For illustration purposes, lets assume I have just invited you over for dinner. Assuming you accepted the invitation, one of the first questions your would ask is “How do I get there? “ The same applies to beginner investors. Every investor was at one time a beginner investor. The investors who reach the finish line with a nest egg had a plan to get there.

Lets get back to dinner. I live in Florida. You live in California. That would not provide enough information for your arrival. You have a starting place and a destination, but what about the plan to get to dinner? You would need to know specifics. The same applies to investing. You would prepare for the journey, chart a course and arrive safely in Florida as you would with your investment goals.
The same principle applies to beginner stock market investing. Lets assume you have $10,000.00 to invest right now. So how do you prepare?

Understand How The Stock Market Works

Individual investors should start right here. What makes a stock price move? Hint: it is not individual investors. Institutional investors, such as mutual funds, and banks, move stock prices up and down. Simple supply and demand I the order of the day. Institutions make a living buying and selling stocks. Following along with how institutions trade is a good place to start. Understand your 1000 shares of XYZ are not going to move the stock price.

Defining Yourself as An Investor

My personal stop loss point is 6%. Why is that? Because I do not like the way it feels losing 10% or even 7%. This is a hard and fast rule for me. I remember following a stock once down to a 20% loss thinking all the while it would come back. It did not. The point is I know myself, and I know my rules. They are non-negotiable factors for me with investing in the stock market.

Where Are You Now As an Investor?

Every journey begins with a starting point. Every journey has a destination point. Everything you do in between will either define your success or document your failure. Set your goals; practice your strategy with paper trading stocks. Set aside capital for short term investing. Plan to include long-term investments. Open a money market account for safely keeping your cash. If you want to trade options, first learn how to trade options . Determine your plan and then work your plan. Dinner is at 6

Margin trading is a high-risk strategy that can give you a huge profit if executed correctly, the flip side of that is that you can have huge losses. One of the only things riskier that investing on margin is doing it without understanding what your doing and what the consequences could be!

Buying or trading on margin means that you are borrowing money from your broker to purchase stock. You are using leverage. It’s a loan that allows you to buy more stock than you would be able to normally. To trade on margin you need a margin account, which is different than just a cash account in which, you trade using money that you have deposited. There is an initial investment required to open a margin account and each brokerage house is different. Once you have your margin account open, you can borrow up to 50% of the stock purchase price, it’s important to know that you do not have to margin up to 50% you can do less 10% or 20%, I personally would not recommend to margin up to 50%!!

You can keep your loan as long as you want, but remember you borrowed money and no one gives a loan for free. You have to pay interest on that loan. The stocks held in your account are collateral for your loan. When you sell a stock in a margin account the proceeds go to the broker for repayment of the loan until it is paid in full.

Buying on margin should be used as a short term strategy. The longer you hold a margined investment, the greater the return that is needed to make a profit or even break even. The longer you hold a margined investment, odds are you will not make a profit.

Not all stocks can be bought on margin. Brokers will not allow the purchase of penny stocks, over the counter Bulletin Board (OTCBB) securities or Initial public offerings (IPOs) to be purchased on margin because of the high volatility and risk associated with these types of stocks.

You have two different types of margin restrictions on your account. One is the initial margin, which is the amount you can borrow. The next is the maintenance margin, which is the amount you need to maintain after you trade. These amounts are set by the Federal Reserve Board. Minimum initial margin is 50% and maintenance margin of 25%, some brokerages can have stricter limits.

If the equity (which is the value of the securities you hold minus what you owe the brokerage) falls below the maintenance margin, the brokerage will issue a margin call. If you are issued a margin call you will need to deposit cash into the account or liquidate your stock positions to cover the call.

For example you purchased $20,000 worth of stock by borrowing $10,000 from your broker and paying $10,000 yourself. The value of your stock drops to $12,000, so the equity in your account falls to $2,000 (12,000 -10,000 = 2,000) 25% of 12,000 = 3,000. You would be issued a margin call for 1,000, which is the difference between the equity in your account and the 25% maintenance’s margin on the value of your 12,000 worth of stock.

If you do not take care of the margin call by depositing money or selling stock, the brokerage has the right to sell securities (stock) to increase your account equity until you are above the maintenance margin. Under most margin agreements, a firm can sell your securities without waiting for you to meet the margin call, and they don’t need to consult you before doing it!

The markets just keep getting disappointing news.

This past week a bunch of banks reported worse than expected earnings and loan losses that are still growing. Bank of America saying they will possibly need billions more in aid from the Federal Government. Then besides all of Thain’s earlier missteps, came the revelation this past week that he spent 1.2 million redecorating his office!! All I could do was shake my head in utter disbelief. What’s 1.2 million when the company (Bank of America) that your are second in command of is getting Billions of dollars of taxpayer money from the Federal Government.

Microsoft released a disappointing earnings report and because of the market volatility they are unable to provide guidance for revenue or EPS (earnings per share) for the rest of the year.

Then there was a decline GDP(Gross Domestic Product) in Q4 for both China and the UK. This means that growth is slowing which is a bad thing.

To top it off housing starts fell to an annualized rate of 550 thousand units, the lowest on record going back to 1959. Initial jobless claims jumped back up to 589 thousand, which is a 26 year high.

Another ponzie scheme was discovered in California. Approximately 1000 people lost 52 million dollars.

Should I keep going on or just quit now? There is just no good news out there.

If the government announces plans to create a bad bank, that’s a bank that buys all the toxic loans from the troubled banks to get the loans off their books, that might put a floor in the financial markets and turn things around. It’s an idea that has been kicked around. We’ll have to wait and see.

Back on November 7th I wrote in my Stock Market Updates “Obama plans to raise the amount of federal money spent on science and technology research, to spur innovation and job creation. He will be seeking approval to spend 150 billion dollars over the next 10 years on clean energy technologies, and 10 billion a year over the next five years on healthcare information systems. He has pledged to double federal funding for basic research in science and technology, this includes embryonic stem cell research.”  As bad as the market has been the last few weeks, stem cell biotechs and healthcare stocks have been moving up. Geron’s announcement this past week about starting stem cell trials in humans for spinal cord injuries really caused a move. Keep in mind it is only a 10 person trial and it’s many years from being marketed. I am not recommending that you go and invest in these stocks, do you own research and investigation. These are sectors to keep your eyes on.

Some economic events this week are:
Existing home sales Jan 26th
Consumer confidence Jan. 27th
Durable goods orders Jan. 29th
Jobless claims Jan. 29th
None of which I expect to be good or surprise us with better than expected numbers.

As always whether you are long or short may all of your trades be profitable!!

Becky

Well ,so much for the trend being up. I am not sure how much more investors can take when it  comes to the scandals that keep hitting  the market. First we find out about Madoff, the biggest ponzi scheme in history, a 50 Billion dollar fraud . Then two smaller ponzi schemes were discovered this week, one for 17 million and one for approximately 50 million. To top it off Wednesday Satyam Computer Services chairman, Ramalinga Raju, announces that the company is a gigantic fraud. We are not talking some small unknown company.This is the 4th largest information technology services company in India, that employs 54,000 people! Satyam was founded 20 years ago. Amazing!!

The unemployment rate rose to 7.2%, the highest level in 16 years. More than 524,000 people lost their jobs in December, but that number was less that many analyst were expecting. In 2008 more than 2.5 million jobs were lost, with more lay-offs expected this year.

Earnings start in earnest this week and they are not expected to be pretty. Most companies are likely to write off as many losses as possible in their results. The only areas expected to post gains are the utilities, healthcare and consumer staples.

I’ll be watching for Alcoa’s earnings after close on Monday. They have already announced lay-offs(13,500 employees) and that they are reducing capacity(18%) and that they would stop “all non-critical capital investments”. Their shares are down 65% over the last 52 weeks. There is worry that they might cut their dividend, if they do I believe the shares will go down. If they say anything that can be construed as a positive and leave the dividend intact I think it will bounce.

Infosys Technologies Limited reports earnings on Tuesday this company could bounce if they hit their numbers. They could also benefit from the Satyam scandal picking up business in their enterprise solutions, financial services and manufacturing divisions.

There are a few other major earnings reports this week Xilinx reports Wednesday. Intel and Genentech report Thursday after the bell. It’s also thought that Roche of Switzerland is preparing an offer for Genentech, of which it owns a 56% stake. The offer is expected to be approximately $95 a share. Genentech closed Friday at $86.34. That’s not to say it’s a sure thing, last July independent directors rejected an offer of $89 a share.

Fed Chairman Bernanke will speak Tuesday at the London School of Economics.

Wednesday data will include retail sales numbers for December: import prices and business inventories

Jobless claims, inflation data will be released with producer prices Thursday the consumer price index, industrial production and consumer sentiment and personal finance on Friday.

Keep in mind that all of these reports have varying amounts of importance to the markets and can move them up or down.

As always keep your eyes on the markets and whether you are long or short may all of your trades be profitable!!

Becky

Becky seemingly everyone wants to makes a living day trading. Can you tell us in reality, how hard is that to accomplish?

That is a hard question to answer. I would say that most people could not make a living day trading. You need to have a good understanding of the markets, their trends and how the markets and individual stocks react to news. You need to know what things to take into consideration (PE, float, volume, chart) before trading a stock.  It takes confidence in your research. You need to have the time to watch the financial news and your stock trades.

You need to know what your risk tolerance is and how you would handle the volatile moves in stock prices. It’s something that comes by trial and error it is something that is learned and it is not learned without risk of monetary loss. But if it is a passion and you have the time to read and learn and the money to risk, yes that type person can make a living day trading.

I did not go to college, have never studied finance or economics, I am a homemaker and a mother that makes money by day trading stocks online. I have been involved in the markets, trading stocks for the past 10 years not necessarily day trading. I had never shorted a stock until this past year. When a market is in a downtrend it is very hard to make money being long.

My thanks go out to theStreet.com and Jim Cramer for sponsoring the Beat the Street contest last year. I did well in the first game (42nd place) and then won their second game, it gave me the confidence to open a margin account and start day trading and shorting stocks.

How much money does a person need to start day trading?

You can open an account with two thousand dollars at Ameritrade (which I use) or
E-Trade. There are other online brokerages Scot trade only requires five hundred dollars to open an account. Keep in mind this type of account you would only be able to buy and sell. To be able to short stocks you would need to apply for a margin account, which requires quite a bit more money. At Ameritrade minimum to open a margin account is twenty-five thousand dollars. You would need to check with each brokerage house to get their requirements for a margin account.

How much time do you spend researching stocks to trade?

I spend approximately two to three hours after the market closes checking earnings reports. In this market I’m looking for missed EPS, Revenue, downside guidance for the next quarter or coming year. I take notes on everything so the next morning I remember what sector the company is in, what they do, how bad the miss was. Next I go research the stock for the PE, float, volume and look at the chart trend. I make notes on that, I read the news releases. If I have more than a few possibilities I narrow my choices to just two or three. In the morning I watch the volume and the amount of the gap down in pre-market and I watch the futures so I have an idea of what the market is going to do when it opens. I also have CNBC on all day.

Do you have a pre-determined exit strategy when you buy a stock?

If I buy or short a stock for a day trade and it moves enough that I make 150.00 to 300.00 I’m out. If it goes against me if it gets to a 20% loss I am out. If it goes against me and does not hit 20% I will watch the daily chart and volume, it will make a high or peak on the chart and go back down if it comes back up and breaks that peak I’m out.

Does your portfolio have long term investments?

Yes, I have long term investments. I think you should have a separate account for those investments. That way it’s easier to track how well you are doing with the day trading. If you have long term investments you have been losing money the past 10 months or so.

What is the number one number mistake a new day trader makes?

I can’t speak for other day traders, but a big mistake I made was to under estimate my risk tolerance and being greedy, holding out for just a little more. For example I shorted 5000 shares of XYZ at 5.88 per share the price goes to 5.80 (that’s a 380.00 profit after commissions), do I cover no I’m hoping for more, the price starts going up it passes the 5.88 I shorted at and I’m losing 50.00 every penny it moves I cover at 5.92 (a loss of 220.00 including commissions) and then it starts moving back down and had I held it I would have had a large profit. I have learned not to make such large trades and when I have a profit, take it.

Now for the last question I would like you to ask yourself a question that people would like to see answered. In other words if you were a new prospective day trader what would you want to know?  Stock picks not included.

Be sure to use limit orders not market orders!! When a stock is moving fast, you used a limit order, and it does not get filled, it is not usually a good idea to chase the stock. There is always tomorrow and a lot more stocks.

I would want someone to tell me to practice first, paper trade stocks. Find a stock that you want to trade, do all of the research. See if it moves like you thought it would. Write down the opening price, your price would be somewhere close to that. Decide to sell or cover, write the price down. See how well you do. I would say to practice for at least two to three months before risking your money. It is not an easy thing to do, and paper trading is way less stressful than when your real money is at risk!

To all of you out there that would like to try your hand at day trading, you need to keep some things in mind. The market has been in a downtrend since December. We have been in a Bear market for the past couple of months. A bear market is when a market index (Dow, S&P 500, Nasdaq) is down over 20%.Right now the indexes are all down between 30% to 50%. In a down market, most stocks are going to go down. There will be individual stocks or sectors that pop on news, but then they will follow the market back down, for example GOOG, ISRG, POT (some of Wall Streets darlings) these companies beat their earnings expectations in the last couple of weeks, but are selling off because the market is trending down. Because of the reasons I stated above I have not been going long with my day trades, I look for stocks to short that have released bad news after the close.

Some things that I look at when I locate a possible short is the float. The float is the number of shares available for the retail investor to trade. The smaller the float the more unpredictable, and wild the swings. I usually do not short a stock that has less than a 15 million share float. I check the volume, I like 75,000 minimums, more is better. I look at the PE (price to earning ratio) the higher the pe the more expensive the stock the better chance it will come down a lot, on bad news. Also check how much of the float is shorted the higher the percentage there is a good chance that a big drop in price they will start covering and the price will start going back up.

If you do not have the time to sit at your computer and watch a stock that your thinking about day trading do not do it! For example last night XYZ reported earnings after market close. Their EPS was .25 vs .26 analyst estimate, their revenue was 130 million vs 142.8 analyst estimate they also issued a downside full year forecast, 562.1 million vs 582.1 analyst estimate.(This is the kind of news that I personally look for). Their float is 64.49 million, average daily volume is 1,059.310 shares traded, and the short ratio is 18.10%. This morning you could have shorted shares of XYZ at 4.90 at the open and within 15 minutes covered your short and made hundreds of dollars, depending on how many shares you shorted.. The share price fell to 3.70 a share within 15 minutes before recovering some. It is best to take your profits while you have them. When the price is falling fast or going up fast and you have a profit take it, don’t wait hoping for a little more. Over reaction is something that happens on good news and bad news, and the price usually adjusts.

It could be that the market has made a bottom and is going to start to rally again, we have had our best week in a very long time, but it was in the worst month that the markets have had in years. Next week will be interesting, with the election on Tuesday you might want to wait and see who gets elected and how the markets react. The job numbers are also being released on Friday, which could affect market direction.

To anyone that is just starting to day trade I would suggest that you paper trading stocks and see how you do before risking your money. This is not an easy thing to do consistently. There are also games that you can enter on the Internet and you can practice your strategy and possibly win prizes and money in the process. Wallstreetsurvivor.com has Online Paper Trading weekly and monthly games going and CNBC is starting a contest November 10.

However you trade short or long, may all of your trades be profitable!

Just like we have said, day trading takes lots of research and experience. We hope to have Becky Smith back as a guest columnist. If you would like to read more from her leave a comment and we will forward them to her. Becky is developing her own website, The Stock Trading Housewife, thanks Becky

Buying Stocks On Hot Tips

Begin buying stocks because someone, a friend, a relative, or a stockbroker gave you a hot tip. Buying stocks is not like buying a lottery ticket, although many people buy stocks the same way. This is gambling and investing should never be confused with gambling. Investing properly require research in the company and research in the market. Failure to do both will guarantee failure, and subsequently lost money.

Buy Stocks Because of Name Recognition

Many people think they are buying stock in huge corporations and that will minimize the risk of losing money. Nothing could be further from the truth. Filings for bankruptcy protection occur everyday and that includes large corporations. When you think to yourself, this company is too big to go out of business, remind yourself of Enron.

Trust your investing decisions with a stranger

As in any business there are unscrupulous individual who prey on unsuspecting victims. Before you hand your resources over to anyone, make sure you have researched their background and their historical performance. Do not rely on their word as the final say. It is likely that you have worked very hard for your money. Saving money is difficult and requires sacrifice in today’s economy. Investing money in the stock market requires that same kind of diligence.

Buying Stocks That Have Recently Fallen in Price

Many beginner investors choose stocks because they are perceived to be cheap. Financial markets often affect stock price. However more often stocks that have fallen out of favor have done so because of the company is not on firm financial ground. Bottom fishing often results is falling further to the bottom. Stocks that have reached new lows more often than not go lower.

Buying Penny Stocks

This is a favored place for beginning investors to begin with investing in stocks. The reasons are simple. Penny stocks are priced right for new investors. Beginner investors are told, 20,000 shares of XYZ can be purchased for pennies per share. The immediately think the stock needs only to appreciate in price a few cents to double their money. The lure of easy money draws then in and frequently the loss of their investments teaches them a lesson. Concentrate on stocks that are proven winners. Leave the speculative stocks to the speculators and train yourself to become an investor.

The process of buying and selling stocks within the day to take advantage of sharp changes in their values within seconds or minutes is called day trading.  Profits are quickly locked in once the rising or the falling of the interplaying stocks is judged to be most beneficial to one’s investment.  The time restriction however, has the negative advantage of the transaction being most risky which can sometimes result to great financial losses within short periods of time.  The usual practice for the day traders is to buy stocks on borrowed money, and heavily leaning on leveraging in order to reap bigger profits.  The success of this endeavor is highly possible, creating wealth overnight, but as mentioned, the reality of having high risks for loss is also quite significant.

Many consider day trading as a sophisticated form of gambling, day trading however, is not unethical, nor illegal.  If an unprepared beginning investor negotiates this type of investment, the stress may be too unsettling especially if the situation calls for a quick decision.  The strategy, timing, and temperament of successful day traders win the day in this game.  The term ‘investment’, actually, is a misnomer in this field of trading.  Stocks are not really owned as traders look for those clues that will make them get out of these stocks before they change course for the worse.  The day traders take advantage of the momentum in the present movement of the stocks’ values.  The beginning investor commonly suffers severe losses in this type trading.

With the great risk of losing high amounts of money, funds intended for living expenses, education or retirement should never be used for this type of complicated day trading.

Our advice is to stay away from day trading if you are a beginner. Talk to any day trader and the tendency will be to tell you about the winners, not so much about the losers. Does that sound familiar? It should, many gamblers are wired the same way.

No matter what type of investor you are, or how long you have been investing your money, invariably you have probably made some mistakes along the way, perhaps even some costly mistakes. But, first and foremost, one of the biggest mistakes people tend to make is to not invest at all.  Do you want to make your money work for you?  You can!  Even if all you can spare is a few dollars a week, now is the time to commit to doing so.  You’d be amazed at how much money you could put aside to invest if you were to really get creative and analyze your monthly outlay with new frugal vision.  As with any decision, what it really boils down to is a choice.  You too, can make a choice to start investing today.

While choosing not to invest and delaying and postponing investment into your financial future are two of the biggest mistakes many people make, investing before you are in the financial position to do so is another rudimentary problem.  Before you begin investing you will want to ensure that your financial situation is in order first.  Get your credit cleaned up first.  Start by paying off high interest loans and credit debts you may be carrying, then set aside at least three months of living expenses in savings and don’t touch it.  Make that your emergency fund should you find yourself unemployed or unable to work for an extended period of time due to an emergency medical situation.  Once you have your financial house in order, you will be ready to begin letting your money work for you with a sound investment strategy.

That brings me to another common mistake people make when they invest.  Don’t invest to get rich quick.  Let’s face it; we have all heard the Cinderella stories of investors who were in the right place at the right time with the right amount of cash that turned an obscure, risky opportunity into one of the most astounding investments in their financial portfolio. How may Cinderella’s do you know?  That’s what I thought, me too, not a one!  But I do know many who equipped themselves with the knowledge they needed to invest based on their particular financial goals and situations that have capitalized on the opportunities that do exist in today’s financial markets.   If you are going to invest to get rich quick, you will likely loose most if not all of your investment.

Next, don’t put all your eggs in one basket.  Depending on your financial situation spread out your investment strategy to incorporate various types of investment for the best possible return.  As you gain more knowledge, experience, investment savvy and capitol within your portfolio, the more opportunities you have to diversify and capitalize on investments that are risky which may prove to be highly lucrative.  Again, it will depend a lot on your particular investment style.

For the beginning investor or the seasoned stiock picker , consistency, strategy, and long term planning will help you to achieve your financial goals. So make the commitment and judiciously embark upon your journey to financial security today!

Day Traders

Traders that participate in day trading are called day traders. Day trading is a very risky trading style. Day Trading by definition is the buying and selling of a security within a single trading day. Stocks are never kept overnight because of extreme risk of prices changing to the detriment of the trader. The rewards of a day trading strategy can be substantial. The risk follows suit. Remember anytime the reward of trading any equity is great, conversely the risk carries the same weight or more if things go south. Ill give an example. I explored day trading a a strategy briefly in my investing career . A stock was purchased at 10 AM one Friday morning priced at $ 8.32 . 2000 Shares were purchased. The stock quickly rose to near $9.00 one hour later. The stock was held. Why? Pure and simple greed. If it went that high that quick perhaps it would go higher, right? That’s the problem with most beginning day traders. There are ways to make money with dat trading but it is not for the faint of heart. By the way the stock mentioned above was sold at the market close that day at under $7.50 a share, money lost and lesson learned

Long Term Investing

Long Term Investing on the other hand reduces your risk substantially and your stress level. Thinking of your investment on a long-term basis, takes away the day-to-day monitoring, even the minute-by-minute monitoring required in day trading. So what happens if your stock goes down on price? Market declines are a normal part of the equity investing cycle. So long as the story behind the stock is still good, market downturns can provide investors with buying opportunities that can add to their long-term growth potential. Stock experts say over the long term the stock market is still the place to put your money if you’re looking for the best returns. Here is another example , albeit one that has a measure regret. There was a day when IBM was the bell weather stock of the Stock Market. As IBM went so did the market. IBM simply controlled the comuter industry. I had read about a company named Dell Computers and did some research on the company. I decided no one could compete with IBM. I was wrong obviously , but the point is what if I had invested just $ 1000.00 dollars in Dell on that day and held the stock. I will figure out what it would be worth today and post in another article . Suffic to say it would be a significant amount.