Online Stock Investing for Beginner

What makes on-line stock investing so different from the time before we had online stock trading tools? Well, for one it's a double hedged sword. On-line stock investing is now much easier for the man in the street to search the whole stock market to find stocks that meet their criteria. At the click of a mouse one can now have access to as much information as only the professional funds, brokerages had many years ago. This is why so many professionally run hedge funds are now being operated from homes. Believe it or not. And why not?

Online stock investing has leveled the playing field. With an Internet connection and the right tools we can now make professional trading decisions. No more are we relying on the so called "money managers" to play with our money. With the advent of the Internet why doesn't everyone simply invest in the stock market for them-selves?

Some examples of the benefits of online stock investing for the individual trader:

* Access stock filter tables where you can plug in parameters and be presented with your own HOT stocks.

* Access company reports.

* On-line charting services. Many are free.

* Free online stock investing information, articles, forums.

The information now available at a low or even free cost in unbelievable. You just have to know where to look and how to apply the information.

The downside to online stock investing:

* Many free forums are no more than gambling pits. People who pump and dump stocks try to get others to buy the stock they are selling.

* Sadly, there are a lot of scams floating around on the Net.

* Information overload. Too much information in too short a space of time can be difficult to digest.

* On-line stock investing is simply an "aid" a "tool" to help you become a better trader. It still comes down to managing your own stock account in a professional manner.

How To Survive A Bear Market

Most traders I talk to nowadays have lost so much money in the markets during the 2000 NASDAQ Bear Market they are ready to throw the towel in. Having watched their portfolios being decimated by over 70% they simply have not got the money or the mental toughness to come back. What a shame. Profiting in bear market is quite simple... when you know how.

On 18^th March 2000 My NASDAQ indicator turned into negative territory for the first time. Since then up to today 4^th December 2000 it has never gone back into positive numbers. The NASDAQ had now declined 50% from its February high and some of the previous highflying tech stocks have been killed. YAHOO. MSFT, AMZN are all way, way off their peaks. Any fool who had a buy and hold strategy with these stocks has just kissed about 70% of their capital good-bye. Yet not only should you never lose more than 10% of your capital during a bear market you do have alternatives to make a profit.

Option 1 - Safe

When my indicators turned negative way back in March I was already stopped out of many of my high-flying stocks, such as Yahoo, Q-Comm. By strategically trailing my stop behind the price advance I automatically exit when things turn around. But I was still in a couple of long positions when my indicator turned negative. So what did I do? Exit straight away? NO. I simply tightened my stop on these shares. I looked for the slightest excuse to get out. The shares duly obliged for within 1 week of my indicator turning negative I was stopped out. No regrets. I was pleased. Why shouldn’t I be with a 144% gain for the year?

Once I was completely in cash and my indicator on the NASDAQ was negative what should I do? Well let’s ask it another way what could I do?

I was in 100% cash. I had just made a 144% annual gain. The market was turning down. Why not walk away from the markets? Take a break. I don’t have to trade all the time. Simply walk away, check the indicator figure every week and wait for a positive market again before starting all over again. What’s wrong with making 144% during every bull market and sitting out of the market during the bear markets? This is what I would advice every novice trader to do. You must have heard the saying "Any fool can make money in a bull market.." So my answer is "trade only in a bull market" It’s really so simple.

Option 2 - Conservative

Most people are surprised to hear about shares still doing well during bear markets. Yes there are still some great moves. Very few and far between. The moves aren’t as powerful but they are there. Why not cut your position size down in half and go searching for these "exceptional" shares? Use MSTS to ferret out these shares and trade them.

Think about it this way. If you can make 144% during a bull market and 25% during a bear market how rich will you be in 5 years time? You cannot treat every market cycle the same. Sometimes you can’t help but make money. Sometimes you will find it difficult to make money. But as long as you preserve your capital you will always be miles ahead of the average trader.

Option 3 - Aggressive Bear:

If you can make a lot of money on the long side (in the right shares with the right system) during a bull market then why not simply reverse the process? Go short! This is where the easy money is during a bear market.

Which shares should you be looking to go short? Most people like to pick bottoms. These people lose money. Reverse this process. When selling shares most people like to pick tops. Impossible! These people lose money. When trying to sell a share at the top the bullish sentiment causes sharp rallies in the share resulting in stops being hit.

Without a doubt and looking at thousands of shorting candidates I always find the very best time to short a stock is four to six months AFTER it has made a top. Back in September I recommended selling Yahoo at $82. It is now down in the $50’s. Look at AMZN, E-Bay, LU, AOL you’ll see how it is best to short shares AFTER the topping process has taken place.

If you can make 144% during a bull market. 100%+ during a bear market how rich will you be?

The next time you get caught in a bear market don’t hold on to your shares HOPING for a rebound. Way up your options 1,2, or 3 and act accordingly. A bear market can be just as pleasant as a bull market

You Can Make Your Fortune In The Stock Market

Sounds too good to be true, doesn't it? It sounds like any other "get rich quick scam."

But you really should be making over 100% per annum in the stock market year in and year out, if you apply some very basic principles. Of course, money managers, stock brokers, financial advisors are going to tell you differently. They are not in the job of looking after your money. there job is to "take your money."

This is how you should be making over 100% per annum in the stock market and the MASSIVE advantage we have over the large institutional funds.

1) Our biggest advantage is our "flexibility". We can flit from trend to trend at a moments notice. The big funds cannot. This point alone should convince you to trade your own money in the stock market. If a stock falls by 10% get out and look elsewhere. Do not waste your time. go looking for the next trend.

2) Trade in lower priced stocks. It's much easier for a $5 stock to gain 300-400% than it is for a $80 to gain 200%. and it will do it in a much faster time frame.

3) Keep to lower cap stocks. These are stocks with much smaller amounts of stock out in the market. Again, these stocks are much easier to shift 300-500% than the larger BLUE CHIP stocks.

4) Do not limit your-self to one industry. If you see as tock you like, buy it. If you are wrong you lose a little. If you are right you make a lot. The big funds limit them-selves to one category, theme, thus tying their hands behind their backs.

5) FOCUS: Notice how the big funds hold 100+ stocks? They may as well simply buy index contracts. You want to narrow your focus down to the top 0.25% of stocks and trade them. Buy big %'s of your portfolio in the VERY best stocks. the ones about to explode right now.

6) Cut your losses early and go looking elsewhere. There are dozens of stocks going on to gain 300-500%+ in less then 6 months. Do not waste your time and money HOPING a losing trade will turn around. Cut your loss and go searching.

7) Play both sides of the market. Most funds are 100% invested during all market cycles. so they do O.K in a bull market only to get slaughtered in a bear market. As a private trader you can be an aggressive bull in a bull market and play it from the short side during those bear markets.

Private traders and small account holders (less than $5 million) have an enormous advantage over the larger funds simply because they can make decisions quickly without affecting the price of a stock. Many of the big funds now have in excess of $500 million (some well into the billions). they are the slow oil tankers of the sea. Taking weeks to get into and out of stock positions. Diversifying into many substandard stocks. They have given up on the idea of making superior returns and gone into the business of managing as much capital as they can. They would rather make 12% on $500 million than 100% on $5 million. Which, from a business stand point actually makes sense. BUT where would you rather have your money invested?

You really can make your fortune in the stock market. It takes time and some effort. But starting at $5,000 and averaging 100% per annum for 10 years (no withdrawals) you will have: $5,120,000. It will take you just under 8 years to make your first million. THEN the power of compounding REALLY kicks in. Unfortunately after $5 million your account size will start to affect your returns. But that's not such a big problem, is it?

I'll see you at the millionaires club meeting one year.

Stock Options - Understanding the Basics

There are two types of options:

A Call Option and a Put Option

The purchase of a call option provides the buyer with the right - but not the obligation- to purchase the underlying item at a specified price, called the strike price or exercise price, at any time up to and including the expiration date.

A put option provides the buyer with the right- but not the obligation- to sell the underlying item at the strike price at any time prior to expiration.

The price of an option is called the premium. As an example of an option, an IBM April 130 call gives the purchaser the right to buy 100 shares of IBM at $130 per share at any time during the life of the option.

The buyer of a call seeks to profit from an anticipated price rise by locking in a specified purchase price. The call buyer’s maximum possible loss will be equal to the dollar amount of the premium paid for the option. This maximum loss would occur on an option held until expiration if the strike price were above the prevailing market price.

For example, if IBM were trading at $125 when the 130 option expired, the option would expire worthless. If at expiration the price of the underlying market was above the strike price, the option would have some value and would hence be exercise. However, if the difference between the market price and the strike price were less than the premium paid for the option, the net result of the trade would still be a loss. In order for a call buyer to realize a net profit, the difference between the market price and the strike price would have to exceed the premium paid when the call was purchased. The higher the market price the market price, the greater the profit.

The buyer of a put seeks to profit from a market decline by locking in a sales price.

The option buyer accepts a large probability of a small loss in the return for a small probability of a large gain.

But what if you had a way of trading options where the probability of a large gain was high?

What if you had a system that would make money regardless of which way the stock moves as long as it does in either direction you will make money? Think you could make some serious money?

Stock Market Simulation Game

Do you play games? I do. Stock market games that is.

Here is a stock market game you will love and not only that, it will give you a great insight into the phrases "expectancy", "draw-downs" and "position sizing".

What is the expectancy of your trading system?

Expectancy is how many times you expect your trading method to give you a profit. Once you realize the average parameters of your trading method not only does making money in the stock market become almost "scientific" it will reduce your stress and have you trading in a professional manner.

Here's the game:

Cut out 100 small blocks of white paper. Make them all the same size and just large enough to write two figures on them.

Write on the blocks in this order:

3 = 10W

7 = 5W

40 = 2W

10 = Nil

35 = 2L

4 = 5L

1 = 10L

So what this no represents is you M.S.T.S. in a statistical form.

Fold all the pieces of paper and place into a hat.

Get a piece of paper and write $10,000 on the top of that paper. This is your trading account.

Now write down "each trade is done with $2,500"

Stop loss is a t 8% = $200

Write down "trade 1 =.........." Draw your first random piece of paper from the hat.

Read it. Let's say you had some REALLY bad luck and draw out a 5L paper. This represents a trade where you had to exit at a 5 * stop loss.

Your first trade was a 5L loss = 5 * $200 = $1,000

Your total trading portfolio is now: $9,000

Your position sizing is $2,250

Stop loss = $180

Do it again.

This time you hit a winner. A 2W

This represents a 2 * stop loss gain = 2 * $180 = $360 gain

Portfolio is now: $9,360

Position sizing is: $2,340

Stop loss= 8% of $2,340 = $187

Do it again.

This time you hit a ten bagger. That's a 10* stop loss gain = 10* $187 = $1,870 gain.

Portfolio is not at: $11,230

And so on.... draw out 100 times and note:

1) How much draw down your trading method has.

2) How many losing streaks and winning streaks you had.

3) How did you feel when your system was performing at its worst?

4) How did you feel when your system was performing at its best?

5) Play around with different position sizing rules. go from one extreme to the other and you will be AMAZED at the equity swings your trading account experiences and the total return on your trading account after 100 trades. This should really drum into the importance that position sizing plays in your trading plan.

Once you are comfortable with your trading method and know how it performs trading for money becomes almost a "sure thing". Every system goes through good, bad, so-so times. But as long as you are prepared for this and adopt a professional trading approach with a proper trading plan, there really is nothing to stop you from succeeding in your stock market career.

Get busy and get serious. Start playing the stock market game now.

Stock Trading Basics

When Dealing With Shares Never Forget The Basics!

What really makes a share move up or down? In today's ultra high tech

World we sometimes forget the basics of supply and demand.

VOLUME is a vital and basic element to stock trading decisions.

One axiom of technical analysis suggests that while prices may fall of their
own weight, only volume can drive prices higher over time. The spring
advance of CACI International, an information systems and high technology
"solutions" company out of Virginia, is one of the best examples of this
phenomenon I've seen in this spring rally.


CACI was moving in a tight consolidation from mid-February into late March
when the first significant high volume day occurred on March 27th. The
uptick in on-balance volume (overlaid on the volume chart) supports the
heavy buying, as does the bullish candlestick. Even though CACI continued to
trade in a very tight range for another three weeks, the heavy volume day on
March 27th was a tip-off that buyers were interested in seeing this stock go
up--moreso than sellers were looking to get out of their positions. From the
beginning of the year until the first big up moves in late April, CACI has
advanced from about 22.5 to 28. While this 24% increase is a more than
reasonable return, the rising on-balance volume strongly suggested that
holders of the stock believed there was more to come.


In most cases, given a market with a neutral or mildly bullish bias, the
only thing that would keep a stock like CACI down (outside of a catastrophic
event) would be the determination of holders to sell, which is not reflected
in the rising on-balance volume, nor in the tightness of the
consolidation--particularly between late February and early April.


As good as the returns from CACI were from January to late April, the
advance from late April to late May was nothing short of spectacular, In
about 30 days, CACI climbed over 53%, largely on the backs of heavy buying
on May 9th and 10th, as well as on the 22nd, 23rd, and 24th. Unlike many
high-volume, high percentage moves, CACI's advance had almost no gaps. In
fact, each advance was supported by a significant support area of at least
two weeks. Nearest support currently is at 36.5 as the stock trades in the
low 40s.


The importance of these small support areas is that the advance is more
likely to be sustainable if there are areas to which CACI can retreat. The
pair of two to three week support areas here can function as places where
selling can occur without overly disrupting any renewed advance. This is in
contrast to what are commonly called "V" advances in which stocks that have
declined rocket upwards without pause, often reaping brief, but fleeting
gains. Advances that come with both heavy volume and short-term support
"platforms" are much more likely to provide reasonable entry points than
those without.

MSTS picked up CACI last week. Already it is showing a nice profit.

Stock Trading Rules

From: Mark Crisp

The Stress Free Momentum Stock Trader

http://www.stressfreetrading.com (c) November 2003

Dear investor

This is a significant step on your road to financial independence. For investing a very small fee, you will receive a set of winning rules that will help you learn how to buy and sell shares, how to invest and how to make money on the stock market. Every investor, whether a novice or very experienced, will be able to win on the stock market with these rules. The aim of my Top 10 Rules is to reduce the risk of losing money and to maximize profits when buying and selling shares.

I am not a stockbroker or an investment advisor or CEO of a big company. I am just a personal investor, who after 20 years of hard work, investing, reading many investment books, trial and error and making a few mistakes, have produced the Top 10 Rules that everyone who wants to make a lot of good, honest money should follow.

I have finally achieved my financial independence and am now enjoying the fruits of my investing. If I had these 10 rules earlier in my life I would have been financially independent many years ago. You can use these rules to make yourself financially secure now !

I started trading stocks back in 1990 on the U.K Stock market. Since then I have also traded shares on the United States Stock market. It is easy to buy and sell shares worldwide now thanks to internet stock broking.

I have done a lot of research by reading investment books, attending investment seminars and subscribing to investment magazines. Over the years I have collected a lot of information and have developed these winning rules that I always refer to before I make any investment in the stock market whether it be in U.S.A.or overseas. By following these Top 10 Rules I have been able to trade in shares successfully..........VERY SUCCESSFULLY !!!

My Top 10 Rules are not a "Get Rich Quick" scheme. They are a set of guiding principles that will help you learn how to save, invest, prosper and to achieve your financial goals. I can not guarantee that they will make you a millionaire overnight but they will certainly help you to get started. Over time you will quickly see the benefits of these rules and your financial prosperity will grow..........SIGNIFICANTLY !!!

Some of these rules are incredibly simple and obvious but until they are spelled out in black and white for you to read, absorb and to follow you probably would never have followed them !!!

The principles used in my Top 10 Rules apply anywhere in the world for anyone that is eager to achieve financial independence and that wants to make good, honest money..........a lot of good, honest money !!!

So if you want to win understand these rules.

1) you cannot predict the future. Stop believing it and stop wasting your time trying to do it. No-one ever has nor ever will be able to "predict" what is going to happen in the future. Runaway markets tend to keep running away. Cheap stocks seem to get much cheaper and expensive stocks more often than not, get much more expensive. do not even bother trying to justify a market simply let it do what it wants to.

2) The big money is made from position sizing. You really must stop chasing a holy Grail and spend time on different position sizing rules. This is the one "secret" that separates a professional from the man in the street.

3) Price is all that matters. Stocks do not follow fundamentals. It's all about "perceptions." Why can two identical stocks have completely different fortunes in the market?

4) Stop thinking like an institution. The big money management funds are not interested in outperforming the stock market. as strange as it seems. They are interested in managing money. So when they tell you to "diversify", only invest in blue Chip stocks with a solid past earnings, great management teams, solid this and that.... treat it for the non-sense it is. Unless you want poor returns.

5) 99% of technical analysis is junk. Whole companies have been set up to feed you B*S in the form of technical analysis. Throw it away and get down to basics.

6) Question everything and everyone. Even me. Never blindly believe anything you read or hear about. Be careful about what you read and even more careful about what you believe in. after all an opinion is only some-ones belief.

7) If you have to ask you shouldn't be in. I can't believe people actually ask other people whether they should hold or sell a stock position they are in. Surely before you enter you have your exits all in place. I'll guarantee if you are asking this question you are not making money.

8) I am in the stock market to make money not to win a puzzle. No-one can beat the market. Make a fortune in a bull market play defensive in a bear market. Returns of 300%+ should be easily attainable in the right conditions but do not give it back when the market conditions change.

9) Some people are just not cut out to trade the stock market. If you attach too much importance to your trading account i.e you are trading "scared money" you will never have the conviction to follow your rules. If you are not having success stop trading. either learn why you are failing or give your money to someone who is.

10) Trading the stock market isn't everything. It's only money. there are much more important things in life and you'd better not forget it.

Momentum Stock Trading System

Momentum trading seems to have many followers and equally many skeptics and cynics but we must first define exactly what momentum trading is and its advantages and disadvantages in order to form an educated opinion.

Momentum trading merely says every year there are a small number of stocks that go on to gain 500%- 1000%+ moves in the stock market. This can easily be seen by going to one of the many free stock screeners and typing in the parameter that displays stocks that have gained at least 500% over the year. Depending on the state of the overall stock market will depend how many stocks show up in this search. Even during the worse bear market I can recall (2000 –2001) there are still dozens of small cap, unknown stocks, going on to make 500%+ moves.

Let's go right back to some good old common sense. Let's say every year there are 30 stocks that go onto make a 700% move in the stock market. What if we can jump on these stocks when they have put in a 400% move for the year? So to jump on board a momentum stock simply identify which stocks have already put in a sterling performance for the year. Buy into them and hope they keep powering on. Some will and some will not. Simply cut your losses quickly on the losers and ride the winners for as long as they keep heading in the right direction.

For many they will look at a stock, which has already gained 400%, and say it has gone too far. They would rather get in at the bottom and ride the stock from 0 to 400%. They have been taught buy " stock guru" to buy low and sell high. This sounds great but in practice it is a losing strategy. Why? You have no way of knowing which stocks the market will or will not fall in love with. All the fundamentals in the world cannot give you a better chance than flipping a coin. You can pick two equally great looking stocks. Both with fantastic earnings and prospects. One will languish the other will go no to make stellar returns. Are you willing to take this risk?

Trying to pick a bottom is greed. You are not happy with making a 200,300%+ gain but you want more. You want it all. Greed and fear are the emotions that always have and always will destroy your stock market profits.

Another advantage with momentum trading and one severely overlooked is the speed at which profits are made. It's all very well making a 800% return on a stock you made but it's that great a return if it took six years to make it. Did you know the fastest movement in a trend is in the last quarter? You do now. Trends start slowly and gather momentum as they continue. A stock, which rises from $10 to $300, will see its fastest move from about $70 onwards. The movement from $70 to $300 will be in about 1/10 of the time it took for the stock to go from $10 to $70. Think about this. It is much better to jump into the tale end of a large trend than catch the smaller, slower moving start of trends and this is exactly what momentum stock trading is all about.

Other Stock Trading Methods

By Mark Crisp

The Stress Free Stock Trader

http://www.stressfreetrading.com (c)

20th August 2003

There are hundreds if not thousands of methods, systems, theories, in which you can "trade" the stock market. But what really works and what doesn't can end up costing you a lot of money, time and effort. Here is my lowdown on some of the more popular methods being touted by system vendors.

Elliot Wave:

What is it?

Elliot Wave is a way of defining the market action in a five wave formation. A very simple explanation. It basically says mass psychology is predictable in a liquid market by a five wave cycle. An accumulation wave. A correction. A much bigger wave. A correction again. Then the final "speculative" wave. Where the public jumps in. This is the final wave and the the next correction is not correction as such but the end of the market cycle.

A picture is worth a thousand words. See the chart of the NASDAQ during the great "bear" of 2001 to 2003

So, looking at the above chart Elliot Wave does seem to hold some credibility. It's is clear the great market crash of 2001 to 2003 did move in an almost perfectly formed five wave cycle. Three waves down. Leg three being the biggest and leg five being the final one. All seems well.

This is what I want to say about Elliot Wave. In a "nutshell" it does seem to have some substance. Look at some monthly bar charts of a liquid market (where there is massive public participation) and you will be able to see some great five wave formations. Great. That's about all the interest I have in Elliot Wave. There is absolutely nothing you can trade off. It's not quantifiable. Sometimes you will see Elliot Wave formations, most of the time you will not. And then it gets worse.

Ask twenty Elliot Wave enthusiasts what they see in the same chart and I'll guarantee you will get twenty different answers. How can you trade of something so subjective? Why should a market move up in three waves? where's the common sense about this method? I do not see it.

And when an E.W. formation goes wrong do they say "oh sorry I am wrong. cut your losses and get out"? No. They they bring in extra rules about a correction wave within the formation and pile more and more B*S already onto a sea of B*S and non-sense.

I used to subscribe to an E.W newsletter. It was really interesting to listen to. this market was in this wave and would go here.. blah,blah,blah.... I didn't make any money from their recommendations. Lost a lot.

Verdict:

Something that might hold some academic interest if this is what "bakes your potatoes" but beyond the definition about liquid markets moving in five waves... I wouldn't delve any deeper into this. I honestly do not believe you can trade from this "theory"

Rating

2 / 10

W.D Gann:

What is it?

This isn't a what but a who. WD Gann was a famous trader who made millions, billions way back at the turn of the century by predicting future stock market trends by using the superb Gann Angle System. Just think for a few hundred dollars many vendors are willing to let you find the "Gann Secrets" and help you make millions in the stock market. Drop everything.. we have found the Holy Grail of stock trading.

Back to reality. Gann ..... do your-self a favor and do not even waste your time in this area. For one it is a method that tries to "predict" the future. ANY method that does this, in my eyes, should not even be considered. But here are some shocking facts about the so called brillaint WD Gann and his amazing method.

The Gann method is about measuring slope of trends to predict reversals in those trends. It's fancy. It can look great on "cherry picked" past charts. But predict the future.... it can not do!

You must read William Gallacher's book: "Winner Takes All", It is some time since I read it and do not have a copy here right now but I always remember the section on the Gann Method. His son was interviewed for a position at a bank and the conversation of his father (the Great W.D. Gann) came up. It went something like this:

Interviewer: So what happened to all those millions your father made in the stock market?"

Son of Gann: "He never left us millions. He left us $50,000 ( do not quote me on this.. it was a low figure). My father was a failure trading the stock market. Although he did o.k. selling his trading materials."

There was a bit more to it than that but read the book for your-self and have a laugh at all those so called "Gann" experts selling trading methods based on a method whose originator never made any money from.

Here is another fact about Gann... I read in the Market Wizards II book the Interview with William Eckhardt (p.110 / p.111) , and believe me if the top, professional traders talk about Gann trading methods in this way, you do not want to be wasting your time on it.

Eckhardt: "If you wanted your computer system to be cognizant of slope, you would have to program this feature into it. At that point, it would become abundantly clear that the slope value depends directly on the choice of units and scales for the time and price axes"

My comment: Basically he is saying in non mathematical language.. Gann angles for trading are too subjective.

Jack Schwager: I have always been amazed by how many people are oblivious to the time scale-dependent nature of chart angles or unconcerned about its ramifications. My realization of the Inherent arbitrariness of slope of line methods is precisely I've never been willing to spend five minutes even five minutes on Gann angles or the works by the proponents of his methodology.

There you have it.

Verdict:

I wouldn't even look at it for an academic interest point. Never mind from a trading method. A complete waste of your time, money and effort.

How to Invest in Stocks For Maximum Profits a short Trading

Investing is stocks is something everyone should be doing. Not only that, investing in stocks is something everyone SHOULD be profiting from but for some strange reason many investors in stocks lose money. Why?

Why do so many who invest in stocks lose money when there are hundreds of thousands of web sites, gurus, newsletters, system vendors telling you investing in stocks for massive profits is oh so easy?

Investing in stocks, in my opinion, is not a mystery. There are no Holy Grail investing systems out there where profits will automatically fall into pockets. There is no one stock investing method that is the BEST way to invest in stocks. Just like there is no one best way to run a business, get fit, be happy, be successful, acquire wealth. There are simply methods that work and methods that do not.

Many people who attempt to invest in stocks and fail at it seem to commit the same cardinal sins. I have listed the ten most common reasons many investors in stocks fail to make a profit when there really is no reason not to:

1) You do not plan. When you get into a stock you must have reasons why. Where will you get out? What happens if the stock flies up 200% in the next 3 months? Will you add to your position. "Trade you plan and plan your trade."

2) Over diversify. You own too many stocks. Like a child in a sweet shop you can't resist buying this and that stock. Focus is the key to large profits.

3) You do not have a system/method. You trade from opinion, tips, outside advice. I don't know anyone who has made money consistently from third party advice.

4) Money management is more important than where to enter. Money management is a vital subject when investing in stocks. How much to buy? How much to risk. This is where you success lies.

5) You actually trade/invest too often. You want to trade all the time. You want action. You are not patient waiting for those ALMOST certain trading/investing opportunities where big profits will be GIVEN to you. You are drawn into short-term gambling methods or even highly stressful day trading techniques. Not realizing the big money is in the big moves. Be patient and the money flows in.

6) You will not pay for specialized advice. For a fraction of the money you can make investing in stocks you can accumulate fantastic information and tools that will help you in your lifetime career of making money from stocks. But being too cheap you prefer to go it on your own. Losing your precious $10,000 account tin the process.

7) You fail to take your time and build your stock empire slowly but surely. Get rich quick schemes sell so well simply because 90% of the population are stuck in this "get rich quick" attitude. It takes time, effort and determination to build the knowledge and experience necessary to make big money in the stock market. It's the same as any other business.

8) Instead of becoming the very best at one style of trading/investing you jump from one hot trading/investing method to the other. To make more money than you could ever dream about in the stock market vow to become the VERY best at one style of trading. Sure the market goes through cycles. The big money is made from a specialized investing method. Not a "jack of all" investing approach. Take a look at millionaires from all industries. They specialize. You don't see Bill Gates learning about the stock market. you don't see Warren Buffet going into software design. they are the leaders of their own specialized niche markets.

9) You will not cut those losses. As strange as it seems many investor/traders of stocks will NOT cut those losses early. This is a lack of planning, fear of losses and arrogance. cut your losses early and watch your portfolio grow.

10) You really didn't want to invest in stocks. I see many people who are desperate in their current situation. They dislike their day job and read there is money to be made in the stock market. Having never read a stock book, or shown the slightest interest in the past, they buy a trading course and expect to make big money from it. There is no interest in investing in stocks. They have no passion about learning about the stock market. If you do not enjoy investing in stocks and learning about the stock market then make your money from something you really enjoy.

Stocks Basics: Conclusion

Let's recap what we've learned in this tutorial:

• Stock means ownership. As an owner, you have a claim on the assets and earnings of a company as well as voting rights with your shares.
• Stock is equity, bonds are debt. Bondholders are guaranteed a return on their investment and have a higher claim than shareholders. This is generally why stocks are considered riskier investments and require a higher rate of return.
• You can lose all of your investment with stocks. The flip-side of this is you can make a lot of money if you invest in the right company.
• The two main types of stock are common and preferred. It is also possible for a company to create different classes of stock.
• Stock markets are places where buyers and sellers of stock meet to trade. The NYSE and the Nasdaq are the most important exchanges in the United States.
• Stock prices change according to supply and demand. There are many factors influencing prices, the most important of which is earnings.
• There is no consensus as to why stock prices move the way they do.
• To buy stocks you can either use a brokerage or a dividend reinvestment plan (DRIP).
• Stock tables/quotes actually aren't that hard to read once you know what everything stands for!
• Bulls make money, bears make money, but pigs get slaughtered!

Stocks Basics: The Bulls, The Bears And The Farm

On Wall Street, the bulls and bears are in a constant struggle. If you haven't heard of these terms already, you undoubtedly will as you begin to invest.

The Bulls
A bull market is when everything in the economy is great, people are finding jobs, gross domestic product (GDP) is growing, and stocks are rising. Things are just plain rosy! Picking stocks during a bull market is easier because everything is going up. Bull markets cannot last forever though, and sometimes they can lead to dangerous situations if stocks become overvalued. If a person is optimistic and believes that stocks will go up, he or she is called a "bull" and is said to have a "bullish outlook".

The Bears
A bear market is when the economy is bad, recession is looming and stock prices are falling. Bear markets make it tough for investors to pick profitable stocks. One solution to this is to make money when stocks are falling using a technique called short selling. Another strategy is to wait on the sidelines until you feel that the bear market is nearing its end, only starting to buy in anticipation of a bull market. If a person is pessimistic, believing that stocks are going to drop, he or she is called a "bear" and said to have a "bearish outlook".

The Other Animals on the Farm - Chickens and Pigs
Chickens are afraid to lose anything. Their fear overrides their need to make profits and so they turn only to money-market securities or get out of the markets entirely. While it's true that you should never invest in something over which you lose sleep, you are also guaranteed never to see any return if you avoid the market completely and never take any risk,

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Pigs are high-risk investors looking for the one big score in a short period of time. Pigs buy on hot tips and invest in companies without doing their due diligence. They get impatient, greedy, and emotional about their investments, and they are drawn to high-risk securities without putting in the proper time or money to learn about these investment vehicles. Professional traders love the pigs, as it's often from their losses that the bulls and bears reap their profits.

What Type of Investor Will You Be?
There are plenty of different investment styles and strategies out there. Even though the bulls and bears are constantly at odds, they can both make money with the changing cycles in the market. Even the chickens see some returns, though not a lot. The one loser in this picture is the pig.

Make sure you don't get into the market before you are ready. Be conservative and never invest in anything you do not understand. Before you jump in without the right knowledge, think about this old stock market saying:

"Bulls make money, bears make money, but pigs just get slaughtered!"

Stocks Basics: How to Read A Stock Table/Quote

Any financial paper has stock quotes that will look something like the image below:


Columns 1 & 2: 52-Week High and Low - These are the highest and lowest prices at which a stock has traded over the previous 52 weeks (one year). This typically does not include the previous day's trading.

Column 3: Company Name & Type of Stock - This column lists the name of the company. If there are no special symbols or letters following the name, it is common stock. Different symbols imply different classes of shares. For example, "pf" means the shares are preferred stock.

Column 4: Ticker Symbol - This is the unique alphabetic name which identifies the stock. If you watch financial TV, you have seen the ticker tape move across the screen, quoting the latest prices alongside this symbol. If you are looking for stock quotes online, you always search for a company by the ticker symbol. If you don't know what a particular company's ticker is you can search for it at: http://finance.yahoo.com/l.

Column 5: Dividend Per Share - This indicates the annual dividend payment per share. If this space is blank, the company does not currently pay out dividends.

Column 6: Dividend Yield - The percentage return on the dividend. Calculated as annual dividends per share divided by price per share.

Column 7: Price/Earnings Ratio - This is calculated by dividing the current stock price by earnings per share from the last four quarters. For more detail on how to interpret this, see our P/E Ratio tutorial.
Column 8: Trading Volume - This figure shows the total number of shares traded for the day, listed in hundreds. To get the actual number traded, add "00" to the end of the number listed.

Column 9 & 10: Day High and Low - This indicates the price range at which the stock has traded at throughout the day. In other words, these are the maximum and the minimum prices that people have paid for the stock.

Column 11: Close - The close is the last trading price recorded when the market closed on the day. If the closing price is up or down more than 5% than the previous day's close, the entire listing for that stock is bold-faced. Keep in mind, you are not guaranteed to get this price if you buy the stock the next day because the price is constantly changing (even after the exchange is closed for the day). The close is merely an indicator of past performance and except in extreme circumstances serves as a ballpark of what you should expect to pay.

Column 12: Net Change - This is the dollar value change in the stock price from the previous day's closing price. When you hear about a stock being "up for the day," it means the net change was positive.

Quotes on the Internet
Nowadays, it's far more convenient for most to get stock quotes off the Internet. This method is superior because most sites update throughout the day and give you more information, news, charting, research, etc.

To get quotes, simply enter the ticker symbol into the quote box of any major financial site like Yahoo! Finance, CBS Marketwatch, or MSN Moneycentral. The example below shows a quote for Microsoft (MSFT) from Yahoo Finance. Interpreting the data is exactly the same as with the newspaper.

Stocks Basics: Buying Stocks

You've now learned what a stock is and a little bit about the principles behind the stock market, but how do you actually go about buying stocks? Thankfully, you don't have to go down into the trading pit yelling and screaming your order. There are two main ways to purchase stock:

1. Using a Brokerage
The most common method to buy stocks is to use a brokerage. Brokerages come in two different flavors. Full-service brokerages offer you (supposedly) expert advice and can manage your account; they also charge a lot. Discount brokerages offer little in the way of personal attention but are much cheaper.

At one time, only the wealthy could afford a broker since only the expensive, full-service brokers were available. With the internet came the explosion of online discount brokers. Thanks to them nearly anybody can now afford to invest in the market.

2. DRIPs & DIPs
Dividend reinvestment plans (DRIPs) and direct investment plans (DIPs) are plans by which individual companies, for a minimal cost, allow shareholders to purchase stock directly from the company. Drips are a great way to invest small amounts of money at regular intervals.

Stocks Basics: What Causes Stock Prices To Change?

Stock prices change every day as a result of market forces. By this we mean that share prices change because of supply and demand. If more people want to buy a stock (demand) than sell it (supply), then the price moves up. Conversely, if more people wanted to sell a stock than buy it, there would be greater supply than demand, and the price would fall.

Understanding supply and demand is easy. What is difficult to comprehend is what makes people like a particular stock and dislike another stock. This comes down to figuring out what news is positive for a company and what news is negative. There are many answers to this problem and just about any investor you ask has their own ideas and strategies.

That being said, the principal theory is that the price movement of a stock indicates what investors feel a company is worth. Don't equate a company's value with the stock price. The value of a company is its market capitalization, which is the stock price multiplied by the number of shares outstanding. For example, a company that trades at $100 per share and has 1 million shares outstanding has a lesser value than a company that trades at $50 that has 5 million shares outstanding ($100 x 1 million = $100 million while $50 x 5 million = $250 million). To further complicate things, the price of a stock doesn't only reflect a company's current value, it also reflects the growth that investors expect in the future.

The most important factor that affects the value of a company is its earnings. Earnings are the profit a company makes, and in the long run no company can survive without them. It makes sense when you think about it. If a company never makes money, it isn't going to stay in business. Public companies are required to report their earnings four times a year (once each quarter). Wall Street watches with rabid attention at these times, which are referred to as earnings seasons. The reason behind this is that analysts base their future value of a company on their earnings projection. If a company's results surprise (are better than expected), the price jumps up. If a company's results disappoint (are worse than expected), then the price will fall.

Of course, it's not just earnings that can change the sentiment towards a stock (which, in turn, changes its price). It would be a rather simple world if this were the case! During the dotcom bubble, for example, dozens of internet companies rose to have market capitalizations in the billions of dollars without ever making even the smallest profit. As we all know, these valuations did not hold, and most internet companies saw their values shrink to a fraction of their highs. Still, the fact that prices did move that much demonstrates that there are factors other than current earnings that influence stocks. Investors have developed literally hundreds of these variables, ratios and indicators. Some you may have already heard of, such as the price/earnings ratio, while others are extremely complicated and obscure with names like Chaikin oscillator or moving average convergence divergence.

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So, why do stock prices change? The best answer is that nobody really knows for sure. Some believe that it isn't possible to predict how stock prices will change, while others think that by drawing charts and looking at past price movements, you can determine when to buy and sell. The only thing we do know is that stocks are volatile and can change in price extremely rapidly.

The important things to grasp about this subject are the following:

1. At the most fundamental level, supply and demand in the market determines stock price.
2. Price times the number of shares outstanding (market capitalization) is the value of a company. Comparing just the share price of two companies is meaningless.
3. Theoretically, earnings are what affect investors' valuation of a company, but there are other indicators that investors use to predict stock price. Remember, it is investors' sentiments, attitudes and expectations that ultimately affect stock prices.
4. There are many theories that try to explain the way stock prices move the way they do. Unfortunately, there is no one theory that can explain everything.

Stocks Basics: How Stocks Trade

Most stocks are traded on exchanges, which are places where buyers and sellers meet and decide on a price. Some exchanges are physical locations where transactions are carried out on a trading floor. You've probably seen pictures of a trading floor, in which traders are wildly throwing their arms up, waving, yelling, and signaling to each other. The other type of exchange is virtual, composed of a network of computers where trades are made electronically.

The purpose of a stock market is to facilitate the exchange of securities between buyers and sellers, reducing the risks of investing. Just imagine how difficult it would be to sell shares if you had to call around the neighborhood trying to find a buyer. Really, a stock market is nothing more than a super-sophisticated farmers' market linking buyers and sellers.

Before we go on, we should distinguish between the primary market and the secondary market. The primary market is where securities are created (by means of an IPO) while, in the secondary market, investors trade previously-issued securities without the involvement of the issuing-companies. The secondary market is what people are referring to when they talk about the stock market. It is important to understand that the trading of a company's stock does not directly involve that company.

The New York Stock Exchange
The most prestigious exchange in the world is the New York Stock Exchange (NYSE). The "Big Board" was founded over 200 years ago in 1792 with the signing of the Buttonwood Agreement by 24 New York City stockbrokers and merchants. Currently the NYSE, with stocks like General Electric, McDonald's, Citigroup, Coca-Cola, Gillette and Wal-mart, is the market of choice for the largest companies in America.

The trading floor of the NYSE

The NYSE is the first type of exchange (as we referred to above), where much of the trading is done face-to-face on a trading floor. This is also referred to as a listed exchange. Orders come in through brokerage firms that are members of the exchange and flow down to floor brokers who go to a specific spot on the floor where the stock trades. At this location, known as the trading post, there is a specific person known as the specialist whose job is to match buyers and sellers. Prices are determined using an auction method: the current price is the highest amount any buyer is willing to pay and the lowest price at which someone is willing to sell. Once a trade has been made, the details are sent back to the brokerage firm, who then notifies the investor who placed the order. Although there is human contact in this process, don't think that the NYSE is still in the stone age: computers play a huge role in the process.



The Nasdaq
The second type of exchange is the virtual sort called an over-the-counter (OTC) market, of which the Nasdaq is the most popular. These markets have no central location or floor brokers whatsoever. Trading is done through a computer and telecommunications network of dealers. It used to be that the largest companies were listed only on the NYSE while all other second tier stocks traded on the other exchanges. The tech boom of the late '90s changed all this; now the Nasdaq is home to several big technology companies such as Microsoft, Cisco, Intel, Dell and Oracle. This has resulted in the Nasdaq becoming a serious competitor to the NYSE.

The Nasdaq market site in Times Square

On the Nasdaq brokerages act as market makers for various stocks. A market maker provides continuous bid and ask prices within a prescribed percentage spread for shares for which they are designated to make a market. They may match up buyers and sellers directly but usually they will maintain an inventory of shares to meet demands of investors.

Other Exchanges
The third largest exchange in the U.S. is the American Stock Exchange (AMEX). The AMEX used to be an alternative to the NYSE, but that role has since been filled by the Nasdaq. In fact, the National Association of Securities Dealers (NASD), which is the parent of Nasdaq, bought the AMEX in 1998. Almost all trading now on the AMEX is in small-cap stocks and derivatives.

There are many stock exchanges located in just about every country around the world. American markets are undoubtedly the largest, but they still represent only a fraction of total investment around the globe. The two other main financial hubs are London, home of the London Stock Exchange, and Hong Kong, home of the Hong Kong Stock Exchange. The last place worth mentioning is the over-the-counter bulletin board (OTCBB). The Nasdaq is an over-the-counter market, but the term commonly refers to small public companies that don’t meet the listing requirements of any of the regulated markets, including the Nasdaq. The OTCBB is home to penny stocks because there is little to no regulation. This makes investing in an OTCBB stock very risky.

Stocks Basics: Different Types Of Stocks

There are two main types of stocks: common stock and preferred stock.

Common Stock
Common stock is, well, common. When people talk about stocks they are usually referring to this type. In fact, the majority of stock is issued is in this form. We basically went over features of common stock in the last section. Common shares represent ownership in a company and a claim (dividends) on a portion of profits. Investors get one vote per share to elect the board members, who oversee the major decisions made by management.

Over the long term, common stock, by means of capital growth, yields higher returns than almost every other investment. This higher return comes at a cost since common stocks entail the most risk. If a company goes bankrupt and liquidates, the common shareholders will not receive money until the creditors, bondholders and preferred shareholders are paid.

Preferred Stock
Preferred stock represents some degree of ownership in a company but usually doesn't come with the same voting rights. (This may vary depending on the company.) With preferred shares, investors are usually guaranteed a fixed dividend forever. This is different than common stock, which has variable dividends that are never guaranteed. Another advantage is that in the event of liquidation, preferred shareholders are paid off before the common shareholder (but still after debt holders). Preferred stock may also be callable, meaning that the company has the option to purchase the shares from shareholders at anytime for any reason (usually for a premium).

Some people consider preferred stock to be more like debt than equity. A good way to think of these kinds of shares is to see them as being in between bonds and common shares.

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Different Classes of Stock
Common and preferred are the two main forms of stock; however, it's also possible for companies to customize different classes of stock in any way they want. The most common reason for this is the company wanting the voting power to remain with a certain group; therefore, different classes of shares are given different voting rights. For example, one class of shares would be held by a select group who are given ten votes per share while a second class would be issued to the majority of investors who are given one vote per share.

When there is more than one class of stock, the classes are traditionally designated as Class A and Class B. Berkshire Hathaway (ticker: BRK), has two classes of stock. The different forms are represented by placing the letter behind the ticker symbol in a form like this: "BRKa, BRKb" or "BRK.A, BRK.B".

Stocks Basics: Introduction

The Definition of a Stock
Plain and simple, stock is a share in the ownership of a company. Stock represents a claim on the company's assets and earnings. As you acquire more stock, your ownership stake in the company becomes greater. Whether you say shares, equity, or stock, it all means the same thing.

Being an Owner
Holding a company's stock means that you are one of the many owners (shareholders) of a company and, as such, you have a claim (albeit usually very small) to everything the company owns. Yes, this means that technically you own a tiny sliver of every piece of furniture, every trademark, and every contract of the company. As an owner, you are entitled to your share of the company's earnings as well as any voting rights attached to the stock.

Example stock certificate (Click to enlarge)

A stock is represented by a stock certificate. This is a fancy piece of paper that is proof of your ownership. In today's computer age, you won't actually get to see this document because your brokerage keeps these records electronically, which is also known as holding shares "in street name". This is done to make the shares easier to trade. In the past, when a person wanted to sell his or her shares, that person physically took the certificates down to the brokerage. Now, trading with a click of the mouse or a phone call makes life easier for everybody.

Being a shareholder of a public company does not mean you have a say in the day-to-day running of the business. Instead, one vote per share to elect the board of directors at annual meetings is the extent to which you have a say in the company. For instance, being a Microsoft shareholder doesn't mean you can call up Bill Gates and tell him how you think the company should be run. In the same line of thinking, being a shareholder of Anheuser Busch doesn't mean you can walk into the factory and grab a free case of Bud Light!

The management of the company is supposed to increase the value of the firm for shareholders. If this doesn't happen, the shareholders can vote to have the management removed, at least in theory. In reality, individual investors like you and I don't own enough shares to have a material influence on the company. It's really the big boys like large institutional investors and billionaire entrepreneurs who make the decisions.

For ordinary shareholders, not being able to manage the company isn't such a big deal. After all, the idea is that you don't want to have to work to make money, right? The importance of being a shareholder is that you are entitled to a portion of the company’s profits and have a claim on assets. Profits are sometimes paid out in the form of dividends. The more shares you own, the larger the portion of the profits you get. Your claim on assets is only relevant if a company goes bankrupt. In case of liquidation, you'll receive what's left after all the creditors have been paid. This last point is worth repeating: the importance of stock ownership is your claim on assets and earnings. Without this, the stock wouldn't be worth the paper it's printed on.

Another extremely important feature of stock is its limited liability, which means that, as an owner of a stock, you are not personally liable if the company is not able to pay its debts. Other companies such as partnerships are set up so that if the partnership goes bankrupt the creditors can come after the partners (shareholders) personally and sell off their house, car, furniture, etc. Owning stock means that, no matter what, the maximum value you can lose is the value of your investment. Even if a company of which you are a shareholder goes bankrupt, you can never lose your personal assets.

Debt vs. Equity
Why does a company issue stock? Why would the founders share the profits with thousands of people when they could keep profits to themselves? The reason is that at some point every company needs to raise money. To do this, companies can either borrow it from somebody or raise it by selling part of the company, which is known as issuing stock. A company can borrow by taking a loan from a bank or by issuing bonds. Both methods fit under the umbrella of debt financing. On the other hand, issuing stock is called equity financing. Issuing stock is advantageous for the company because it does not require the company to pay back the money or make interest payments along the way. All that the shareholders get in return for their money is the hope that the shares will someday be worth more than what they paid for them. The first sale of a stock, which is issued by the private company itself, is called the initial public offering (IPO).

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It is important that you understand the distinction between a company financing through debt and financing through equity. When you buy a debt investment such as a bond, you are guaranteed the return of your money (the principal) along with promised interest payments. This isn't the case with an equity investment. By becoming an owner, you assume the risk of the company not being successful - just as a small business owner isn't guaranteed a return, neither is a shareholder. As an owner, your claim on assets is less than that of creditors. This means that if a company goes bankrupt and liquidates, you, as a shareholder, don't get any money until the banks and bondholders have been paid out; we call this absolute priority. Shareholders earn a lot if a company is successful, but they also stand to lose their entire investment if the company isn't successful.

Risk
It must be emphasized that there are no guarantees when it comes to individual stocks. Some companies pay out dividends, but many others do not. And there is no obligation to pay out dividends even for those firms that have traditionally given them. Without dividends, an investor can make money on a stock only through its appreciation in the open market. On the downside, any stock may go bankrupt, in which case your investment is worth nothing.

Although risk might sound all negative, there is also a bright side. Taking on greater risk demands a greater return on your investment. This is the reason why stocks have historically outperformed other investments such as bonds or savings accounts. Over the long term, an investment in stocks has historically had an average return of around 10-12%.