Tuesday, June 8, 2010
Friday, May 28, 2010
Penny Stock Investing and Trading
If you ask anyone in the finance world what they think about investing or trading penny stocks, the answer that you will probably get will be: "Don't do it. You will lose your money since 90% of penny stock companies are scams. penny stock companies just want to sell shares and are not interested in developing their businesses." The truth is that investing or trading penny stocks is a very risky business. So here is the most important tip about penny stocks: Invest only money that you can afford to lose.
If penny stocks are so risky then, why do people invest in or trade them?
The answer is because you can make a lot of money in a short time if you know what you are doing.
If you are still reading and have decided that you want to trade penny stocks, you need the right tools and good advice to help you survive and even win some money.
Step # 1 - Finding the Right Penny Stock to Buy
To discover the right one stock, you will have to do some investigation, or Due Diligence. There are a lot of websites that will help you with your DD and you can find a list of useful ones at www.stocks-reporter.com.
The following points will guide you in learning important information about a company in which you are interested in investing:
1. Share structure: AS (Shares Authorized) and OS (Outstanding Stock and Float)
2. Transfer agent transparency
3. SEC filing
4. Financial track record
5. Competitive position in its industry
6. Business model
7. Earnings power
8. Valuation or the potential value of the company.
For example, when looking into share structure what you want to see is that there is no dilution. A good sign is when the company has maximized the OS and is close to AS. Watching Level 2 will also give you good indication if there is any dilution from the company. A good strategy is to follow insiders who know the company better than anyone else.
Step # 2 - Deciding When to Buy
After finding the penny stock that you plan to buy, you have to find your entry point and how to execute it the right way. Following the trading in that particular stock for a few days together with chart analyzing will give you a lot of valuable information. At this point it is highly recommended for anyone to learn some basic chart reading or at least let others analyze the chart for you. You can ask for help on many of the popular message boards that discuss stock trading and chart analyzing. An important tip about how to execute the trade in a penny stock is: Be very patient and always try to buy at the BID price.
Step # 3 - When to Sell or The Exit Strategy
The exit strategy is something very personal to different traders or investors.
It is very important to implement your strategy immediately after executing the buy order. In most cases, a good idea would be to set a sell order of 50% of your position at around 20%-30% PPS spike. Another 10%-20% rise of PPS and then sell another 50% of your current position and let the rest ride for a while. In general, your exit strategy should be very flexible and change with news, momentum, and volume. 90% of the time, though, you should sell at the ASK so it won't affect the run.
TIP: Remember always to take profits.
Happy Trading
Investing in the Stock Market for the Individaul Investor
Over the past few years the stock market has made substantial declines. Some short term investors have lost a good bit of money. Many new stock market investors look at this and become very skeptical about getting in now.
If you are considering investing in the stock market it is very important that you understand how the markets work. All of the financial and market data that the newcomer is bombarded with can leave them confused and overwhelmed.
The stock market is an everyday term used to describe a place where stock in companies is bought and sold. Companies issues stock to finance new equipment, buy other companies, expand their business, introduce new products and services, etc. The investors who buy this stock now own a share of the company. If the company does well the price of their stock increases. If the company does not do well the stock price decreases. If the price that you sell your stock for is more than you paid for it, you have made money.
When you buy stock in a company you share in the profits and losses of the company until you sell your stock or the company goes out of business. Studies have shown that long term stock ownership has been one of the best investment strategies for most people.
People buy stocks on a tip from a friend, a phone call from a broker, or a recommendation from a TV analyst. They buy during a strong market. When the market later begins to decline they panic and sell for a loss. This is the typical horror story we hear from people who have no investment strategy.
Before committing your hard earned money to the stock market it will behoove you to consider the risks and benefits of doing so. You must have an investment strategy. This strategy will define what and when to buy and when you will sell it.
History of the Stock Market
Over two hundred years ago private banks began to sell stock to raise money to expand. This was a new way to invest and a way for the rich to get richer. In 1792 twenty four large merchants agreed to form a market known as the New York Stock Exchange (NYSE). They agreed to meet daily on Wall Street and buy and sell stocks.
By the mid-1800s the United States was experiencing rapid growth. Companies began to sell stock to raise money for the expansion necessary to meet the growing demand for their products and services. The people who bought this stock became part owners of the company and shared in the profits or loss of the company.
A new form of investing began to emerge when investors realized that they could sell their stock to others. This is where speculation began to influence an investor's decision to buy or sell and led the way to large fluctuations in stock prices.
Originally investing in the stock market was confined to the very wealthy. Now stock ownership has found it's way to all sectors of our society.
What is a Stock?
A stock certificate is a piece of paper declaring that you own a piece of the company. Companies sell stock to finance expansion, hire people, advertise, etc. In general, the sale of stock help companies grow. The people who buy the stock share in the profits or losses of the company.
Trading of stock is generally driven by short term speculation about the company operations, products, services, etc. It is this speculation that influences an investor's decision to buy or sell and what prices are attractive.
The company raises money through the primary market. This is the Initial Public Offering (IPO). Thereafter the stock is traded in the secondary market (what we call the stock market) when individual investors or traders buy and sell the shares to each other. The company is not involved in any profit or loss from this secondary market.
Technology and the Internet have made the stock market available to the mainstream public. Computers have made investing in the stock market very easy. Market and company news is available almost anywhere in the world. The Internet has brought a vast new group of investors into the stock market and this group continues to grow each year.
Bull Market - Bear Market
Anyone who has been following the stock market or watching TV news is probably familiar with the terms Bull Market and Bear Market. What do they mean?
A bull market is defined by steadily rising prices. The economy is thriving and companies are generally making a profit. Most investors feel that this trend will continue for some time. By contrast a bear market is one where prices are dropping. The economy is probably in a decline and many companies are experiencing difficulties. Now the investors are pessimistic about the future profitability of the stock market. Since investors' attitudes tend to drive their willingness to buy or sell these trends normally perpetuate themselves until significant outside events intervene to cause a reversal of opinion.
In a bull market the investor hopes to buy early and hold the stock until it has reached it's high. Obviously predicting the low and high is impossible. Since most investors are "bullish" they make more money in the rising bull market. They are willing to invest more money as the stock is rising and realize more profit.
Investing in a bear market incurs the greatest possibility of losses because the trend in downward and there is no end in sight. An investment strategy in this case might be short selling. Short selling is selling a stock that you don't own. You can make arrangements with your broker to do this. You will in effect be borrowing shares from your broker to sell in the hope of buying them back later when the price has dropped. You will profit from the difference in the two prices. Another strategy for a bear market would be buying defensive stocks. These are stocks like utility companies that are not affected by the market downturn or companies that sell their products during all economic conditions.
Brokers
Traditionally investors bought and sold stock through large brokerage houses. They made a phone call to their broker who relayed their order to the exchange floor. These brokers also offered their services as stock advisors to people who knew very little about the market. These people relied on their broker to guide them and paid a hefty price in commissions and fees as a result. The advent of the Internet has led to a new class of brokerage houses. These firms provide on-line accounts where you may log in and buy and sell stocks from anywhere you can get an Internet connection. They usually don't offer any market advice and only provide order execution. The Internet investor can find some good deals as the members of this new breed of electronic brokerage houses compete for your business!
Blue Chip Stocks
Large well established firms who have demonstrated good profitability and growth, dividend payout, and quality products and services are called blue chip stocks. They are usually the leaders of their industry, have been around for a long time, and are considered to be among the safest investments. Blue chip stocks are included in the Dow Jones Industrial Average, an index composed of thirty companies who are leaders in their industry groups. They are very popular among individual and institutional investors. Blue chip stocks attract investors who are interested in consistent dividends and growth as well as stability. They are rarely subject to the price volatility of other stocks and their share prices will normally be higher than other categories of stock. The downside of blue chips is that due to their stability they won't appreciate as rapidly as compared to smaller up-and-coming stocks.
Penny Stocks
Penny Stocks are very low priced stocks and are very risky. They are usually issued by companies without a long term record of stability or profitability.
The appeal of penny stock is their low price. Though the odds are against it, if the company can get into a growth trend the share price can jump very rapidly. They are usually favored by the speculative investor.
Income Stocks
Income Stocks are stock that normally pay higher than average dividends. They are well established companies like utilities or telephone companies. Income stocks are popular with the investor who wants to own the stock for a long time and collect the dividends and who is not so interested in a gain in share price.
Value Stocks
Sometimes a company's earnings and growth potential indicate that it's share price should be higher than it is currently trading at. These stock are said to be Value Stocks. For the most part, the market and investors have ignored them. The investor who buys a value stock hopes that the market will soon realize what a bargain it is and begin to buy. This would drive up the share price.
Defensive Stocks
Defensive Stocks are issued by companies in industries that have demonstrated good performance in bad markets. Food and utility companies are defensive stocks.
Market Timing
One of the most well known market quotes is: "Buy Low - Sell High". To be consistently successful in the stock market one needs strategy, discipline, knowledge, and tools. We need to understand our strategy and stick with it. This will prevent us from being distracted by emotion, panic, or greed.
One of the most prominent investing strategies used by "investment pros" is Market Timing. This is the attempt to predict future prices from past market performance. Forecasting stock prices has been a problem for as long as people have been trading stocks. The time to buy or sell a stock is based on a number of economic indicators derived from company analysis, stock charts, and various complex mathematical and computer based algorithms.
One example of market timing signals are those available from www.stock4today.com.
Risks
There are numerous risks involved in investing in the stock market. Knowing that these risks exist should be one of the things an investor is constantly aware of. The money you invest in the stock market is not guaranteed. For instance, you might buy a stock expecting a certain dividend or rate of share price increase. If the company experiences financial problems it may not live up to your dividend or price growth expectations. If the company goes out of business you will probably lose everything you invested in it. Due to the uncertainty of the outcome, you bear a certain amount of risk when you purchase a stock.
Stocks differ in the amount of risks they present. For instance, Internet stocks have demonstrated themselves to be much more risky than utility stocks.
One risk is the stocks reaction to news items about the company. Depending on how the investors interpret the new item, they may be influenced to buy or sell the stock. If enough of these investors begin to buy or sell at the same time it will cause the price to rise or fall.
One effective strategy to cope with risk is diversification. This means spreading out your investments over several stocks in different market sectors. Remember the saying: "Don't put all your eggs in the same basket".
As investors we need to find our "Risk Tolerance". Risk tolerance is our emotional and financial ability to ride out a decline in the market without panicking and selling at a loss. When we define that point we make sure not to extend our investments beyond it.
Benefits
The same forces that bring risk into investing in the stock market also make possible the large gains many investors enjoy. It's true that the fluctuations in the market make for losses as well as gains but if you have a proven strategy and stick with it over the long term you will be a winner!
The Internet has make investing in the stock market a possibility for almost everybody. The wealth of online information, articles, and stock quotes gives the average person the same abilities that were once available to only stock brokers. No longer does the investor need to contact a broker for this information or to place orders to buy or sell. We now have almost instant access to our accounts and the ability to place on-line orders in seconds. This new freedom has ushered in new masses of hopeful investors. Still this in not a random process of buying and selling stock. We need a strategy for selecting a suitable stock as well as timing to buy and sell in order to make a profit.
Day Trading
Day Trading is the attempt to buy and sell stock over a very short period of time. The day trader hopes to cash in on the short term fluctuations in a stock's price. It would not be unusual for the day trader to buy and sell the same stock in a matter of a few minutes or to buy and sell the same stock several times a day.
Day traders sit in front of computer monitors all day looking for short term movement in a stock. They then attempt to get in on the movement before it reverses. The real day trader does not hold a stock overnight due to the risk of some event or news item triggering the stock to reverse direction. It takes intense concentration to monitor the minute by minute movement of several stocks.
Day trading involves a great deal of risk because of the uncertainty of the market behavior over the short term. The slightest economic or political news can cause a stock to fluctuate wildly and result in unexpected losses.
There are a few people who make respectable gains day trading. The people who probably make the most are the self proclaimed "experts" who sell the books or operate the web sites that cater to the day trader. Because of the profits to be made from sales to people who want to get rich quick, they make it seem as attractive as possible. The truth is that in the long run more people lose than gain by day trading. This does not translate into a very good investment.
If you are considering investing in the stock market it is very important that you understand how the markets work. All of the financial and market data that the newcomer is bombarded with can leave them confused and overwhelmed.
The stock market is an everyday term used to describe a place where stock in companies is bought and sold. Companies issues stock to finance new equipment, buy other companies, expand their business, introduce new products and services, etc. The investors who buy this stock now own a share of the company. If the company does well the price of their stock increases. If the company does not do well the stock price decreases. If the price that you sell your stock for is more than you paid for it, you have made money.
When you buy stock in a company you share in the profits and losses of the company until you sell your stock or the company goes out of business. Studies have shown that long term stock ownership has been one of the best investment strategies for most people.
People buy stocks on a tip from a friend, a phone call from a broker, or a recommendation from a TV analyst. They buy during a strong market. When the market later begins to decline they panic and sell for a loss. This is the typical horror story we hear from people who have no investment strategy.
Before committing your hard earned money to the stock market it will behoove you to consider the risks and benefits of doing so. You must have an investment strategy. This strategy will define what and when to buy and when you will sell it.
History of the Stock Market
Over two hundred years ago private banks began to sell stock to raise money to expand. This was a new way to invest and a way for the rich to get richer. In 1792 twenty four large merchants agreed to form a market known as the New York Stock Exchange (NYSE). They agreed to meet daily on Wall Street and buy and sell stocks.
By the mid-1800s the United States was experiencing rapid growth. Companies began to sell stock to raise money for the expansion necessary to meet the growing demand for their products and services. The people who bought this stock became part owners of the company and shared in the profits or loss of the company.
A new form of investing began to emerge when investors realized that they could sell their stock to others. This is where speculation began to influence an investor's decision to buy or sell and led the way to large fluctuations in stock prices.
Originally investing in the stock market was confined to the very wealthy. Now stock ownership has found it's way to all sectors of our society.
What is a Stock?
A stock certificate is a piece of paper declaring that you own a piece of the company. Companies sell stock to finance expansion, hire people, advertise, etc. In general, the sale of stock help companies grow. The people who buy the stock share in the profits or losses of the company.
Trading of stock is generally driven by short term speculation about the company operations, products, services, etc. It is this speculation that influences an investor's decision to buy or sell and what prices are attractive.
The company raises money through the primary market. This is the Initial Public Offering (IPO). Thereafter the stock is traded in the secondary market (what we call the stock market) when individual investors or traders buy and sell the shares to each other. The company is not involved in any profit or loss from this secondary market.
Technology and the Internet have made the stock market available to the mainstream public. Computers have made investing in the stock market very easy. Market and company news is available almost anywhere in the world. The Internet has brought a vast new group of investors into the stock market and this group continues to grow each year.
Bull Market - Bear Market
Anyone who has been following the stock market or watching TV news is probably familiar with the terms Bull Market and Bear Market. What do they mean?
A bull market is defined by steadily rising prices. The economy is thriving and companies are generally making a profit. Most investors feel that this trend will continue for some time. By contrast a bear market is one where prices are dropping. The economy is probably in a decline and many companies are experiencing difficulties. Now the investors are pessimistic about the future profitability of the stock market. Since investors' attitudes tend to drive their willingness to buy or sell these trends normally perpetuate themselves until significant outside events intervene to cause a reversal of opinion.
In a bull market the investor hopes to buy early and hold the stock until it has reached it's high. Obviously predicting the low and high is impossible. Since most investors are "bullish" they make more money in the rising bull market. They are willing to invest more money as the stock is rising and realize more profit.
Investing in a bear market incurs the greatest possibility of losses because the trend in downward and there is no end in sight. An investment strategy in this case might be short selling. Short selling is selling a stock that you don't own. You can make arrangements with your broker to do this. You will in effect be borrowing shares from your broker to sell in the hope of buying them back later when the price has dropped. You will profit from the difference in the two prices. Another strategy for a bear market would be buying defensive stocks. These are stocks like utility companies that are not affected by the market downturn or companies that sell their products during all economic conditions.
Brokers
Traditionally investors bought and sold stock through large brokerage houses. They made a phone call to their broker who relayed their order to the exchange floor. These brokers also offered their services as stock advisors to people who knew very little about the market. These people relied on their broker to guide them and paid a hefty price in commissions and fees as a result. The advent of the Internet has led to a new class of brokerage houses. These firms provide on-line accounts where you may log in and buy and sell stocks from anywhere you can get an Internet connection. They usually don't offer any market advice and only provide order execution. The Internet investor can find some good deals as the members of this new breed of electronic brokerage houses compete for your business!
Blue Chip Stocks
Large well established firms who have demonstrated good profitability and growth, dividend payout, and quality products and services are called blue chip stocks. They are usually the leaders of their industry, have been around for a long time, and are considered to be among the safest investments. Blue chip stocks are included in the Dow Jones Industrial Average, an index composed of thirty companies who are leaders in their industry groups. They are very popular among individual and institutional investors. Blue chip stocks attract investors who are interested in consistent dividends and growth as well as stability. They are rarely subject to the price volatility of other stocks and their share prices will normally be higher than other categories of stock. The downside of blue chips is that due to their stability they won't appreciate as rapidly as compared to smaller up-and-coming stocks.
Penny Stocks
Penny Stocks are very low priced stocks and are very risky. They are usually issued by companies without a long term record of stability or profitability.
The appeal of penny stock is their low price. Though the odds are against it, if the company can get into a growth trend the share price can jump very rapidly. They are usually favored by the speculative investor.
Income Stocks
Income Stocks are stock that normally pay higher than average dividends. They are well established companies like utilities or telephone companies. Income stocks are popular with the investor who wants to own the stock for a long time and collect the dividends and who is not so interested in a gain in share price.
Value Stocks
Sometimes a company's earnings and growth potential indicate that it's share price should be higher than it is currently trading at. These stock are said to be Value Stocks. For the most part, the market and investors have ignored them. The investor who buys a value stock hopes that the market will soon realize what a bargain it is and begin to buy. This would drive up the share price.
Defensive Stocks
Defensive Stocks are issued by companies in industries that have demonstrated good performance in bad markets. Food and utility companies are defensive stocks.
Market Timing
One of the most well known market quotes is: "Buy Low - Sell High". To be consistently successful in the stock market one needs strategy, discipline, knowledge, and tools. We need to understand our strategy and stick with it. This will prevent us from being distracted by emotion, panic, or greed.
One of the most prominent investing strategies used by "investment pros" is Market Timing. This is the attempt to predict future prices from past market performance. Forecasting stock prices has been a problem for as long as people have been trading stocks. The time to buy or sell a stock is based on a number of economic indicators derived from company analysis, stock charts, and various complex mathematical and computer based algorithms.
One example of market timing signals are those available from www.stock4today.com.
Risks
There are numerous risks involved in investing in the stock market. Knowing that these risks exist should be one of the things an investor is constantly aware of. The money you invest in the stock market is not guaranteed. For instance, you might buy a stock expecting a certain dividend or rate of share price increase. If the company experiences financial problems it may not live up to your dividend or price growth expectations. If the company goes out of business you will probably lose everything you invested in it. Due to the uncertainty of the outcome, you bear a certain amount of risk when you purchase a stock.
Stocks differ in the amount of risks they present. For instance, Internet stocks have demonstrated themselves to be much more risky than utility stocks.
One risk is the stocks reaction to news items about the company. Depending on how the investors interpret the new item, they may be influenced to buy or sell the stock. If enough of these investors begin to buy or sell at the same time it will cause the price to rise or fall.
One effective strategy to cope with risk is diversification. This means spreading out your investments over several stocks in different market sectors. Remember the saying: "Don't put all your eggs in the same basket".
As investors we need to find our "Risk Tolerance". Risk tolerance is our emotional and financial ability to ride out a decline in the market without panicking and selling at a loss. When we define that point we make sure not to extend our investments beyond it.
Benefits
The same forces that bring risk into investing in the stock market also make possible the large gains many investors enjoy. It's true that the fluctuations in the market make for losses as well as gains but if you have a proven strategy and stick with it over the long term you will be a winner!
The Internet has make investing in the stock market a possibility for almost everybody. The wealth of online information, articles, and stock quotes gives the average person the same abilities that were once available to only stock brokers. No longer does the investor need to contact a broker for this information or to place orders to buy or sell. We now have almost instant access to our accounts and the ability to place on-line orders in seconds. This new freedom has ushered in new masses of hopeful investors. Still this in not a random process of buying and selling stock. We need a strategy for selecting a suitable stock as well as timing to buy and sell in order to make a profit.
Day Trading
Day Trading is the attempt to buy and sell stock over a very short period of time. The day trader hopes to cash in on the short term fluctuations in a stock's price. It would not be unusual for the day trader to buy and sell the same stock in a matter of a few minutes or to buy and sell the same stock several times a day.
Day traders sit in front of computer monitors all day looking for short term movement in a stock. They then attempt to get in on the movement before it reverses. The real day trader does not hold a stock overnight due to the risk of some event or news item triggering the stock to reverse direction. It takes intense concentration to monitor the minute by minute movement of several stocks.
Day trading involves a great deal of risk because of the uncertainty of the market behavior over the short term. The slightest economic or political news can cause a stock to fluctuate wildly and result in unexpected losses.
There are a few people who make respectable gains day trading. The people who probably make the most are the self proclaimed "experts" who sell the books or operate the web sites that cater to the day trader. Because of the profits to be made from sales to people who want to get rich quick, they make it seem as attractive as possible. The truth is that in the long run more people lose than gain by day trading. This does not translate into a very good investment.
Electronic Currency Exchange
One of the easiest ways to make money online today is to learn e-currency trading. Many people have spent countless hours looking for the perfect program that will make them a millionaire over night. The truth is, these programs do not exist. Electronic currency exchange allows people to make a long-term investment that can yield substantial profits in years to come.
There are a number of courses available online that can help anyone get started and become successful in the currency exchange market. These courses offer essential resources and techniques that will help even the novice user make the most of their investment.
The first thing one would do if interested in getting started in e-currency trading is to open a portfolio. After the creation of their portfolio an initial investment is then made. The portfolio will receive daily gains of anywhere from 2.% to .4%. Therefore on a $1,000 investment a user can expect to profit very close to $5 per day. Over the course of a year it is not uncommon to turn an initial investment of $1,000 into a $50,000 portfolio where they will realize profits of $200 a day.
The most recent course that I have looked at has been the Mazu course. The course provides one on one phone support, conference calls, chat rooms, forums, and a beginner and advanced course on how to trade in the e-currency exchange market. After having reviewed the Mazu program it turned out to be a very helpful legitimate program.
The 40 Year Plan Over
Unbeknownst to 98% of working people, the 40 year plan is over. Statistics show that by age 65 less than 2% of Americans can truly retire in comfort without the help of family members or the government. The lackluster performance of the stock market over the past 6 years has dashed many people's hopes of retiring early. It used to be that you could get a great education, get a great job and settle with a company by 25 years of age, keep your nose clean, work your way to the top, invest in your companies stock and by age 65 retire the company you sacrificed for will take care of your retirement and medical expenses for life.
For many now this is just wishful thinking and a pipe dream.
Today's norms:
The harsh reality is: Corporate down-sizing (e.g. Gillette, Ford, and GM). Corporate bankruptcies - Enron, Worldcom). Company's robbing company pension plans and judges are allowing it to happen just ask people working for the airlines, illegal insider stock trading, age discrimination, companies cannot afford to pay health insurance premiums because they have sky-rocketed and people are living longer.
Other forces: World Instability, unfettered nuclear proliferation, Sept 11th, natural disasters all cooked together.
Yes, the poor performance of the stock market, lower interest rates and the real estate boom have contributed greatly to people looking for alternative investment strategies such as self directed investing of retirement funds in real estate.
The Internet, information proliferation, people's ability to share information, online financial software, and real time stock quotes.
Benefits of investing with self directed ira funds:
- Stimulates the economy... It is great for recession proofing an economy. Money from retirement funds keep construction crews working
- With the ability to look outside the stock market, you may find alternative investment vehicles that are safer with higher returns which will allow you to make up for lost time.
- The government and taxpayers do not have to pick up the tab in order to help someone maintain their lifestyle during retirement.
- Permits true retirement diversification and wealth accumulation in tangible assets.
- Global investing... With your Self Directed IRA, you can invest in international real estate.
10 Essential Trading Elements
1. You can't take more risk than you are comfortable with - emotion is the enemy of the trader. Most of us are slaves to our emotion, which is why most traders fail despite the apparent simplicity of trading. To be successful, you have to manage emotion, and the first step toward emotional mastery is to not take more risk than you are comfortable with. If you can't sleep at night over the potential of losing more than $500 on a stock trade, then you should not risk more than $500 on a stock trade. The less you care about the outcome of a trade, the smarter you will execute it.
2. Stops loss orders must be used - one big loss can wipe out the gains of five winning trades. Success requires that you don't take big losses, so utilize stop loss orders. Once you are entered in a trade, enter a stop loss order and stick to it. If your brokerage does not provide the ability to execute stop loss orders, then change brokers.
3. No one cares more about your money than you - only you really care whether you make money or not. Therefore, do not depend on others to make you money; you have to take control and know what is going on. You can use the skills of others to help you make decisions, but ultimately, your success in the market will come down to what you do.
4. Losers react, winners predict - the market does not care about what happened in the past. If you are using publicly available information to make trading decisions, then you are using old information. The stock market moves on what it expects to happen in the future, and not on what has already happened. Use what has happened in the past to provide clues to what may happen in the future, but don't make decisions on information that is widely known.
5. The stock market is not fair - Within every stock, there are a small group of investors who know more than the general public. They have an advantage, because they can better predict what a company will do in the future. To be successful, we have to figure out what the investors with better information are doing, and then do the same.
6. Information is biased - the financial industry wants you to buy stocks. The brokerages that finance the companies, the newsletters that get paid to advertise company stories, the promoters that get paid to promote stocks, the media that sell more advertising in an up market and of course, the companies themselves all benefit when stock prices go higher. The more buyers, the higher prices go. Trust no one when making investment decisions, because everyone can have a bias. Only the market can not lie (although it can seem pretty stupid sometimes), therefore, trust what the market tells you.
7. Hard work does not make money in the market - you need to work hard to learn how the stock market works. You need to work hard to learn how to manage your emotions. You need to work hard to learn discipline. However, the most money is made in a market that is trending, one where there are lots of opportunities and it seems easy to make money. When the market is not trending, it is harder to find opportunities. Working harder when the going gets tough will cause you to take marginal trades. Take the obvious trades, they are more likely to work.
8. Black boxes don't work - there are a lot of companies selling trading systems that magically spit out buy and sell recommendations. The stock market is like a flu virus; just when you think you have it figured out, it changes in to something else. Therefore, systems too must evolve with the market. A system that worked in the past may not work in the future. However, what seems to always work is understanding how humans and crowds behave. Learn that, and you can begin to pick stocks in any market condition. More importantly, learn the art of trading well, knowing that you can not always be right, that you have to limit losses and let profits run and that you have to understand what motivates people to buy and sell. Systems, indicators, and computer programs are simply tools to help you make better decisions.
9. The stock market is usually efficient - actually, stock, futures, currencies and any other market that has enough people trading them are usually efficient. That means, most of the time you can not beat the markets. To do better than the masses, you have to identify situations where market efficiency is breaking down. That occurs when the crowd is emotional or when small groups of investors are trading on private information. Usually, that is most easily found when stocks are trading abnormally in terms of price and volume. Focus your attention on abnormal behavior when looking for trading opportunities.
10. Discipline is essential - you have to manage risk effectively, you have to use stops loss orders, you have to always be looking for high probability trading opportunities, you have to avoid taking too much risk and you have to let winning positions run. The laws of trading are nothing if you don't have the discipline to follow them.
The very first sentence:
"Successful trading of the stock market requires a lot more than knowing what to buy or sell. "
In other words....
IT'S NOT WHAT YOU TRADE, IT'S HOW YOU TRADE IT!
2. Stops loss orders must be used - one big loss can wipe out the gains of five winning trades. Success requires that you don't take big losses, so utilize stop loss orders. Once you are entered in a trade, enter a stop loss order and stick to it. If your brokerage does not provide the ability to execute stop loss orders, then change brokers.
3. No one cares more about your money than you - only you really care whether you make money or not. Therefore, do not depend on others to make you money; you have to take control and know what is going on. You can use the skills of others to help you make decisions, but ultimately, your success in the market will come down to what you do.
4. Losers react, winners predict - the market does not care about what happened in the past. If you are using publicly available information to make trading decisions, then you are using old information. The stock market moves on what it expects to happen in the future, and not on what has already happened. Use what has happened in the past to provide clues to what may happen in the future, but don't make decisions on information that is widely known.
5. The stock market is not fair - Within every stock, there are a small group of investors who know more than the general public. They have an advantage, because they can better predict what a company will do in the future. To be successful, we have to figure out what the investors with better information are doing, and then do the same.
6. Information is biased - the financial industry wants you to buy stocks. The brokerages that finance the companies, the newsletters that get paid to advertise company stories, the promoters that get paid to promote stocks, the media that sell more advertising in an up market and of course, the companies themselves all benefit when stock prices go higher. The more buyers, the higher prices go. Trust no one when making investment decisions, because everyone can have a bias. Only the market can not lie (although it can seem pretty stupid sometimes), therefore, trust what the market tells you.
7. Hard work does not make money in the market - you need to work hard to learn how the stock market works. You need to work hard to learn how to manage your emotions. You need to work hard to learn discipline. However, the most money is made in a market that is trending, one where there are lots of opportunities and it seems easy to make money. When the market is not trending, it is harder to find opportunities. Working harder when the going gets tough will cause you to take marginal trades. Take the obvious trades, they are more likely to work.
8. Black boxes don't work - there are a lot of companies selling trading systems that magically spit out buy and sell recommendations. The stock market is like a flu virus; just when you think you have it figured out, it changes in to something else. Therefore, systems too must evolve with the market. A system that worked in the past may not work in the future. However, what seems to always work is understanding how humans and crowds behave. Learn that, and you can begin to pick stocks in any market condition. More importantly, learn the art of trading well, knowing that you can not always be right, that you have to limit losses and let profits run and that you have to understand what motivates people to buy and sell. Systems, indicators, and computer programs are simply tools to help you make better decisions.
9. The stock market is usually efficient - actually, stock, futures, currencies and any other market that has enough people trading them are usually efficient. That means, most of the time you can not beat the markets. To do better than the masses, you have to identify situations where market efficiency is breaking down. That occurs when the crowd is emotional or when small groups of investors are trading on private information. Usually, that is most easily found when stocks are trading abnormally in terms of price and volume. Focus your attention on abnormal behavior when looking for trading opportunities.
10. Discipline is essential - you have to manage risk effectively, you have to use stops loss orders, you have to always be looking for high probability trading opportunities, you have to avoid taking too much risk and you have to let winning positions run. The laws of trading are nothing if you don't have the discipline to follow them.
The very first sentence:
"Successful trading of the stock market requires a lot more than knowing what to buy or sell. "
In other words....
IT'S NOT WHAT YOU TRADE, IT'S HOW YOU TRADE IT!
Managing the Income Portfolio
The reason people assume the risks of investing in the first place is the prospect of achieving a higher rate of return than is attainable in a risk free environment... i.e., an FDIC insured bank account. Risk comes in various forms, but the average investor's primary concerns are "credit" and "market" risk... particularly when it comes to investing for income. Credit risk involves the ability of corporations, government entities, and even individuals, to make good on their financial commitments; market risk refers to the certainty that there will be changes in the Market Value of the selected securities. We can minimize the former by selecting only high quality (investment grade) securities and the latter by diversifying properly, understanding that Market Value changes are normal, and by having a plan of action for dealing with such fluctuations. (What does the bank do to get the amount of interest it guarantees to depositors? What does it do in response to higher or lower market interest rate expectations?)
You don't have to be a professional Investment Manager to professionally manage your investment portfolio, but you do need to have a long term plan and know something about Asset Allocation... a portfolio organization tool that is often misunderstood and almost always improperly used within the financial community. It's important to recognize, as well, that you do not need a fancy computer program or a glossy presentation with economic scenarios, inflation estimators, and stock market projections to get yourself lined up properly with your target. You need common sense, reasonable expectations, patience, discipline, soft hands, and an oversized driver. The K. I. S. S. Principle needs to be at the foundation of your Investment Plan; an emphasis on Working Capital will help you Organize, and Control your investment portfolio.
Planning for Retirement should focus on the additional income needed from the investment portfolio, and the Asset Allocation formula [relax, 8th grade math is plenty] needed for goal achievement will depend on just three variables: (1) the amount of liquid investment assets you are starting with, (2) the amount of time until retirement, and (3) the range of interest rates currently available from Investment Grade Securities. If you don't allow the "engineer" gene to take control, this can be a fairly simple process. Even if you are young, you need to stop smoking heavily and to develop a growing stream of income... if you keep the income growing, the Market Value growth (that you are expected to worship) will take care of itself. Remember, higher Market Value may increase hat size, but it doesn't pay the bills.
First deduct any guaranteed pension income from your retirement income goal to estimate the amount needed just from the investment portfolio. Don't worry about inflation at this stage. Next, determine the total Market Value of your investment portfolios, including company plans, IRAs, H-Bonds... everything, except the house, boat, jewelry, etc. Liquid personal and retirement plan assets only. This total is then multiplied by a range of reasonable interest rates (6%, to 8% right now) and, hopefully, one of the resulting numbers will be close to the target amount you came up with a moment ago. If you are within a few years of retirement age, they better be! For certain, this process will give you a clear idea of where you stand, and that, in and of itself, is worth the effort.
Organizing the Portfolio involves deciding upon an appropriate Asset Allocation... and that requires some discussion. Asset Allocation is the most important and most frequently misunderstood concept in the investment lexicon. The most basic of the confusions is the idea that diversification and Asset Allocation are one and the same. Asset Allocation divides the investment portfolio into the two basic classes of investment securities: Stocks/Equities and Bonds/Income Securities. Most Investment Grade securities fit comfortably into one of these two classes. Diversification is a risk reduction technique that strictly controls the size of individual holdings as a percent of total assets. A second misconception describes Asset Allocation as a sophisticated technique used to soften the bottom line impact of movements in stock and bond prices, and/or a process that automatically (and foolishly) moves investment dollars from a weakening asset classification to a stronger one... a subtle "market timing" device.
Finally, the Asset Allocation Formula is often misused in an effort to superimpose a valid investment planning tool on speculative strategies that have no real merits of their own, for example: annual portfolio repositioning, market timing adjustments, and Mutual Fund shifting. The Asset Allocation formula itself is sacred, and if constructed properly, should never be altered due to conditions in either Equity or Fixed Income markets. Changes in the personal situation, goals, and objectives of the investor are the only issues that can be allowed into the Asset Allocation decision-making process.
Here are a few basic Asset Allocation Guidelines:
(1) All Asset Allocation decisions are based on the Cost Basis of the securities involved. The current Market Value may be more or less and it just doesn't matter.
(2) Any investment portfolio with a Cost Basis of $100,000 or more should have a minimum of 30% invested in Income Securities, either taxable or tax free, depending on the nature of the portfolio. Tax deferred entities (all varieties of retirement programs) should house the bulk of the Equity Investments. This rule applies from age 0 to Retirement Age - 5 years. Under age 30, it is a mistake to have too much of your portfolio in Income Securities.
(3) There are only two Asset Allocation Categories, and neither is ever described with a decimal point. All cash in the portfolio is destined for one category or the other.
(4) From Retirement Age - 5 on, the Income Allocation needs to be adjusted upward until the "reasonable interest rate test" says that you are on target or at least in range.
(5) At retirement, between 60% and 100% of your portfolio may have to be in Income Generating Securities.
Controlling, or Implementing, the Investment Plan will be accomplished best by those who are least emotional, most decisive, naturally calm, patient, generally conservative (not politically), and self actualized. Investing is a long-term, personal, goal orientated, non- competitive, hands on, decision-making process that does not require advanced degrees or a rocket scientist IQ. In fact, being too smart can be a problem if you have a tendency to over analyze things. It is helpful to establish guidelines for selecting securities, and for disposing of them. For example, limit Equity involvement to Investment Grade, NYSE, dividend paying, profitable, and widely held companies. Don't buy any stock unless it is down at least 20% from its 52 week high, and limit individual equity holdings to less than 5% of the total portfolio. Take a reasonable profit (using 10% as a target) as frequently as possible. With a 40% Income Allocation, 40% of profits and dividends would be allocated to Income Securities.
For Fixed Income, focus on Investment Grade securities, with above average but not "highest in class" yields. With Variable Income securities, avoid purchase near 52-week highs, and keep individual holdings well below 5%. Keep individual Preferred Stocks and Bonds well below 5% as well. Closed End Fund positions may be slightly higher than 5%, depending on type. Take a reasonable profit (more than one years' income for starters) as soon as possible. With a 60% Equity Allocation, 60% of profits and interest would be allocated to stocks.
Monitoring Investment Performance the Wall Street way is inappropriate and problematic for goal-orientated investors. It purposely focuses on short-term dislocations and uncontrollable cyclical changes, producing constant disappointment and encouraging inappropriate transactional responses to natural and harmless events. Coupled with a Media that thrives on sensationalizing anything outrageously positive or negative (Google and Enron, Peter Lynch and Martha Stewart, for example), it becomes difficult to stay the course with any plan, as environmental conditions change. First greed, then fear, new products replacing old, and always the promise of something better when, in fact, the boring and old fashioned basic investment principles still get the job done. Remember, your unhappiness is Wall Street's most coveted asset. Don't humor them, and protect yourself. Base your performance evaluation efforts on goal achievement... yours, not theirs. Here's how, based on the three basic objectives we've been talking about: Growth of Base Income, Profit Production from Trading, and Overall Growth in Working Capital.
Base Income includes the dividends and interest produced by your portfolio, without the realized capital gains that should actually be the larger number much of the time. No matter how you slice it, your long-range comfort demands regularly increasing income, and by using your total portfolio cost basis as the benchmark, it's easy to determine where to invest your accumulating cash. Since a portion of every dollar added to the portfolio is reallocated to income production, you are assured of increasing the total annually. If Market Value is used for this analysis, you could be pouring too much money into a falling stock market to the detriment of your long-range income objectives.
Profit Production is the happy face of the market value volatility that is a natural attribute of all securities. To realize a profit, you must be able to sell the securities that most investment strategists (and accountants) want you to marry up with! Successful investors learn to sell the ones they love, and the more frequently (yes, short term), the better. This is called trading, and it is not a four-letter word. When you can get yourself to the point where you think of the securities you own as high quality inventory on the shelves of your personal portfolio boutique, you have arrived. You won't see WalMart holding out for higher prices than their standard markup, and neither should you. Reduce the markup on slower movers, and sell damaged goods you've held too long at a loss if you have to, and, in the thick of it all, try to anticipate what your standard, Wall Street Account Statement is going to show you... a portfolio of equity securities that have not yet achieved their profit goals and are probably in negative Market Value territory because you've sold the winners and replaced them with new inventory... compounding the earning power! Similarly, you'll see a diversified group of income earners, chastised for following their natural tendencies (this year), at lower prices, which will help you increase your portfolio yield and overall cash flow. If you see big plus signs, you are not managing the portfolio properly.
Working Capital Growth (total portfolio cost basis) just happens, and at a rate that will be somewhere between the average return on the Income Securities in the portfolio and the total realized gain on the Equity portion of the portfolio. It will actually be higher with larger Equity allocations because frequent trading produces a higher rate of return than the more secure positions in the Income allocation. But, and this is too big a but to ignore as you approach retirement, trading profits are not guaranteed and the risk of loss (although minimized with a sensible selection process) is greater than it is with Income Securities. This is why the Asset Allocation moves from a greater to a lesser Equity percentage as you approach retirement.
So is there really such a thing as an Income Portfolio that needs to be managed? Or are we really just dealing with an investment portfolio that needs its Asset Allocation tweaked occasionally as we approach the time in life when it has to provide the yacht... and the gas money to run it? By using Cost Basis (Working Capital) as the number that needs growing, by accepting trading as an acceptable, even conservative, approach to portfolio management, and by focusing on growing income instead of ego, this whole retirement investing thing becomes significantly less scary. So now you can focus on changing the tax code, reducing health care costs, saving Social Security, and spoiling the grandchildren.
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