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Thanks to TechCrunch, I just found an interesting site that can help investors find hot stocks.  StockTwits is like Twitter for investors.

Rather than search with the popular hash-tag used in Twitter, StockTwits uses a system to help investors follow particular stocks or users to find the latest trades and news.  I tried a search for $NEM, to find news on Newmont Mining, and was impressed to see many users talking about it today.

I would by no means by or sell a stock based on someones Twit, but it is a fun research tool that can lead to finding great investments on your own.

The site has some integration with popular news outlets and companies like Bloomberg, CNN, NASDAQ, CBOE, and CME, which lends some credibility.  Just remember, each Twit is a random investor’s opinion.  They may be right or wrong and you may make or lose money if you follow their advice.

I make a small portfolio tweak this morning.  Home Depot was downgraded by Goldman Sachs today and another firm last week.  Based on projections in the housing market, I agree that it may be on a downward trend for the next little while.  I sold my shares for about a 5% profit.  Not bad for two and a half months.

It is always important to keep track of your investments in your portfolio.

I read an interesting article this morning on The Street about dividend stocks that are safer than treasury notes.  The article goes over a formula to test each company’s ability to continue payments despite economic conditions, and seven passed the test.

The seven stocks discussed are Proctor and Gamble, Coca Cola, Intel, Exxon Mobil, Johnson and Johnson, Home Depot (in my portfolio), and Pfizer.

I have become more of an advocate for dividend stocks over the last year or so.  Yields have generally increased as the market have been very volitile, and a good dividend can easily make up for a decrease in stock price.

Also, thanks to Suburban Dollar for including my post on How IPOs Work in this week’s carnival of personal finance.

I just made a stock trade, and I plan to start sharing each trade I make immediately for the sake of openness and transparency.

This afternoon, about two minutes before the closing bell, I bought 11 shares of PM for $46.48.  You may recognize PM as Phillip Morris International.  MO is the symbol for Altria, the United States holding company for Phillip Morris in the United States and several other diverse businesses.  I am trying to make investments in lots of at least $500, which is why I picked an odd number of shares.

I believe the fundamentals of PM are stronger than MO.  I considered MO because of its high 7% dividend, but I believe the risks of the tobacco industry in the United States are too high to justify purchasing a tobacco stock that relies on the US as a revenue base at this time.  PM is paying over 5%, and no single country will make or break its profitability and free cash flow generation.

I did think twice before buying a tobacco company.  I have mixed feelings toward this industry.  I now want more people to smoke internationally so I can make more money, but I also want to see people stop smoking for health reasons.  If smoking laws toughen up in the US, at least, it will not hurt my bottom line directly.

I have asked the readers about sin stocks once before, and I still want to know what you think.  Would you buy a company even if you don’t agree with what they do?  I obviously was comfortable enough to hit the purchase button, but I did think twice.  I figure that someone is going to be making money from Phillip Morris International, it might as well be me.

An IPO, or initial public offering, is the event that brings a company into the stock market.  When an IPO takes place, investors are able to buy the company’s stock on a major market, such as the New York Stock Exchange or NASDAQ.  There are many reasons for a company to go through the IPO process, or avoid an IPO, and the mechanics of the process are fairly complex.

When small companies are looking to grow, they need money.  There are several methods for raising funds.  First, a company will look for an angel investor or venture capital funding.  Those funding sources can help small companies build up revenues and, hopefully, reach profitability.

To scale up further, the company will generally need debt or equity financing.  Debt, in the form of loans or bonds, has to be repaid with interest.  Equity allows investors to put money into the company for an ownership stake.  The stock issued does not have to be paid back, but the managers will have to act in the interest of shareholders once the stock has been issued.  You might also be interested to see what a share of stock represents.

To issue stock, the company approaches a large investment bank that acts as a lead underwriter for the transaction.  Examples of investment banks are Goldman Sachs and Morgan Stanley.  Large financial institutions such as Bank of America and Citibank also have investment divisions.

The investment bank then undertakes a lengthy, detailed review of the company’s financial situation, growth potential, and value.  Based on that value, the investment bank, or group of investment banks depending on the size of the company, will come up with a target price and number of shares.

The underwriting banks enter into a contract that requires the bank to pay the company the value of the initial public offering and sell the shares to investors.  If you are interested in investing in an IPO, check with your stock broker.  My brokerage firm only allows high net worth investors to buy into an IPO. 

Tesla Motors, which builds high end electric motor sports cars, is planning to have an IPO on June 29^th.  The IPO share price will be announced just before the stock begins trading, and investors have to commit to purchasing the shares ahead of time, without knowing the exact price.  Rather, they are given a price range and prospectus explaining the risks of the investment.  The range for Tesla is $14-$16 per share.  At $15 per share, Tesla is a $1.4 billion company.  The IPO will generate about $160 million for the company to use for further growth.

For a company that has never had a profitable year, this is a risky investment.  If you have never seen what Tesla cars can do, take a look at the Tesla Motors website.  The 288 horsepower Tesla Roadster can go from 0 to 60 in 3.7 seconds and has a top speed of 125 miles per hour, which is electronically imposed. (It could go 193 mph otherwise)

While the IPO will make the owners and early stage investors very rich, hopefully the company will put its new $160 million capital infusion to good use and build up a successful electric car company.  The economy could use a new car company and the environment could really use electric cars (as long as we are off of coal power plants, which we are a long way from).

Common stock is the standard stock that most of you think of when you think of the stock market.  Each share entitles you to a fractional ownership and vote in a company.  It may come with a dividend payment.  It allows you to enter the company’s annual meeting and submit shareholder resolutions.  Preferred stock is very different.

Preferred stock is more like a perpetuity paid by a company than a standard share of stock.  The key differences of preferred stock, in general, are that it does not give the owner a vote and it pays a fixed dividend.

For investors nearing retirement, preferred stock can be a very good income stream.  If a company has to stop paying the dividend on common stock, the shareholders are out of luck.  If a company suspends a dividend on preferred stock, it is generally required to make catch up payments at a later date.

There are risks to preferred stock.  In many aspects, it is treated like a bond with no repayment date.  Some preferred shares may be callable, meaning the company has the right to buy the stock back whether you like it or not.  They may be convertible, meaning the company can turn the preferred shares into common shares if the board of directors votes to do so.

It is important to note where preferred shareholders are ranked on the ladder of importance to a company in the event of financial hardship.  Debt holders (bond holders) are given priority in terms of interest payments and liquidation.  Preferred shares come later.  Common shareholders are last in line.  Preferred stock is often rated by the major debt rating agencies, such as Moody’s and Standard and Poor’s.  Those rating help you judge the viability of continued payments.

I do not own any preferred stock, but I am not opposed to doing so in the future.  It is important to keep a diversified portfolio, and preferred shares are a great tool to stay diversified as you near retirement or hope to avoid market volatility.  You can buy preferred stock through your stock broker similar to any other stock transaction.

Everyone knows that old saying that the key to investing success is to buy low and sell high.  While any dummy can understand the importance of that, putting it to practice is much more difficult.  The two major schools of thought for predicting stock movements are fundamental analysis and technical analysis.

Technical Analysis

Technical analysis uses historical pricing to predict future movements of a stock’s price.  Commonly, technical analysts will look at the moving average of a stock over a fixed time period, such as 50 day, 100 day, and 200 day, to establish a baseline price and maximum price to build a range for the stock.  If it hits the baseline, many traders believe that the stock can only go up.  If it hits the top of the range, they believe it can only go down.

Note that I refer to people that follow this method as traders, as opposed to investors.  As a general rule, people who focus on technical analysis are not buying stocks for the long run; they are looking for short term wins.  I personally rate this method just a step ahead of gambling.  Most day trades and short term sales are all based on technical analysis, which does not take into account how the company’s financial situation (fundamentals) and the overall markets are doing as a whole.

My preferred technical indicator when reading technical analysis charts are Bollinger bands.  Created by John Bollinger in the 1980s, Bollinger bands create a low, middle, and upper band based on the volatility and moving average of the stock.

Just remember, if you are looking at technical charts, your investments are based on the past.  We all know that the past might be helpful but is not a sure bet in predicting the future.

Fundamental Analysis

Fundamental analysis looks at a company’s current and projected (pro-forma) financial situation to decide what the company is worth today.  Most mutual fund managers use fundamental analysis for their purchase decisions.  Warren Buffet’s value investing strategy is also based on a company’s fundamentals.

The main inputs for fundamental analysis are the balance sheet and income statement.  Those statements, released quarterly by each public company, tell about the financial health of the company.  Using those statements, analysts build predictions of future growth and performance.  Those pro-forma statements are based on industry trends, company trends, the economy, and major news impacting the company’s business.

Once a pro-forma balance sheet and income statement are created, the most common valuation for a company is a free cash flow analysis.  Investopedia defines free cash flow, often referred to as FCF, as operating cash flow minus capital expenditures.  A free cash flow is discounted based on a company’s risk level to create a total enterprise value.  Divide the company value by the number of shares of common stock outstanding to find the intrinsic value of a share of stock.

If the intrinsic value of a share is higher than today’s market price, it is considered a “buy.”  If it is within a very close range, it is a “hold.”  If it is below the market price, it is rated given a “sell” rating.  Some investment analysts have more rating categories and use different names, but they are essentially giving you this information.  For example, outperform, market perform, and underperform correlate to buy, hold, and sell respectively.

Emotion

One thing to completely take out of the picture is trading with emotion.  Emotional investing leads to stock market crashes, selling at the wrong time, and buying at the wrong time.  If you have done well with a stock and want to keep the profits, it is best to decide if the stock is still undervalued.  If it is, why would you ever sell?  The same goes for buying.  If a stock has done really well recently, it is generally a bad time to buy it.  You already missed the big gain and will lose money if it goes back down.

Whenever you are going to click the buy or sell button, don’t think of what you have already gained or lost unless you are taking taxes into account.  What has happened is done.  Those are sunk costs.  Only buy and sell based on the future.

Conclusion: What Should You Do?

I think the best method for deciding when to buy and sell is to conduct a fundamental analysis yourself and take the technical analysis into account as a secondary valuation method.  If you think a stock is wildly undervalued, it is probably a good idea to buy it even if it has trended down lately.  I always rank fundamentals ahead of technicals.

You are never going to be right 100% of the time.  My portfolio is up 30% as a whole, but I do have two stocks that are down at the moment.  I just stick to my intelligence, not my emotion, and trust that my analysis is correct.  So far, it has worked pretty well for me.  I am up just under 15% per year since I started investing.  I hope you have the same luck success as me.

Please share your investment strategy and how well your investments have performed in the comments.

Disclaimer: If you buy or sell stocks based on what I say, you do so at your own risk.  This analysis is my own opionion based on my own research.  My investment strategy is to buy and hold, not trade regularly.

WMT – Walmart was my first stock purchase.  It has risen and fallen with the market, but it is still a slight gain for me.  In addition, the dividend, which currently yields just over 2%, makes this solid company a better investment than any bank savings account I know of.  I drove by the first store and headquarters last weekend and was happy to see the great test stores in Northwest Arkansas.  I think this company will continue to perform well internationally and grow slowly in the United States.

GE – I bought GE because of its long history of solid performance.  No matter what happens, I doubt this company will suffer very much.  I took a big loss on this in the big market drop of 2008, but it has come back to a slight gain.  It also pays a 2.45% dividend.

HD – Home Depot was a good buy.  I am up 25% on this investment and plan to keep holding it.  With a weak economy, Home Depot stores can attract more do-it-yourself people that might hire a contractor otherwise.  As the economy rises, I expect sales to increase as well.  HD pays a 2.85% dividend.

WWE – I admit that I am a long time fan of WWE, and that is why it popped up on my radar.  A lengthy fundamental analysis proved that the stock is worth more than the current price.  It also pays a massive 8.56% dividend.  As long as free cash flow remains strong, this is a good company to own.

BRK.B – I bought 1 share of BRK.B a few weeks before it split 50:1.  The split took the stock from $3500 per share to $70 per share.  I guessed correctly that the stock would spike after the split, and I sold 40 shares for a profit.  I kept the 10 shares for the long haul.  They also got me in the 2010 shareholders meeting in Omaha.

Company Stock – I can purchase my company’s stock for a 15% discount, and it has performed incredibly well for me.  It pays a good dividend and has given me a 72% return to date.  I am overweight in this stock, but with the discount and good performance, it is worth buying.

EBAY – I did an analysis on eBay and found that the stock price was about half of the intrinsic value I calculated.  It did great for me before the worst May in years.  I am now down on the stock, but I am confident PayPal and StubHub will lead to profit growth over the next few years.

VAR – This one was a stock tip from my Dad.  He has done well with the company so I trusted him and bought in.  It has not done very well, particularly in last month.  It is a company with great products and a good mission, and I am sure its advances in cancer treatment will lead to long term growth.  I am holding it for now.

NEM – I did not want to buy gold, but I wanted gold in my portfolio.  Newmont Mining is one of the biggest gold mining companies in the world, and I expect gold to rise with increased volatility in European markets.  As long as it stays at current levels, the stock will continue to see increased profits as production increases at several key mines around the world.  It pays a small .75% dividend.

If you are new to investing, you might be interested in what a share of stock represents and value investing strategy.

As you all know if you are a regular reader, I am a fan of Lending Club.  Lenders on the site are exposed to the entire dynamics of a market system, and that correlates directly to what you experience when investing in the stock market.  If you are not familiar with the site, I will start with a quick breakdown of how it works.

When you sign up with Lending Club, you are given the ability to invest in personal loans to other people in $25 increments.  If you sign up through links from this website, you are given a risk free $25 bonus to begin investing.  The loans are listed by a credit rating system developed by Lending Club.  Higher risk loans have a lower rating.  As the risk level increases, so does the interest rate.

What does this teach you about the stock market?  Higher risk should equal higher return, but high risk means a higher chance of losing all or part of your investment.

This is what investment analysts, insurers, credit issuers, and individuals look at when deciding how to invest and what return is expected.  If you invest in a stable blue chip company like Walmart, the risk is low and the stock return will be relatively low.  If you invest in a start-up tech company, there is a good chance it will fail and you will have a loss.  However, there is also a chance that the company will be wildly successful and you will have a several hundred percent return.

Lending Club is a great way to get a feel for what you should be thinking when investing.  Many people buy and sell stocks based on emotion and news.  This is a bad strategy, because it does not take the intrinsic value of the company into account.  The intrinsic value includes risk, and higher risk should correlate to a higher return.

A recent example of this can be seen in by looking at two companies: AIG and Lehman Brothers.  Around the same time, these two companies appeared to be on the brink of bankruptcy and possible closure.  Had you invested $100 in Lehman Brothers in mid 2008 as the financial crisis began unfolding, you would have nothing today.  Shortly after Lehman’s bankruptcy, there was an opportunity to purchase AIG for less than $10 per share.  Many people speculated that the company would fail.  That $100 investment would be worth about $400 today.  That is an example of high risk for high return.

In the same time period, you could have purchased Walmart with little worry about its future.  That $100 would be worth about $114 today.  That is still a good return, but not nearly 300% that you would have earned had you made a risky bet in AIG.

The same is true at Lending Club.  You can buy into an A rated loan for a 7.14% return or a G rated loan for a 20.90% return.  Higher risk means high possible return, but a higher chance of default comes along with it.

If you decide to start investing with Lending Club, please consider signing up through an affiliate link from this site.  Not only do you get $25 for free, but I get a little something for referring you as well.

If you get sick when your stocks are down, this might be a bad day to look at your portfolio.  According to what I just saw on CNBC, 95% of stocks in the S&P 500 are down today.  For a moment there, my portfolio was down nearly 10%.

It appears that there was a short panic sell-off on almost every stock.  There are fears that the Greek sovereign debt troubles scared a lot of investors.  Some people speculate that Greece will default on its debt and that the Euro will fail as a currency.  As one of the most powerful currencies in the world, a global financial disaster would follow a Euro wide failure sparked by Greece.

However, the market always comes back.  You can learn something from today’s stock charts.  Everyone who went into panic mode and sold near the bottom of the 15 minute market decline of about 600 points, you would have missed the 15 minute gain where most of the losses were erased.

This is still a rough day to be a stock holder, but you would have to kick yourself for selling at the bottom.  That is why investing is a long term endeavor.  You will never succeed if you invest on emotion.  Even when it hurts, stick with it in the long run.  If history is any predictor of the future, you can still make a solid return of over 10% every year in the long run if you don’t buy and sell as the market moves.

Please give your thoughts on the causes and results of this market dive in the comments.