying Canadian Utilities).
It’s always a good time to sell bad stocks, or stocks that are wrong for your portfolio. But you need to balance that rule against the fact that in the final couple of months of the year, some investors dump stocks without thinking, just to cut their taxes. In some cases, they simply want to sell and be done with it. In others, they intend to buy the stock back after 30 days (as we mentioned, if you buy back any sooner, you cannot deduct your loss.)
As a result, stocks that have been weak tend to stay weak in the final month or two of the year. But the best of the bunch can put on extraordinary recoveries when tax-loss selling season ends.
Bonus tip: Don’t let tax considerations spur you to make a costly selling mistake. You can always sell next year and carry your loss back.
Did you find my tips on capital gains tax helpful? Please share your thoughts in the comments section.
This post was originally published in 2015 and is regularly updated.
It doesn’t get as much play in the media as it did a decade ago, but even in the strong 2022 market, online trading carries hidden dangers that aren’t always evident at first.
The main risk comes from the fact that online trading may seem deceptively easy. The lower costs and higher speeds of online trading can lead otherwise conservative investors to trade too frequently. That can lead you to sell your best picks when they are just getting started.
The apparent ease of online trading may even prompt conservative investors to take up short-term trading or day trading. That’s just another danger of trading stocks online—there’s a large random element in short-term stock-price fluctuations that you just can’t get away from.
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Online trading: Lower costs are attractive, but it’s investment quality that makes money
This random element can be profitable for short periods. But you can’t reliably profit from it over the long term. In fact, most short-term traders wind up losing money. By the time their beginner’s luck fades, many are trading in dangerously large quantities.
Frequent trading can also lead you to buy lower-quality, thinly traded stocks. The danger arises from the fact that the bid and ask spreads of many of these investments can be so wide that the share price will have to go up significantly before you’ll even begin to make money on a sale.
You can make trades quickly in online trading, and that cuts your commission costs. However, for successful investors, this is a bonus, not the object of trading stocks.
It is far more important to focus on high-quality, well-established companies and how they fit in your portfolio. The longer you hold these stocks, the greater the chance that your profits will improve, as well.
Here are two other dangers to avoid in online trading. Both can seriously hurt your long-term returns:
Practice accounts can breed false confidence: Some investors are nervous about trading stocks online. So, instead of jumping right in, they start off by using the “practice accounts” or “demo accounts” that the online brokerage industry initiated several years ago. Practice accounts are supposed to be identical to real accounts in all but one respect: you buy stocks in them with imaginary or “play” money, rather than the real thing. The brokerage industry says this gives would-be traders a free opportunity to learn how to trade online without risking any money. Using an online broker’s practice account, you can learn online trading essentials, such as how to enter an order to sell or buy stocks; how to double-check your order before submitting it, so you avoid obvious but common mistakes, like buying 10,000 shares when you only meant to buy 1,000; and so on. The big risk with practice accounts is that you’ll try out a risky and ultimately unwinnable investment approach, like day trading or options trading, and hit a lucky streak. This could embolden you to put serious money at risk just when your results are about to regress to the mean. This will deliver losses instead of profits.
Automated stock-picking systems can backfire: Some investors who trade stocks online use automated stock-picking systems to help them make investment decisions. These systems are typically marketed with impressive-looking performance records designed to make investors think they are sure to make guaranteed profits. However, those records are typically derived by “back-testing” the program against past data. In other words, the promoters go back through old trading records and see what would have worked in the past. Automated stock-picking systems essentially do two things: First, they narrow down the data you use when you make investment decisions; second, they apply a fixed rule, or rules, to draw a conclusion or an investment decision from that selection of data. Unfortunately, the market’s key concerns continually change. Today’s good investments can turn into tomorrow’s dead ends. For a time, these systems seem to work, but that’s usually coincidental. If the market is going up and the system tells you to buy volatile investments, it automatically generates profitable trades. But they can just as quickly turn around and begin pumping out unprofitable trades. Often this happens just when they can do the most damage to the investor relying on the system.
Bonus tip: Building a “buy and watch closely” portfolio
Of course, there are a variety of ways to build an investment portfolio. Some work better than others. But our buy-and-watch-closely approach has done well for our portfolio management clients over the past few decades. We recommend this approach for our readers as well.
We start by applying our three-part Successful Investor rule for portfolio construction:
Invest mainly in high-quality, well-established companies, with a history of earnings if not dividends;
Diversify across most if not all of the five main economic sectors (Manufacturing & Industry; Resources & Commodities; Consumer; Finance; Utilities);
Downplay or stay out of stocks that are in the broker/media limelight. This limelight raises investor expectations to dangerous levels. When stocks fail to live up to those heightened expectations, share-price slumps can be swift and brutal.
We advise selling particular stocks when we feel the situation has changed and they no longer qualify as high-quality investments. We also sell if we decide that a stock isn’t as high-quality or well-established as it needs to be, to cope with the challenges it faces. Of course, many of our sales are due to a successful takeover of a company’s stock, which generally results in a major profit for our clients.
Note: This post was originally published in 2012 and is regularly updated.
What is a blue chip stock’s role in a well-diversified portfolio? Read on, for our answer—plus we’ll tell you how to find the best of those stocks.
What is a blue chip stock and what is its value in your portfolio? First, let’s explain blue chip stocks. A blue chip stock is typically a stock in a company that is a household name. And the top blue chip stocks have stood the test of time. Coca-Cola and Apple are two good examples.
Savvy investors invest in blue chip stocks for the long term. They don’t expect spectacular short-term gains, but they do bank on steady returns over time.
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What is the value of a high-quality blue chip stock to a diversified portfolio? It could be your key to long-term stability
The blue chip investments we recommend generally have a history of profits going back for at least 5 to 10 years. Companies that make money regularly are safer than chronic or even occasional money losers.
Blue chip companies can give investors hoping to save for retirement an additional measure of safety in volatile markets. And the best ones offer an attractive combination of moderate p/e’s (the ratio of a stock’s price to its per-share earnings), steady or rising dividend yields (annual dividend divided by the share price) and promising growth prospects.
Here are some things to watch for when looking for the best blue chips
As mentioned, blue chip stocks we recommend have a history of earnings and, in most cases, a history of sustainable dividends. They have established their value over the long term. Like all stocks, they can of course fluctuate widely and many suffer in a long-term market downturn, but they offer a higher probability of long-term gains.
We feel most investors should hold a substantial portion of their investment portfolios in securities from blue chip companies. These stocks should offer good “value”—that is, they should trade at reasonable multiples of earnings, cash flow, book value and so on. Ideally, they should also have above-average growth prospects, compared to alternative investments.
You may be surprised to find out that the root of the term “blue chip” stems from the game of poker, as the blue chips represent the highest value. At TSI Network, we think investors will profit most—and with the least risk—by buying shares of blue chip, dividend-paying stocks.
The dividend yield is certainly one of the most concrete indicators of a sound investment. It is the percentage you get when you divide the current yearly dividend payment by the share or unit price of the investment. It’s an indicator we pay especially close attention to when we select stocks to recommend in our investment newsletters.
What is a blue chip stock worth to your portfolio? Find these four characteristics and you could profit:
Blue chip investments should have industry prominence if not dominance.
Blue chip investments should pay dividends.
Blue chip investments should have low debt.
Blue chip investments should have the freedom to serve (all) shareholders.
Here’s what else investors should look for in blue chip stocks
The best blue chips offer both capital gains growth potential and regular dividend income.
Good blue chip investments may have hidden assets, such as real estate. For instance, when a company buys real estate, the purchase price goes on its balance sheet as the historical value of the asset. Over a period of years or decades, the market value of that real estate may climb substantially. But the purchase price remains unchanged on the balance sheet. You have to look closely to spot this hidden value. At times, the hidden value in a company’s real estate can come to exceed the market value of its stock. This hidden value may only become apparent to investors when the company upgrades the use of the real estate. For example, a merchandiser might re-purpose a parking lot to build a shopping mall with a residential condo tower on higher floors, and a parking garage down below.
Additionally, some blue chip companies may have a hidden asset in their relationship with loyal customers. After a series of satisfactory dealings, long-time customers develop a level of trust that makes them receptive to related offerings from the company. For example, Apple was able to move into the digital music player and smartphone businesses as quickly as it did in the past decade because it had an established core of fans for its Mac computers.
Add top blue chip stocks to your portfolio by using our three-part Successful Investor approach
Hold mostly high-quality, dividend-paying stocks.
Spread your money out across most if not all of the five main economic sectors: Manufacturing & Industry, Resources & Commodities, Consumer, Finance and Utilities.
Downplay or stay out of stocks in the broker/media limelight.
Some companies hold a blue chip reputation but over time lose the characteristics and qualities of a blue chip investment. How do you ensure that a blue chip stock is actually a blue chip?
Do you think blue chip stocks still offer the stability they promise? Or are there better options for limiting risk in your portfolio?
Take into account various options when you consider dividend vs index investing: Not all index investments are equal, and dividends are a true sign of investment quality.
One big advantage of index funds when weighing dividend vs index investing is that they can help you avoid the risk of choosing a mutual fund with a management style that virtually guarantees below-average long-term performance.
Another advantage of index funds is that they can give investors with limited funds a low-cost way to get some stock-market exposure. They can also be a good starting point for a registered education savings plan (RESP), or a child’s in-trust account. Many investors also consider them when they invest funds in their tax-free savings accounts (TFSAs).
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Dividend vs index investing: Reasons why investors like index investing with ETFs
The MERs (Management Expense Ratios) are generally lower on ETFs than on conventional mutual funds. That’s because most ETFs take a much simpler approach to investing. Instead of actively managing clients’ investments, ETF providers invest so as to mirror the holdings and performance of a particular stock-market index.
ETFs practice this “passive” fund management, in contrast to the “active” management that conventional mutual funds provide at much higher costs. Traditional ETFs stick with this passive management—they follow the lead of the sponsor of the index (for example, Standard & Poors). Sponsors of stock indexes do from time to time change the stocks that make up the index, but generally only when the market weighting of stocks changes. They don’t attempt to pick and choose which stocks they think have the best prospects.
This traditional, passive style also keeps turnover very low, and that in turn keeps trading costs for your ETF investment down.
Industry specifics are important factors when you’re comparing dividend vs index investing
We look for Canadian dividend stocks that have industry prominence, if not dominance. Our reasoning, besides brand recognition, is that major companies can influence legislation and industry trends to suit themselves. Minor firms can’t do that.
Canadian dividend stocks are an important contributor to your long-term gains, and dividend-paying stocks tend to expose you to less risk than non-dividend-payers. That’s why the majority of your stocks should be dividend-payers at all times. As you get older and closer to retirement, you should raise the proportion of dividend-paying stocks in your portfolio, to cut risk and improve the stability of your investment results.
Dividend vs index investing: Dividend-paying investments can be among your best holdings
We’ve always placed a high value on a record of dividends, mainly because it provides something of a pedigree for stocks we recommend. After all, you can’t fake a record of dividends. It takes a lot of success and high-quality management for a company to have the cash and the determination to declare and pay a dividend every year for five or 10 years. It’s not something you can create at the spur of the moment.
If you stick with top-quality, high dividend-paying stocks, the income you earn can supply a significant percentage of your total return—as much as a third of your gains. And at the same time, dividends are more dependable than capital gains as a source of investment income.
We think Canadian dividend stocks are some of the best investments you can own.
Dividend vs index investing: The best of both worlds
There are ETFs that pay dividends, which is important to note while looking at dividend vs index investing.
Overall, we recommend looking for dividend-paying ETFs that hold companies with records of long-term success and a long history of payouts. These companies are the most likely to keep paying and increasing their dividends.
3 tips for finding the best dividend-paying ETFs
Know the economic stability of countries when investing in international dividend ETFs. It’s also worth mentioning that foreign leaders may not be your ally when it comes to passing legislation that can affect your investments.
Know how broad the dividend ETF is, so you can determine its volatility. The broader the ETF, the less volatility it may have. A sector-based ETF, like one that tracks resource stocks, may be more volatile.
Know the current financial health of each company in the ETF. If a company is doing well, has done so consistently, and shows signs of growth, these factors are indicative of stocks that will keep paying a dividend.
Bonus Tip: An added benefit for some dividend stock investors
Dividend reinvestment plans, or DRIPs, are plans some companies offer to allow shareholders to receive additional shares in lieu of cash dividends. DRIPs bypass brokers, so shareholders save on commissions.
DRIPs also eliminate the nuisance effect of receiving small cash dividend payments. Second, some DRIPs let you reinvest your dividends in additional shares at a 5% discount to current prices. Third, many DRIPs also allow optional commission-free share purchases on a monthly or quarterly basis.
Generally, investors must first own and register at least one share before they can participate in a DRIP. Registration will generally cost $40-$50 per company. The investor must then notify the company that they wish to participate in the company’s DRIP.
An extremely high dividend yield can be a sign of danger. Have you chased a high dividend before, and if so, what led you to take the risk?
If you had to choose between investing in an index fund or dividend stocks, what would factor into your decision?
Use these tips and strategies to learn how to get dividends from stocks that will lead you to maximum portfolio gains
If you are interested in learning how to get dividends from stocks that will be sustainable, focus on those companies that have maintained or raised their dividends during economic or stock-market downturns. That’s because these firms leave themselves enough room to handle periods of earnings volatility. By continually rewarding investors, and retaining enough cash to finance their businesses, they also provide an attractive mix of safety, income and growth.
Additionally, the best dividend-paying stocks offer capital-gains growth potential as well as regular income from dividend payments.
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How to get dividends from stocks? Start by zeroing in on income stocks.
Income stocks are stocks that produce above-average income, usually in the form of dividends.
An income stock usually has two distinct traits. You can identify income stocks by their high dividend yields (the percentage you get when you divide a company’s current yearly payment by its share price). For example, stocks with a dividend yield higher than, say, 3% would typically be attractive to an income-seeking investor. Investors should note that a very high dividend yield can also be a warning sign of trouble (such as an imminent dividend cut).
Apart from a high dividend yield, you should look for a second trait: stocks that have a long history of paying (and raising) their dividends. In determining how to get dividends from stocks, this is one of the most important factors.
If you’re an income stock investor, you may wish to place more emphasis on Utilities and Canadian banks. That’s because these firms generally pay high, secure dividends, and have long histories of raising their payments, even during downturns. However, you’ll still want to make sure your portfolio is well-diversified across most if not all of the five sectors.
Here’s what to do to find the best stocks paying the highest dividends—and how to determine if they will keep paying them:
Look for companies with a history of long-term success.
Examine the current financial health of the company.
If a company currently offers a steady dividend, this is a good sign of its potential to continue doing so.
Look for companies with a strong hold on a growing market and a unique product or service that cuts its competition.
Subscribe to TSI Network’s Dividend Advisor. When a dividend-paying stock grabs our attention, we write about it here.
How to get dividends from stocks: Take advantage of the dividend tax credit as part of your dividend stock investing strategy
Canadian taxpayers who hold Canadian dividend stocks get a special bonus. Their dividends can be eligible for the dividend tax credit in Canada. This dividend tax credit—which is available on dividends paid on Canadian stocks held outside of an RRSP, RRIF or TFSA—will cut your effective tax rate.
This means that dividend income will be taxed at a lower rate than the same amount of interest income.
If you include top-quality dividend stocks in your portfolio, the income you earn can supply a significant percentage of your total return—as much as a third of your gains. And at the same time, dividends are more dependable than capital gains as a source of investment income.
Use our three-part Successful Investor approach to help you find the best dividend-paying stocks
Invest mainly in well-established, dividend-paying companies;
Spread your money out across most if not all of the five main economic sectors (Manufacturing & Industry; Resources & Commodities; the Consumer sector; Finance; Utilities);
Downplay or avoid stocks in the broker/media limelight.
Bonus tip: Look for hidden assets to help you find the best stocks to buy
A balance sheet is a financial statement that gives a snapshot of a company’s assets, liabilities and shareholders’ equity. Investors use this data to determine how sound a company’s finances are—and also to discover if it has any “hidden assets.”
Certain types of assets on a balance sheet might have actual market values well above historical values. For example, when a company buys real estate, the purchase price goes on its balance sheet as the historical value of the asset. Over a period of years or decades, the market value of that real estate may climb substantially. But the purchase price remains unchanged on the balance sheet.
At times, in fact, the hidden value in a company’s real estate can come to exceed even the market value of its stock. This hidden value may only become apparent to investors when the company upgrades the use of the real estate. For example, a merchandiser might repurpose a parking lot to build a shopping mall with a residential condo tower on higher floors, and a parking garage down below. Similarly, balance sheets often fail to assign any value to brand names, even those household names that have built up multitudes of loyal customers over the years.
How much do you focus on dividend stocks in your portfolio, and how much do they contribute to your overall return?
Investing in stock market futures for tomorrow can turn a modest stake into a fortune, but the odds favour the professionals and in reality you are likely to suffer big losses
When you buy or sell a futures contract, you commit yourself to buy or sell a quantity of a commodity (or currency or financial instrument) in the future. The date and quantity are standard; you fix the price when you buy or sell the contract.
In theory, high leverage makes it possible to turn a modest stake into a fortune in futures. In practice, however, most stock market futures for tomorrow (meaning at some point in the future) wind up losing money.
Successful investors recognize that investing in futures is a form of recreation. You may do it for fun, but don’t count on it for profit.
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Here’s how futures work:
Trading in futures is a long-established and perfectly legal way to bet on price changes in commodity, currency and financial markets. This attracts futures traders.
Here’s an example: The first futures were in commodities, which offer a clear example of the way futures trading works. Say you purchase a March wheat contract at $6.60. That means you’ve agreed to a contract for 5,000 bushels of wheat in March, paying $6.60 each, for a total of $33,000. The seller has agreed to sell that much wheat at that price on that date.
Since the transaction takes place in the future, the buyer and seller only put up a deposit of perhaps 5% of the $33,000. This provides enormous leverage. A 5% price rise represents a 100% gain for the buyer and a 100% loss for the seller.
Futures started out as a convenience for commercial interests. Farmers sell wheat futures to fix their income from this year’s harvest. Bakers buy wheat futures to fix their flour costs. But most futures transactions take place between speculators who are simply betting that prices will rise or fall. Most contracts get closed out prior to delivery.
When you trade stock market futures for tomorrow, you are betting on the direction and speed of coming price changes. Nobody consistently wins these bets. Sometimes you guess right and sometimes you guess wrong, but you pay commissions and fees with every trade. You may feel you have a knack for predicting changes in prices of stock market futures. Many futures traders start out burdened with this belief. Most come to see they were wrong. The reason is simple. The markets determine price changes, and there are extremely intelligent and hard-working people on both the buying and selling sides of every futures market. As a result, most of the time, prices are about where they should be, based on existing information.
Of course, new information comes along every second of every day. No one can consistently predict if the next tidbit of info will push prices up or down, or how much of a push it will deliver. However, professional futures traders have a big advantage over amateurs and hobbyists, just as in every other field.
Here are three reasons to stay away from futures:
Trading in futures is not the same as investing in stocks or funds. There are three fundamental differences investors must be aware of to understand the nature of futures trading:
Futures contracts have a fixed life, usually under one year. You can hold stocks or mutual or exchange-traded funds indefinitely.
Futures contracts do not give you any income. Some stocks, and some funds, do provide dividend payments.
Futures are a speculation—a bet on price movements. To make money, you have to outguess other players by a wide enough margin to pay commissions. Stocks and funds are an investment because they let you profit from economic growth.
Our three-part Successful Investor approach is the best way to make money in the stock market
At TSI Network, we recommend using our three-part Successful Investor philosophy to make money no matter what happens in the market:
Spread your money out across most if not all of the five main economic sectors (Manufacturing & Industry; Resources & Commodities; Consumer; Finance; Utilities);
Downplay or avoid stocks in the broker/media limelight.
Bonus tip: Avoid gold stock market futures for tomorrow as well as structured products
You have to learn a lot of things to become a successful investor, and few people learn them all in any logical progression. Instead, most of us move from one subject of interest to another, with a lot of zigs and zags in between.
That’s why some investors go through a phase when they know just enough about a particular investment to be a danger to themselves and others.
A gold investing mistake to avoid is structured investments. Brokers sell various structured products for investing in gold and other commodities, while supposedly limiting risk. Most participants will ultimately lose money in these investments. Or they will make a poor return in relation to their risk.
The difference between structured products and gold futures trades is that the losses won’t happen so quickly. However, more of the money you lose will flow into brokers’ fees and commissions, while you’ll typically lose less on the commodity investments themselves.
Futures have many controversies surrounding them. What would convince you to invest in futures regardless of these controversies?
Have you dabbled in the futures market? What was your experience?
Successfully playing the stock market — like chess—is never about going for broke.
Many investors like to use analogies from sports or the military to describe their investment approach, so they’ll often use the phrase playing the stock market. But if I had to compare our investing approach to anything outside the investment business, I’d choose chess.
Good chess players never “go for broke,” as the saying goes. Instead, they try to position their pieces so they can profit from the mistakes they expect from opponents who are less talented, less experienced or less patient.
How Successful Investors Get RICH
Learn everything you need to know in 'The Canadian Guide on How to Invest in Stocks Successfully' for FREE from The Successful Investor.
How to Invest In Stocks Guide: Find 10 factors that make your investments safer and stronger.
Successful investors follow a comparable approach. But the crucial difference is that they have no opponent who can be relied upon to make mistakes.
Instead, successful investors try to arrange their portfolios so that they more-or-less automatically tap into the profit and long-term growth that inevitably come to well-established companies operating in relatively free economies in relatively prosperous times.
Four key points to sum up the basics of successfully playing the stock market
At the same time, it’s essential to diversify, as you do if you are investing your money with our three-pronged investment approach of targeting well-established companies, spreading your investments across most if not all of the five economic sectors, and avoiding stocks in the broker/media limelight.
In addition, successful investors need to limit their involvement in trouble-prone areas like new issues, start-up companies and illiquid investments.
They need to stay out of companies in which they have doubts of any sort about the integrity of insiders.
They also need to recognize the special risks of investing in fashionable or excessively popular minefields, such as Internet stocks in the late 1990s, or income trusts in the 2000s, or today’s social media stars.
In fact, you could sum up the basics of successful investing quite simply in four key points:
Don’t depend on luck to make money for you or to prevent losses.
Be skeptical of the claims and recommendations of brokers, promoters or anybody else with a vested interest in a particular investment.
Don’t do anything stupid.
Win by not losing.
How many stocks should you hold in your portfolio?
You’ll hear all kinds of advice pertaining to the number of stocks you should hold in your account when you start playing the stock market. We recommend that you invest initially in a minimum of four or five stocks—one from each of most, if not all, of the five main economic sectors (Resources & Commodities, Finance, Manufacturing & Industry, Utilities and Consumer).
You can buy them one at a time or over a period of months (or even years), rather than all at once. After that, you can gradually add new names to your portfolio as funds become available, taking care to spread your holdings out as we recommend.
When you get above $200,000 or so, you can gradually increase the number of stocks you hold. When your portfolio reaches the $500,000 to $1-million range, 25 to 30 stocks is a good number to aim for. For a mature portfolio, 40 stocks is a good upper limit.
Of course, you may fall a few stocks below that range, or go a few above it, particularly when you’re making changes to your holdings. That won’t matter if you follow our three-part prescription of mainly investing in well-established companies; spreading your money across the five main economic sectors; and downplaying stocks that are in the broker/media limelight.
There is a reason why our upper limit for any portfolio is around 40 stocks. Any more than that, and even your best choices will have little impact on your personal wealth.
Be smart while playing the stock market and avoid diluting your profits with mutual funds
Some investors prefer to hold stocks through mutual funds or ETFs. However, many fund investors routinely hold more than 40 stocks through their fund holdings. That’s because they often invest in 10 or more individual funds, any one of which may hold 50 to 100 stocks. There’s a lot of overlap in stocks between funds, of course, but this still represents far too much diversification.
When you hold too many stocks, you spread your money out too thinly and condemn yourself to mediocre results, at best. The best you can hope for is a long-term return that more or less equals the market, minus the average mutual fund MER (the yearly cost of investing in most funds) of 2.5% to 3%.
All of these points relate to our analogy of the intelligent chess player’s approach to investing. Successful investors playing the stock market will set up a portfolio that can tap into the best opportunities in the market, under all market conditions—instead of just reacting to events in the market and the economy and hoping you’ve made the right moves.
Are you a new investor who has just started playing the stock market? What other topics would you like to hear about? Share your thoughts with us in the comments.
This article was originally published in 2017 and is regularly updated.
Here’s what to look for when investing in stocks—and how to fit them into a well-balanced and diversified portfolio.
Do you know what to look for when investing in stocks? We recommend investors build a portfolio mostly composed of well-established, dividend-paying companies. As well, some of the biggest profits you ever make will come from buying stocks before they find their way into the limelight.
When we’re looking for the best investments to recommend in our newsletters and investment services, we start by putting all the important information we know about a company into perspective. That helps us spot the best stocks—and in the long run, investors make most of their profits in investments that offer good value and an attractive long-term outlook.
How Successful Investors Get RICH
Learn everything you need to know in 'The Canadian Guide on How to Invest in Stocks Successfully' for FREE from The Successful Investor.
How to Invest In Stocks Guide: Find 10 factors that make your investments safer and stronger.
What to look for when investing in stocks: Stay away from extremes
In the end, there are many ways to try to put the facts about a company into perspective. None are perfect, since all involve a mental balancing act between high and low estimates, history and the future, and faith versus skepticism.
Nonetheless, our goal is to put all the information we gather about a company into a form that lets us weed out the extremes—excessively overvalued stocks, or those that are suspiciously cheap.
What to look for when investing in stocks: Diversification is a key to profiting over time
Always maintain a diversified stock portfolio—and avoid the temptation of trying to pick hot stocks or sectors.
Different investors may be more comfortable holding a larger or smaller number of investments in their portfolios, including stocks and exchange-traded funds (ETFs). Here are some tips on diversifying your stock portfolio:
When it comes to a diversified stock portfolio, stocks in the Resources, and Manufacturing & Industry sectors, in general, expose you to above-average share price volatility.
Stocks in the Utilities and Canadian Finance sectors entail below-average volatility.
Consumer stocks fall in the middle, between volatile Resources and Manufacturing companies, and the more-stable Canadian Finance and Utilities companies.
Most investors should have investments in most, if not all, of these five sectors. The proper proportions for you depend on your temperament and circumstances.
Find out what to look for when investing in stocks and learn why blue-chip companies are top holdings for your portfolio
Some of the most successful investors we’ve met know what to look for when investing in stocks: blue chip companies. You can still look at blue chips as the strongest and most secure stocks on the market. (Just be sure you look at the stock’s qualities and not just at the label. That’s because some blue chips only get their reputation through a strong public relations effort or by being in the right industry or business situation at the right time and place.)
When assessing blue chip companies that are good companies to invest in, you need to ask: What are they doing to remain vital? These companies continue to hold strong positions in healthy industries. They also have strong management that will make the right moves to remain competitive in a changing marketplace.
Stocks like these give investors an additional measure of safety in today’s markets. And the best ones offer an attractive combination of low p/e’s (the ratio of a stock’s price to its per-share earnings), steady or rising dividend yields (annual dividend divided by the share price) and promising growth prospects.
Here are some characteristics of top blue-chip stock companies to help you can make smart investment decisions
Blue chip investments should pay dividends: Review a company’s 5- to 10-year record of paying dividends. Companies can fake earnings, but dividends are cash outlays. If you only buy dividend-paying value stock picks, you’ll avoid most frauds.
Good blue chips have low debt: It doesn’t matter if you’re investing in blue chip stocks or penny stocks, the company under consideration should have manageable debt. When bad times hit, debt-heavy companies often go broke first.
Blue chip investments should have industry prominence if not dominance: Major companies can influence legislation, industry trends and other business factors to suit themselves.
Good blue-chip investments have the freedom to serve (all) shareholders: High-quality stock picks must be free of excess regulation, free of dependence on a single customer, and free from self-dealing insiders or parent companies. Canada-wide is good, multinational is better. There’s extra risk in firms confined to one geographical area.
Above all, use our three-part Successful Investor approach to help you find the best dividend-paying stocks
Invest mainly in well-established, dividend-paying companies;
Spread your money out across most if not all of the five main economic sectors (Manufacturing & Industry; Resources & Commodities; the Consumer sector; Finance; Utilities);
Downplay or avoid stocks in the broker/media limelight.
What is the first data point you look for when considering stocks to buy?
What are the most important considerations for you when you buy a stock?
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The contents of this web site and our publications are based upon sources of information believed to be reliable, but no warranty or representation, expressed or implied, is given as to their accuracy or completeness. Any opinion reflects the Successful Investor’s judgment at the date of publication and neither the Successful Investor, nor any of its affiliated companies, nor any of their officers, directors or employees, accepts any responsibility in respect of the information or recommendations contained in the publications or on this web site. Moreover, the information or recommendations are subject to change without notice.
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