How to Make Money in Stocks

 

This is the first cheque I got for my stocks' earnings and I have to say that it was a great feeling to collect such a cheque! I have been in Amman Stock Exchange for over 2 years where I started all by myself and had to learn things the hard way. Today I am willing to share my experience.

First of all there are three major ways to make money in a stock exchange (what's a stock exchange? please visit my previous post)

1. You sell the shares you bought after their value increases over time; over years or even over a day.
2. In case the company generates earnings and decides to give dividends to shareholders. This happens once a year, usually in the first third of the year. I call the season when earnings are distributed The harvest time.
3. Sometimes a company makes earnings but instead of distributing them to shareholders, it would use them to expand business, such earnings are called retained earnings (تدوير الأرباح). Of course, if the business expands this means your share has also expanded. Retained earnings usually imply your company will give you free shares.

I found out that options 2 and 3 are the best trouble-free methods to generate revenue. With all the mistakes I made I was able to generate a yearly return on investment of about 4% . Option 1 is also good for some strategic stocks (long term investment) but trust me it is not worth doing on the short term. If I had to pick some favorite stocks from my portfolio I can recommend the following ones:

• Jordan Electric Power Company (stock symbol: JOEP)
• Jordan Express Tourist Transport (JETT)
  
• Salam International Transport and Trading (SITT)
• Jordan Steel (JOST)
• National Aluminum Industrial Company (NATA)
• Arabian Steel Pipes Manufacturing Company (ASPM)
• Arab Pesticides and Veterinary Drugs Manuf. Company (MBED)

Also, here are a couple of useful websites:

http://www.stocksexperts.net → whenever I have a question this great forum has the answer

http://www.ufico.com → search for stock prices and graphs using stock symbols

http://ase.com.jo go to Rules & Regulations (الأنظمة و التعليمات) → Trading Directives (دليل استخدام نظام تداول الأوراق المالية) also good for disclosures

Suppose JOST shareholders decide in the general assembly meeting to give 15% dividends on 22-April-2010. On this day JOST buy and sell orders are suspended and each holder of this stock on that particular day is eligible to receive dividends. The nominal value of all stocks in Amman Stock Exchange is JOD 1 , so a disclosure stating a distribution of dividends with a value of 15% is in relation to the nominal value and not to the stock's current price; this means you will get 15 piasters.

I recommend that you buy and sell your stocks on two stages so that you will not regret any hasty decision and please always bare in mind that trading stocks is risky. My other advice would be to retain your own earnings and buy more stocks with the dividends at least for the first couple of year. So what's the good thing about going into stocks at this time? It is simply because prices are cheap. Some stocks have a market value that is even cheaper than real value. Exactly, that's a bargain!

Fact of the day: The Amsterdam Stock Exchange is considered the oldest in the world. It was established in 1602.

What is a Stock Exchange?

 

Multaqa Al-Tadawul (The Trading Forum) is the brokerage house I use to manage my humble portfolio in the Amman Stock Exchange. What's a stock exchange anyway?

Let us assume your friend has a grocery store that makes good money. You like this idea, and instead of envying your friend, you offer to pay him/her and become a partner in this business. So, a helpful accountant evaluates the worth of this store to be $1000 and divides this value by a suitable number of portions (say 100 shares); now each share's value is $10 or alternatively each stock has a value of $10. You pay your friend $400 for 40 shares, voila you are officially a partner in this business.

One day you decide that this grocery store is not your cup of tea and you decide to opt out from it. You need to sell your shares, how do you do that? You need a market to put your shares in for sale and wait for a potential buyer, in other words you need a stock exchange. Trading in Amman Stock Exchange everyday is from 10:00 AM until 12:15 PM (except for Friday and Saturday). Each stock's price is allowed to move up or down within 5% of the last day's closing price. The Amman Stock Exchange website contains useful information, plus you can also use it to track stocks in real time via the market watch live link.

On the other hand a brokerage house is the link between you and the stock exchange. For every share you sell/buy, a small percentage of your deal goes both to the stock exchange and the brokerage house. For me I choose Multaqa Al-Tadawul because it has an e~portfolio service in addition to a very convenient trading commission (as low as %0.55). By the way opening a portfolio is usually free.

Pros of investing in stocks:

• Stocks make good investment. Also, most brokerage houses require an affordable minimum balance to open a portfolio. For example I started my portfolio with only JOD 280 ($400).
• Stocks helped me learn important business concepts (such as supply and demand) in a very simple way.
• Trading stocks is prestigious, you get something useful to talk about in social events instead of gossiping. 

Cons of investing in stocks:

• Some stocks might loose value dramatically due to a multiple of factors, one of which is bad news. For example, within 50 days, the BP oil spill resulted in 50% decline in BP share price.
• Since stocks require finding a potential buyer/seller it might not be easy to liquidize your portfolio whenever you need to opt out and cash your assets. Otherwise you might sacrifice and give up some of your initial capital.

Be careful, trading stocks might be risky, in this post I only give you the starting point, but if you have any questions please feel free to leave me any. Stay tuned for my next post, I will give you my ultimate stocks' tips.
Fact of the day: New York stock exchange is the world's largest stock exchange, the daily trading of stocks in New York began under a buttonwood tree on Wall Street!

Saving Accounts

Have you ever used a post office? Possibly after reading this post you will rush in to the nearest post office! Let us summarize what we have learned so far:

• You must put aside a fixed amount of your income as savings
  
• Write what you spend (do an expense sheet) it helps you control your expenses
• You can use your expense sheet to optimize the amount you save via making a budget
  

My tip today would be to put your savings in a separate bank account; in my case I receive my salary through HSBC, but I put my savings in the Postal Saving Bank (yes you can open a savings account in the post office). In any banking system there are two main types of saving accounts:

• The Regular savings account: Banks usually require a minimum balance of JOD 200 for such an account. However, you can open a savings account in the Postal Saving Bank with a minimum balance of JOD 25 !
  
• The time deposit accounts: You deposit an amount of money that cannot be withdrawn for a period of time (say 6 months). The longer the period the more investment flexibility you give to the bank; hence you get a higher return on your investment. I introduce below a sample of available Islamic banking instruments (please note that the profit percentages mentioned below may vary over the year), yet it is good to note that the time deposit accounts are available in all banks.
  

Jordan Dubai Islamic Bank
Expected profit is around 3.5 % for a year (so if you put JOD 1000 for a year at the end of the year you get JOD 35, profit is not tax exempted)
The minimum for deposit accounts is JOD 3000

Postal Saving Bank (phone: +962-6-569-2385 #135)
Expected profit is around 7 % for a year (profit is tax exempted)
The minimum for deposit accounts is JOD 1000
Trade-off: Supplementary services may not be available (such as e-banking and ATM)

The Islamic International Arab Bank
Expected profit is around 3 % for a year (profit is not tax exempted
The minimum for deposit accounts is JOD 1000
Bad quality of service (honestly i don't recommend this bank to anyone)

In 1861 Great Britain was the first nation to offer the postal savings system. Nowadays you can find post offices all over the globe promoting the saving culture; for example in India the post office sells gold coins! Remember, you save so that you will reward yourself eventually.

* Update: On Feb. 7th 2011 I had the pleasure of meeting Ms. Karen Adams/ CEO of HSBC Jordan. I asked her about saving tips, she said put 10% of any income you get until you retire, the only exception to spend from this account is for investment purposes (for example: buying a property).

How to Set a Budget

To encourage recycling I am going to use last month's picture. Besides, to learn how to set a budget you will also need:

1. A pen or a pencil.
2. A notebook
3. A calculator.

A budget is originated from the french word bougette which means a purse, yet we can define it as a forecast for the expenses you wish to control. Remember my earlier promise to give hints on how to save more? Today I will introduce one of those tips. Last month's homework (the expense sheet) must have given you an idea where all your money goes. Based on it we can estimate how much we expect to spend for the coming month, shall we proceed?

• Transportation to work: taxi takes JOD 1.5 * twice a day * 24 working day per month = JOD 72 for transportation
• Weekly groceries: JOD 15 * 4 weeks in a month = JOD 60
• Eat out at weekends: JOD 10 * 4 weeks in a month = JOD 40
• Weekly shirts ironing: JOD 2.5 * 4 weeks in a month = JOD 10
• Once a week eat out at the office: JOD 7 * 4 weeks in a month = JOD 28
• Cinema once in a month + pop corn (yummy!): JOD 10
• Monthly Subscription to an association (or gym etc): JOD 20
  

Go ahead and add the numbers in red, the total would be JOD 240. We add a 10% to this number (as a margin of surprising expenses such as birthday presents). There you go; 240 + 24 = JOD 264, what does that mean? It means that you need no more than JOD 264 as an allowance! I suggest that you leave 10% of this JOD 264 (= JOD 26) as a backup for the last week of the month, so that you would not be broke - as most of us sadly are. Now for the secret recipe, the optimal budget would look something like this:

• 50% of your net income should be spent as allowance (supposedly in our example: more than the JOD 264; reward yourself laborers).
  
• 10% of your net income would go for charity.
• The remaining part (40%) would be savings (full-throttle the savings to their maximum potential).

Superb! You now know how to set a budget plus you can use this same technique to control your vacation expenses or to financially manage your future enterprise, great ha?

What is an Expense Sheet?

Good day readers! Today (or actually during the whole coming month) we will be having an exercise; that is to create an expense sheet. You will need:

1. A pen or a pencil.
   
2. A notebook.
   
3. A calculator.
   

The exercise is to try your best to write everything you spend throughout the month on a daily basis. At the end of each week you will use the calculator to subtract all your weekly expenses from the initial income. Let's take an example, shall we?

If your net income is JOD 410, according to last month's post you will have JOD 400 left to spend. Let your expenses for this week be:

JOD 20: Groceries
JOD 15: Gas for the car
JOD 35: Gym subscription
JOD 5: Dining out

The remaining of your salary would be:
400 - 20 - 15 - 35 - 5 = JOD 325

This number (JOD 325) should match the actual remaining money that you have (in you pocket + in your salary bank account); I call what we just did "closing the expense sheet". Expenses of the next week will be subtracted from the new balance (that is from the JOD 325). One more thing, I find it helpful to write down the date each time you close your expense sheet.
To me, it feels great to close the expense sheet! Nonetheless, you might expect some leakage every now and then. Here are my tips:

• As a start, a maximum of 10% leakage is OK (in our example it would be a JOD 40 that you cannot remember how you spent).
  
• Get a receipt whenever you can for what you pay (example: go to major supermarkets that give receipts). If no receipt is available you can write it as a note in your diary/ mobile device until you copy it to the expense sheet.
  
• If you enjoy closing you expense sheet you can do it more frequently (twice a week for example). Take into consideration that if you make it very frequent (i.e. daily) you might end up hating managing your money affairs and this is not our goal here.
  

Although all an expense sheet does is to tell you where all your money did go, yet it helps you control your expenses. How is that?

First: During the month you are aware of how much money is left (i.e. No surprises at the end of the month).
Second: You can look back at your expenses, realize and do something about the major expenses that eat up your income.
Try it yourself and see the results.

ABC's of Saving

I was looking for a piggy bank to use in this month's post when I noticed that there are other forms of penny banks such as our friend pictured here, please say hi to Mr. Froggy (Did you know that in Japanease myth, frogs are symbols of good luck?!). As you can see, poor Mr. Froggy is lost and confused as coins are in front of his eyes but he cannot save, how come?!

In my opinion saving is a separate culture of its own. The main reason we daily leave our homes for 9 hours is to receive a payroll at the end of the month and if we fail to save anything from that salary this would not lead to a happy ending. So what is the secret? How do we save?

Saving in the first place is not about how much you save, it is about putting aside a fixed sacred amount of your income that you would not allow yourself to spend no matter how broke you get. Start with something you are sure you can afford (Example: JOD 10 per month). If it helps to have a penny bank buy a one or even make your own, after all you are save to help yourself in the bad times.

 

While researching for this post I came across the fact that piggy banks exist in this world since the 15th century! A very clear message that it is time to start saving. In my future posts I will give hints on how to full-throttle our savings to their maximum potential.

Goldfingers

Goldfinger is a James Bond movie that goes back to 1964 (that's right I am a James Bond fan). However, we are going to talk today about Goldfinger(s). Golfingers is a term that I created for the group of people who are convinced in using Gold as a medium-term investment. Since the dawn of time Gold has been considered a safe haven that earned its value basically for being shiny and resisting harsh physical conditions (such as humidity). The glory of Gold continues until this day where it is still considered an excellent commodity for achieving financial security.

So, why to invest in Gold?

• Gold is a limited resource; this means supply is decreasing year after year while demand in the worst case scenario would remain the same, eventually the price would go up (Trend of average price in US$ is heading upwards over time).
• Great countries (such as China and India) did their math and they are also buying Gold in massive quantities.
• In my opinion buying Gold is somehow similar to land investments, however Gold is easier to maintain and take care of than land investments.

Besides all of the above, one of the good reasons I am truly convinced with is that research says: Gold if obtained on a regular basis can beat inflation (inflation is the decrease in the value of money over time). Think of it this way, what was the price of a watermelon before 20 years and what is the price of a watermelon nowadays? Gold lasts, watermelon decays.

Tips for buying Gold In Jordan:

• The best method would be Gold coins. The two main forms of coins are "Rashady-which weighs 7 gm, pictured left" and "Englizi-which weighs 8 gm, pictured right". Both are 21 karat Gold. Coins are good because their sell/buy difference is small compared to jewelery.
• Before buying Gold you can check current 24 karat Gold price in US$ (top left corner). 1Gold ounce = 31.1gram, 21K gram price = 0.881* 24K gram price . So for example: If the current Global Gold price is $1085/ ounce,
  The price of a 24K gram is $1085/ 31.1 = $34.88
  The price of a 21K gram is $34.88* 0.881 = $30.73
  The price of a 21K gram in JOD is $30.73* 0.7 = JOD 21.5
  Or alternatively use this site Gold Price in JOD.
• I recommend you go to the Gold Souq in downtown Amman which might be a fun experience. Browse ten stores randomly and check for prices, this way nobody can cheat you. Also a sharp edge of the coin is considered a good sign.
• Get a receipt for your coin; this will help you in case you intend to sell it in the future.
• Every now and then keep track of Gold news, so that you will sell/buy at the proper time.

I thought I should give priority to this post so that you can benefit from the current upward trend of Gold price (current price is $1090, analysts expect it to reach somewhere near $2000). Goldfingers are waiting for you, what are you waiting for ?!

* Update - May 2010: Subscribe to this free newsletter which gives you hints about Gold price trends.