An example of an undervalued stock would be one that is selling for $25 but can be figured out to be worth approximately $50 based upon what would be projected and predicted cash flow in the future.  There are many books available in the marketplace explaining undervalued stocks.

The first area to review as a potential investor would be a ratio known as the price to earnings ratio.  You also should investigate the management of the company behind the stock as well as the nature of business. As indicated in Warren Buffett’s 1989 letter to Berkshire Hathaway shareholders, “a value of a business is the sum of the cash flow over the life of the business discounted at an appropriate interest rate.” Warren Buffett, by the way, is commonly known as “The Oracle of Omaha.”

Therefore, as a potential future investor, you need to feel confident that a company’s stock may be undervalued based upon the future earnings as well as future interest rates. Some other examples would be:

1. What is the company’s history? And is it a stable consistent operating company?
2. The company does specialize in an industry that may fizzle in a short period of time.
3. The tangible (hard) asset value is not lower that the company’s selling price.
4. The company has a credit rating of a triple A, double A or an A.
5. During the last recession, the company did not experience a loss.

According to Buffett’s partner, Charles Munger, a good rule of thumb is the purchase price of an excellent stock at a fair price is more likely to be undervalued than a poor stock at a cheap price.

If you are a newcomer in the stock market, be sure not to invest more than you are willing to lose.  There are many stocks that could be classified as undervalued.  Some are what is referred to as penny stocks.  You need proceed with caution however, and do your research prior to investing.  You may be lucky and find undervalued stocks that really take off whereby you make a huge profit.  On the other hand, you can also lose your life savings.  Get information and be informed.  The information is available online, at the library or by seeking out a stock professional.

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One of the smartest things you can do as an investor is to stay abreast of new investment strategies so that you don’t miss any tricks. Michael over at over at Stock Market Investing Today is holding a ‘blog carnival’ which will take a look at a series of hot investing topics from various sites on the net. It’s well worth browsing through some of the information shared here so click on over and take a look.

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With the uncertainty and fluctuations of today’s stock market, many investors are looking for more secure methods of investing their money. Money market investing is one of the strategies that can be used as a conservative but relatively secure investment strategy, and is an interesting alternative to a traditional term deposit or even a high interest savings account.

The money market is effectively a type of fund in which the fund managers invest in a range of short term securities. These can include certificates of deposit, government issued treasury securities, and other financial instruments that generally have a short term or fixed maturity of less than one year. These instruments are referred to as ‘paper’ or ‘commercial paper’

Money market investment is considered a safe strategy for parking your cash, due in part to the liquidity of the securities. However while it is relatively low risk, it is also low reward – hope to stay ahead of inflation but don’t be surprised if you make as little as a few percent return on your investment.

Benefits of money market investing

One of the great benefits of money market investments, apart from their security, is the flexibility with which you can access funds when needed. This is in contrast to fixed term deposits. In fact, many money market funds have an option to write check s against the balance of your fund.

Money market funds also allow purchasers to enter with a relatively low investment.

Points to consider

• Like any fund, investing in the money market will mean paying fees to the fund manager. If you are only parking a small amount of cash, factor these costs into your projected return on investment.
• Low ROI. Despite the uncertainty and risk associated with the share market at present, there are still plenty of good buys. In fact, some argue that there has never been a better time to pick up bargains. By taking the safe route and plunging all cash into low return but secure funds, investors are giving up potential gains.

As with any investment tool, money market investing is a valuable way to reduce the risk associated with a volatile market. However, make it a component of your portfolio while still using some of your cash assets to give yourself the chance of generating better returns.

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DRIPs are offered by nearly every corporate firm.  By offering a dividend reinvestment program, a company allows people to buy shares in the company directly from the company itself rather than on the open market.  In most cases, you are able to buy stock from the company at a discount (sometimes a very significant one) compared to buying the stock on the open market.  Additionally, with a DRIP you can set up direct deposit style withdrawals from a banking or checking account in order to buy a small amount of stock each month.  On top of that, when you are enrolled in a DRIP investment, any dividends that the company issues are used to buy more shares of the stock rather than the standard method of a check.

Why use a DRIP?

Together, the discount on share price, monthly purchasing, and the reinvestment of dividends allows you to build up a large position in a company’s stock in a relatively short period of time.  Most people who are enrolled in a DRIP find that they hold a very large number of shares before they even realize that they have been building a position over time.  A DRIP also does not require a great deal of effort or attention in order to build a sizable number of shares owned.  In fact, DRIP investing is one of the best ways to invest if you are not a person who enjoys watching the monthly ups and downs of the market.

How to Enrol in a DRIP:

The most common form of DRIP is an employee DRIP.  That is, if you work at a company whose stock is on the open market, it is usually possible to enroll yourself in your company’s DRIP, particularly if part of your compensation is in the form of stock and options.  You can specify that a certain portion of your paycheck be used to build your position through your DRIP, and in some cases a company will match a certain portion of your contribution every month.  An employee DRIP is a wonderful way to earn money beyond your base salary.

The other form of DRIP is a stockholder DRIP.  To enroll in one of these programs, you must hold a certain number of shares in a company before you are allowed to enroll.  Most firms, however, set this minimum at one share.   Once you are a shareholder, setting up a DRIP is as easy as contacting the firm’s investor relations department and asking about their dividend reinvestment program.  Since most companies handle the specifics of their program differently, it is impossible to offer individualized advice on this matter.  However, in most cases you will be asked to transfer your currently held shares from your brokerage to the company itself and/or its transfer agent.  Should you decide to enroll in a firm’s DRIP, you should strongly consider allowing them to debit your checking or savings account for a set amount of dollars each month.  There are numerous benefits to this:

1. You will be forced into a sound investment strategy.  When you buy a certain dollar amount of shares each month, you automatically buy more shares when the price is low and less shares when the price is high.  Additionally, you will be forcing yourself to think on a longer-term basis.  When you buy shares each month, you are less tempted to look for cheap or easy gains.
2. You will be saving money without having to make a conscious decision each month.  One of the hardest parts of actually saving money is actually making the decision to do so. When the decision is made automatically for you, you have no choice but to make the right decision.
3. You will build a very large position over time.  Most people buy and sell shares in large chunks and wonder why they are unable to build consistent positions.  Automatically purchasing shares in a company each month is an effective way to build a huge position.
4. Dividend reinvestment programs are one of the open secrets of stock market success.  The investing public is generally unaware of these programs, but savvy investors take full advantage.

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Price: The price in dollars at which you can purchase a security (be it a stock, bond, fund, or otherwise) on the open market.  You can find the price of a security simply by typing its ticker symbol into Yahoo or Google finance, or the financial information website of your choice.

Value:   The value in dollars of a security (be it a stock, bond, fund, or otherwise) that is available to purchase on the open market.  Unlike the price, it can be exceedingly difficult to find the value of any given security.

As you may have already guessed, there is often a very significant difference between the price of a security and the value of a security.  This difference has been attributed to many things—market irrationality, improper valuation methods by the market, market momentum, market manipulation, etc.  Whatever the reason, a value investing strategy is predicated on exploiting this difference to make a profit—over the long run—in the market.  Warren Buffett’s teacher, Benjamin Graham, often remarked that in the short run the market is a measure of popularity but in the long run is a measure of value.  By this he meant that over the long run, the market will eventually price securities close to their underlying value, even if there are massive fluctuations in the short term.

So with all of that said, just how do you value a security?  This article will focus primarily on stocks, as it is quite a bit easier to value publicly traded firms than, for example, bonds, funds, or derivatives.

Earnings. Otherwise known as income, this is the oldest metric by which the value of companies is measured.  If you’ve spent any time at all dealing with stocks, you know about that pesky term “price/earnings.”  This is a very simple statistic:  it is the stock’s market price divided by its most recently measured annual earnings.  In the most general sense, the lower the price is in relation to earnings, the better a deal you are getting.  However, there are dozens or even hundreds of other factors to consider, including the quality of a firm’s earnings, future earnings, growth of earnings, sustainability, and so on.  The historical market average P/E is approximately 15.  However, the P/E ratio is notoriously unreliable to use as a metric during times of market turmoil, which are often the very best times to invest.  As such, the primary question you need to address regarding earnings is:  “Will this company earn money in the future?  If so, will those earnings justify or more than justify its current market price?”  If you can answer yes to both questions, you are likely making a good value buy.

Book Value. This is the company’s tangible value as determined by its balance sheet.  To find this, you simply subtract the company’s total liabilities from its total assets.  Some companies have a negative book value, while some companies have a book value far in excess of their price.  Generally, a high book value is good, though you should only trust it if you have good knowledge of the company’s assets, liabilities, and how these things are calculated.

Intangible value. This encompasses dozens of different aspects, including branding, patents, market trends, quality of management, economic indicators, and so on.  The very best value buys often have a very strong intangible value proposition.

Once you put these three things together, you can generally determine the value per share of a company totally independent of its market price.  Once you’ve assigned a value to a company, you can then compare it to the market price.  If it’s lower, you buy, and if it’s higher, you don’t buy or you sell it short.  Because of stock market fluctuations, nearly every company in the history of western civilization has been a good value investing play at some point.

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Get contracting experience by working on your own home

Instead of improving your home in the usual “do it yourself” manner, consider hiring carpenters, plumbers, and handymen to do work.  Solicit bids and figure out which companies and firms do the cheapest and best work.  Having construction experience and knowledge certainly helps, but it is just as important that you can efficiently utilize contractors; nobody can complete every job that is required in property improvement.  If you can be a useful, all-around general purpose contractor then you will not only improve your employment opportunities, but you will have the skill necessary to successfully perform property investment.  (A small note here:  This barrier to entry is exactly what makes property investment lucrative)

Build a relationship with a bank

To properly improve a property, you will need to be able to secure construction financing.  Being able to get a mortgage on a property will not provide enough capital to improve the value of the property.  As such, you will have to have bank contacts that are willing to give you an investment property loan to finance your construction work.  It can be difficult to secure this type of financing unless you have general contracting experience.

Start small

To invest in property, ideally you want to stick to property that is being sold in your geographic area.  You will generally have a better idea of the sort of architecture and taste common to the area, and so will have an advantage against national property management companies and investors.  Scour the newspapers for foreclosure sales and tax deed sales.  The ideal property to invest in is one that is being sold at a discount compared to other homes in the area, but that also can be improved at a reasonable price.  This is where your contracting and construction experience will come in handy.  Most foreclosed properties are sold at a deep discount, but most investors will be unaware of the true cost of improving it to a saleable condition.  If you’re aware of these costs and can make intelligent assessments of the cost associated with repairs, you have a gigantic advantage against other investors, and even property investment companies.

Consider your income streams

You will eventually have to pay down the mortgages and construction loans associated with residential property investment.  This can be done either through the outright sale of a property, or otherwise through renting it out.  Unfortunately, the only way to know for sure which option is more lucrative is to do an analysis of your local market.  In some cities, rents can be enough to pay down loans and collect monster profits, while in other cities it will be necessary to sell the property to make any profit.

Keep close track of your accounting

The most important part of property investment is keeping track of costs.  Many people who engage in property investment believe they are making a profit until they do a comprehensive analysis of the costs incurred over the life of the investment.  There are dozens or even hundreds of small costs that will occur over the life of a property investment, and the difference between successful and failure is often simply whether or not these costs are accounted for.  Property investment analysis is critical – by keeping track of your costs, you will also better learn how to reduce them. If you want to learn more about this market, consider attending a property investment seminar. These can be invaluable in terms of giving you background information, and networking in your local area.

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Stay out of stocks entirely. This may seem odd, but it is possible to make a decent return in the market by not buying stocks.  How?  By buying “junk” bonds.  These bonds were a very big deal in the 1980s and parts of the early 1990s, but today are mostly ignored.  A junk bond is simply a bond issued by a corporation or municipality that is rated below “investment” grade by the major ratings agencies.  While it is not advisable to buy individual junk bonds, it is possible to buy a bond fund that invests strictly in junk bonds.  One such fund is Vanguard’s “High Yield Corporate” fund. The advantages of a junk bond fund include a risk profile very similar to the stock market (most of the bonds held by junk bond funds are issued by companies that are publicly traded on the major stock markets) including the potential for appreciation of principal, but also a nicely steady income.  You can expect to receive distributions of 7-12% a year on your purchase of such a bond fund, but be prepared for the principal to wildly fluctuate depending on the condition of the stock and credit markets.

Use quasi-insider investment strategies. This tip comes mostly from Peter Lynch’s seminal One Up on Wall Street (a book you should read if you are interested in the stock market at all).  If you have a job, you have the inside track on information that is relevant to the price movement of any number of stocks.  For example, if you work at a news media company, you have a much better view of the direction of the media market than the market at large.  As such, you will be better able to predict the fortunes of publicly-held companies in news media.  For example, if you know that ESPN is going to release a new website that will make its competitors effectively obsolete for the next few years, you may consider investing in its parent company, Disney.  This is just one example; you already have access to all kinds of insider information with regard to the stock market based on your current job and/or hobbies.

Get a job in the stock market. This is the only truly guaranteed way to make money in the stock market.  Financial service companies are always hiring and have surprisingly low barriers to entry.  This is because education and experience are poor determinants of future success in finance.  Accordingly, most financial firms are willing to hire at the entry level nearly anybody with a bachelor’s degree who can display intelligence and organization.  The average entry level salary, especially after bonuses, in financial services is far above average.

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What is a tax lien sale?

When a property owner falls behind on paying taxes, the government agency that holds jurisdiction over the property will place a lien on the property for the amount of the delinquent taxes and all applicable interest and fees.  This lien can sometimes also be applied to the property owner’s bank accounts or wages in order to recover the delinquent tax payments.  The government, however, either wants or needs the money as soon as possible.  Subsequently, they will put these tax liens up for sale to individuals or businesses.  In return for getting their money up front, the government agency will offer a guaranteed rate of interest to prospective investors.  This is where you come in.

How to efficiently invest in tax liens

In the United States, for example, every state, and some counties within individual states, offers a different rate of interest to tax lien investors.  Some states guarantee 1% per month, other states 2% per month, and other states variable rates depending on bids and other factors.  These are great returns for relatively low risk (most tax liens are eventually paid back; a tax lien that is not paid back can end up in the transfer of the property to the holder of the tax lien), though you have to consider that a bankruptcy can potentially discharge a tax lien, particularly if it is an individual investor rather than a government that holds it.

Because many states allow bidding on tax liens, and this bidding can be fiercely competitive, while other states offer guaranteed returns and no-bid tax lien sales, the key to getting a good return is doing some basic research.  Bidding on a tax lien sale is similar to bidding on a government contract:  the tax lien goes to the investor who is willing to accept the lowest rate of interest.  It is up to you to find tax lien sales that offer a good return or otherwise avoid fierce bidding competition.  Because tax lien investing is a relatively sparse marketplace, it is sometimes easier than you’d imagine to find great returns.

The risks of tax lien investing

Investing in tax lien certificates does involve you taking on some risk when putting your money down.  The risks and rewards associated with tax liens are fairly unique.  For example, it is sometimes beneficial for a tax lien you buy to default, as you will receive deed to the property associated with the tax lien.  However, if there are environmental risks or separate liens associated with the property, they will also transfer to your name and could cost far in excess of the property’s value.  If it’s at all possible, you should attempt to do some rudimentary research into the properties on which you are buying tax liens.  It is also possible for a tax lien to be discharged in bankruptcy, though this is quite a rare occurrence.  Specifically, if the property owner wishes to keep his property, he will be forced to pay off the tax lien before he is able to re-affirm his mortgage.

Tax lien certificate investing can be quite lucrative as long as you are willing to do some rudimentary research.  Note that it can take months for a tax lien you buy to be paid off and these instruments are very difficult to sell on any kind of secondary market.  Only invest money you can afford to have tied up for some time.

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Unless you are making a time-sensitive or news-related investment, wait three days before buying or selling a security.  One thing that nearly every individual investor suffers from is rash decision making and buyer’s (or seller’s) remorse.  Giving your decisions a generous incubating period allows you to remove the emotion from the equation.  During this three day period, you will also have extra time to analyze the financials, pore over the annual and quarterly reports, and research the company.  You were doing your research, right?  This brings us to the next investing tip.

Familiarize yourself with the meanings of financial statistics and the language of business writing.  It doesn’t take a genius to understand what a standard ratio like price over earnings (p/e) means or to be able to decipher a company’s balance sheet.  Specifically, you want to look for companies that have a high level of earnings compared to other companies in the sector and for companies that are cash-rich and carry a small or manageable debt load.  For a very in-depth explanation of all of the terms and how to read financial statements, consult some of the other sections of this site or Benjamin Graham’s classic, The Intelligent Investor

Buy the rumor, sell the news. This motto is often repeated in financial circles, but its meaning is not well understood.  Specifically, the motto is a reference to market psychology.  Take this hypothetical scenario:  A rumor is floated that a $3 per share broker is being purchased by a national bank for between 5 and 10 dollars per share.  The stock price of the broker would certainly reach 10 dollars a share, and in fact the buying pressure may be so high that it would rocket past ten dollars.  Now take another hypothetical scenario:  The news is released that a $3 per share broker is being purchased by a national bank for $7.50 a share.  The stock price of the broker would likely move to the $6-7 range, and maybe stay even lower based on skepticism that the deal would ever happen.  This scenario plays out over and over in the market.  Just remember that rumors tend to generate optimism and news tends to generate cynicism.  If you intend to make news-related swing trades, you should deal primarily in rumor and not news.  This principle also works in the opposite direction:  Negative rumors kill stock prices, whereas negative news, unless it is catastrophic, tends to have little effect on the stock price of a company.  If you catch wind of a negative rumor about a stock you own, it just may be time to cut your losses.

Ditch high-priced brokers. Even though there are scores of brokers these days that offer trades for as cheap as $5-10 per trade, a lot of people still do their individual investing through brokerages that charge as much as $25 per trade.  Most of the discount brokerages also have banking wings, so moving your money around is absolutely no problem.  In the world of investing where small percentages make all the difference, you absolutely cannot afford to be paying out your profits to your broker.

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Luckily for you, investing for ‘dummies’ in the stock market can still be a good place to put your money. There are a number of precautions that you can take to not only give your investments a very good chance at being profitable, but also protect against most or all of the downside in an economic catastrophe.  Unlike the banks and the financial firms, you:  are not subject to restrictive legislation; are not subject to the demands of your investors; are not beholden to any pre-determined assets; and are not tied into long-term contracts.

On top of having those basic advantages against large financial companies, you are also not leveraged in any way (assuming, of course, you follow some of the advice in this article).  Leverage is the number one reason for the failure of financial services companies.  Put simply, leverage is the use of borrowed money to make an investment.  Some banks were making so much use of this that they were investing thirty dollars for every dollar of real money they began with.  It’s a great strategy when you’re making money, but if you lose even a small percentage on your leveraged investments you are effectively insolvent.  This brings us to the cardinal rule of investing:

Only invest money that you can afford to lose

This is so incredibly important that it cannot be repeated enough:  Only invest money that you can afford to lose.  There are a great deal of reasons for this:

Investing entails risk, including the loss of most or all of your money.  If you invest even a penny more than you can afford, you are putting you and your family in financial danger.

Investing money you are less attached to takes a great deal of the psychological and emotional element out of investing.  Most individual investors who lose money due so because they make wild decisions based on panic or fear.  If you are risking money you can afford to lose, this becomes less of an issue.

Your investment decisions will not inordinately affect other aspects of your life.  Knowing that a downturn in the market could significantly alter your quality of life will stress you out more than you can even imagine.

Now that that’s out of the way, we can focus on some investment strategies that are easy to implement.  By following these guidelines, you will take out a great deal of the risk involved in personal investing.

Asset diversification

This means buying a mix of assets.  The particular ideal mix is different for everybody’s individual situation, but in general you want a mix close to 60% stocks, 30% bonds, and 10% metals or real estate.  Asset diversification is one of the first things that a financial planner will have you do, and it’s for good reason.  Asset classes tend not to move in concert; this means that if the stock market takes a dive, your bonds and gold will either be steady or rising.  The profits from one class of assets will cover the losses in the other class.

Diversification

This is different from asset diversification.  This means that you should buy a nice mix of stocks or bonds.  The easiest way to do this is to buy an indexed Exchange Traded Fund (ETF) that tracks a wide variety of stocks or bonds.  The rationale is similar to asset diversification:  by having a large mix of financial instruments, you cover yourself from excess risk.  It’s extremely simple to buy an ETF from your broker.  Vanguard’s “Total World” stock index trades under the ticker symbol “VT”.  Diversifying is s as simple as buying and selling VT (or a similar indexed ETF).  Buying a share of an index fund is similar to buying a small share in every company in the world.

Do your research

You may be tempted to buy individual stocks, which is perfectly acceptable once you are properly diversified.  When buying stocks, it is extremely important that you are aware of what the financial details mean.  You can get these statistics on yahoo or Google finance, or through your broker’s research tool.  Elsewhere on this site you can find in-depth explanations on the meaning of a company’s financials.

It may seem counter-intuitive, but following these simple tips will contribute a lot more to being profitable than being a financial genius or a whiz-kid trader.  These are the very fundamentals of investing, and you ignore them at your own peril.

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