Posts filed under 'Stock Trading Investing Basics'
Advantages of Trading Online
Low Commissions
Before the days when it was possible to trade online, anyone who wanted to invest in the stock markets needed to retain the services of a broker—something that still exists today, regardless of the fact of whether or not you are trading over the internet. Brokers in the real world are able to charge their customers quite large commissions based on trades executed. So, unless you are trading or others on your behalf are trading in a large volume of stock, the net cost of the commission means that it is not economically viable for you to trade small volumes of shares.
The introduction of the Internet changed all this. It is now possible to offer customers online trading services with far lower commissions, sometimes as low as $5.00 or sometimes at no cost whatsoever.
Limitless Available Information
When it comes to investing in the stock market, knowing the right moment to buy or to sell a stock is what separates the winners from the losers. In the real world, you would have to research the information yourself, or have someone else provide it. Past experience certainly helps and luck is the always the lady. With internet trading, an online stock trading software program provides technical charts, such as bar charts and line charts; technical analysis indicators, such as the Bollinger band: real time stock trading prices. With all this information, you should be able to make an educated decision whether or not to invest in a particular stock.
You Decide When You Want to Invest
Choosing a stock via the internet is a choice only you make without any outside interference. You are in full control and can choose any investment vehicle, 24 hours a day, 365 days a year.
Disadvantages of Trading Online
Investors Have Little or No Investment Experience
Statistics show that 80% of new online stock traders will have a lose from day one. In addition, the new trader has no understanding of how technical indicators and stock charts work, will not know to diversify his portfolio, and will not know when to make the right stock trade.
Lack of Information Service
In the real world, brokers provide their customers with investment information in the form of a monthly bulletin or some other publication. Since online traders do not normally receive this information, it is more difficult for investors to make informed investment decisions.
Limited Access to Market
It is more difficult to execute trades on many bourses. Most trades on multiple exchanges will be within the USA—such as both the NYSE and NASDAQ. In addition, there is limited “real-time” stock ticker-tape prices, and the quotes on many screens relayed to traders are time-delayed prices. By the time you come to sell the stock, the bid/ask price of the stock could well have changed.
No Exit Plan
An exit plan is an instruction you give to your broker to the effect that if the share hits a high of “x” amount, the broker is required to sell the stock. Alternatively, if the stock hits a low of “y” amount, the broker is required to sell the stock. Because trading online is instantaneous, it is not always possible to provide a broker with your instructions.
September 23rd, 2008
Only a few of us are born with investing qualities. Even the greatest investor of all times, Warren Buffet, made a number of mistakes before getting on the right track. The difference between a successful investor and an unsuccessful one is the ability to learn and avoid the mistakes other people have made.
It’s no secret that many investors focus obsessively on one investment that’s losing money, even if the rest of their portfolio is in the black. This is one of the most famous mistakes, called loss aversion. Like this mistake, many investing mistakes are related to our physiological nature as human beings. Here are two more main behavioral mistakes that you should avoid.
Overconfidence
Overconfidence refers to our boundless ability to think that we’re smarter or more capable than we really are. Optimism isn’t a bad thing; however, overconfidence can harm you as an investor when you believe that you are more capable of spotting the next Microsoft than another investor. You have to recognize that you are probably not (nothing personal…).
Overconfident investors tend to trade more frequently because they think they know more than the person on the other side of the trade. The commission and tax drawbacks of trading too frequently are the number one factor for shrinking the portfolio of these traders.
To avoid overconfidence in your investing, document and review your investment record over time. It’s easy to remember your one stock that gained 50% in a short period, but records may reveal that most of your investments have overall negative returns for the year. Also, even if you’re an expert, remember that the investor on the other side of the trade is no less smart than you; always consider the odds that he can be right and you can be wrong.
Anchoring
Ask an American to estimate the population of Spain and they will anchor on the number they know, the population of the U.S., and adjust it down, but not enough. The opposite will also happen if you ask a Spaniard about the population of the U.S. This anchoring will happen to any one of us when trying to estimate things that are unknown.
The same thing happens to many investors. They buy a stock and anchor on the price they paid for it or on the financials of the company when they bought it. As a result, if the stock price went down, even if the company is not attractive any more, they continue holding on to the stock. They anchor on last year’s earnings and on the buy price, hoping that the stock will return at least to the point where they bought it. For the most part, it won’t happen and the deterioration of the business was translated into price reduction; thus, years could elapse before the stock returns to that point, if at all.
In order to avoid that, ask yourself a simple question: “Based on the current valuation of the company, would I buy this stock now?” if the answer is yes, it is rational to keep it; otherwise, realize that you have lost some money, then sell it and move to other stock. Remember that the loss from this investment can be used to reduce tax payments on other investing gains.
It’s easy to recognize these mistakes but harder to avoid them in your investments. The best way to overcome these mistakes is simply by practicing in similar situations. Obviously, it isn’t wise to practice in your real investment account so you are encouraged to practice it in Yalicoo stock trading competitions. At the beginning, it is possible that you’ll make mistakes in many of the games that you’ll participate in. In time, you’ll become much more experienced and aware of these behavioral mistakes, and eventually learn to avoid them.
September 14th, 2008
The Earning Per-Share (EPS) by itself does not mean much. Most investors employ the Price to Earnings (P/E) ratio to examine a company’s earnings relative to the price of its shares. The P/E ratio, often called “multiple”, divides the stock price by the last four quarters’ EPS (this is the same as dividing the market capitalization of the company by its total earnings). For instance, if ABC Corp. is currently trading at $15 a share and its last four quarters’ EPS is $1, it would have a P/E of 15. It could be a surprise for many of you, but this well-known ratio has substantial drawbacks that Wall Street analysts, who frequently use it, won’t tell you.
The P/E is used by many analysts and investors to trace bargain stocks. The underline assumption is that companies that run similar businesses (i.e. are from the same industry) should have a similar P/E. Therefore, low P/E stocks are often considered a bargain. Is it really true? Not always.
While some low P/E stocks could be cheap, many of them are not such attractive investments. For example, consider a company with a low P/E that has a large debt. In this case, the market cap of the company does not truly reflect its real value. The company’s real Enterprise Value (EV) would be the sum of its market cap and its debt (minus the company’s cash), making the numerator larger, thus the P/E will be larger than what it was initially calculated to be.
Simply stated, it means that the real price of the stock is not as cheap as it seems to be. On the other hand, if a company has a higher P/E ratio, it doesn’t necessarily mean it is not cheap. If this company is loaded with cash, then again its market cap wouldn’t reflect its true value; in this case the EV of the company would be its market cap minus its cash, thus dramatically lowering the P/E value. In order to avoid this problematic feature of the P/E, it is wise to use a different ratio, called the Earning Yield (EY), which is calculated by dividing the earnings of the company by its EV.
Another problematic feature of the P/E is its dependence on the company’s past performance. The earnings of the past 12 months are not necessarily an accurate prediction of future earnings. A company could have a uniquely profitable year for many reasons but its future earnings could be ambiguous. Therefore, looking only at the trailing 12 months’ P/E is kind of like driving while looking out the rearview mirror- it is important, but the obstacles you need to be careful of lie ahead of you. In other words, many stocks that are traded with low P/E these days often deserve to have a low P/E because of their questionable future prospects.
One of the not so commonly used ratios, which can solve this issue, is the Price to Earning Growth (PEG) ratio (The PEG is calculated by dividing the P/E ratio by the company’s predicted annual growth rate). The PEG simply takes the annualized rate of growth out to the furthest estimate and compares this with the current stock price. Since it is future growth that makes a company valuable, the PEG ratio makes a lot of sense. But this is not the end of the story, since the PEG also has a crucial problematic feature – it depends on the assumed growth of the company, a parameter which is obviously unknown by itself.
In any case, considering a low P/E ratio as an initial screening criterion for finding bargain stocks could be useful. However, this by itself does not assure a cheap stock, and additional criteria must be considered in order to find a true bargain (e.g., stocks with low Price/Book Value).
Tags: EPS, PEG, Price ot Earning
August 26th, 2008
Everyone agrees that the market is continuing to decline and some of the analysts are even considering a much longer recession period in the U.S. Does this mean that you have to close all your stock positions and divert your investments into a low yield government bonds shelter?
Over the past decade, the market has seen both bullish runs and bearish ones; dot-com irrational exuberance; corporate corruption and the resulting legislation; 9/11 and the following consequences; and now a global sub-prime credit crisis. Despite all of these, the market has been more up than down.
Since it is impossible to predict in advance when a bearish or bullish period starts or ends, the conclusion is that in the long run you have to stay in the stock market in order to benefit from its overall increment throughout the years. This is not meant to suggest that you should never sell stocks; it is just that you should continuously learn stock investing strategies, improve your investing skills, and invest with your brain, not your emotions.
You can choose to hold an Index Fund or an Exchange Traded Fund that will match the market return; but, in case you want to beat the market return and gain larger profits, there are generally two ways to consider. The first is to buy stocks and hold them for a longer period of time; this is the value investing way and it is used by great investors such as Warren Buffet, Bill Miller, and a few others. This strategy includes analyzing the fundamentals of the company, such as its financial condition, its management and other essential issues, in order to estimate the company’s intrinsic value and understand if its stock is currently undervalued, which means the price is right for buying.
The second way is to try and gain from the short term volatility of a given stock price by using Technical Analysis indicators. Technical Analysis is based on the assumption that all the information about a stock is reflected in its price; thus, by analyzing the movements of the price or the changes in the trading volume of the stock, one can predict the future short term behavior of the stock price. As in the previous strategy, this too requires self-education and practice.
No matter which path you choose, you’ll need to find the right stocks for your portfolio and know when to buy and when to sell them. The Yalicoo arena is a great place to provide these needs. Yalicoo has thousands of registered traders holding many winnings stocks. Yalicoo’s leaders have proved in the past that they can definitely beat the market at any given time by picking the right stocks and holding them for the right period of time.
In any virtual stock trading competition that you join, you will immediately see the five top leaders in the competition, including all their transactions - live. Besides the cash prizes you can win in these competitions, copying Yalicoo leaders’ stocks into your real money portfolio can increase your actual profits by hundreds and even thousands of dollars. This will dramatically simplify the process and time required to choose the right stocks for your portfolio. In any case, remember one thing: monitoring the leaders’ moves should be regular and persistent in order to achieve consistent profits.
Tags: stocks
August 24th, 2008
After the market has dropped more than 20% and despite some encouraging recent earning reports, most analysts now agree that the U.S. market is already in recession. All of us have heard about the burst of the housing bubble, the banking bankruptcy crises, overextended consumer credit and more. The U.S. economy is surely slowing and is expected to grow much slower than the global rate of growth. However, if you thought that this decline is painful, think again! A 20% drop is significant, but it is only a relatively small fluctuation compared to the five (and even the ten) worst markets crashes in U.S. history.
The king of all crashes is the 1932 stock market crash. During the 810 days between April 1930 and August 1932, the market dropped 86%! Combined with the crash of 1929 (the 4th worst crash in the list), this created the greatest depression of all time. To recover from a loss like that, you need to increase your portfolio value by 615%! This was very difficult considering the fact that the market didn’t fully recover until 1954, 22 years later.
The second worst crash was the 1937-1938 crash. Five years after the end of the 1932 depression, when investors thought the market was finally on the right track, the market plunged again by 49% due to the war scare and Wall Street scandals.
The “Panic of 1907″, the stock market crash during 1906-1907, was the 3rd worst crash. Its primary cause was a retraction of loans by some banks that began in New York City and soon spread across the nation, leading to the closing of banks and businesses (sounds familiar…). To bring relief to the situation, the U.S. Treasury Department bought 36 million dollars worth of government bonds to offset the decline. However, only after J.P. Morgan stepped in and redirected money between banks and bought plummeting stocks of healthy corporations, the panic passed and the crash was over.
The next two crashes are the deadly 1929 crash, when the market declined by 48% in only two and a half months (!), and the post World War I boom crash, the 1919-1921 crash were the market dropped 46.5% (after it rose for more than 51%…). The 1929 crash was the shortest of all market crashes, but it kicked off what we now know as the Great Depression, which lasted until 1954.
Considering the large declines of these crashes can help you see the current bearish market decline in the correct perspective. Although these crashes were devastating, it is important to remember that after they bottomed the recovery was sharper and quicker than the declines. Excluding two cases in history, the patient stock market investors who held their stocks steadily and patiently came out of the crash on top.
August 1st, 2008
The first thing every investor learns is not to put all his eggs in one basket, which means – diversify your portfolio with a blend of securities or, in the case of a stock portfolio, a larger number of stocks. Diversification makes sense as long as you understand that over-diversification is as bad as under-diversification.
The main purpose of diversification is to protect you from losing money due to the risk involved in the stock market. This stock market risk is composed of two kinds of risks: the overall market risk and the individual business risk (let’s ignore inflation and currency risks in this post for simplicity). The market risk is the risk caused by the fluctuations in stock prices. Many factors can cause these fluctuations, starting from changes in individual companies, to revisions in sectors and changes in the overall economy. The fact that there is no definitive way to predict the direction of these fluctuations in advance, combined with market globalization, makes it almost impossible to reduce the market risk. In other words, unless you have a fortune teller’s skills, no matter which or how many stocks you hold, your portfolio will fluctuate in a manner similar to the market (on average). As a result, in a bearish (declining) market such as the market we are currently in, your picks will probably go down (again, on average),and vice versa - if the market trend is up, your portfolio will benefit from it.
This can be demonstrated by observing the portfolios of great market gurus; almost all their portfolios lost value due to the market drop in the past year. For example, Bill Miller and his Legg Mason Value Trust beat the S&P 500 from 1990 to 2005, but he’s down 30% a year to date. Investment expert Marty Whitman’s Third Avenue Value Fund, which returned more than 14% a year since 1990, is down about 17% so far this year. Even the all-time greatest value investor Warren Buffet’s company recently suffered major losses.
However, a wise diversification can definitely decrease the individual company risk while not reducing your chances to beat the market. The following chart presents the difference between the risks involved in a portfolio composed of a number of randomly selected stocks to the overall market. For example, if you hold only one stock, your portfolio will be 30% riskier than the market risk (risk is measured here as usual by the annual standard deviation).
Holding only a few stocks in your portfolio is obviously much riskier than holding 500 stocks. However, the additional risk rapidly decreases as the number of stocks increases; if you hold 15-20 stocks in your portfolio, even if they are randomly chosen, the risk will be only slightly higher than the market risk.
There’s no absolute best number of stocks to own. Too few and you’ve taken on too much risk. Too many and you’ve diluted the power of your holdings more than you needed to. Different numbers work for different people; it all depends on the level of confidence you have in the companies you chose.
As a rule of thumb, it is usually wise for novice investors to hold around two dozen stocks in their portfolio (but not more than that). As your level of research and margin of safety on each company rises, experienced investors can safely concentrate their portfolio on much fewer ideas, setting it to grow more quickly. In any case, remember that diversification by itself is not a magic word; it won’t do you any good if you don’t know what you’re doing. Therefore, do your homework and practice virtual stock market investing before putting your real money in the market.
July 27th, 2008
Indexes were created in order to evaluate trends in the financial markets. Index is a magic word most share market traders use, but very few can tell what an Index is, what are its components, and how is it being calculated. Most investors know just that if the index rises, it is a good sign and vice versa, if the index drops it is a bad sign. The true and full meaning of this term remains a mystery. Some investors, for example, also understand that if an index such as the Dow Jones Industrial declines by more than 20% it is considered a bear-market.
An analysis of today’s markets leaves no choice but to conclude that we are in bear market. Since the beginning of the year the Dow Jones index declined by more than 16%; in the past 12 months it declined by even higher percentage points. A similar conclusion can be reached when we realize that the NASDAQ composite index plunged YTD (Year-to-Date) by more than 12%. Thus the questions have to be asked: Are we really in a bear market? Is global economy facing a recession? I personally doubt the above conclusions and feel that it is the “cross-sector” indexes which create the unfavorable impression.
I would like to avoid getting into complex explanations of how an index is calculated and what do deviations mean, only to suggest that indexes should not be used when trying to make a wise investment decision. For example, the importance of banks and other financial institutions is relatively high when calculating a cross-sector index; this may lead to a distorted assessment of the economy if one looks only at the index, when the value of banks drops aggressively due to various reasons (as it happened recently due to the sub-prime mortgage crisis).
As previously mentioned the Dow Jones Industrial index lost more than 20% in recent months (16% in 2008), the NASDAQ composite is down 18% from its high value, and all these happened while the major financial institutes index lost 70% (!!!!) In the past 12 month. On the other hand the AIG Commodities index GAINED 25% YTD and energy indexes show more than a 30% GAIN, precious metals are up 5%, Transportation index up 5%, and the utility index remained flat.
The simple conclusion is that cross sector indexes do not have significant value and do not give a lot of valuable indication to investors. The experienced stock market trading investor should look mainly at indexes which represent specific sectors and even here to be very observant (the transportation index is composed from land transportation, oceanic transportation and airlines, each behaves differently). Mixing various sectors of the economy into one index may lead to erroneous conclusions about the health of the economy.
While as said above the cross sector indexes are sub-optimal in determining the status of the market, many investors are influenced by them and make buy/sell decisions according to these numbers. As we know, emotions do play a significant role in a price of a stock thus while financially an index may be not important, it may lead to a change in a tendency to buy or sell and therefore affect stock prices.
Shimtom
( Satisfied www.yalicoo.com player)
July 23rd, 2008
An online stock market game is something that will teach you how to play in the real stock market. There are many rules to putting money into stocks that you should really know before you start risking your hard earned cash. Places such as Yalicoo that have stock market competition and the stock trading game can help teach you the benefits of playing in a virtual stock market.
Virtual trading will look as real as the true stock market. It is designed to give you the latest news, updates, quotes, and graphs of the stock market without you investing your money. With Yalicoo you even have stock trading competition to try your skills against others who are learning just like you. The first thing you should know about online virtual stock trading is that you should be having fun while learning something.
Your stock market game will begin with 100,000 dollars for you to invest in stocks. The stocks you choose need to be based on the qualifications rather than your gut. In other words you need to research the stocks carefully to understand how they are expected to move and what the risk is in them. You get to choose what stocks you buy or sell based on the real time price, but you still need to know what you are choosing. The stock market competition can help you learn which stocks to choose. You are playing against others to make the most profitable portfolio and the top winners get cash prizes.
Once a stock has been researched you are not through with the stock trading game. In fact you have just begun. Even in the virtual trading you need to have a well rounded portfolio. This means that you have four to ten stocks in a variety of industries. There should be one stock in an industry in your portfolio. You don’t want to have a portfolio that plays off of each other even in a stock trading competition. For example if you have an energy stock you don’t want to buy the competitive companies stock. You are going to lose in that type of situation. The same can be said for trains, which are really hot buys right now. You don’t want to have the 3 train stocks available on the US market. One will go down and the other up and keep you in a stalemate.
The virtual stock market should be followed just like it was a real portfolio. In this we mean you will need to sell a stock if the news is bad and the numbers begin to reflect the downturn. You want to sell when the stock reaches the peak, not once it has already fallen and is too late. In this case you would be losing money again.
Since you are trying to earn money in the market you need to watch the virtual trading every day. You need to listen to the news and see what could happen to your stock. Trust that your knowledge as you delve further into the game will teach you when to sell or hold. You don’t want to panic either and sell too soon. By learning the trends of the stocks you are interested in before buying you should be able to pick some great stocks.
July 12th, 2008
While watching the news on TV or reading the newspaper one encounters phrases such as “the NASDAQ went up by 15 point” or “Google’s stocks fall 5% in the early trading session”. These statements are actually information about what is called the stock market.
Many people find the stock market a confusing place. Some believe that the stock market is like a casino. They think that investing is a form of gambling, and the investor more than likely end up losing money. These fears usually arise from testimonies of family members or friends who did not succeed and lost money following investing in stocks; while indeed people do lose money in the stock market, in many cases the investments were done without proper understanding of the stock market itself, without information about the company issuing the stock and without proper experience.
Other people view the stock market as an exclusive arena for professional investors or traders. Thus, they leave their financial decisions to professional traders.
Obviously, the stock market is a complex environment and investing can be complicated, but after knowing the facts and understanding the basic concepts of operation of the market, you will realize the benefits and importance of educated investing.
The purpose of the stock market
Giants businesses such as Star Bucks, Wal-Mart or McDonalds, which post profits of billions of dollars every year, were not always as big as they are today. Star Bucks started as a small store in Seattle, Wal-Mart began as a single store in Arkansas, and McDonalds was originally a restaurant in San Bernardino.
How did they do it? With vision, proper management and efficient operation these small start-ups have grown to become global market leaders. But there was another pre-requisite for growth- capital. And indeed, these companies have raised capital from investors by selling a share of their business in the stock market.
When a company is growing, it needs money to expand; modern buildings, more equipment, new employees, research and development, marketing, all these cost money.
Raising capital can be done in one of two ways: borrowing money from the bank or selling a part of the business to investors and using the money to fund growth.
Borrowing money from the bank is often very useful, but it is limited. Banks will not easily lend large amounts of money to small businesses and this loan obviously bears an interest. Therefore, many business owners choose the other option – selling a part of the business to the public. This is done by issuing stocks of the company to investors through the stock market.
In other words, the stock market is necessary for companies to raise capital from investors so that they can fuel growth.
Investors and the stock market
A company selling its shares needs to “go public” at the stock market, through places also known as Exchanges (like the NASDAQ). Each investor pays the company for the amount of stocks that she is interested in (and can afford) buying, and in return she gets a fractional ownership of the business.
If for example you bought 5% of a company’s stocks, you now own 5% of the business. If the company is profitable you are entitled to 5% of profit available for distribution to the owners, or- dividends.
The stocks of the company are now traded in one of the exchanges in the stock market, whether in the country where the company operates or in other stock markets over the world (such as London, Hong Kong, Tokyo, etc). Shareholders can offer new investors to buy their piece of the business by selling them part of their stocks. The negotiation between the two sides is carried out through computerized system activated by broker, who are individuals or firms that charge commissions for executing buy and sell orders requested by investors. If there is a match between the offer of the seller and the buyer, the order is executed. In this case, the seller gets the cash for the sell while the buyer receives the seller’s stocks. The buyer now owns a share of the company, equal to the percentage of stocks he has relative to the total number of shares the company has issued.
Summary and next steps
We have just reviewed the very basic operation of the stock market. Every day there is a large auction of stocks of many companies in the various exchanges around the globe. Your role as an investor is to identify the companies whose shares are sold at an attractive price, which means, at such a price that after you buy them their value will rise and you will be able to sell them at a profit.
This is not an easy task, but it is possible. In order to become a successful investor you have to acquire the education and practice. We at Yalicoo recommend that you keep reading about the way stocks are traded, how to choose the right ones and use how to use Yalicoo for practicing and improving your trading skills.
June 24th, 2008
