Skip to main content

Everything You Need To Know

Stock Investing

Play Video

Video Overview | Page last updated July 2024

The stock market is a dynamic and multifaceted marketplace where investors buy and sell shares of publicly traded companies, acquiring partial ownership in businesses that span diverse sectors, from technology behemoths to local retail chains. At its core, it serves as a platform for individuals to invest in a company’s growth potential while enabling businesses to raise capital by issuing shares to fund expansion, innovation, or operations. Major stock exchanges, such as the New York Stock Exchange (NYSE) and Nasdaq, facilitate these transactions, operating as highly regulated environments driven by the forces of supply, demand, and broader economic trends.

Beyond mere trading, the stock market acts as a barometer of global economic health, reflecting shifts in consumer confidence, corporate performance, and geopolitical events. It offers significant opportunities for wealth creation through capital appreciation and dividends, but it also carries inherent risks due to market volatility and economic uncertainties. Successful navigation of this complex landscape requires discipline, a solid understanding of financial principles, and strategic decision-making. Whether you’re a novice or seasoned investor, the stock market demands respect for its intricacies and rewards those who approach it with knowledge and patience. For personalized guidance or to address specific questions, we invite you to schedule a meeting with us at TrustTas Capital.

Overview

Stock Basics 丨 Past Performance 丨 Types of Risk 丨 Taxation

Stock Basics

At its core, a stock (also referred to as equity) represents partial ownership in a company. When you purchase a stock, you acquire a claim to a portion of the company’s assets and earnings, proportional to the number of shares you own. Additionally, shareholders often gain voting rights, allowing them to influence major corporate decisions, such as electing board members or approving mergers. Companies issue stocks to raise capital, which they can deploy to fund operations, invest in growth opportunities, or innovate, ultimately aiming to increase profitability and enhance shareholder value. A company’s stock price is driven by supply and demand dynamics, influenced by a range of factors, including economic conditions, market sentiment, and company-specific developments like earnings reports or strategic initiatives.

Two Main Ways To Make Money With Stocks

Investing in stocks carries inherent risks, including the potential loss of principal due to market volatility or company-specific challenges. Despite these risks, stocks offer opportunities for wealth creation through two primary mechanisms:

↳ Dividends

Some companies distribute a portion of their profits to shareholders in the form of dividends, typically paid quarterly or annually. Dividends represent a share of the company’s earnings and are often viewed as a sign of financial stability. Investors can choose to reinvest dividends to purchase additional shares, compounding their investment over time, or use the cash for other purposes. Not all companies pay dividends, as some prefer to reinvest profits back into the business to fuel growth.

↳ Capital Appreciation

Capital appreciation occurs when a stock’s price increases, allowing investors to sell their shares at a higher price than their purchase price. This price appreciation is often driven by positive developments, such as strong earnings growth, favorable market trends, or company-specific achievements like product launches or strategic partnerships. Investors realize a profit by selling their shares at the appreciated price, with the gain calculated as the difference between the purchase and sale prices, minus any transaction costs.

  • However, stock prices can also decline, leading to potential losses, which underscores the importance of research and risk management in stock investing.

Stock Market Past Performance

While past performance is not a guaranteed predictor of future results, historical data provides a critical foundation for making informed assumptions about potential returns and shaping effective investment allocation strategies. The S&P 500, a benchmark index representing 500 of the largest U.S. companies, offers a valuable lens for assessing the stock market’s risk and reward dynamics over time. For instance, the S&P 500 experienced a dramatic -36.6% decline in 2008 during the global financial crisis, reflecting the impact of economic turmoil, while it gained a robust 31.2% gain in 2019, driven by strong corporate earnings and favorable monetary policies.

These swings, which have historically ranged from declines exceeding -30% to gains surpassing 30% in certain years, underscore the market’s inherent volatility. Factors such as monetary policy decisions, corporate earnings performance, geopolitical events, and macroeconomic trends significantly influence these movements. This dynamic landscape presents both significant opportunities for wealth creation and notable challenges, requiring investors to approach the market with discipline, risk management, and a long-term perspective to navigate its complexities successfully.

Types of Risk

Investing in the stock market exposes you to various risks that can lead to the loss of your investment principal. These risks are broadly categorized into two types: systematic and unsystematic risk. Understanding these risk structures is crucial for making informed investment decisions and managing potential losses effectively

↳ Systematic Risk

Systematic risk, often called market risk or non-diversifiable risk, refers to the potential for investment losses due to widespread disruptions affecting the entire market or financial system, rather than risks specific to an individual company or industry. This type of risk is inherent to the market and cannot be eliminated through diversification, as it stems from broad, unpredictable macroeconomic forces. A key metric for assessing systematic risk is beta, which measures an investment’s volatility relative to the overall market. A beta greater than 1 indicates higher volatility than the market, while a beta less than 1 suggests lower volatility.

The 2008 financial crisis serves as a stark example of systematic risk, where the collapse of major financial institutions triggered a global market downturn, illustrating the interconnectedness of modern financial systems and the speed at which losses can cascade. Below is a list of external events that commonly contribute to systematic risk:

  • Global recessions
  • Geopolitical events
  • Global pandemics
  • Natural disasters
  • Monetary policy
  • Currency crashes

Systematic risk can be further categorized into specific subtypes, each driven by distinct economic or external factors:

Market Risk

Market risk arises from broad market movements caused by factors such as poor economic conditions, negative investor sentiment, or unfavorable global events. For example, a bear market driven by widespread pessimism can lead to significant declines across asset classes.

Interest Rate Risk

Interest rate risk results from fluctuations in interest rates, which can impact stock valuations. For instance, rising interest rates often reduce the present value of future cash flows, disproportionately affecting growth stocks with high valuations, such as technology companies.

Inflation Risk

Inflation risk occurs when rising prices erode purchasing power, squeezing corporate profits and reducing the real returns on investments. High inflation can lead to lower stock valuations, particularly for companies with fixed income streams or high operating costs.

Currency Risk

Currency risk affects companies with international operations or investments, as exchange rate fluctuations can alter earnings or asset values. For example, a strengthening U.S. dollar may reduce the value of foreign revenues for U.S.-based multinationals.

Political Risk

Political risk stems from government actions, policy changes, or geopolitical events, such as trade wars, sanctions, or regulatory shifts, that disrupt financial markets. For instance, unexpected tariffs can harm industries reliant on global trade, leading to market-wide impacts.

↳ Unsystematic Risk

Unsystematic risk, also known as specific risk or idiosyncratic risk, refers to the potential for investment losses tied to individual stocks or companies, rather than the broader market. Unlike systematic risk, unsystematic risk is unique to a specific company or industry and can be significantly reduced through diversification—spreading investments across multiple companies, sectors, or asset classes. Examples of unsystematic risk include a product recall, a labor strike, or regulatory changes that disproportionately affect a single company. By holding a well-diversified portfolio, investors can minimize the impact of these isolated events on their overall returns.

Unsystematic risk can be further categorized into the following subtypes, each driven by distinct company- or industry-specific factors:

Company-Specific Risk

Company-specific risk arises from internal issues, such as poor management decisions, product failures, or corporate scandals. For example, a CEO resignation due to misconduct or a defective product recall can erode investor confidence, leading to a sharp decline in the company’s stock price, even if the broader market remains stable.

Industry-Specific Risk

Industry-specific risk affects an entire sector due to challenges unique to that industry. For instance, new healthcare regulations may increase compliance costs for pharmaceutical companies, or supply chain disruptions may hamper technology firms reliant on specific components. These risks can impact all companies within a sector, regardless of their individual performance.

Financial Risk

Financial risk stems from a company’s capital structure or financial health. High debt levels, poor cash flow management, or weak earnings performance can make a company vulnerable to stock price declines. For example, a highly leveraged company may struggle to meet debt obligations during an economic slowdown, leading to investor concerns and a falling stock price.

Strategic Risk

Strategic risk occurs when a company loses market share or competitiveness due to external pressures, such as stronger competitors, disruptive innovations, or shifts in consumer preferences. For instance, a retailer failing to adapt to e-commerce trends may see its stock value decline as competitors capture market share.

Legal or Regulatory Risk

Legal or regulatory risk arises from lawsuits, fines, or regulatory actions targeting a specific company. For example, a pharmaceutical company facing litigation over a drug’s side effects or an energy firm hit with environmental fines may experience significant stock price declines due to the financial and reputational impact.

Taxation

When you earn income from stock investments—whether through dividends or by selling stocks at a profit—you are generally required to pay taxes on those gains. Understanding the tax implications of dividends and capital gains or losses is essential for effective investment planning. The tax treatment depends on factors such as the type of income, the holding period, and your overall income level. Additionally, high-income earners may be subject to the Net Investment Income Tax (NIIT). Your brokerage will provide a Form 1099-B (for capital gains and losses) and a Form 1099-DIV (for dividends) by mid-February, summarizing your investment activity to assist with tax reporting.

Tabbed below shows the different tax treatments:

↳ Dividends

Dividends are payments made by a company to its shareholders, typically representing a portion of its profits. These payments can be a valuable source of income for investors, but their tax treatment depends on whether they are classified as qualified or nonqualified (also called ordinary) dividends. The classification determines whether the dividends are taxed at the preferential long-term capital gains rates or the higher ordinary income tax rates. Your brokerage will provide a Form 1099-DIV by mid-February each year, detailing the dividends paid and specifying whether they are qualified or nonqualified, which is critical for accurate tax reporting.

Qualified Dividends

Qualified dividends are taxed at the more favorable long-term capital gains rates, which range from 0% to 20%, depending on your taxable income and filing status. To be considered qualified, dividends must meet specific IRS criteria, including:

  • Holding Period: You must hold the stock for more than 60 days during the 121-day period that begins 60 days before the ex-dividend date (the date by which you must own the stock to receive the dividend). The holding period includes the ex-dividend date.

For example, if you purchase a stock before its ex-dividend date and hold it for at least 61 days within the 121-day period, any dividends received are typically considered qualified and eligible for lower tax rates.

The long-term capital gains tax rates for qualified dividends for the past several tax years are tabbed below:

For Tax Year 2025

Tax Rate Single Married Filing Jointly
0% $0 to $48,350 $0 to $96,700
15% $48,351 to $533,400 $96,701 to $600,050
20% $533,401 or more $600,051 or more

For Tax Year 2024

Tax Rate Single Married Filing Jointly
0% $0 to $47,025 $0 to $94,050
15% $47,026 to $518,900 $94,051 to $583,750
20% $518,901 or more $583,751 or more

Nonqualified (Ordinary) Dividends

Nonqualified dividends do not meet the IRS criteria for qualified dividends, often due to insufficient holding periods or because they are paid by entities like real estate investment trusts (REITs) or certain foreign corporations. These dividends are taxed at your ordinary income tax rates, which range from 10% to 37%, depending on your income bracket—the same rates applied to wages or other earned income. Because ordinary income tax rates are generally higher than capital gains rates, nonqualified dividends result in a higher tax liability.

Tax Planning Considerations

Investors can optimize their tax liability by holding stocks long enough to ensure dividends qualify for lower tax rates or by holding dividend-paying stocks in tax-advantaged accounts like IRAs or 401(k)s, where dividends are not taxed until withdrawal (or not at all in Roth accounts). Additionally, understanding the ex-dividend date and planning purchases or sales around it can help meet the holding-period requirements for qualified dividends.

↳ Capital Gains & Capital Loss

In its simplest terms, a capital gain occurs when you sell a stock for more than its purchase price, resulting in a profit, while a capital loss occurs when you sell it for less, resulting in a loss. Until a stock is sold, any increase or decrease in its value is considered an unrealized gain or unrealized loss (often called a “paper” gain or loss), which is not subject to taxation. Once sold, the gain or loss becomes realized and is subject to tax treatment based on whether it is a gain or loss and whether it is classified as short-term or long-term. Understanding these tax rules is critical for maximizing your after-tax returns and effectively managing your investment portfolio.

Capital Gains

A capital gain is the profit earned when you sell a stock for more than its cost basis (typically the purchase price plus any associated fees, such as brokerage commissions). The basic formula is:

  • Capital Gain = Selling Price − Cost Basis

Example: You buy 100 shares of ZZZ stock at $100 each ($10,000 total). You sell them at $250 each ($25,000 total). Your capital gain is $25,000 − $10,000 = $15,000.

The tax treatment of capital gains depends on the holding period:

  • Short-Term Capital Gains: Gains from stocks held for one year or less are taxed at your ordinary income tax rates, which range from 10% to 37% in 2025, depending on your income bracket.

  • Long-Term Capital Gains: Gains from stocks held for more than one year are taxed at preferential long-term capital gains rates, which are 0%, 15%, or 20%, based on your taxable income and filing status.

Long Term Capital Gain Rates - For Tax Year 2025

Tax Rate Single Married Filing Jointly
0% $0 to $48,350 $0 to $96,700
15% $48,351 to $533,400 $96,701 to $600,050
20% $533,401 or more $600,051 or more

Long Term Capital Gain Rates - For Tax Year 2024

Tax Rate Single Married Filing Jointly
0% $0 to $47,025 $0 to $94,050
15% $47,026 to $518,900 $94,051 to $583,750
20% $518,901 or more $583,751 or more

Example: You bought 100 shares of ZZZ stock at $100 each ($10,000 total) several years ago (long-term) and 100 shares of XXX stock at $50 each ($5,000 total) this year (short-term). You sell ZZZ at $250 each ($25,000 total, $15,000 gain) and XXX at $75 each ($7,500 total, $2,500 gain). The ZZZ sale results in a long-term capital gain of $15,000, taxed at 0%, 15%, or 20%, depending on your income. The XXX sale results in a short-term capital gain of $2,500, taxed at your ordinary income tax rate.

Capital Losses

A capital loss occurs when you sell a stock for less than its cost basis. The formula is:

  • Capital Loss = Cost Basis − Selling Price

Example: You buy 100 shares of ABC stock at $50 each ($5,000 total). You sell them at $30 each ($3,000 total). Your capital loss is $5,000 − $3,000 = $2,000.

Like gains, capital losses are classified based on the holding period:

  • Short-Term Capital Loss: Losses from stocks held for one year or less.
  • Long-Term Capital Loss: Losses from stocks held for more than one year.

Capital losses can offset capital gains and reduce your taxable income. If your losses exceed your gains in a tax year, you can deduct up to $3,000 per year against ordinary income, with any excess losses carried forward indefinitely to offset future gains or income.

Netting Gains and Losses

The IRS follows a specific process for netting capital gains and losses:

  1. Short-Term Netting: Short-term capital losses offset short-term capital gains.

  2. Long-Term Netting: Long-term capital losses offset long-term capital gains.

  3. Cross-Category Netting: If there are remaining losses in one category (short-term or long-term), they can offset gains in the other category.

  4. Excess Losses: If total capital losses exceed total capital gains, you can deduct up to $3,000 per year against ordinary income, with any remaining losses carried forward to future years.

Netting Example

Gains and Losses Overview:

  • Short-Term Capital Gain: $5,000 (Stock A)
  • Short-Term Capital Loss: $1,000 (Stock B)
  • Long-Term Capital Gain: $1,000 (Stock C)
  • Long-Term Capital Loss: $15,000 (Stock D)

Step 1: Short-Term Netting: $5,000 gain − $1,000 loss = $4,000 net short-term gain.

Step 2: Long-Term Netting: $15,000 loss − $1,000 gain = $14,000 net long-term loss.

Step 3: Cross-Category Netting: $14,000 long-term loss − $4,000 short-term gain = $10,000 net loss.

Step 4: Deduction and Carryforward: Deduct $3,000 against ordinary income for 2025, and carry forward the remaining $7,000 loss to offset future gains or up to $3,000 of ordinary income per year.

Tax Planning Considerations

Your brokerage will provide a Form 1099-B by mid-February, detailing your realized gains and losses, including the cost basis and holding period, to assist with tax reporting. To optimize after-tax returns, consider strategies like tax-loss harvesting (selling losing stocks to offset gains) or holding investments for over a year to qualify for lower long-term capital gains rates. Investments in tax-advantaged accounts, such as IRAs or 401(k)s, defer taxes on gains until withdrawal (or avoid them in Roth accounts).

↳ Net Investment Income (NII)

The Net Investment Income Tax (NIIT) is a 3.8% tax imposed by the IRS on certain types of investment income for high-income individuals, estates, and trusts. Net Investment Income (NII) includes income from assets such as stocks, bonds, mutual funds, and other investments, as well as passive income sources like rental income, royalties, and certain business income not subject to self-employment tax.

  • NII is calculated as the total investment income minus related expenses, such as investment advisory fees or brokerage commissions.

The NIIT applies to individuals whose Modified Adjusted Gross Income (MAGI) exceeds specific thresholds, depending on their filing status. The tax is levied on the lesser of your NII or the amount by which your MAGI exceeds the threshold. The thresholds are:

Filing Status MAGI Limit
Single $200,000
Married Filing Jointly  $250,000

How the NIIT is Calculated

The NIIT is 3.8% of the lesser of:

  1. Your Net Investment Income, or

  2. The amount by which your MAGI exceeds the applicable threshold.

Example One – Assume you are single, with an NII of $15,000 and a MAGI of $220,000:

  • Your MAGI exceeds the single filer threshold ($200,000) by $220,000 − $200,000 = $20,000.

  • The NIIT applies to the lesser of your NII ($15,000) or the MAGI excess ($20,000), which is $15,000.

  • Tax: 3.8% × $15,000 = $570.

Example Two – Assume you are single, with an NII of $30,000 and a MAGI of $220,000:

  • Your MAGI exceeds the threshold ($200,000) by $220,000 − $200,000 = $20,000.

  • The NIIT applies to the lesser of your NII ($30,000) or the MAGI excess ($20,000), which is $20,000.

  • Tax: 3.8% × $20,000 = $760.

Tax Reporting and Considerations

Your brokerage will provide a Form 1099-DIV for dividends and a Form 1099-B for capital gains, which help calculate your NII. The NIIT is reported on IRS Form 8960 and filed with your annual tax return. To minimize the NIIT, consider strategies such as:

  • Investing in tax-advantaged accounts like IRAs or 401(k)s, where investment income is deferred or exempt from NIIT.

  • Timing the realization of gains to keep MAGI below the threshold.

  • Deducting allowable investment-related expenses to reduce NII.

Note: The NIIT is separate from capital gains taxes and ordinary income taxes

Stock Picking

Fundamental Analysis 丨 Market-Cap Analysis 丨 Wisdom To Live By

Fundamental Analysis

Fundamental analysis is an investment approach that seeks to determine a company’s intrinsic value—its true worth based on its underlying financial health and potential—by examining its financial statements, economic conditions, and industry trends. The primary goal is to assess whether a stock is undervalued (trading below its intrinsic value, presenting a buying opportunity) or overvalued (trading above its intrinsic value, potentially signaling a sell or avoid). Rooted in the belief that a stock’s market price may not always reflect its true value, fundamental analysis helps investors make informed decisions by focusing on a company’s operational and economic fundamentals. For long-term investors, this method provides a disciplined framework for identifying high-conviction stock picks that can drive wealth creation over time.

Below are the key components of fundamental analysis:

↳ Financial Statements

Financial statements form the bedrock of fundamental analysis, providing a detailed snapshot of a company’s financial performance, position, and operational efficiency. These documents, publicly available through a company’s Annual Report (Form 10-K) and Quarterly Reports (Form 10-Q) filed with the U.S. Securities and Exchange Commission (SEC) via the EDGAR database, offer critical insights into a company’s health. The three primary financial statements—the income statement, balance sheet, and cash flow statement—enable investors to assess whether a company is generating sustainable profits, managing debt effectively, and maintaining adequate liquidity. By analyzing these statements, investors can evaluate a company’s intrinsic value and make informed investment decisions.

Note – While financial statements provide critical data, they should be analyzed in context with industry benchmarks, economic conditions, and qualitative factors like management quality. Historical trends (e.g., comparing five years of statements) and peer comparisons enhance insights. Additionally, be aware of accounting practices or adjustments (e.g., non-GAAP metrics) that may affect reported figures.

↳ Financial Ratios

Financial ratios, derived from a company’s financial statements, are powerful tools in fundamental analysis, enabling investors to compare companies across industries, assess performance over time, and evaluate investment opportunities. By distilling complex financial data into standardized metrics, ratios provide insights into a company’s valuation, operational efficiency, profitability, liquidity, and financial risk. One commonly used ratio is the Price-to-Earnings (P/E) ratio, which indicates how much investors are willing to pay per dollar of earnings. However, a wide range of ratios can be analyzed to gauge different aspects of a company’s financial health, helping investors determine whether a stock is undervalued, overvalued, or aligned with its intrinsic value.

↳ Qualitative Factors

While financial statements and ratios provide critical quantitative insights, fundamental analysis also considers qualitative factors—non-financial aspects that influence a company’s long-term value and competitive position. These factors, including a company’s business model, competitive advantage, management quality, market share, and industry dynamics, offer a deeper understanding of a company’s potential for sustained growth and resilience. By evaluating these qualitative elements, investors can assess whether a company is well-positioned to create value over time, complementing the numerical data from financial analysis.

Note: Qualitative factors can be subjective, so triangulate insights from multiple sources, such as company filings, industry reports, and management interviews, to ensure accuracy.

↳ Economic and Market Conditions

Fundamental analysis extends beyond a company’s financials to include an evaluation of macroeconomic and market conditions that can significantly influence its performance and stock valuation. These macro factors, such as GDP growth, inflation, interest rates, geopolitical events, consumer trends, and other economic or market indicators, shape the broader environment in which a company operates. By analyzing these conditions, investors can better understand external opportunities and risks, enabling them to make informed decisions about a company’s growth potential and resilience in varying economic climates.

Note: Macroeconomic data can be volatile, so rely on reputable sources and consider historical trends for context.

↳ Growth Prospect

A critical aspect of fundamental analysis is evaluating a company’s growth prospects—its potential to increase revenue, earnings, and market presence over time. By analyzing factors such as revenue growth, earnings growth, innovation, market expansion, and mergers, investors can assess a company’s ability to generate sustainable value and deliver returns. Strong growth prospects often signal that a company is well-positioned to capitalize on opportunities, adapt to market changes, and enhance shareholder value, making this analysis essential for identifying high-potential investments.

Note: Growth projections rely on assumptions, so cross-reference data from primary sources (e.g., SEC filings) and monitor market conditions.

The Fundamental Analysis Process

Fundamental analysis is a disciplined approach to evaluating a company’s intrinsic value, but its execution can vary depending on the investor’s strategy. The process typically follows one of two primary frameworks: top-down or bottom-up. These approaches differ in their starting point and focus but share the common goal of identifying undervalued or high-potential stocks by assessing economic, industry, and company-specific factors. By understanding and applying these frameworks, investors can tailor their analysis to align with their investment philosophy and goals.

  1. Top Down – The top-down approach begins with a broad analysis of the macroeconomic environment, narrows down to promising industries, and then selects individual companies within those industries. This method prioritizes the big picture, ensuring investments align with favorable economic and sector trends.
  2. Bottom-Up – The bottom-up approach starts with individual companies, focusing on their financials, management, and competitive position, regardless of industry or economic conditions. It then compares these companies to peers to assess relative value, prioritizing company-specific strengths over broader trends.

Market-Cap Analysis

Market capitalization (market cap) analysis is a key component of stock analysis, used to evaluate a company’s size, growth potential, risk profile, and suitability for an investor’s portfolio. Market cap is calculated as the total value of a company’s outstanding shares, determined by multiplying the current stock price by the number of shares outstanding (Market Cap = Stock Price × Shares Outstanding). It provides a snapshot of how the market perceives a company’s worth at a given time, reflecting investor sentiment, company scale, and economic influence. However, market cap does not necessarily equal a company’s intrinsic value, which requires deeper analysis of financials and qualitative factors.

Market cap analysis helps investors compare companies within the same industry or sector, assess relative valuation, and align investments with their goals, risk tolerance, and portfolio strategy. For example, if two similar companies in the same industry have significantly different market caps, investors might investigate why—potentially uncovering overvaluation, undervaluation, or differences in growth prospects. This analysis also highlights potential risks (e.g., how much could be lost if a high market cap company’s valuation aligns with industry averages) or opportunities (e.g., gains if a smaller company’s market cap rises).

Companies are typically classified into market-cap categories, each with distinct characteristics, risk profiles, and investment implications. The following are the primary categories, with approximate ranges based on market standards:

↳ Mega-Cap

Market Cap: > $200 billion

Mega-cap companies are global titans that dominate their industries, characterized by widespread brand recognition, diversified revenue streams across regions and products, and significant economic influence. These companies typically have mature, well-established business models, substantial cash reserves, and robust operational scale, making them resilient to economic downturns and market volatility. Due to their size and high trading volume, mega-caps generally exhibit lower price volatility compared to smaller companies, though they remain susceptible to broader market corrections or sector-specific challenges. Their stability and liquidity make them a cornerstone for many investment portfolios.

Example: Apple, Google, etc.

↳ Large-Cap

Market Cap: $10 billion to $200 billion.

Large-cap companies are well-established, often leading their industries or holding significant market share in sectors such as banking, retail, healthcare, or technology. They strike a balance between the stability of mega-caps and the growth potential of mid-caps, offering a combination of resilience and moderate growth opportunities. While large-caps typically operate across multiple regions, they may have less global diversification compared to mega-caps, focusing on strong regional or sector-specific dominance. Their size, financial stability, and market presence make them attractive to investors seeking a blend of reliability and growth potential.

Examples: Starbucks Corp, Uber, etc.

↳ Mid-Cap

Market Cap: $2 billion to $10 billion.

Mid-cap companies are typically in a growth phase, actively scaling operations, entering new markets, or launching innovative products. These firms often dominate specific niches or regions, such as technology solutions, specialty retail, or regional services, offering a balance between the stability of large-caps and the high-growth potential of small-caps. Mid-caps are more volatile than large-caps due to their smaller size and exposure to market fluctuations, but they are less risky than small-caps, with reasonable liquidity in their stocks. Their size and growth trajectory make them attractive acquisition targets for larger firms, often resulting in buyout premiums that can enhance shareholder returns.

Example: Vail Resorts, Etsy, etc.

↳ Small-Cap

Market Cap: $300 million to $2 billion.

Small-cap companies are typically young firms in their early growth stages, often focusing on innovation or niche markets such as biotechnology, technology startups, or specialized services. These companies offer significant upside potential if they succeed in scaling operations or capturing market share, but they also carry higher risks, as many may fail, stagnate, or face operational challenges. Small-caps are highly sensitive to company-specific news, earnings reports, or shifts in market sentiment, leading to sharp price swings and increased volatility compared to larger firms. Their smaller size and limited resources make them appealing for growth-oriented investors willing to accept higher risk.

Example: GoodRx Holdings, Upwork, etc.

↳ Micro-Cap

Market Cap: $50 million to $300 million

Micro-cap companies are typically startups, pre-revenue firms, or early-stage businesses operating in niche markets. These companies are often in the initial phases of development, with limited operational history and minimal financial stability. Their small size and speculative nature result in extreme price volatility, where stock prices can double or crash rapidly in response to news, funding announcements, contract wins, or regulatory developments. However, micro-caps face significant challenges, including very low trading volumes, which can complicate entering or exiting positions, and a higher susceptibility to fraud, pump-and-dump schemes, or bankruptcy due to their limited resources and reliance on external funding.

Wisdom To Live By

Success in stock investing is not a matter of luck or shortcuts—it’s built on discipline, knowledge, and patience. The following principles serve as a roadmap to guide investors toward smarter decisions, helping you avoid costly mistakes and steadily build wealth over time. By internalizing these lessons, you can navigate the complexities of the stock market with confidence and clarity.

Note: Stock investing involves risks, and no strategy guarantees success. Continuously educate yourself, monitor your investments, and consider consulting with us to tailor these principles to your unique financial situation and goals.

(#1) Never Invest in a Stock in Which You Don’t Use Their Products or Understand Their Business Model

Investing in a company you don’t understand is akin to betting on a sport you’ve never seen. If you can’t clearly explain how a company generates revenue, what drives its success, or why its products or services matter, you’re gambling, not investing. Stick to businesses you interact with regularly or can thoroughly research. For example, if you use a company’s smartphone daily and observe its growing market presence, you’re better positioned to evaluate its competitive strengths and customer loyalty. Familiarity provides valuable insights, reducing blind spots and boosting confidence in your stock picks.

Practical Tip: Before investing, answer these questions: How does the company make money? Who are its customers? Why do its products or services stand out? If you struggle to answer, consider passing on the stock until you’ve done more homework.

(#2) Understand Thy Opponent

The stock market is a competitive arena where your stock picks face constant challenges from rivals, economic shifts, and regulatory changes. Success requires understanding the broader landscape your company operates within. Who are its competitors, and what are their strengths? Are disruptive technologies, new regulations, or macroeconomic trends looming? For instance, a pharmaceutical company’s stock could soar with a breakthrough drug but plummet if a competitor launches a superior alternative. Stay curious and skeptical—read earnings reports, industry news, and analyst reports to grasp the forces shaping your investment’s future.

Practical Tip: Review the “Risk Factors” section in a company’s Form 10-K to identify potential threats. Regularly monitor competitors’ performance and market trends to stay informed.

(#3) Short Game Is A Losers Game

Day trading or chasing quick profits is a recipe for losses. Short-term price movements are often driven by market noise—headlines, speculation, or algorithmic trading—making them unpredictable. Instead, focus on long-term growth by investing in companies with strong fundamentals: consistent revenue growth, capable leadership, and durable competitive advantages. Hold these stocks through market volatility, as time in the market consistently outperforms attempts to time the market.

Practical Tip: Set a multi-year investment horizon (e.g., 5–10 years) and select companies with clear long-term growth drivers, such as expanding markets or innovative products. Ignore short-term dips unless fundamentals deteriorate significantly.

(#4) Respect the Market’s Power

The stock market is a complex system, relentlessly pricing securities based on vast streams of information processed by professional investors, hedge funds, endowment funds, sovereign wealth funds, and retail traders. Competing against these players—many with faster access to data and sophisticated tools—is a formidable challenge, even for experienced investors. Outsmarting the market requires thorough research, unique insights, and unwavering conviction in your analysis. Don’t assume you can pick winners without a disciplined approach, as overconfidence can lead to costly errors. Respect the market’s efficiency and complexity, and focus on building a robust investment process.

Practical Tip: Ground your decisions in fundamental analysis, leveraging data from SEC filings, earnings calls, and industry reports. Seek a margin of safety by buying stocks trading below their intrinsic value, reducing the risk of overpaying.

(#5) Never Risk More Than You Can Afford To Lose

Investing is not an all-or-nothing pursuit. Protect your financial well-being by only committing funds you can afford to lose without jeopardizing your lifestyle or emergency savings. Diversification is key to managing risk—spread your investments across multiple industries, asset classes, and market-cap categories to limit the impact of any single stock’s failure. A common rule is to allocate no more than 5–10% of your portfolio to a single stock. By setting clear risk limits, you ensure you can stay invested through market downturns without being forced to sell at a loss.

Practical Tip: Before investing, assess your financial situation and establish an emergency fund. Use portfolio management tools to monitor diversification and avoid overexposure to any one stock or sector.

(#6) Master Your Emotions

Fear and greed are the investor’s greatest adversaries. Panic-selling during market crashes or chasing hyped stocks during rallies can sabotage your strategy. Develop a clear investment plan based on fundamentals and stick to it, ignoring short-term market noise or sensational headlines. For example, during the 2020 COVID-19 market, investors who sold in panic missed the subsequent recovery, while those who held fundamentally strong stocks reaped rewards. Regularly review your portfolio based on objective criteria—financial performance, competitive position, and growth prospects—not emotional reactions. Emotional discipline transforms good investors into great ones.

Practical Tip: When emotions run high, refer to your investment plan to stay grounded. Consider automating contributions to maintain consistency.

Keep It Simple

Stick To Passive Index & ETFs Instead Of Individual Stocks

Investing doesn’t need to be complicated to be successful. By focusing on passive index funds and exchange-traded funds (ETFs) that track broad indices, you can build wealth steadily with minimal effort, lower risk, and less stress compared to picking individual stocks. This approach leverages the market’s long-term growth trajectory, offering a straightforward path to financial success for both novice and experienced investors.

Chasing individual stocks can feel like searching for a needle in a haystack—time-intensive, emotionally draining, and fraught with risk. Passive index funds and ETFs provide broad market exposure, spreading your investment across hundreds or thousands of companies. This diversification mitigates the impact of any single company’s failure while capturing the overall growth of the market or a specific sector. Historically, funds tracking indices like the S&P 500 or total stock market have delivered consistent returns, often outperforming actively managed funds or individual stock-picking strategies over the long term. With lower fees, reduced need for constant monitoring, and simplicity, passive investing allows you to focus on your life while your portfolio grows steadily.

What Are Passive Index Funds and ETFs?

Passive index funds and ETFs are investment vehicles designed to replicate the performance of a specific market index, like the S&P 500 or Nasdaq 100. An index fund is a type fund that holds the same stocks as its target index in identical proportions, aiming to match its returns. They are priced once daily after the market closes, making them ideal for long-term investors who prefer simplicity and automatic contributions. ETFs, or exchange-traded funds, also track indices but are structured to trade like stocks on an exchange, allowing you to buy or sell shares throughout the trading day at market prices. Both are “passive” because they avoid active management, keeping costs low—index funds may have slightly lower expense ratios, while ETFs provide more trading flexibility.

Advance Strategies

Covered Calls 丨 Cash Covered Puts 丨 Leveraged, Passive ETFs 

Covered Calls: Generate Income with Lower Risk

The covered call strategy is a popular options trading approach that allows investors to generate additional income from their stock holdings while potentially reducing downside risk. By selling call options against stocks you already own, you collect premiums that enhance your overall returns, making this a disciplined method for generating steady cash flow. Covered calls are particularly appealing for investors seeking to balance income generation with moderate risk, especially in flat or mildly bullish markets.

↳ How Covered Calls Work

In a covered call strategy, you own at least 100 shares of a stock (since one option contract typically represents 100 shares) and sell call options against those shares. A call option gives the buyer the right, but not the obligation, to purchase your stock at a specified strike price by a set expiration date. In exchange, you receive a premium, which is paid upfront and is yours to keep regardless of the option’s outcome. The strategy’s outcomes depend on the stock’s price movement relative to the strike price by expiration:

  • If the stock price stays below the strike price: The option expires worthless, you keep the premium, and you retain your shares, free to sell another call option if desired.

  • If the stock price rises above the strike price: The option may be exercised, requiring you to sell your shares at the strike price. You keep the premium and any gains from the stock’s price increase up to the strike price.

  • If the stock price falls: The premium provides a cushion against losses, though significant declines may still result in a net loss on the stock position.

Example

You own 100 shares of XYZ stock trading at $50 per share. You sell a one-month call option with a $55 strike price for a $2 premium, collecting $200 ($2 × 100 shares). Possible outcomes at expiration:

  • Stock at $54: The option expires worthless (below $55). You keep the $200 premium and your 100 shares, effectively lowering your cost basis to $48 per share ($50 − $2) without accounting for taxes.
  • Stock at $60: The option is exercised, and you sell your shares at $55, earning $5,500 ($55 × 100) plus the $200 premium, for a total of $5,700. Your profit is $700 above your original $5,000 investment ($50 × 100), though you miss out on gains above $55.
  • Stock at $45: The option expires worthless. You keep the shares and the $200 premium, which offsets part of the $500 unrealized loss ($50 − $45 × 100), resulting in a net unrealized loss of $300.

↳ Benefits and Risks of Covered Calls

Covered calls are attractive because they generate income through premiums, which can cushion losses if the stock price dips slightly. They also allow you to set a target selling price for your shares, providing clarity on potential outcomes. For instance, in a flat or mildly bullish market, you can consistently collect premiums without losing your shares. However, the strategy caps your upside: if the stock surges well beyond the strike price, you miss out on those gains. There’s also the risk of the stock dropping significantly, where the premium may not fully offset losses, though owning the stock outright carries this risk anyway. Covered calls work best for stable stocks or in portfolios where you’re comfortable selling at a predetermined price, balancing income generation with limited risk.

Cash Covered Puts: Earn Income with a Buy-Low Mindset

The cash-secured put strategy is a disciplined options trading approach that allows investors to generate income while positioning themselves to buy stocks at a lower price. By selling put options backed by sufficient cash reserves, you collect premiums upfront and potentially acquire shares at a discount, making this strategy ideal for investors who are bullish on specific companies but cautious about paying current market prices. Cash-secured puts align with a “buy-low” mindset, offering a way to enhance returns while strategically entering stock positions.

How Cash-Secured Puts Work

In a cash-secured put strategy, you sell put options on a stock you’re willing to own, obligating yourself to buy the shares at a specified strike price by the expiration date if the option is exercised. Each put option contract represents 100 shares, and in exchange for taking on this obligation, you receive a premium paid upfront. To ensure you can fulfill the purchase if the option is exercised, you must have enough cash in your brokerage account to cover the cost of the shares (strike price × 100 shares per contract). The outcome depends on the stock’s price at expiration:

  • If the stock price stays above the strike price: The put option expires worthless, you keep the premium as profit, and you don’t buy the shares, freeing you to sell another put if desired.

  • If the stock price falls below the strike price: The option may be exercised, requiring you to buy the shares at the strike price. The premium reduces your effective cost basis, making the purchase more attractive than buying at the current market price.

  • If the stock price drops significantly: You still buy at the strike price, but the shares may be worth less than your purchase price, resulting in an unrealized loss (though the premium mitigates this).

Example: You’re interested in owning XYZ stock, currently trading at $50, but want to buy it cheaper. You sell a one-month put option with a $45 strike price for a $1.50 premium, collecting $150 ($1.50 × 100 shares). You set aside $4,500 ($45 × 100) in cash to cover the potential purchase. Possible outcomes at expiration:

  • Stock at $48: The option expires worthless (above $45). You keep the $150 premium as profit, with no shares purchased, yielding a return of 3.33% on the $4,500 reserved ($150 ÷ $4,500) in one month.

  • Stock at $42: The option is exercised, and you buy 100 shares at $45, costing $4,500. Your effective cost basis is $43.50 ($45 − $1.50 premium) without accounting for taxes, so your unrealized loss is $150 (($43.50 − $42) × 100), mitigated by the premium. However, you know own the shares you wanted to buy in the first place.

  • Stock at $55: The option expires worthless. You keep the $150 premium and can sell another put or redirect your cash elsewhere.

Benefits and Risks of Cash-Secured Puts

Cash-secured puts offer dual advantages: you earn premium income regardless of the outcome, and you may acquire stocks at a price you’re comfortable with, ideal for long-term investors. In flat or rising markets, you keep the premium without buying the stock, boosting returns. If the stock dips, you buy at a discount that you wanted to buy, thanks to the premium lowering your effective cost. However, the risk is that the stock could fall significantly below the strike price, leaving you with shares worth less than your purchase price. This strategy suits investors who research their targets and are prepared to hold shares if assigned, balancing income generation with strategic stock acquisition.

Playing Volatility Through Passive, Leveraged ETFs

Leveraged ETFs are powerful investment vehicles designed to amplify returns in both volatile and rising markets, offering a way to magnify gains from market growth or capitalize on short-term price swings. For investors who believe the market trends upward over time, these funds can enhance portfolio growth during bullish periods. However, their high-risk nature demands careful management, active monitoring, and a clear understanding of their mechanics to avoid significant losses. Leveraged ETFs are particularly suited for tactical, short-term strategies, though they can align with longer-term bullish outlooks if used strategically.

Note: Leveraged ETFs carry significant risks, including potential for substantial losses or complete loss of capital, especially in volatile or declining markets. Review fund prospectuses for details on leverage, fees, and risks, and consider consulting with us to align leveraged ETF strategies with your investment goals and risk tolerance.

How Leveraged ETFs Work for Volatility and Growth

Leveraged ETFs are exchange-traded funds designed to deliver a multiple (e.g., 2x, 3x) of the daily performance of an underlying index, such as the S&P 500, Nasdaq 100, or sector-specific indices like technology or financials. For example, a 2x leveraged S&P 500 ETF aims to deliver twice the index’s daily return: if the S&P 500 rises 1% in a day, the ETF targets a 2% gain (before fees). This amplification makes leveraged ETFs attractive for investors confident in:

  • Long-Term Market Growth: In sustained bull markets, daily gains can compound, potentially leading to significant returns over weeks, months or even years.

  • Short-Term Volatility: Leveraged ETFs can capture sharp price movements, such as rallies after positive economic data or dips during market corrections.

However, most leveraged ETFs reset their leverage daily, meaning their performance is tied to daily returns, not long-term index performance. This daily reset, combined with compounding effects, can lead to unexpected outcomes in volatile or flat markets, making them primarily a short-term trading tool. Strategic timing and active management can align them with longer-term bullish strategies, but investors must be vigilant.

Benefits and Risks of Leveraged ETFs

Leveraged ETFs are beneficial for those who believe markets rise over time, turning modest index gains into amplified returns. For example, in a steady bull market, a 3x ETF could transform a 5% monthly index gain into a 15% return, boosting portfolio growth. They’re accessible, trading like stocks with no high minimums, and require no options expertise. However, their daily reset amplifies losses as much as gains, and volatility decay can erode value in choppy or flat markets—even if the index trends upward long-term. Significant declines can also wipe out gains quickly or liquidate the position completely if a large enough daily decrease occurs. These funds suit active investors with a strong market conviction, who monitor positions closely and use them for tactical plays, balancing the potential for outsized returns against heightened risk.

FAQs

?

y. 

Schedule a Meeting

Don't wait, get your questions answered and start the process today →

丨Or schedule in-person meeting with this link