Q: I’m new to the game of investing and have been lucky with some penny stocks. Which low-priced stocks do you recommend?
A: Don’t think of investing as a game. It can be fun and exciting, but it’s also serious business. It’s your hard-earned money, and your retirement, that you’re “playing” with.
If you haven’t lost money in penny stocks, you’re actually quite fortunate. They’re notoriously volatile and risky, and have cost many people many dollars.
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Some naive investors wrongly assume that since they’re not rich, they should focus on stocks with low prices. Yes, $1,000 will buy you 500 shares of a $2 stock.
But it stands a good chance of becoming a $1 stock. Instead, you could just buy 15 shares of a $65 stock or 5 shares of a $200 stock.
Q: What’s the short-term tax hit for stocks? If I bought shares of stock at $10 and now they’re at $25, what capital gains tax rate would I face when selling?
A: The short-term capital gains tax rate applies to stocks held for a year or less and is the same as your ordinary income tax rate, which can be as high as 39.6 percent.
If you’re in the 25 percent bracket and your gain is $5,000, you’d face a $1,250 tax hit.
Note, though, that the long-term rate, for stocks held at least a year and a day, is just 15 percent right now for most investors. On a $5,000 gain, that would come to just $750. So if you’ve held your shares for almost a year, it might be worth it to hang on a little more.
Decades ago, my investment club’s methods of seeking out undervalued and out-of-favor stocks led me buy shares of Gap.
I did very, very well with it, primarily because of two factors: I didn’t sell it just because it was a winner, and I benefited from the power of compounded growth over long periods.
I recommend holding at least a portion of your winners as long-term investments.
— M.R., Port Townsend
The Fool responds: While shares of Gap have experienced downturns and stagnant years, they have rewarded patient investors well, averaging annual gains of 18 percent over the past 25 years, 12 percent over the past 20 years and 11 percent over the past decade. It has been paying a dividend for decades, too.
This is true of many solid, growing companies. You don’t have to find and invest in obscure companies to succeed.
Those interested in forming or joining an investment club should visit betterinvesting.org, or read “Investment Clubs for Dummies” by Douglas Gerlach and Angele McQuade.
The Motley Fool take
In 2013’s first quarter, Detroit’s Big Three accomplished something that hadn’t been done in 20 years: All three gained market share. Ford (NYSE: F) and General Motors (NYSE: GM) are promising stocks to consider right now.
Ford’s CEO Alan Mulally’s “One Ford” vision is paying off big-time. The company is producing more profit than GM, off lower revenue, because it’s running so efficiently.
The good news for GM is that its potential isn’t as tapped as Ford’s right now. It expects to improve operations and significantly boost profits and margins by mid-decade.
Both companies are leaner and are having success with new models. Consider that Ford can’t make enough Fusions or Escapes to keep its inventories as high as it would like.
GM is a little behind Ford in releasing new vehicles because it needed to shore up its financials first. It’s planning to refresh, replace or redesign almost 90 percent of its vehicles by 2016. GM also has a leg up on Ford when it comes to its luxury Cadillac line, which enjoys higher profit margins than standard cars.