Stock Market for Beginners = Las Vegas?

The stock market for beginners is a very exciting place with the lure and charm of Las Vegas. However, to really make money in the stock market, beginners in the stock market must come to terms with the fact that MOST investors lose money. Making money in the stock market is neither easy nor guaranteed, especially for beginners. In fact, investing in the stock market tends to be a boring task for most beginners.

The article below tells an interesting story of how seeking excitement in the stock market can easily turn a winning stock portfolio into a losing one.

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In my previous message about investing for beginners, I tried to convey some of the realisations that a new investor needs to make to help him or her become successful.

This time, I am going to offer a few thoughts on what I believe helps me to be successful and a few examples of what can and may go wrong. As ever, I hope that this isn't below your level of either confidence or competence as I don't wish to insult. However, I have found that there seem to be far more people that want to understand finance 'a little better' than there are people who can lecture on the subject.

Firstly to an example. Back in the mid 90's I joined an Investment club in the UK. I knew a couple of the members from a local health club I was a member at. Knowing that I was (a) keenly interested in investment and (b) more knowledgeable than most of them, I was invited along.

Suffice to say that on the first evening, I realised that I had been invited along to do all the work! I enjoyed the work so that didn't actually bother me. I also could purchase some additional investment tools 'for the club' which I couldn't justify for myself.

The main work of analysis was carried out by myself and another member who is a long-time friend and no mug in the world of shares and investment himself. We were using as our template a theory offered by Jim Slater which centred around price / earnings growth ratios. In short, it was highly successful.

At the end of the first year, we were 'up' by around 80%. Admittedly, this was during the tech-boom bull and any idiot could get 30% pa without trouble or effort, but still we were very impressed. The second year started well too and within 6 months of year two, our small company growth share portfolio (the only portfolio) was up comfortably over 100%. Nice work if you can get it.

For those of you that haven't been a member of an investment club and don't know, they are a democracy. Every opinion counts equal in a vote to buy or sell, whether they understand investment - or not. Here was our trouble. If you can believe it, making an enormous profit was 'boring' and they needed 'excitement'. To me, making money as quickly as we did was not merely exciting - it was thrilling!! But, when we wanted to sell they wouldn't and when we offered rock solid buy predictions they disliked something and again, we wouldn't.

I think our lowest point was not buying shares in a UK pizza delivery firm (that was growing very quickly and would have turned into a great investment) because (and I kid you not) one of the founding members didn't like 'Italian food'. Who cares?

The club ended rather badly with arguments and falling outs. Several years later it still has a couple of holdings in shares that might 'one day turn around'. Fat chance!!!!

So here is the tip: why do you want to invest? This needs analysis.

My friend and I invested because we were willing to put in the effort, wanted to increase our holdings, make money and frankly, we like winning in a global market against the nation's smartest minds!!

Our other members however, were there to gamble. It was just fun. Who cares about the result? We all meet in a pub, have a meal, chat about shares and throw some money at the market. We wanted profits, they wanted a social group.

After being up by over 100% after 18 months, we closed the club at a loss of both money and friendship. Ridiculous.

What about you? Why do you want to invest? If you want to gamble, take up sports betting. You get to watch a game as well as be financially involved - that sounds much better.

Do you plan to follow the market? If you don't, best to keep away.

I'm not the world's greatest at tracking a market - I can admit it. Each day, I look at the shares in my portfolio, funds I advise clients about, prospective investments I am mulling over, general financial news and read a few posts by other advisers / analysts online. And yet, if I'm honest, I worry that don't pay enough time each day to the markets.

If you want to make serious decisions, with serious amounts of money and (hopefully) make serious amounts of profit, you need to be - SERIOUS!!!

Personally, I don't like the idea of gambling much. I consider myself to be either a speculator or an investor, not a gambler. When I first started investing, I didn't know the difference (though I started at 18 and had no-one to guide me). That meant that all my investments were gambles. Mostly, they weren't so hot.

These days, I assess and analyse much more. I avoid 'turnarounds', since I don't think they turn around too often. Greater life experience has taught me to recognise that most companies that need to turn, or might turn, are already dead - they just don't know it yet.

I also have learned my lesson with 'development' companies. You know the thing, one great idea that 'if' they get to market will make 'tens of millions'. I own shares in a couple that I bought years ago. Broadly, I was right to buy. Of all the development stocks I could have bought, these actually did develop and do make products. They just don't make profits yet - years after I bought.

One of my development picks actually dominates the bluetooth market. That's right, I invested in the company that developed much of the bluetooth technology we use today! How could it not make a bundle of money? Am I a genius or what? Years later, I am still down 65%.

Another has an amazing fuel saving device for gear boxes in cars, lorries and off-road vehicles. In this age, you'd think that fuel saving technology would be all the rage. Over the years, I have bought more shares in the lows and sold them in the highs to make some 'trading' profits. But still my initial investment (I think 8 years ago) is down.

Though I may not have realised it at the time, these were not investments, they were gambles. So is the stock exchange really a place for beginners?

An investment is in a company that has products, a defined market and notable market share, profits, a track record and much more. Remember that. Think about Warren Buffett - he makes investments, good ones at that.

I'm also quite traditional about investing. I have never spread bet, used an option or future or sold short. I don't use leverage. If I can't figure out what might go wrong, FOR CERTAIN, I'd rather not do it. I buy, I hold and I sell. That's it.

I have no doubt that these admissions mean that I miss out on all sorts of possible investment opportunities. There are all sorts of weird and wonderful investments out there, but I invest and I don't like to gamble.

If you think about it though, what I just said doesn't really hold me back. I own some coins, stamps, comics, unit funds, shares, books and art - I did mention that I speculate didn't I? And if the world suddenly has a crisis, it means that I own actual, physical assets as well as just share certificates.

So that brings me to another point ... can you focus?

Ideally, you need to know quite a lot about certain areas and use that knowledge for your investment benefit. The art and books I own are mostly related to cricket. I love cricket and know a lot about the game and it's history - which means that I know when I see something of value. If it has value now, it probably will have for some time to come. Whether I buy at a good price or not, value and scarcity count.

Who'd imagine ME telling you that the stock market isn't everything?

Investment risk is lowered by knowledge. Every time. If you are buying shares on the stock exchange, what does the seller know that you don't? What do you know that the seller does not? You can bet your life that the buyer or seller opposite you in any transaction has done some serious research. If you don't do yours, who do you think will win? You or the market?

So of all the things that I might have said about investing, I haven't really made it sound 'sexy' yet. Have I? The truth is, investing isn't really very sexy. Pop stars are sexy. Carmen Electra is sexy. Investing is graphs, moving averages, annual reports, company statements, calculators and work. Not so sexy. It's kind of like being an accountant but with marginally more life and a few graphs.

But the great thing about investment is that in the long run, you decide whether you'll be successful or not. The harder you work at it, the luckier you will be. If you are just starting out, think about YOU first, not the market or companies. Decide on what you want to specialise on, whether the stock market for beginners is a place to invest and how you will approach it.

It might help to find areas in which you have useful knowledge already. Either that or decide on an area and slowly become an expert. What do I mean? Well, if you worked in a bank for 10 years, you must know something about banking. When you read an annual report from a bank, do you laugh and see through the waffle or does it make real sense? If you can see through the waffle of some far off CEO and CFO, you can start to compare the relative prospects in the same market of competing firms. Hey - that could be an opportunity!

If you really know about banking, you can compare the product offerings and service as well as the annual reports. You might still know some bank staff that are happy to tell you honestly that they are being 'creamed' in the market or whatever. Before you know it, you have a picture building of a competitive market. Before long, you will REALLY understand the investment potential of several companies. That will put you far ahead of many other investors.

As I said earlier, investment risk is lowered by knowledge - EVERY TIME.

Stuart Langridge is a financial and investment adviser and an investor. He works with expatriates in the Benelux region. For more of hi insight into the world of finance and investing, please visit his site at http://www.StockExchangeSecrets.com

Article Source: http://EzineArticles.com/

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That was a pretty long article, but it does have a few good points:

1. Investing in the stock market is boring. It involves reading charts, financial reports etc.
2. Turnarounds don't turn around too often.
3. 'Development' companies are too risky and should be avoided.
4. Invest in something you know. For instance, if you work for a bank, you should be in a better position to evaluate and compare the performance of various banks.
5. Investment risk is lowered by knowledge.
   

The stock market is not a place to 'get-rich' fast. In order for beginners to succeed in the stock market, they must be willing to learn and put in their efforts analyzing stocks and studying about the stock market.

How to Overcome Fear in Trading

Beginners are especially susceptible to fear when trading in the stock market. Fear manifests itself in at least two main ways, fear of losing money and fear of losing profits.

Fear of Losing Money

Fear of losing money happens when a trader first initiates a position and immediately sees the trade go against him/her. At this moment, beginners in the stock market (who normally do not trade according to some pre-determined rules) will often second guess their decision. Intense fear of losing can cause the trader to immediately 'cut loss' and exit the trade, at a small loss. These losses, though individually small, can quickly add up to a significant amount. Over time, such losses can cause the trader to lose his/her morale and confidence.

To overcome fear of losing, I remind myself that a surgeon spends more than 10k to receive his/her qualification. I treat losing in the stock market as a form of tuition fees, a necessary investment. Investment in education always pay the best return. To make sure I get the highest return from my 'tuition fees', I make sure I analyze each losing trade to find out what mistakes I made and modify my trading rules accordingly.

Fear of Losing Profits

Another fear is the fear of losing profits of winning trades. When a trader sees his/her position making a profit, the trader starts fearing that any second, the position will turn against him/her. To quote Jesse Livermore (one of the greatest stock traders of all times): "Most people fear when they should hope and hope when they should fear." Thus, they close out their winning trades, taking a small profit, believing that they can't go broke taking a profit.

Unfortunately, they CAN go broke taking small profits. Unless the trader can achieve 100% accuracy in picking stocks, he/she is bound to have a number of losing trades. In order for traders to make money in the stock market, they need profits from those winning trades to be big, so as to cover for losing trades. If a trader constantly takes small profits, it is unlikely that he/she will have a significant amount of surplus left after covering for these loses. George Soros once said: "It is not about whether you win or lose, it is about how much you win when you are right and lose when you are wrong that matters."

To overcome fear of losing profits, I use the method mentioned by Jesse Livermore in his book "How to Trade in Stocks". I constantly remind myself: "Why am I afraid of losing profits I did not have the day before?" Instead of focusing my thoughts on the possibility that the position can go against me, I focus on the need to win big when I am right.

In generally, there are three main methods to overcome fear of losing:

1) Changing one's perception of losing. To overcome the fear of losing money, treat any money lost as tuition fees. In addition, do not treat unrealized profit as your money; those are merely profits on paper. One can't be afraid of losing money that do not belong to them yet.

2) Have clearly defined rules for cutting loss and taking profits. These should be based on empirical research or intensive back-testing. Alternatively, one may choose to adopt the rules of a proven time-tested system (such as the CANSLIM system by Mr Williams O'Neil).

3) Use visualization techniques to take one's focus away from the possibility of losing. Visualise the current position becoming a big winner, a grand slam. (Note, this does not mean one should pray and hope and visualise a losing position turning into a grand slam. A good trader should always ensure that they know exactly when to cut loss. As long as the cut loss level is not reach, one should not let the fear of losing overwhelm him/her resulting in the closing of a position prematurely.)

It helps to ask yourself three questions:

Q1) What is the worst that can happen?
[e.g. The worst is that your stop loss is hit and you lose $1000 on the position.]

Q2) What is the best that can happen?
[e.g. The best is your profit target is hit and you win $4000.]

3) What is most likely to happen?
[e.g. The most likely is you are stopped out of your position by your trailing stop and your profit is less than $4000]

If you cannot accept the worst that can happen, you should not open the position. If you can accept, you should find courage in the fact that even if the worst happens, your world won't fall apart (which means there's nothing to fear). You should then focus your energy on visualizing the best scenario.

Making Money in the Stock Market with Penny Stocks

What are Penny Stocks?

According to the official SEC definition, a penny stock is a low-priced stock of a very small company. In the U.S. financial markets, penny stocks commonly refer to stocks that trade for less than $5 a share, have market capitalization under $500M and are traded over the counter.

The Dangers and Profit Potential of Investing in Penny Stocks

Many new investors are attracted to penny stocks due to the low price and potential for rapid growth (which may be as high as several hundred percent in a short period). However, investors must be warned that trading in penny stocks involve high risks; including limited liquidity in the stock (thus making the penny stock susceptible to price manipulation) and lack of financial reporting by the company. Because penny stocks tend to have a smaller number of investors, a moderate amount of buying/selling by a single investor can sometimes cause the price to spike, making the penny stock highly volatile at times.

However, on the other hand, because of such volatility, a penny stock can prove to be very profitable, especially if there is a sudden interest in the stock. For instance, the price of a penny stock can soar in a very short period if there is speculation that the company is a candidate for a takeover bid at a price considerably higher than the current share price.

How to find profitable penny stocks?

I consider penny stocks to be highly speculative, something I buy due to the lure of high profits in a short period of time. Hence, I advocate using only technical analysis to look for penny stocks, so that one can buy into a profitable stock quickly. In fact, I subscribe to a newsletter that makes recommendations for profitable penny stocks. This newsletter uses a trading robot (i.e. a computer program), Marl, to analyze various aspects of a penny stock, including: volume traded, support and resistance levels, trend reversals patterns, consolidation patterns and channels.

Marl is the first commercially available trading robot developed by 2 "geeks", Michael and Carl. Michael, the computer programmer who developed the famous "Global Alpha" computer stock trading model while contracted to Goldman Sachs, worked with fund manager Carl Williamson to create the robot.

To find out more about Marl or the newsletter, click here.

Note: Even though I've consistently made money buying the stocks recommended by the newsletter, I must warn you in advance before you decide to subscribe:

1. Penny stocks trading is highly speculative in nature. Do not bet your entire account on them. Personally, I never invest more than 10% of my available trading funds on penny stocks.
   
   
   
2. Penny stocks trading is not suitable for everyone. Some may find the stocks too volatile (in terms of the percentage change) and thus too much of a emotional roller coaster, something not everyone can cope well with. Thus, I suggest you try out the newsletter first to determine if it is suitable for you.
   

To try out the newsletter for free, click here.

Buy Good and Cheap Stocks using Investors' Business Daily

About IBD

The Investors' Business Daily is a daily investment newspaper that is read by many financial professionals, and mentioned in many bestselling books (including Peter Navarro's “When the Market moves, will you be ready?”, Jason Kelly's “The Neatest Little Guide to Stock Market Investing” and Stan Weinstein's “Secrets for Profiting in Bull and Bear Markets”). IBD provides detailed information about stocks; such as detailed, concise statistics using earnings, stock price performance, and other criteria to help investors find quality stocks.

I've subscribed to the IBD for more than 3 years and have used it to find many winning cheap (and not-so-cheap) stocks, which paid for my subscription fees many times over. If you have yet to subscribe, I strongly recommend that you do so. They offer a 4 weeks free trial*, so you can try it out and see if it suits you. Over the weeks, I'll be covering various ways of using IBD to find winning stocks.

Using IBD to find Quality Cheap Stocks

1. [This step is only for subscribers of the Digital Edition]
   Log in to IBD and click on eIBD – Digital Edition. Follow the on-screen instructions until you reach the first page of the newspaper.
   




Look for the section “Making Money”.



Select “Top Ranked Low Price Stocks”.






Look through the stock and find stocks that satisfies the following criteria**:
Smartselect Composite Rating > 80
EPS (Earnings Per Share) > 70
RS (Relative Strength) > 70
AccDis at least a B
Closing Price should preferably be above the 52 week high (this means the stock has just made a NEW 52 week high, which is a very bullish signal)

That's all. A simple 4 steps procedure for finding top quality cheap stocks. However, you should note that stocks trading under $10 tend to have lower volume, which makes them more susceptible to stock price manipulation. Therefore, please exercise caution when investing in such cheap stocks. Personally, I combine IBD's ratings with my own technical analysis and I allocate only 10% of my account to investing in cheap stocks.

To try out Investors' Business Daily for free, click here.*

*Note

This is an affiliate link, which means I'll earn a small commission when you subscribe through this link. Contrary to common belief, subscribing through an affiliate will not make it more costly for you. Commission is paid by the merchant, not the subscriber. As much as I like to earn my living through affiliate marketing, I make it a point to recommend only products that I believe in and that I personally use.

** Data Definition

Earnings Per Share (EPS) Rating

An exclusive rating found in Investor's Business Daily. Stocks are rated on a 1 to 99 scale (with 99 being best) comparing a company's earnings per share growth on both a current and annual basis with all other publicly traded companies in the William O'Neil + Co database.

Stocks with EPS Ratings of 80 or above have outperformed 80% of all publicly traded companies in earnings.

The EPS Rating calculation combines the company's most recent two quarters of earnings-per-share growth, with its three-year to five-year annual growth rate.

Relative Price Strength (RS) Rating

This is another exclusive rating in Investor's Business Daily. It measures each stock's price performance over a twelve-month period, compared to all other stocks.

Accumulation/Distribution (Acc/Dis™) Rating

The Acc/Dis rating tracks the relative degree of institutional buying (accumulation) and selling (distribution) in a particular stock over the last 13 weeks. Updated daily, stocks are rated on an A+ to E scale.
A = Heavy buying
B = Moderate buying
C = Equal amount of buying and selling
D = Moderate selling
E = Heavy selling

SmartSelect® Composite Rating

The IBD SmartSelect Composite Rating combines 5 proprietary IBD Ratings into one easy-to-use rating. More weight is placed on EPS and RS Rating, and the stock's percent off its 52-week high is also included in the formula. Results are then compared to all other companies, and each company is assigned a rating from 1-99 with 99 being the best. A 90 rating means that the stock has outperformed 90% of all other stocks in terms of its combined SmartSelect Ratings.

How to Invest in Stocks | Trading System Part 2

There are 2 reasons why you sell stocks that you invested in: Selling to cut your losses or Selling for profit.

The first is often ignored by beginners. They only worry about what stocks to invest in, probably with the intention of keeping it for life (the typical Buy-and-Hold investors). Buying and holding stocks has major advantages.

1. Firstly, minimal work is needed; just do your research, invest in the right stocks and never worry about selling it.
2. Secondly, if you invested in the right stocks, such a strategy can normally produce higher yields compared to repeated buying and selling (especially after taking commissions into consideration).

BUT, and that's a big but, if you invested in the wrong stocks, buying and holding can easier blow your account. Consider the dot com bubble in 2000, if you had invested in JDSU at its highest price ($1227) back then, you would have waited for eight years to find that its stock price is worth only $13.94 on 1 Apr 2008, never returning to its peak or even getting close to it. Or consider the more recent example of JSDA, worth $32.60 at its peak, lost more than 90% of its value in less than a year. Therefore, unless you believe you'll be able to live up to a hundred years old and can patiently wait for the stock you invested in to rebound to its previous value, ignoring to cut loss is one of the easiest way to blow your account.

Although there's no fixed rule for deciding when to cut your losses, I recommend never holding a stock beyond a 10% fall. That it, if you invested in your stock at $40, the biggest loss you should tolerate is $4 (10% of $40).

The next reason for selling your stock is when you've made a profit. Again, there's no formula for selling at a profit. It depends on your appetite for risk, your trading timeframe and most importantly, your personality. Some techincal analysts recommend a 3-to-1 profit-risk ratio. That is, for every $1 you risk, you should demand at least a $3 profit. So if you invested in the stock at $40 and will cut your loss at $36, you should demand a profit of at least $12. Other experts prefer to use a trailing stop, selling at a certain percentage of the maximum profit you gained after you invested in it. For instance, if you used a trailing stop of 10% of your profit, and the highest gain you achieved is $1000, you'll sell once the profit drops to $900 (after your maximum gain dropped by 10%).

Regardless of whatever rules you prefer, you must make sure your trading system has such rules for clearly deciding when to sell. These rules are probably more important than rules for investing. Even if you are the best stock picker in the world, you will definitely have one or two bad picks (and yes, Warren Buffett sells his stocks too. Even though he is famously known for saying the best time to sell a stock is NEVER, he DOES sell his stocks). Your occasional bad stock picks are the ones that can break your account.