YourFinanceQuestions.com

I was thinking about signing up for an account on E-Trade.com but I really don’t have any experience in stock market investing. Basically, do you just purchase a certain amount of shares, wait for them to go up in value, and then sell? Also, how long does it take you to sell the stock and who buys it? Do you get the amount of money the stock is worth or will people try to offer you a lower price then the market value? Please fill me in on this because I’d really like to learn. – Greg, Clearwater, FL
Once you have money in a brokerage account, you can immediately begin to buy and sell stocks. There is no limit to how many shares you can buy of each company. If you decide to sell a stock, a market order is executed immediately, as long as the market is still open. A market order means that you sell your shares for whatever the asking price is at that moment in time. The other type of sell order is a limit order. This varies from a market order because you set a price in advance for what you will sell each of your shares for. The order is not executed until another party is willing to pay your specified price for the shares. Sometimes a party is willing to pay what you are asking for right away, however there are times when nobody will want to buy your shares for the price you selected, meaning it is too high. The benefit of a brokerage house is that it will find a buyer for your shares without you having to do any additional work.

Be aware that shares do not always go up in value and sometimes you will need to sell after their value has declined. In this scenario you are selling because the fundamentals of the business you invested in have changed, and you are trying to sell before the stock price declines further. Many investors believe that knowing when to sell shares is a lot more complicated to figure out than when to buy shares.

After you sell your shares, you get the full amount the stock is worth minus the commission you pay the brokerage for selling it for you. However, it is important to keep in mind that you will be paying taxes on any capital gains you may have. A capital gain is defined as the difference between what you bought the shares at and what you sold them at. For example, if you bought 100 shares of Disney at $10 a share and sold them at $15 a share, you would have $500 worth of capital gains ($5 a share * 100 shares = $500). Not to bore you, but you should also be aware of the current tax implications if you sell your shares within a year. If you do this, and have recorded a capital gain, your profit will be taxed at your ordinary income tax level. However, if you hold the shares for at least a year, you will be taxed at a lower set rate. Thus, it is more tax friendly to hold your shares for at least a year. Good luck investing.

I once heard that having too many credit cards is bad for your credit even if you pay them off on time. Is this true? If so, how many do you think it is safe to have? Also, How do you look up your credit score, and what is considered good or bad? Further, What kinds of practices do you recommend for improving your credit score in general? – Katherine, New York, New York

In general, having too many credit cards is not a good thing. You have to manage every account and make sure that every bill gets paid on time. There is no real need for a person to have more than three or four credit cards. One might consider getting a Visa, MasterCard and American Express just in case a merchant only accepts one type of card. For example, Costco, the membership warehouse, only accepts American Express at its stores.

Every person that has a credit card also has a credit score. A credit score is what lenders use to determine how risky you are to lend money to. A mortgage company will look at your credit score when determining what interest rate to give you, if they decide to give you a mortgage. If you get an auto loan from your local bank, it too will look at your credit score to determine what interest rate to charge.

The most well-known credit score is called the FICO score. The FICO score range is between 300 and 850 and it gets its name from the company that developed it, the Fair Isaac Corporation. If you want to see your FICO score, you will have to pay for it. You can go to www.myfico.com and sign up to view it. A good FICO score is anything in the high-700s. Consumers with a score in the high 700s will receive the best rates from lenders.

To improve your credit score you should focus on the following two things:

1) Pay bills on time.
This is the one that most people already know. Paying your bills on time shows lenders that you are dependable and trustworthy. Late payments negatively affect your credit score. If you have trouble organizing your bills, you should try using some personal finance software such as Quicken or Microsoft Money. Another way to assist you in paying your bills on time is using a free online service like mint.com, which automatically logs into your financial accounts and gives you reminders when bills are due.

2) Keep the debt to credit ratio in check
The debt to credit ratio measures how much debt one has compared to available credit. For instance, if I have a $15,000 credit line on my American Express card and I have spent $1,500 this month, my debt to credit ratio is 10% ($15,000 divided by $1,500). While the exact methodology for calculating the FICO score is not published, many credit experts say that keeping the debt to credit ratio below 50% is essential for having an excellent credit score. While some people shy away from a high credit limit, actually having one but not using it is beneficial to your credit score.

It is important to maintain a good credit score. However, it is not something to obsess over on a daily basis. Just keep paying your bills on time and monitoring your debt to credit ratio and your credit score should be excellent when it comes time to apply for a loan.

I’m looking into investing in stocks for the first time. I have heard that money market mutual funds are a good and reliable choice, however I would like to invest in something that has a greater earning potential. I understand that this kind of investing is a little more risky, but I don’t mind taking that risk if I have read up on the company and truly see growth potential. How can I find information on what kind of stocks would be good? - Katie, Maplewood, MN

Katie,
You are right in that stocks have the potential for greater gains than money market funds. One thing that you need to realize before investing in individual stocks is that they also carry a lot of risk. Most investment advisers urge their clients to invest in mutual funds for the diversification they offer. You said that you do not mind investing in a company where you see growth potential, but you need to keep in mind that the stock market might have already factored this growth into the stock price.

The first thing I would do is to visit your local public library and read everything you can get your hands on regarding investing. If you want to be successful, the first thing you will need to learn is how to interpret financial statements. These are the publications released by every publicly traded company on either a quarterly (10-Q) or annual (10-K) basis. They contain the relevant financial data that illustrates how the company performed for the given quarter or year. A word of warning: financial statements are very difficult for a beginner to understand. Make sure you read the footnotes of an annual report before even thinking of investing your money. Footnotes are where the company’s management likes to hide the bad news.

If you are determined to try your hand at picking individual stocks, I would certainly recommend reading The Intelligent Investor by Benjamin Graham. If you are unfamiliar with the author, he was Warren Buffett’s mentor and his professor at Columbia. The book is a difficult read, but it gives insight into how to select stocks using a “value” approach. Another great book to read is Common Stocks and Uncommon Profits by Philip Fisher. Warren Buffett has said that this book influenced his stock selection process, as it emphasized that buying a great business at a fair price as opposed to a lousy business at a great price.

Once you have developed your own criteria for purchasing stocks, you will need to keep up with current events in the stock market. I have found that the best place to find up to date information is in the Wall Street Journal. The online version of their website posts Wall Street’s breaking news. If you plan to invest in individual stocks you should also be reading industry trade magazines and newsletters to get a better feel for the business you are investing in.

While I have just given you some references that will serve as a starting point, I would like to warn you that successfully picking individual stocks takes a lot of effort. Most people, including the professionals, fail to beat the market average. Keep that fact in mind before investing a penny in an individual stock. Good luck!