Expert: Steven Burgauer - 6/12/2001

Question
G'day there mate!
Im a beginner in the stockmarket, Im from Australia and would like to get more into the markets as Im 17 years old and would like to make a fortune some day out of doing something great.

I have been wanting to know for a little while, how do you know whether a share price is going to go up or down?

What are blue chip stocks?

I have $2000, could I day trade it and make a lot of money if I knew how?

Thanks mate
Rockie

Answer
Dear Rockie
    Been to your lovely country, and so I'll try to help you if I can.
    First of all, get day trading out of your head.  It's a fool's game unless you're very smart or very lucky or both.
    A blue chip stock is a company with substantial financial strength and a long history of paying dividends.
    In my opinion there are three things you should look at in an investment:
(1) whether the company pays a dividend and whether it increases that dividend on a regular basis.  The percent dividend is not so important, but should be at least half of the going long-term interest rate.  Nowadays, with rates hovering around 6%, I would want to have a dividend rate of around 3%.
(2) the P/E ratio.  It should be no more than about two to two and a half times the long-term interest rate.  Again, with rates around 6%, the maximum P/E would be about 12 to 15.
(3) whether you understand what the company does.  If you can't explain its business in less than 10 words, it's too complicated; forget it.
    Now, as to how I know whether a stock will go up or not--I don't.  If the country is prosperous, stocks will appreciate.  There's nothing more to it than that.
   I hope this helps.  G'Day
Most sincerely
Steven Burgauer
author of THE WEALTH BUILDER'S GUIDE (available online at amazon.com)