New Stock Trader Tips

Beginner Investing Market Stock Rules

1. There are no guarantees. Despite what late night guru's might try to tell you, there are no guarantees. Investing is risky and uncertain. That is why it is rewarded.
2. Investing is not the same as saving! When you set aside emergency funds or savings accounts that is one portion of your financial planning. Budgeting is another. Investing is yet another. Combined, they each comprise important parts of your total financial strategy but never make the mistake of putting all of your additional discretionary income toward investing. Again - investing is not the same as saving.
3. Past performance doesn't forecast the future. There is a reason a similar disclaimer is included in almost every bit of investment advice: it's true! Unfortunately, people don't believe it. While history can provide a great deal of insight into the probability of certain events, it cannot forecast future events.
4. Diversify, Diversify, Diversify.
5. Fundamentals never go out of style. Learn everything you can about how the stock market works and stock market investing basics. Understand the industry. Read the business section. Listen to economic data and actually read industry reports. Gather all the information possible and then use it to make your own decisions.
6. Don't be afraid to be a contrarian. There are times when the masses are wrong. Fortunes can be made by understanding when to roll with the crowd and when to go it alone.
7. Establish a Free Online Paper Trading account at Wall Street Survivor to test your assumptions before trying it out in real life.

An Exchange Traded Fund or ETF superficially resembles index mutual funds but with some important differences:

1. ETF's are traded throughout the day just like regular stock.
2. NAV or Net Asset Value is known. The value of an ETF can be calculated throughout the day because the underlying index doesn't change.
3. Arbitrage. ETF's are not traded at systematic premiums or discounts since financial institutions can exchange ETF's for the underlying assets.
4. Tax Advantages. Very few ETF's distribute capital gains.

Learn more about Investing with ETFs or Exchange Traded Funds

	Book: The Pied Pipers of Wall Street: How Analysts Sell You Down the River
	Book: Confessions Of A Wall Street Analyst: A True Story Of Inside Information And Corruption In The Stock Market

Dividends are profit distributions made to shareholders by a company. Instead of reinvesting all of the profits, a company may decide to distribute the profits.

For many years, dividends seemed to have fallen out of favor among investors. The emphasis was on growth or appreciation of stock prices rather than using stocks as a source of income and reinvestment. However, as the Baby Boomers retire and other investors seek more stable forms of income and returns, dividend earning stocks are getting a second look.

Some stocks allow dividends to be automatically reinvested or you can have the payment sent directly to you for a small stream of passive income. If you are searching for dividend payments then do a little homework to determine how long each stock has been paying dividends. If only for a few years then it may or may continue. On the other hand, some companies have a long history of paying dividends such as:

When examining dividend stocks look for:

1. How long has the company paid dividends?
2. Is the payment increasing, decreasing or maintaining? If changing - why?

	Book: All About Dividend Investing
	Book: Beating the S&P with Dividends: How to Build a Superior Portfolio of Dividend Yielding Stocks

Dollar cost averaging is a simple method of investing a specific amount of money at specific periods of time without consideration for the cost. For example; you decide to take $100 a week out of your paycheck and have it automatically set aside to fund the purchase of a stock or bond each week. For the sake of simplicity, the stock originally sold for $20 per share so each week you were initially able to purchase 5 shares. Later the stock price increased to $25 per share so now you can only purchase 4 shares.

Notice, the number of shares has declined but the original value of the first shares increased.

The rationale is that buy purchasing at a steady rate, you will benefit from the increases while negating the decreases. But does it actually work?

According to a landmark bit of research conducted by the Journal of Financial & Quantitative Analysis in 1979...No, it doesn't measure up to lump sum investing when comparing total return. Statistically speaking the overall rate of return was less for dollar cost averaging. On the other hand, dollar cost averaging does provide a return - just not quite as high as that of lump sum investing. It is also a valuable way to begin investing especially for new investors.

Understanding how to calculate gain/loss of a stock can be a little confusing especially if you use dollar cost averaging or other methods to invest. Follow these quick tips to make sure you properly calculate gain/loss of a stock.

1. Stay organized and keep good records! Your friends at IRS expect you to substantiate all profit or losses with evidence.
2. Understand the cost basis. The cost basis is the purchase price + fees and commissions on the purchase and sale of the security.
3. If the Sales of the security is greater than the cost basis (see above) then you have a profit. If the security sells for less than the cost basis then you have a loss.

Myths about how to invest in the stock market abound. The truth is that you really can take control of your financial future and do quite well. Here are some of the most common myths surrounding stock market investing.

1. It requires advance training and college degrees. Nothing could be further from the truth. While education is certainly beneficial, the stock market is constantly changing. Invest in your own ongoing education by using online resources, read books and do your own intensive research into the industry and market.
2. You get what you pay for. When it comes to financial sales-people they would love to make you believe that your rate of return more than pays for the financial advice and expertise they provide. Sadly, the statistics show differently. Eliminating the middle man significantly increases the rate of return for many investors. Understand what you are paying for and then decide if it is really worth it.
3. Pay-for-Performance. Mutual fund companies have been criticized for high fees without demonstrated performance. Especially once the fees are subtracted, performance isn't always that impressive....some would even call it dismal. Don't pay to play if the fund doesn't perform.

Market capitalization is a great common sense tool that gets lost in the more sexy investing software, charts and systems. It's a shame because many people would have been spared a great deal of grief in the past by understanding how to use market capitalization.

Before going further, market capitalization is calculated by multiplying the market price of stock by the number of issued shares of stock. Using an overly simplistic example, let's assume the price per share of stock for company X is $10 and they have issued 1 million shares for a total market capitalization of $10 million.

By this point a few questions should immediately come to mind including:

1. What is the total market for this given service or product? If company X in the above example was selling bejeweled dog collars for miniature tea cup sized poodles then will the demand warrant the total investment. Seems simple enough but novice investors might be surprised to learn how frequently a company over-estimates the total demand for a given product. This is particularly true with new and/or un-proven technology. The classic example is Beta video tapes. Although VHS video tapes went on to predominate the market, for a variety of reasons, the demand for Beta remained insufficient to take the lead.
2. What is the anticipated penetration level? Are the estimates realistic? It doesn't matter if Company X is the only one today...they still can't expect 100% market penetration because as soon as they become profitable copy-cat companies will move in. Without the start-up costs they might even have a distinct price advantage. Further, compare market capitalization with expected saturation levels. The more risky and/or unproven then the more conservative penetration and saturation estimates should be for any given company.
3. Does the market capitalization level reflect the actual opportunity? Here is an example from a newly funded start-up. Company ABC operates in a $6 Billion dollar industry within the health care arena. The IPO was $50 million and they were quickly listed on NASDAQ. Closer scrutiny reveals that the sub-industry within which they operate is only a $40 million dollar annual industry. While it is true the industry is shifting toward the new technology, due to regulatory and insurance reimbursement schedules, that shift will require major overhaul and recognition before going mainstream.

Measure stock portfolio performance vs. Benchmarks especially when trying to decide whether you need a financial planner or if your portfolio needs a major adjustment.

The scenario goes something like this: you sit down for an annual review of your portfolio and find it hasn't moved...or worse, it's actually declined. Is it time to fire your financial manager - or in the case of acting as your own financial manager - is it time to hire one?

It all depends. It is important to use an independent measure of performance before jumping to conclusions. If your portfolio is only up a couple points but the entire market has taken a turn for the worse then it might be time to celebrate. On the other hand, if the overall market is up 20 percent and your portfolio is lagging then serious attention is warranted.

Great. So, what is an appropriate benchmark? Again, it depends upon your portfolio. Try to use widely recognized standards as a comparison: for example, the S&P 500 would provide a good overview for stocks since it is such a comprehensive index. Use a bond index to benchmark the bond portion and be sure to maintain an approximate level of diversity between stock and bonds.

Paper trading is a fun and effective method for testing out your investment strategy in a simulated market environment. It is also a great opportunity to learn more about investor behavior and market psychology including some of the most common investor fallacies such as:

Representatives Bias: The tendency to make decisions based upon stereotypes or former learning.

Overconfidence: The tendency for new investors to over-estimate their forecasting skills or ability.

Anchoring: The tendency to fix or adhere to a course of action once it has begun.

Gambler's Fallacy: The tendency to believe a trend is due for a reversal despite probability.

Availability Bias: The tendency to emphasize the importance of easily obtainable information.

If you are brand new to investing then take time to understand what you are reading when viewing a Stock Exchange Symbol and learn Stock Market Investing Basics.

First, a stock exchange is exactly what it sounds like: a place where people buy and sell (or exchange) the purchase of stock and securities. Each security or stock is identified by its very own stock exchange symbol. In the United States some of the more common stock exchanges include:

• NYSE: New York Stock Exchange
• NASDAQ: National Association of Securities Dealers Automated Quotation System
• AMEX: American Stock Exchange

However, there are literally dozens of other lesser known exchanges in operation both in the USA and throughout the world. Some of the more common international stock exchanges you are likely to encounter in the media include FTSE International (London Stock Exchange), Australian Stock Exchange and Tokyo Stock Exchange (TSE).

A stock index is a compilation of individual stocks. By measuring the compilation of similar stocks instead of just one or two stocks, a stock index provides information about that particular market or segment.

Stock indices are typically related by some commonality: for example, the Dow Jones Wilshire 5000 is an index that measures or tracks almost every publicly traded stock in the United States. The Morgan Stanley Biotech Index is a small index that follows the biotechnology market. Each stock index has a specific focus that can provide highly specific or very generalized information.

Interested in learning more? Explore new stock market indexes such as: Ethical Stock Market Indexes and Environmental Stock Market Indexes.

The question of when to sell stock is not easily answered. On the one hand, you know a correction is coming but the question of "when" isn't so clear. Anyone who has ever sold early only to stand by and watch others reap in huge profits have felt the pain of premature sales. Sure, once the correction finally comes you might have some consolation but by that point your brother-in-law has a new convertible so what do you care that you were "right" but just a little early.

Of course, the only thing worse than selling out early is selling late. Nobody wants to be the idiot holding the hot potato once the market cools. So, where is the happy medium?

1. Set a Sell Strategy in Advance...then stick to it! What is your performance goal for this stock? If it is 10% then sell when it reaches 10% and move on. Learn not to look back. Everyone has those "could have - would have" stories.
2. Cut Losers. Admit when you have made a mistake. Live and learn. It's part of the game.
3. Put it into writing. Use trailing stops or stop loss orders and other techniques to remain focused and take the emotion out of the equation.

Book: It's When You Sell That Counts