Expert: Paul Henneman - 8/23/2004

Question
Hi Paul,
My question may look very stupid for you, the swing trader, but I have to ask....
Now, for example, I buy a stocks of Microsoft through some web day trading site, for example etrade.com, and I keep these stoks for defined period of time without trading it, during this time, Microsoft announces EPS of 0.65.
My questions:
1) Is that means that I'll get for each my stock $0.65?
2) If yes, then how do I get this amount? Through etrade also?
  If the answer to question number 1 is no then Question number 2 is: What EPS means then?
3) what is Dividends?
4) I know that there are swing traders, scalpers, and swing traders,.... how would you call me, I would like to buy stocks for certain companies in order to save my money in stocks instead of banks. Just buy stocks and forget about them for long period of time?

Hope I am not bothering you with my stupid questions and anyway,
Thanks Paul....

Answer
Oussama,
  Thank you for your question! You are asking good ones. The answers are complex and should be much more detailed than I can provide here, but will give you some suggestions at the end of this reply on some sources that could help further.

     EPS is not directly related to the amount that you will receive for each share of stock. EPS is defined as the "portion of a company's profit allocated to each outstanding share of common stock. For example, a corporation that earned 10 million last year and has 10 million shares outstanding would report earnings of $1 per share." I got this definition from Barron's "Dictionary of Finance and Investment Terms", page 168. It is a great source to have on hand and I recommend it.
    Instead, what determines how much you make is mostly based on the stock price itself. It is related to EPS (As the EPS figure goes up, so usually does the stock price). Stock price is really only determined by what people are willing to pay for it. If earnings per share is growing and getting bigger, it is a good thing, and the stock price will go up. If earnings per share is good but is getting smaller over time, this usually affects stock price in the other direction. So even if a company has a positive EPS, the stock price could decline.  Remember that EPS is based on the company's profits and number of shares issued, not on the actual price of each share.
  The way you actually receive any profits is to buy shares, which can be done on such sites as www.etrade.com as you mention. Another good service is www.scotTrade.com which has lower fees than Ebay. They watch the price of the stock per share that you have purchased. If it goes up, then you can sell your shares for the difference. Here is an example: If you buy one share of Microsoft stock at $100, then it rises to $120, you can sell your share and make $20 profit.  But keep in mind that stocks can also go down and lose you money!
   Dividends are payouts that some companies offer to people who own their stocks. If the company is profitable, sometimes they will pay a portion of these profits to stock holders in the form of a dividend. Most companies do not do this, but some do. There is almost always a minimum amount of time that you must hold the stock to get the dividend. Microsoft I believe does pay out a dividend. It is usually large, very well established companies that pay out dividends. This is not necessarily good, as large established companies may have reached the limit of their growth. If so, then their stock price may not rise quickly, and offset the fact that you get a dividend. The fact that a stock does offer a dividend should not be the only thing you look at when deciding to buy a stock. But for a long term investment, it is good.
   They type of investor that purchases stocks for a long period of time is commonly called 'buy and hold' investor. Of course the question becomes which stocks are the best ones to buy for you. If you are a buy and hold investor looking at the long term, you are correct that you should look at large, stable companies that have strong prospects for slow but continuous growth for a long time. There are some websites that can help you research this type of thing:  finance.yahoo.com, cbsmarketwatch.com, motleyfool.com, and morningstar.com
   Another recommendation I have is to purchase the book "Investing for Dummies". This is a great introduction, and covers the buy and hold approach. Most importantly it will go over the basic data points that you can look up for each stock you are interested in, and give you ideas on how to look for the stocks that are good investments for you. The book is available on www.Amazon.com and in most major bookstores. It also goes over other types of investments, such as mutual funds that you may find very attractive for your type of investment needs.
  I hope this helps get you started! It is a big topic, and the successful investor spends the time needed to learn it. But the rewards are well worth it. Even a conservative portfolio for the long term should double in value approximately every 5 years. Some years will be better, some years will be worse. But over time, a good investment plan can lead you to a much more comfortable lifestyle in the future.

  Please do not hesitate to follow up with me if I can be of any additional service!

Sincerely,
Paul Henneman
President
ValuEngine, Inc.
www.ValuEngine.com
www.VEInstitutional.com