Archive for

Stock Market Investing Tips For the Newbie

The world of stock market trading has changed dramatically over the last 20 years. Trades that used to take more than a week to process now take only moments. Almost all trading was done through a broker and large commissions were commonplace. Now, just about anyone with a computer and an internet connection, or for that matter a smart phone, can trade with the ease of a few key strokes and with commissions a fraction of the old days.

Because of this ease of trading, it can become very tempting to trade too often and to take bigger risks than we should. Stock market investing can become similar to gambling with that thrill of the big win. However, the possibility of huge losses is ever present. Better to think a little bit like the professional traders, buy value and hang on for a long time.

Be prepared to educate yourself with as much information as possible. While it’s true that even the most informed traders make mistakes, the more you know, the less likely this will happen. This means immersing yourself in reliable, timely and knowledgeable advice. If you’re not willing to take the time to properly educate yourself, you might want to leave investing to your broker.

How do you know if online stock market investing is for you? Here are a few tips that will hopefully tip the balance to the side of winning.

1. Open an account with one of the well known discount brokers. Scottrade and Ameritrade are two of the best but by no means your only choices. Find out who fits your needs the best in terms of minimum balances, commission structures, educational materials, online services, and most of all customer service. If you are new to this game, having a reliable source for answers to your questions or helping a trade go through in some cases is a valuable asset.

2. Be very careful about acting on “stock tips” from just about any source. Unless you can verify the information is legitimate and timely, don’t waste your money. There are so many scammers out there pumping the markets with false information to take advantage of the uninformed trader. I would suggest you find a reliable newsletter that fits both your stock trading style and your budget and try a subscription. Many of them would probably send you a free copy if you wrote and requested one and almost all of them will let you cancel and refund the remaining part of your subscription if you want to discontinue receiving the letter.

3. If you’re going to trade individual stocks, you need to spend some time managing your account. No, I don’t mean you should be looking at your account every few hours or for that matter even every day. However, keeping an ear out for what the market is doing every few days and checking the performance of your stocks at least once a week would be reasonable.

4. Try to find stocks or investments that are undervalued and have strong positions in their industry. Research them a little to find out if they have unique advantages over their competition or have high barriers to new competition entering their market. Buy stocks that you can hold on to for 3-5 years if possible and get to know them well. You don’t see Warren Buffet trading companies everyday do you?

5. Always use limit orders when buying and selling stocks. A “limit order” is simply stating the price you will pay for a stock when you purchase, or what you will sell it for when you are selling. Yes sometimes you will miss getting a stock at the that price, but if you always place market orders you will bet burned by a market maker who will manipulate the pricing and gouge you. Getting the best prices when stock market investing sometimes takes patience and persistence.

6. Use trailing stops with all of your stock market investing. A trailing stop is a price set usually 25% below the current price of the stock. It should be calculated immediately when you purchase the stock in case the stock misbehaves and reverses direction. This will preserve your capital and prevent large losses. If the stock goes up as planned, you make adjustments to the trailing stop to follow that upward movement. This lets you lock in some profits in case of a reversal in direction. You can calculate this 25% stop manually or there is a service that will track it for you and send you alerts. You can find them at Tradestops.com. I think the cost is around $69/year.

7. There is an old saying on Wall Street that the market is driven by just two emotions: Fear and Greed. This is probably on oversimplification, but it often is true. I think one of the best tips I can leave you with is some sage advice from Warren Buffet about how to avoid these two emotions. “We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful”.

This is by no means a comprehensive list of things to know to become competent at stock market investing. I have been investing for over 34 years and still study and learn all the time about the markets. Just like most things, they are constantly changing. However, if you will follow these few tips it will go a long way toward getting you started with some good stock market investing habits. Good luck.

Stock Market Tips – Are Mutual Funds Really Mutually Beneficial?

Mutual funds are one of the most popular investment vehicles in America.  So popular that there are well over 10,000 available to choose from!  Most articles focus on picking a fund but I’m going to ask a completely different question. Are the benefits of mutual funds mutually beneficial?

What is a fund?

To start let’s define what a mutual fund is for those readers who may be a little unsure.  A mutual fund is an account (called a fund) where many people pool their money for the purpose of investing. Imagine you want to buy a McDonald’s franchise.  However the cost of opening this store is going to be almost $2 million.  You do not have that much money so you look for partners.  Eventually there are 5 partners, each splitting the $2 million startup investment.  Then 4 years later the 5 of you decide to sell.  You sell the complete business for $10 million and divide the profits 5 ways.  That would be a partnership.  And yet it’s also a good  picture of how a mutual fund works.

A mutual fund is a bunch of people who become small partners.  They pay in their investment and then someone else runs the business – in this case a stock portfolio.  However there are some partners who don’t pay in.  In fact they get paid to not pay in.  They are the fund managers and all the people involved in the business.  And that’s where the mutual benefits break down. 

The inequality comes in the form of SEC rules.  According to SEC rules a mutual fund can only buy stock, hold it, and sell it later.   That means a mutual fund can only make money when the stock market goes higher.  The plan of the fund manager is to buy low, and sell high.  Unfortunately the stock market does not always go up (just look at the October 2008 market crash).  So inevitably the fund’s value will go up and down.  At the end of the year investors are hoping generally for an annual return, or growth, of about 15-20%. 

This description may not sound bad to you.  That’s because you have probably adjusted to this treatment and assume it is “the rules of the game”.  After all this is how you have been programmed to respond.  But what you may not know is what happens behind the scenes. 

It may not be legal for a mutual fund to trade your MONEY during a down market, but they CAN trade the fund’s assets.  And they do.  And they make bank.  In fact the trading behavior of institutional investors is so predictable an entire segment of stock market analysts spend their time watching behavior of institutions and trading off of that behavior. 

What Are They Doing With Your Money?

So what exactly are they doing with your stocks?  Most they are doing one of two things.  They are:

Lending your stocks to Short Sellers.   When an institution has a fund full of stock shares those shares are available to be lent out.  And believe me, they do.  When it looks like a stock is going down they lend your stock to people who want to sell it without owning it.  These people are known as short sellers.  When they lend these stocks you know of course they make profit.  In and of itself lending stock to short sellers is not a problem.  The unfair part is the fact that the institution alone, and not the fund investors, benefit from this little dealing.  So the fund manager is lending your stock, and making money, while you sit at home wondering why your portfolio is getting smaller and smaller.

Write Options against it.  The second thing funds may do is to write options against your stock.  They really don’t even care how it pans out.  Worst case scenario for the fund is they sell your stock for less than they meant. So long as the people make a little profit the fund doesn’t care if the people don’t make as much as they could.  And what about the option?  Well they make money on that too.  Usually 10-20% per month.  That’s right, you are settling for 20% each year, while the people managing your mutual fund are making 20% each month with the stock you bought. Again, the practice they are doing is fine – but it’s not fair that they make the money and do not share in the profit.

There is however a way you can profit from the same tricks traditionally held for fund managers.  You simply learn the same strategies and techniques and do them on your own, without a fund manager.  Not only are these strategies legal, they are done every day by millions of Americans.  The difference in you and them is simply a little education. 

Stock Market Tips – How to Stay in There and Make it Big

The only way to make it big in the stock market is to learn your way through the stock-market trading yourself. There are hundreds of online guides and articles about stock-market tips – all of which have worked for some people – and failed for some others. There is no sure shot formula to get rich by trading in stocks – you have to try things for yourself, keep a clear head and a keen eye, risk some, win some and lose some. The following stock-market tips are not your conventional five step formula for making it to the top – because these formulas have no guarantee of success whatsoever. Rather, these stock-market tips are about keeping your wits about you so that you can go in there and learn the ropes for yourselves.

Firstly, don’t get swayed by your emotions; don’t let every little rise or fall excite or worry you. You shouldn’t trust your emotions to get you good deals or keep you away from bad ones – trust your wits and use your brains. Don’t make decisions on obsessions – stick to your own game plans while following the stock-market – keep your positions small so that every little change doesn’t stress you out.

Here is another one of those stock-market tips that you might not want to hear – don’t get too involved. Take breaks, keep yourself away from the stock-markets at intervals of time – keep the stock market away from you. This will help you to control your emotions and keep a cool head about you while you trade. Make sure that you don’t get too involved with watching the charts and hanging on their every little flicker of movement with bated breath. Don’t make the stock market your life and your death – take regular breaks and keep your mind healthy.

Next, accept that you can make mistakes and learn from the mistakes you make. This is one of the most important stock market trips that you can get; investing n the stock market means that you will win some and you will lose some – learn from your wrong choices and learn from your right ones as well. Ask yourself what you are doing right – and also what you did wrong. Don’t make the same mistakes twice, stay on your feet and if you fall, make sure you look back and see what tripped you up.

Be careful of your every step – remember that the stock market isn’t going to make you rich overnight. Make sure that you use the tools available to you: risk management, stop orders and position sizing. Cut your losses short whenever you can – keep your capital as safe as you possibly can. Let me tell you again, you will win some and you will lose some – learn to understand when you should pull out – and observe caution. This is one of the stock market tips that you will have to keep in your head even if you have become an expert on the stock market.

Make a set of rules for yourself and stick to them no matter what. This is the last of the stock market tips that this article will provide you with – and perhaps the most important one. While framing these rules, keep in mind how much you are prepared to risk and how much you want to earn against this. All stock market tips will fail if you don’t learn to control your emotions and let your rules take you through the trades you make. Don’t take unnecessary risks – if you want you can modify the rules slowly as you become better at predicting the market – but don’t let you emotions do the modification – let your brain do the talking.