Explaining Investing to Kids – Stocks, Proxy Statements

For my nephew’s 13th birthday, I transferred some shares of stock into a UTMA account for him under a dividend reinvestment plan (DRIP), and I’ve been using the investment as a teaching opportunity. Every time I get a statement or other correspondence about the investment, I forward it to him with a brief note explaining what it is and what it means to him and his investment. As I was crafting my latest email to him about the proxy statement we received, I realized that others trying to teach children about investing might appreciate reading my notes, too. So I lightly editted it to make a bit more cohesive for people without a knowledge of the background, and I offer it to you…

I got a message from Fortune Brands (Ticker: FO) and since you’re an owner, too, I wanted to share it with you.

In a small corporation like mine (I own an IT consultancy), I’m the sole owner, president, and most of the workforce. However, public companies like Fortune Brands are owned by thousands or even millions of individual investors like you and me. As owners, we get to control the company, but there are too many of us for everyone to be involved in the day-to-day operations – that would be crazy. Instead, we exercise our control by electing a board of directors to provide direction and guidance for the company. The board of directors hires a CEO for the company, and some of the other top officers, and those officers handle the day-to-day operations of the business.

You and I don’t participate in decisions about manufacturing, sales, shipping/receiving, hiring/firing of employees, payroll & benefits, business hours, or office locations – we leave that to the company’s officers, who are selected by the board of directors you and I elect. Since we don’t get involved in the daily grind, the company produces annual and quarterly status reports for us about its activities, successes, and failures. An annual Proxy Statement asks for our votes for the board of directors and for our input on a limited few additional important issues. We can submit our votes by mail or over the Internet, or we may attend the meeting in person in Illinois at the end of April.

I’ve attached the company’s 2010 Proxy Statement (omitted from this article), containing information about their upcoming shareholders’ meeting. It’s going to seem very confusing, but don’t worry – I don’t need you to read the whole thing – I just wanted to show you something on one page of it…

Board members have a limited term, so we’re voting to replace the ones who are expiring this year. Knowing who to vote for can sometimes be a difficult matter. Different people approach this different ways. All of the candidates being offered to us have been selected by our existing board of directors, so they are people that our board thinks we’ll like and will be a good fit with the other board members. For many owners, that’s good enough, and they just go with the board’s recommendation, especially if they’re happy with the way the company has been running. Other owners may do some research into the resumes and past experiences of the various candidates before deciding.

I approach it a different way: I want the board members to have my interest at heart, and that is that I want my investment to increase in value. To be sure that they have the same interest, I look for candidates who, themselves, have large investments in the company’s stock. If you open the attached PDF file and flip to page 60 (sorry, readers – just imagine it), you’ll find a table entitled “Certain Information Regarding Security Holdings” that reveals this information. The table shows the number of shares owned by each officer and director of the company, and by multiplying these numbers by the share price, I know how much money each of them has invested in the company. I only vote for those with sizable investments. Today, it was all of them, but I always check because I’ve occasionally seen candidates who own few or even no shares of the company.

Besides the election of directors, the proxy statement goes on to ask for our votes on several other items, such as approving an auditor, approving a change in voting requirements, and approving a plan to pay directors with additional stock. I like the way the board has been handling things, so I voted in favor of all of their requests.

There’s one last special item on the list, too. As owners of the company, you and I have a right to propose our own issues to be put forth to vote upon by the other shareholders. The last item on the list is one such proposal from another shareholder. He wants us to make a rule that anytime 10% of the shareholders feel strongly about something they may call a “special meeting” of all of the shareholders, rather than wait for this once-a-year regular meeting to discuss and vote on the matter. It’s the sort of thing you’d like to be able to do yourself, but it could start to get expensive and disruptive for the company to have to send out announcements, reserve auditoriums, and arrange flights and lodging for executives every time a vocal minority wanted to talk about an insignificant issue. I voted against it.

As the custodian for your shares, they sent me a single proxy statement for the total of both your and my shares, so I’ve already voted for both of us. In the future, when you’re old enough to control your own investments, the responsibility of voting on these issues will rest with you. If you have questions, I’m always happy to help.

Investing in Penny Stocks – How to Invest in Penny Stocks Profitably

Investing in penny stocks has its share of ups and downs, tips to be adopted for greater success and pitfalls to avoid. This isn’t gambling if you know what you’re doing. You need to think of it as increasing the value of your investment portfolio with smaller seed capital but with larger returns to compensate for the higher risks involved. 

The Upside

With these stocks, you can start investing and earning with as little as $100 to open your online account.  Indeed, you are well advised to start with a minimal capital investment while you are learning the ropes of the business.  It does not help your stock investment portfolio to put in more than you can afford to lose!

Another benefit of investing in penny stocks is that you can have huge profits out of small investments. Well, of course, you have to know the basics of the business before this happens but the potential is exciting. Also, you can avail of the services of online discount brokers for these investments. Unlike traditional stockbrokers, you can save on the high costs of sundry service fees and commissions with these discount brokers.  In effect, your bottom line will benefit. 

How To Invest Profitably

In order secure the most benefits out of investing in penny stocks, you can apply the following tips: 

  • Look for the stocks with the highest price-earnings ration but the lowest price-earnings-growth ratio. 
  • Stick to your entry and exit plans.  You must control your monetary greed even when it seems that the penny stock in consideration will rise in value after you have reached your profit limit – it often will not move in the way you predict or desire. 
  • Go with the market flow.  You cannot control the market and as such, it is futile to want to change it to suit your profit objectives. 
  • Make decisions based on reliable information coming from the thorough analysis of charts and other tools necessary for successful investing. Inside information and hot tips can be manipulative practices meant to deceive investors and, hence, rob them of their money. 

The bottom line is that these stocks operate in similar ways as their Big Board-listed stock counterparts.  Hence, you can apply your knowledge in mainstream stock trading to penny stock trading with a few revisions to account for the higher risks involved. 

The Risks

Speaking of risks, you must avoid the pitfalls that come with these investments. Keep in mind that these stocks can be very speculative and can be easily manipulated, which means that investors must maintain vigilance over their investments decisions.  One of the most notable pitfalls in trading these stocks is the provision of misleading financial statements to investors.  You have to double check with independent bodies like the Securities and Exchange Commission, when applicable. 

Investing in penny stocks is a good decision where your investment portfolio is concerned.  You can enjoy the benefits just as long as you adopt smart investment management and avoid the pitfalls.