Welcome to Part 2 of this multi-part series of blogs where I will teach you a better way to invest in the stock market and improve your stock performance.
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If you have missed Part 1, please click here to read it: Read Part 1
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So at the end of Part 1, we were talking about a really bad day in the stock market. We laid out a scenario where you owned a million dollars worth of Stock X in the morning, and after a disastrous day, it was worth just $3000 in the afternoon. Most investors would feel that they are ruined. However, that need not be the case if you know how to invest the smart way. Read on.
A Classic Example of Your Stock Performance
If you bought the X stock at say $1 a share and you invested $10,000; you would own 10,000 shares of X. Over the next however long the market rises and the price of the shares increases to $100 each.
Your 10,000 shares are now worth $1,000,000. If you sold them at that price you would make $990,000, less any taxes due and brokerage fees payable. You turned ten grand into a million bucks. Well done. Now wake up and stop dreaming.
The likelihood of this happening is rare, but not impossible. Plenty of stocks have increased more than 100 times their opening price; it’s the stuff that fuels the bubble legends after all. Let’s return to the ‘billions wiped off the stock market’ headline. Say you didn’t sell. You decided to hang on to your portfolio of X. A bad day of trading, influenced by the US backing Israel over something in the Middle East, Russia demanding a former Soviet Republic pay what they owe for gas supplies, US raising interest rates and pulling back from Quantitative easing, and a major global corporation buying out another in Asia and the market is ‘jittery’. People start to sell, and before you know it there is a run on and everyone is selling whatever they can to try and cash up. Your X stock is hit hard and slides to $50 a share.
Your million dollar portfolio is now worth just half, $500,000. You are still way ahead, but you panic and sell of some of your stock, which makes other people panic and they sell, and just after you can get rid of half what you hold, the stock has plummeted to just $2 a share. You sold 5,000 shares at $30, the best you could get anyone to pay for them. You still hold 5,000 shares but they are worth only $10,000. You look at the $150,000 you made selling half your portfolio and weep. You weep because you had plans to cash in those 5,000 shares when they were worth $100 each and buy a retirement home. Now you can barely afford a Time Share on the Gold Coast or in Miami.
The problem is not the money you made or the money you failed to make (you can’t have lost it as you still have your original $10,000) but how you look at the whole investing thing. Attitude and mindset make all the difference. Too many in this position will lament the loss of hundreds of thousands of dollars… dollars they never had. The stock was worth that amount of money, for a time. In reality, stock is only worth what someone is willing to pay for it. You paid $1 a share, so one might argue that is what it is worth; to you. You sold 5,000 shares at $30 a pop, that’s a huge gain. The buyer thought the stock was worth that, hence they bought, and in real terms you are lucky to find anyone paying for stock that has already dropped $70, but those figures are just for illustration purposes, anyway.
The more likely scenario would have been you being unable to sell a share to anyone until the market bottomed out at wherever it was going to end; in our case at $2. You could have sold your 5,000 shares then and made your investment back, plus still have $10,000 worth of stock just waiting for the next day’s trading. The next day there is just as much chance the stock will rise as it will fall. 50/50 to be precise. It could stay where it is, which is the third option, but generally it will go up or down, but you won’t know which way until it starts to move.
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The Guessing Game
I could jump in at this point and offer to sell you a crystal ball, imported by a Romanian neighbour of mine whose sister lives next door to genuine gypsies in Bucharest. Or, how about a high-tech smart phone app that predicts market trends based on algorithms and the square root of Pi… but neither ‘tool’ would be worth what I could get from you for them. There is no way to accurately predict which way the market will go. Yes, you can make an educated guess based on all sorts of factors, experience and what have you, but nothing is guaranteed. Nothing is, or can be, a 100% sure thing.
Investing on the stock market is a guessing game. You can look at the ‘form’ of stocks over the past however long they have been traded and get some idea of how they might perform in the future, but you can’t predict with any surety how they actually will behave. Nobody can. Most especially, anyone who makes their living selling people the lie that they can predict the market; whether through training, consultation, a software program or any other means or method. It can’t be done.
The worst part of the Guessing Game is the bit where people speculate with Calls and Puts and buy Options based on how they hope or wish the stock will perform. We will cover this in more detail later however for now, know that there are two sides to the Options market. For the buyer of an Option to acquire it, there has to be a writer of the Option who creates it and then sells it to the buyer. Buyers are speculators, guessing and gambling in the hope they get the direction right. Writers create Options, sell them, open their positions on the stock market with a Credit, earning income irrespective of whether the market or the Option goes up or down. We covered call investors use the stock market as a vehicle to earn income from it, every month irrespective of market direction, just like property investors use the property market as a vehicle to earn income, (rental) irrespective of whether the property goes up, down or sideways in value.
So, could YOU be the creator of the Options and generate a monthly income for yourself for very minimal work?
Let’s find out how in Part 3. Click here to read Part 3.
Learn This Strategy and boost your stock performance by attending the “Smart Money” Online Masterclass for Free!