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Saturday, November 3, 2007

What is it that I do exactly?

Ok. What is it that I do?

1) I invest in companies via stocks.

2) I trade the stocks of companies.

3) I trade commodity futures and futures options.

Those are three totally separate things. That's important to understand. First, it's important to understand that trading, and investing are two different things. What do I mean?

Trading: There is the old expression: Buy low. Sell high. You do this, and you're trading. I buy 400 shares of Frontline Ltd (FRO) at $41.00 I sell the 400 shares of Frontline Ltd (FRO) at $46.00 I walk away with approximately $2000.00, less the $7 to $15 in commissions. I just traded that company. Trading is basically considered more speculative. A great way to make money, as long as you know what you're doing. If you're trading in the Futures arena, it is absolutely vital to understand that you're are trading and engaging in a zero-sum game. I will discuss this more later.

Investing: I buy Frontline Ltd stock (FRO). I now own a common share with voting rights in FRO. I am looking to make money by owning stock in that company. I don't sell it. I'm trading nothing. I'm interested in making money from owning FRO. That is key. Investing is a long-term way to make money. You make money by owning the company in two ways. By means of dividends, by means of the stocks valuation. Investing in the stock market is not a zero-sum game, as is Futures. The stock market can create wealth.

Sometimes people use the term 'investing' and 'trading' interchangeably. While there are similarities, it's important to note the differences. Some may say I'm being rather pedantic and playing with semantics. But I think if you have those two terms clearly in mind with such definitions, it will aid you. You will understand each purchase you make. It automatically forces you to assess and plan each purchase before you make it. You will be thinking of it as either an investment? Or as a trade. This will aid you as you develop your strategy for that purchase.

Dividends, valuations and yields. Always, always, always check to make sure a stock pays you dividends if you're going to invest in it. I'm what you term a 'dividend investor' so dividends are very important to my investment portfolio. I think in my entire career, I've only invested in one company that did not pay me dividends (Google). Trading? Dividends aren't really important when trading. I trade companies all the time, that don't pay any dividends. No biggie though, because in trading, you're trying to make money by price difference. But when you invest in a company, you are looking for dividends, yields and stock price valuation; or the rise in the stocks price. In other words, you can make money by the worth of the stock rising. Every shareholder wants this to happen. But if it doesn't, it's not a total loss.

So what is a dividend?

Well, let's take Frontline Ltd. as an example. They're in the business of shipping tankers. Why? To make money right? Well, when they make that money, they can do one of two things with the profits. The profits can either be re-invested in the business (called retained earnings), or they can be paid to the shareholders of Frontline Ltd as a dividend. This encourages others to buy the stock, which in the end, adds to the Value of owning Frontline stock. Many companies retain a portion of their earnings and pay the remainder to their shareholders. Companies differ as to when you'll get the dividend. If they pay one. Some just keep it all to retained earnings. Companies usually pay dividends on a fixed schedule, commonly annually, bi-annually or quarterly. But in all honesty, they can declare a dividend at any time. The dividend is usually cash, but I've been paid in stocks of other companies at times as well.

Frontline Ltd (FRO) has a history of paying very high dividends. Generally, they run about $6.00 per share annually. This means that for every share of FRO you own? You are paid $6.00 over the course of a year. There's a lot to consider before investing in a company due to dividends. What if they paid their shareholders $12.00 per share, but they've only done that once in 5 years? Look for good strong companies, with a strong balance sheet, and that pays regular dividends. There's more to it than that, but I figure we'll just go at this slowly.

Here's a great article at Wikipedia that will teach you everything you need to know about dividends.

Ok, now what about trading Futures Options? Heck, what are Futures? Well, that's another topic I will discuss over the next few days . . .

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This is not an investment or trading recommendation. The losses in trading can be very real, and depending on the investment vehicle, can exceed your initial investment. I am not a licensed trading or investment advisor, or financial planner. But I do have 12 years of experience in trading and investing in these markets. The $500.00 challenge account is run for the education of other traders.

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