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(Over) night moves
THE MOTLEY FOOL
Ask the Fool
Published: September 24, 2020
Q. How can a stock suddenly start trading at a very different price than where it closed the day before? -- V.B., Winona, Minnesota
A. It means that something happened overnight while the market was closed. Imagine that shares of Help Depot (ticker: RUOK) are trading around $75 per share when the market closes. If the company then reports blowout revenue and earnings, demand for the shares may build up. When stock trading resumes the next morning, the stock price probably won't open at $75 and then rise gradually. Instead, it's likely to just begin trading at a significantly higher level. That's because many investors will now assign a greater value to the company, and the limited existing shares will have risen in value to meet the higher demand. Buyers are simply willing to pay more for the shares.
The opposite can happen, too, of course, if there are negative developments about a company.
Q. What's a mock portfolio? -- H.K., Jacksonville, Florida
A. A mock portfolio is a pretend one -- ideal for beginning investors, and others who want to practice investing without putting any real money down. You can set one up on paper, or you can create an online portfolio at sites such as Finance.Yahoo.com. Then go through the motions of investing: Study companies, decide which ones to invest in, note that you've "bought" a certain number of shares at a certain price, and then follow the progress of the companies and the stocks. Over time, see how you do.
A mock portfolio can serve as a kind of watch list, too, as it can alert you when the price of a stock you're interested in falls to an attractive level.
Fool's School
What If Your Tax Return Gets Audited?
There are many scary words and phrases, such as "root canal," "bedbugs" and "new transmission." "Tax audit" is one of them -- but you probably needn't worry too much about that.
For one thing, relatively few tax returns get audited, and audit rates have been falling in recent years. During the tax agency's fiscal year 2019 (which ended Sept. 30, 2019), only 0.45% of individual tax returns were examined -- down from 1.11% in 2010.
Here's what you need to know, though, in case you do get audited:
-- You need to respond to the notice. It will tell you which items are being questioned, so you know what documentation you need to mail in or bring to the audit in person. (Most audits are handled completely by mail.)
-- Stay focused. Bring or send in only what's required, as additional items could raise further questions. Also, send copies of documents, not originals, in case any get lost. If you meet with an auditor, you're essentially providing testimony, so keep your answers to questions brief -- if possible, just say "yes" or "no." Light banter about your new Porsche, for example, could raise some unwanted questions.
-- Replace any missing documents supporting your return. An auditor won't skip items just because you can't find them. Without supporting documents, that deduction you took may be denied.
-- Learn about your rights as a taxpayer: Read IRS.gov/taxpayer-bill-of-rights. For example, you have the right to hire someone (such as a lawyer, a certified public accountant or an IRS Enrolled Agent) to represent you in your dealings with the agency.
Most audits involve a simple question and can be easily resolved. You might reduce your chances of being audited in the first place by making sure your tax return is legible and complete. And keep good records of your income and expenses, as they can make dealing with an audit much easier. Learn much more at IRS.gov and Fool.com/taxes.
My Dumbest Investment
A Splitting Headache
My dumbest investment was selling my shares of Netflix at $81, before its 7-for-1 split. That taught me to hold or add to companies you believe in. -- B.A.W., online
The Fool responds: Ouch. Some readers may think it's a shame to miss out on a stock split, but splits rarely mean much. You get more shares (seven times the number you own, in this case), but their price shrinks proportionately (to about a seventh of their original value, in this case). If you'd bought your shares at, say, $70 apiece, that purchase price would have been adjusted by the split to a seventh of that, to give you a new cost basis (for tax calculation purposes) of $10 per share. That makes your sale even more regrettable, as shares of Netflix were recently trading near $480 apiece, post-split. If you'd originally invested $3,000 in Netflix, your stake recently would have been worth more than $140,000.
That's all in the past, though. What you can do now is decide whether you have any interest in buying shares again. Many investors see much more upside ahead for the company, though others worry that its growth rate will slow and that its shares may be overvalued now. If you're intrigued but not sure, you might add Netflix to a watch list, follow the company's developments, and wait and hope for a better entry price later.
Foolish Trivia
Name That Company
I trace my roots back to 1846, when two brothers-in-law started packaging baking soda in a kitchen to sell to businesses. (I'm currently America's leading maker of it.) I began using recycled paperboard for packaging way back in 1907. Today, based in Ewing, New Jersey, I'm a consumer products powerhouse, encompassing brands such as Arm & Hammer, Trojan, OxiClean, Spinbrush, First Response, Nair, Orajel, XTRA, Kaboom, Orange GLO, L'il Critters, Vitafusion, Batiste, Arrid, WaterPik and Flawless. I recently sported a market value of around $23 billion, rake in more than $4 billion annually, and employ almost 5,000 people. Who am I?
Last Week's Trivia Answer
I trace my roots back to the 1940s, when a retired high school principal met a retired teacher living in poverty in a chicken coop. After the principal formed an organization to help retired teachers, in 1958 she founded me to address the needs of all older people. I launched a lifelong learning institute in 1963. In the 1960s, I successfully pushed for legislation banning age discrimination in the workplace. In 1979, I launched driver-safety programs for older drivers. My magazine, formerly called Modern Maturity, is read by tens of millions. You can join me even if you're younger than 50. Who am I? (Answer: AARP)
The Motley Fool Take
Profits Brewing?
Like most businesses, Starbucks (Nasdaq: SBUX) has suffered during the pandemic, with far fewer people grabbing refreshments on their way to or from work, and many indoor eating areas closed.
In the company's last reported quarter, revenue declined 38.1% year over year; that was better than expected, as consumers offset a 51% drop in traffic with much higher order sizes, up 23% from last year. On its conference call with analysts, management noted an accelerating improvement in U.S. store trends, with a 65% decline in traffic in mid-April improving to a 16% decline in late June. Its recovery in China also exceeded expectations.
Starbucks isn't standing still, waiting for the pandemic to end, either. The company recently unveiled a new store format for urban environments called Starbucks Pickup, which should greatly boost profit efficiency in expensive urban markets. It's also rolling out a new curbside pickup experience at up to 1,000 stores this quarter, as well as a new handheld payment processor to increase throughput. Management expects a return to profitability this quarter.
Starbucks is certainly challenged right now, but the combination of its world-class brand, leadership in the digital arena and continuous innovation presents a promising opportunity for long-term investors. The company even pays a dividend, which recently yielded 1.9%. (The Motley Fool owns shares of Starbucks and has recommended Starbucks stock and options.)
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