Just when I think he is about to get it, he asks a question that shows he still has no clue. It happens every time and I know he will die before he understands what the Internet is all about. I just have to accept it.

No Internet But He Still Makes Money In Stocks

Interestingly though, my dad has made quite a bit of money in the stock market in his life (I’m talking $1,000,000+) and while a lot of that was before the Internet, some of that has definitely been in the last ten years. He continues to actively monitor his portfolio and make all buying and selling decisions himself WITHOUT any access to the Internet.

My father has accounts at a couple of full service brokers (Merrill Lynch and Raymond James) and I guess he does get some recommendations from them. But he doesn’t use an online broker and he doesn’t know how to access his account online. He doesn’t even know how to check stock prices online if he were to ever figure out how to get online.

For him, the whole Internet world doesn’t exist.

And yet he continues to make money in the stock market!

What Does This Really Mean?

To me this shows that all the bells and whistles that are available today with the online discount brokers aren’t as important as they would want you to believe. All the charts, tools, apps, real time quotes, and other things that come with an online account aren’t worth anything if you don’t pick good stocks in the first place.

You might say that all those “extras” you get with an online account may help a person learn how to pick winning stocks. That may be true and access to information is inarguably a good thing. But I really doubt the average stock investor learns the discipline from those tools that my dad has used for over 50 years to consistently make money in the stock market.

I would argue that all those comprehensive charts, the ability to screen stocks, and everything else you can do now days in your online broker account makes a person want to trade MORE OFTEN. Remember, those online brokers make money when you trade and getting you to trade is important to them. They would rather have you do more of it than less of it.

Buying Stocks For Long Term Gains

My dad doesn’t trade stocks. He invests in them and that means in most cases, he holds them for longer than a year. He doesn’t go after the quick hits that are so tempting with a cheap online account. Just twenty bucks for a round trip trade means you can gamble on any stock you want in today’s world of online investing and not worry about trading fees. Don’t get me wrong, its great that buying and selling stocks is now so cheap but sometimes I fear that is a bad thing.

I sometimes take shots at stocks I shouldn’t, hoping for a quick short term gain and knowing that it won’t cost very much in trading fees. But 9 times out of 10, those “shots” I take end up being losers. I don’t have the discipline he has and I often pay dearly for it.

To make money in stocks you need to pick winners more often than losers and you need to have DISCIPLINE. You can’t be all over the board buying this and selling that and making those decisions on the fly. You need to go about things slowly and methodically and stick to a plan.

For my dad, that plan has been to buy only those stocks that he thinks will do well over a longer time frame. That way, he pays less in taxes (long term gains are taxed at less than short term gains) and he saves on trading costs. He puts more time into his decisions than I might and he is more committed to sticking with them. Will this work for everyone? I don’t know but it has sure worked for my him.

Many of those people are planning on becoming first time stock buyers and making Facebook the first stock they will own. But maybe they should think twice, or even three times, before they plop their money down on IPO day?

Remember another social platform years ago called MySpace? It was super hot too at one time and it hardly even exists anymore. Okay, Facebook probably won’t suffer that same fate but it shows how fleeting some of these Internet fads can be. I mean, when you buy Facebook stock you are betting that the company will be around for a long time and growing so that you can make money with an appreciating stock price.

Isn’t everyone you know already on Facebook?
How much more can it grow without invading our lives even more?
Won’t people get tired of it at some point?
Is the sky really the limit to its popularity and earning potential?

There are other recent examples of highly publicized Internet IPO’s that I’m sure many investors wish they stayed away from. Like Groupon (GRPN) for example that has a stock chart with nothing but losses:

Then there is Pandora (P) which has also taken a gigantic hit since it’s first day on the market:

Finally there is LinkIn (LNKD) which has a better chart and is actually up since its IPO but has had some rocky down time in between. If you had stayed away from the IPO you could have picked up LNKD stock for almost half price at one point before it started going back up:

There is clearly a ton of hype surrounding Facebook and this will be the IPO of the year in terms of publicity and interest. People who would have never thought about buying stocks will be getting their introduction to the market when they buy this stock. Many will do it just because it is the cool stock to own at this moment and they don’t want to miss out on what they hope is a money making opportunity.

But all the hype in the world doesn’t mean a thing when it comes to investing. As you can see with the stock charts above, investors can sour on a stock just as quickly as they can fall in love with it. And when everyone is heading for the door, that means losses for most of them.

If I were going to buy Facebook stock (which I am not) I would wait for a better entry point several months down the road after the IPO just like you find with the three stock charts above. The incredible amount of publicity surrounding the stock surely means the price will be propped up too high at the beginning. If you have any doubts and need even more reasons to become conservative and NOT buy at the IPO price, check out this article which might scare you into keeping your money in your wallet.

In theory it is easy to understand: if you buy a stock BEFORE the ex-dividend date you get the dividend and if you buy the stock ON or AFTER the date, you don’t get the dividend. Easy right?

But some websites state that it isn’t that simple and your stock purchase has to be “settled” before the date and not just bought. Here is an example of that on Investopedia:

And another here on this blog which gives you a weekly list stocks that have ex dividend dates:

When you push that “buy” button on your computer screen, just because the trade went through doesn’t mean everything is final just yet. The trade still has to be settled and if you look on any stock buy or sell that you have ever made, you will see a “trade date” and a “settlement date”.

So, does your trade have to be settled before the ex-dividend date in order to be entitled to the dividend or does the trade just have to be made before that date?

When a company announces a dividend, it gives an ex-dividend date and a record date. Because it takes 3 business days to settle a stock trade, the “ex” date is always two business days earlier than the “record date” which is really the date you have to own the stock by. So the answer to our question is that as long as you buy your stock before the ex-dividend date you should be in line to get the dividend. I say “should” because nothing in life is guaranteed.

Not all stock snapshots you find online show the ex dividend date. Yahoo finance doesn’t show it for example. But on most of the discount broker websites (such as E*Trade) you can see lots of dividend information right away. This is what it looks like on E*Trade for Nokia (see middle column toward the bottom):

The idea is that you can pretend to buy stocks and see how you would have done had you done it for real. There is a problem with that though and it is that doing it on paper can’t ever be repeated for real. That is because every day in the stock market is different from the last.

Just because you bought stock XYZ on paper and it went up doesn’t mean you can do it again. Whether you make money or lose money on your paper trial, doing it for real is much harder and will end with different results. It has to because there is no repeatable system that works for making money in the stock market.

Don’t get me wrong, becoming familiar with the stock market before you buy is a good thing. Everyone should do it as best they can. However, if you start out paper trading and beat the market, you shouldn’t feel like you now have a leg up on what it is like to do it for real. Because you don’t.

Buying Real Stocks Is Different Than On Paper

Buying stocks for the first time involves a lot of hand wringing for most any beginner. Initially there is the decision of what stock to buy and when to buy it which is more serious this time around because real money is involved. Then comes the daily watching to see what the stock does. If it immediately goes down, doubt will creep into any beginner’s mind. Should they sell?

When real money is on the line, especially for someone who has never experienced that feeling, there is anxiety. The stock market seems to be more volatile than it used to be and with that a beginner will have to determine their risk tolerance. Not everyone can handle losing money any day of the week while they are at work and the market goes down.

When to sell a stock in real life is also much more difficult than on paper. You can let your profits ride and not lose a minute of sleep when they are just a simulation. Likewise, losing money won’t cost you any sleep either. But when you have your hard earned savings on the line in your first stock(s), making those decisions becomes much harder. You might really want to take that small profit when your real cash is involved rather than hold on and hope the stock goes up even more.

Online Stock Market Simulations

Paper trading is something lots of high schools do and even college students do in some classes. Now days though, paper trading has graduated to online stock simulators such as Wall Street Survivor which is one of the best. At least with a site like this, the student can get a feel of what it is like to make a trade as the online simulator is very similar with what they would find with any one of the real online stock brokers.

You can learn an awful lot online now before you ever venture out to make your first trade with real money. But the one thing you can’t learn is how to make money every time. No matter what your success rate is with paper trading or with an online stock simulator, you SHOULD NEVER assume you will be able to repeat your performance for real.

Many people wrongly assume that quarterly estimated tax payments only need to be made by people who are self employed, have their own businesses, or have freelance income. But many more people need to make those payments and the best place to read about it is this IRS page. Even a more detailed source is publication 505.

Basically, you owe tax on all money you make so if you make enough in any areas of your life other than your job (where taxes are already being withheld) , you need to make that estimated payment. As it says on the IRS site, the United States tax system is a pay as you go system so that means they want their money as you earn it and NOT at the end of the year.

Your capital gains on stocks may mean you need to make an estimated tax payment

When you buy stocks and get into investing your savings, the goal is to make money. And if you do start to make money, whether it be on a consistent basis or just on periodic stock sales, you will owe those estimated payments (as long as you owe more than $1000 in taxes).

The more money you accumulate in the course of your life, the greater the likelihood that you will have to start making those estimated tax payments every quarter for the income you generate from your savings and investments. This is just about the only negative there is to having money that I can see!

How much tax do you owe on your stock sale?

That will depend on what your stock gain is, whether the gain is long or short term, and what your income is. For 2012 all stock long term gains will be taxed at 15% (or less) and short term gains may be taxed as high as your income tax bracket. See chart below:

Long term stock gains are easiest to figure out because you will either owe nothing or 15% of your gain depending on whether you are in that 25% (or higher) tax bracket or not.

You will be paying more for short terms stock gains as the chart shows and you will need to add up all the income you think you will make in 2012 and then determine what tax bracket you will be in. That will determine whether you owe 10%, 15%, 25%, 28%, 33% or 35% on your stock gain.

The key is to know what your tax bracket is and whether the gain is short or long term.

Once you do those calculations, you will then know how much you owe the IRS for your quarterly estimated tax payment. About the only good thing is that the IRS gives you a buffer of 10% and you won’t get a penalty if you pay 90% of what you owe. That way, if you miscalculate a bit, you don’t have to worry about getting penalized.

Do you owe all the tax right away or can you pay some each quarter?

You must pay all the tax you owe right away in the quarter you earn it. For instance, if you have a $20,000 short term stock gain in the first quarter of 2012 (many people might have that if they sold Apple stock!) and your marginal income tax rate is 25%, you will owe 25% of $20,000 which is $5,000 in taxes.

You have to pay that $5,000 to the IRS with your first quarter estimated payment and you CANNOT pay it in equal installments of $1250 in each of the four quarters of the year. Unfortunately, the IRS always wants their money right away.

A lot of first time buyers of stock who got into the market because they wanted Apple stock may be wrestling with whether to take short or long gains as well as how to make their quarterly tax payments that are due for the first time.

When you are new to buying stocks and just learning the ropes, you might think that the wash rule means that you aren’t allowed to back a stock for 30 days after you sell that same stock for a loss. But THAT IS NOT TRUE because you can. You can buy and sell stocks any time the market is open on any day of the week. No one will stop you.

You see, the wash rule is an IRS tax rule and NOT a stock market or stock exchange rule. It is a rule that involves your taxes and what you are allowed and not allowed to claim. It is NOT a rule instituted or monitored by any stock exchange in the world.

The wash rule can get complicated with all the different scenarios and a great explanation of it can be found here. It basically says that in order to claim a capital loss on a stock, you can’t turn around and buy it back again for 30 days. You also cannot have bought additional shares of the same stock 30 prior to selling either.

If you do either of those (which you are allowed to do!) you simply have to change the cost basis of the new shares and take the loss when you sell them, whenever that might be. It means you can’t take the loss you wanted right now.

This rule was devised to prevent people from trying to take a capital loss on their taxes and then turning around and repurchasing the very same stock because they still think it could go up. In other words, selling stocks just for tax reasons is a no no according to the IRS and our wonderful elected leaders in Congress.

I won’t get into my political views but they admittedly lean toward less government rather than more government. The wash rule is an example of how Washington, through the IRS, tries to maximize the taxes we pay today and delay any losses to a future date.

That “small” fee along with how easy it is to buy and sell stocks these days might mean that many of us forget about those charges altogether. But that can be a mistake depending on how often you trade and the size of your portfolio.

Remember, for every stock you buy, you WILL have to sell it. So while you might be paying only $4.95 at TradeKing or $7.00 at Scottrade, the total round trip price tag for each stock you pick will be double that. Those $10 to $20 buy and sell charges can add up over time, especially if you trade a lot of stocks.

How Much You Have Makes A Difference

Your portfolio size is the biggest indicator of how often you can afford to be trading. If you only have a couple thousand dollars to invest, every one of those trades is shrinking your nut. Someone with that small a portfolio may find it hard to make more money than they are spending on their trades over a year’s time. And with online trading, there is no one there to slow you down and remind you that your frequent trades are eating away too much of your portfolio.

Of course if you have a larger portfolio, those trading fees will represent a smaller percentage of your investing dollar. Depending on how much you have, the online trading fees might indeed be small and almost insignificant.

But more and more people are entering the market with limited funds these days as our economy continues to struggle. People are looking for ways to get better returns than they can with simple interest and they are often putting their last dollars into the market. Its not the best investing situation but it is a sign of the times. So for this type of person, fees DO matter.

Buy And Hold Investing Means Fewer Fees

Money managers and advisers used to recommend buy and hold strategies a lot more than they do now days. But the investing world has changed tremendously and with Internet trading and quick access to information, we have a more volatile stock market. Buy and hold doesn’t get talked about very much by the professionals you see in the media as their interest lies in getting you to make trades. The more action they can drum up, the more money Wall Street makes.

The next time you look at your trading activity and wonder how you can make more, take a look at how often you buy and sell stocks. Make sure there are real reasons behind every trade and you aren’t just making them on a whim. Maybe you should be holding on to your stocks for longer periods and not doing so much buying and selling?

It is easy to get into a pattern where you read something good about a stock and you buy it. A month later you read something negative about that stock and you sell it. Do this over and over too many times and you will find that those trading fees are making a bigger impact on your bottom line than you thought!

Under the “Fundamentals” tab I get

1) Shareholder equity information
2) Valuation (MRQ)
3) Management effectiveness (TTM)
4) Dividend (TTM)
5) Financial strength (MRQ)
6) Profitability (TTM)
7) Growth rate (TTM)
8-  Operating ratios (TTM)

Additionally there are tabs for insider trading, analyst research, and earnings and clicking those tabs will give you even more numbers, charts, and graphs for you to view. All in all, there is more than enough stats for the average investor available online no matter which discount broker they choose.

Is it necessary for a beginner to understand all those numbers and know what they stand for? Will those numbers and charts help them find stocks to buy? While it most certainly is a good idea to learn all that stuff and become familiar with what most of it means, you really don’t need to sift through all that company information before you buy a stock. I have bought many stocks without knowing much more than whether they pay a dividend and what their P/E ratio is.

So how do I find stocks to buy?

Often times I find companies I might be interested in investing in by keeping alert and paying attention to what is going on in the world. I read an assortment of financial magazines and also lots of business articles on my iPad. That gives me ideas and a variety of different opinions. It also is where I discover companies I have never heard of before that could be good investments.

Staying observant to what people are buying in stores and which stores are doing well is another thing I always try to do. Years ago I went into Costco for the first time and marveled at how full the parking lot was. Trip after trip I noticed that their parking lots were full, even on weekends. That prompted me to do more research on Costco and I ended up buying it and making a nice profit from it. All because I noticed their parking lots were full.

Everyone hears the constant barrage of news stories about Google, Apple, JP Morgan, and all the other dominant companies in the world. But those are not the only stock picks out there. Thousands of other companies are there just waiting for you to invest in and they could be winners too. That is, if you can find them!

So, the more experiences you have and the more you pay attention to the world around you, the more likely you are to come across things that will lead you to a company that you might want to buy stock in. Paying attention to EVERYTHING is what I try to do and it really has made me money in the stock market!

The old saying that information is power translates to the world of buying stocks and profiting in the stock market. The more information you have about what companies exist, what they do or make, and what their plans are for the future will increase your chances of making money.

Retirees are especially impacted when interest rates are low like they are now because they need to have their savings in low risk investments and those are the ones that pay interest. This makes dividend stocks increase in popularity because in many cases, you can get a higher return with them than you can with regular investment vehicles.

So, Apple announced a dividend that made most investors in the stock happy. What they may not realize because it won’t happen until 2013 is that President Obama wants a bigger piece of that dividend.

In his never ending pursuit to tax and re-tax all forms of income, Obama is trying to raise taxes on dividend income starting in 2013. Right now in 2012, qualified dividends are taxed at 15% but under the new plan that rate would be raised to your highest marginal rate. For some people that would mean almost a tripling of the rate when you add in the surcharge for Obama’s health care law and some deductions being removed.

When you think about it, taxing dividends are double taxation because that money that has already been taxed once through corporate taxes. This is how it works: a company makes money and it gets taxed on that profit. With what is left over the company then disperses dividends to you and me, the stock holders. We then have to pay pir tax on that income and the rate we will have to pay in 2013 will be our marginal (top) tax rate depending on what tax bracket we are in.

This doesn’t just impact the rich and as I said before, it REALLY affects retired people like my Dad. Of the money he has in stocks, much of it is in dividend stocks so that he can have some cash flow. It is very common (and smart) for seniors to invest in dividend paying stocks rather that stocks that don’t have a dividend because they need that extra bit of money coming in. But now the government is going to try to get a bigger piece of that too.

It seems it is a never ending uphill battle to save and accumulate money these days. Politicians keep digging us a deeper hole and think that higher taxes is the solution to get us out. I’d like to see that mentality change in my lifetime but I don’t have high hopes.

Anyone who has looked at buying Apple stock has heard the predictions from the analysts: the stock will go to $500, the stock will go to $600, the stock will go to $700,  and even some were/are saying $1000. When the price of AAPL was in the $300 to low $400 dollar range those predictions might have seemed awfully high and at best, far away in terms of time. But now that those $500 and $600 targets have been hit, it has left many recent purchasers of Apple stock with big gains that are all short term gains.

All short term gains are ones from stocks that you own less than a year. Those gains are taxed at your highest marginal rate which tops out at 35% for higher income earners. Long term stock gains for 2012 (stocks held for more than one year and a day) will be taxed at a flat rate of 15% for everybody.

So, you can see the problem faced by many new owners of Apple stock: the stock has gone up too fast and left them with a difficult decision of whether to take a nice gain now and pay higher taxes or try to wait it out for more than a year and only have to pay the lower 15%. After all, there is risk and if current AAPL owners decide to try to wait a year, all or much of their gains could evaporate which would be much worse than just paying the higher tax rate.

Don’t get me wrong – it is a decision I wish I had every day so I shed no tears for those lucky Apple owners!

No one can tell you whether it is best to postpone taking gains in hopes of getting a lower tax rate down the line as your stock turns into a long term holding. I guess each investor has to decide just how much they need to guarantee the gain and what their risk tolerance is. It does go to show though, that figuring out when to sell a stock is often a harder decision than the decision of when to buy it.

Selling Can Be A Harder Decision Than Buying

When you buy stocks, you always look for an entry point. Once you find one you jump in and don’t look back. From that point you are then swept away in a current of daily ups and downs as you get more familiar with your stock and how it performs. You watch it, read the daily news about it, stress out through earnings reports, and generally come to love or hate the stock. Where to jump (or climb) out of that moving stream can be a very difficult one.

You might have a gain but not want to miss out on an even bigger gain. You might have a loss and wonder whether you should throw in the towel. No matter where you are with a stock holding, there are probably reasons to hold it and dump it. Making that final decision to sell is the one that has given me the most trouble over my life time.

Right now, a lot of ecstatic Apple stock owners are wrestling nightly with their own reasons for holding or selling. At least they have a gain to protect and not a loss to minimize which is a real good place to be.