As anybody North of the 49th will tell you, there are certain aspects of being Canadian that we all revel in.
Paying tax is not one of them.
With tax season just passed, it seems like a good time to take a look at the various ways the government pries your investment return dollars out of your wallet.
When I was first getting into investing, I invested a lot of money into a Mortgage Investment Corporation. It provided quite good monthly returns, and I can still remember being pretty pleased with myself that the investment was throwing off almost $500 a month. Tax time brought a cold shower, a slap in the face, and a wakeup call all rolled into one. Unlike taxes paid on working income, investment taxes are all paid once annually, at tax time. At this point, I don’t remember exactly what the tax hit was, but for a person of my modest income, it was substantial. Coincidentally, it was about that time that I became aware of a fact that has had a major impact on my investing practices since then.
When I was first considering investing in the stock market, one of the things that struck me was that some stocks seemed to chug along relatively steadily, while others rose and fell like some kind of Fear Factor Ultimate Challenge roller coaster ride. I was looking to make money, not lose sleep, so I was quite happy to forego the highs and lows of certain stocks for the steady-eddies that just kept on keeping on. As a happy coincidence, dividend stocks, which I was investigating at the time, are much more the former than the latter. As my stock research became more focused on the types of stocks that paid stead dividends, I ran across fewer and fewer high flyers. Still, I wondered, is there a way to quantify the volatility of a stock?
The answer is yes, and the number that name that is given to the describing of this characteristic is beta.
I recently wrote about stop orders. Briefly, they allow an investor to set a threshold that, should the market price for stocks he owns reach that threshold, his stocks will be sold into the market, even if the investor is not watching the markets at that particular moment. This post is about another tool in a similar vein that investors should be aware of. It can be used to ride a stock on its way up, and then to sell that same stock close to its top. At worst, a trailing stop helps you cut your losses. At best, it lets you automate the process of getting out while you’re ahead.