An Exercise in Stock Investment Basics…for Us

An Exercise in Stock Investment Basics…for Us

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#FinLit #Monday​

Announcing the Training

I put some time into the Stock Trading for the Rest of Us training this morning. It will be available by the end of October online and on DVD. Until then, I thought I would share an interesting exercise illustrating both the risk and the opportunity for stock trading.


Fear and Lack of Knowledge
I have talked to a number of people, smart people, over the last 4 years as I worked to learn everything I could about the stock market. A lot of these smart people told me that I was brave and living dangerously for investing in such a volatile environment. They said that the stock market was too risky for them. They could never do it for fear of losing all their money.

Many of them did not know two things that I am going to illustrate in this post. First, stock investing begins with stewardship of your money. If you could get greater value from (yes from) your money, it would be wasteful not to get it. Second, you have control of your money even while it is invested. You can watch the trends weekly, or you can make moves annually. You will end up roughly similar across a typical stock portfolio.

The Exercise Narrative
This table illustrates my point. Let’s say you saved $42 per month, and invested the $500 in Exxon Mobile on December 25 each year. The table shows the two ways that your investment would have increased in value over that time. Dividends were deposited each quarter. The stock also rose in value 8 of the ten years.

I chose this stock for this exercise for a few reasons. Oil stocks are something you would typically have in your portfolio because you spend money on gas. Exxon is a large company that would appear insulated from economic downturns. Also, the stock offers a dividend–one that rose in amount over the ten years.

I also chose this stock because you would have lost money if you sold the shares at the end of the 10 year period! But, don’t miss my main point about your fear. If you had put away $41 per month for ten years, you would have amassed $5000 by now!


The Table Illustration

[Download the Excel file and play with it yourself]

Date Share Purchase Stock Price Add Shares Total Shares Total Value +/- Dividends Year’s Dividend
12/30/2005 $500.00 $56.17 8.9 8.9 $500.00
12/29/2006 $500.00 $76.63 6.5 15.4 $1,193.49 $182.09 $11.39 $0.32
12/28/2007 $500.00 $95.00 5.3 20.7 $1,998.44 $283.35 $21.59 $0.35
12/26/2008 $500.00 $77.19 6.5 27.2 $2,158.95 -$368.45 $28.96 $0.35
12/18/2009 $500.00 $68.21 7.3 34.5 $2,460.64 -$243.95 $45.64 $0.42
12/31/2010 $500.00 $73.12 6.8 41.3 $3,190.72 $169.37 $60.71 $0.44
12/30/2011 $500.00 $84.76 5.9 47.2 $4,249.56 $481.13 $77.71 $0.47
12/28/2012 $500.00 $85.10 5.9 53.1 $4,873.12 $16.06 $107.50 $0.57
12/27/2013 $500.00 $101.51 4.9 58.0 $6,365.50 $871.51 $120.87 $0.57
12/26/2014 $500.00 $93.21 5.4 63.4 $6,530.07 -$481.68 $146.25 $0.63
9/21/2015 $73.32 0.0 63.4 $5,454.20 -$1,260.99 $185.12 $0.73
Total Invested $5,000.00 Return 9.1% Total Div $805.75
Profit $454.20

Two things to Consider
1. This exercise is based on an investment of $42 per month. What were you going to spend that money on? With the investment, you still have $5454.20 of value–a 9.1% increase in value. You could cash out just profit of $454.20 and go shopping. But, who would do that now knowing what they have to gain?

If you had lost money, consider that you could have alternatively spent that money on Christmas gifts. If you had, you would not get any cash back. We may disagree, but I think it was better to have put that money to work. The stock is still in play, and may yet increase in value making all of your money back plus a hefty bonus. Plus, you receive dividends based on the number of shares you own. They pay out no matter the stock value when they pay out.

2. What if you had divested (sold the stock shares) last year? You would have put in only $5000 total. It would have been worth $6530.07, December 2014–a 30% return! That’s a year it had lost just a few hundred in value. How would you have known to sell it? The fall in the previous year would have been one indication. The fall in the gas prices may also have signaled a change for you.

Where is your money now? In your bank? Has your bank ever offered you a 30% return on investment? Consider that they have received such a return. Guess where they got the money they used to invest? Hint: It starts with Y and ends with U!

The stock market continues to be where a large portion of US wealth is concentrated. I am not saying that you must participate. I am not telling you what stock to invest in. I am stressing that you not be fearful and ignorant. I am also working on a training to help you understand the basics like where to start, how to watch the market, and how to develop your portfolio and keep your financial home secure. The first 100 people that sign up on or will receive a code via email to access the course absolutely free when it launches at the end of October 2015.

Go to the SUBSCRIBE space on this page, enter you email, respond to the email confirmation, and I’ll send your access code by November 1, 2015.