Monday, November 30, 2009

How Can I Tell When Big Money Is Buying Into Stock?

The key to making money in stock market investing today according to William O'Neil is by buying stocks that institutional buyers like mutual funds are buying. But, how can you tell when the big money is buying a particular stock? The answer is by analyzing the price and volume action of the stock on a daily basis. What you'll find is that when a the big money is flowing into a stock, the price of the stock will move higher on volume that is higher than the day before. Conversely, if you want to know when the big money is flowing out of a stock, you need to spot the price falling on higher volume than the previous day.

The real question is: why does this matter?

The reason is that when institutions start buying a certain stock, it drives the price up because the stock is in greater demand. If you can spot this demand when it first starts occuring, you can ride the stock up in price until they decide to get out. This is also the time that the media announces what a great buy it is. By "advertising" the stock in this manner, it helps attract buyers that the big guys need desperately. Without them, they'll drive the stock price down too fast.

You'll notice this on a smaller scale in penny stocks. If you have ever received a flyer or email promoting a stock, it's the same philosophy at work.

Buy stocks with strong earnings and strong institutional sponsorships and you'll be much better off than you were before.

Stock Market Investment Software

I came across a piece of stock market investment software called the Checklist Investor. If you have read some of my stuff so far, you know that I highly recommend keeping a checklist of the steps you take to make every investing decision you make. This kind of software allows you to do just that. The reason I think checklists are so valuable is because it takes the emotion out of your decision making. If you have already pre-thought out your decisions before you are in the heat of the battle. It's much easier to follow your plan. If you wing it, you make decisions based on emotion not logically. You can't do that and make money consistently.

You should run your stock market investing system like a well oiled machine. Only changing one thing at time until you see the effect of that decision and how it plays out. You'll eventually develop a list of best practices to follow.

Checklists like this are used everyday by professionals in all fields. I know that as I watch this, I am watching an NFL game and on the sideline the coach has a huge laminated piece of paper that boils down all of the decisions he makes during the game to one page. When he finds himself confronted with different game situations, he has already decided what he is going to do -- before the game starts. When the airplane landed in the Hudson River, the first thing the pilots did when the engines went out was pull out a checklist.

You as an investor, should do the same.

Can I Buy Penny Stocks With My Roth IRA?

Someone was asking me the other day if they could buy penny stocks within their Roth IRA. The answer is yes. IRA's can be funded with stocks, real estate and more. Basically, you can fund an IRA with any type of investment vehicle as far as I know. All you would do is open up a special brokerage account specifically for Roth IRA's.

Once you have the brokerage account, you could then buy stocks, bonds, options and more if your account was approved for it with the brokerage house. An IRA or a Roth IRA is a creation of the tax code set forth buy the government. These rules classify the taxation of contributions you make to the account, the returns you get within the account and the withdrawals you make from it. The day in day out operation of the account as far as trading goes works like any other stock market investing account you might have.

Is It Safe To Start A Stock Market Investment Program In Today's Economy?

A lot of people are wondering with all that is going on if it is safe to start an stock market investment program in today's economy. Now, if you talk with most financial advisors they will tell you to start now and get your money in the market to start working immediately. I agree that it is good to start an stock market investing program now. However, I think that you need to only invest when the market is in an uptrend. I also think that while you can just put your money in a mutual fund and forget about it. I think it is better to be an active stock market investor.

If I learned anything from the market in 2008, it's that no one tells you to sell. Meanwhile, everybody gives back their stock market gains. You've got to learn to invest in individual stocks and have a buying strategy PLUS a selling strategy. You've got to learn how to lock in stock market gains and cut losses immediately. No matter what you decide to do, you've got to get started taking control of your investment portfolio instead of leaving it up to those who tell you only when to buy and never when to sell.

Investing in today's economy is no different than in many of the economies of the past. The stock market has gone up and down. It's crashed. It's gone through depressions and recessions in the past and has still proven to be the best long term investment vehicle for the small and large investor alike.

What Are People Doing With Their Money Now That The Stock Market Is Scary?

After the stock market decline of 2008, a lot of people are wondering what are people doing with their money. For the most part, I believe that most investors stayed put and rode their mutual fund values down and then held onto them. If they did that, they were rewarded by strong returns in 2009.

I think that if you are in a mutual fund with a long term investment horizon, you've got to ride out the storms of the ups and downs of the stock market investing. The reason I feel that way is because when you are invested in a mutual fund, you own shares of the fund and not shares of one or a few shares of stock. This means that fund can dump underperforming stocks and keep ones that are artificially depressed.

Mutual funds are great place to be as a long term investor. The main downside I see to being invested in funds is that they stay fully invested at all times. That means you are subject to the overall trend of the market. You've got to ride those out.

For individual stocks, I don't believe that you should buy and hold. You should buy with an exit plan. All stocks no matter how good will go down at some point and there is no need to give back all of your stock appreciation. You've got to have strong sell rules that prevent and limit losses and lock in gains.

Many people though, are scared stock market investing. They are so scared that they have sold out and are sitting on their money in savings accounts and certificates of deposit (CD's). I read a story the other day that their were some people so afraid of the banks even that they kept all of their cash at home in a safe. But, really they found out that it isn't much safer when it was stolen from their house.

While the stock market might be scary to those unfamiliar or unused to the ups and downs, it still remains one of the best options for someone to make money in the market but only if you have a long term investment horizon.

What Is The Stock Market?

It dawned on me that some of my readers are beginning investors and may wonder: what is the stock market? I don't know about an official definition, but this is how I describe it. The stock market is a place where buyers and sellers meet to trade stocks. It's much like when you go to the store to buy groceries. All of the sellers send their goods to the store and all the of the buyers can go to one place to purchase the things that they need instead of having to go to each individual seller to buy it.

It's the same for companies shares of stock. In the stock market today, companies issue stock to raise capital. An investor buys the stock in hope of getting a return on their investment. However, when he wants to sell his stock, he needs an efficient way to find a buyer. If he had to go door to door or call all of the people he knew to sell it, he might not find a buyer and he also might not find the best possible price if he only finds one buyer.

In order to transact the buying and selling of stocks, the stock market was created to bring buyers and sellers together in one place and allow them to bid on how much they want to pay. Prices are determined then by supply and demand for the stock. Prices are also affected by the stock market investing news each day. Rightly or wrongly, this news affects the price regardless of whether it might be true or not. Therefore, you've got to be careful to know the companies you buy stock in and not be swayed back and forth by talking heads in the media.

Those new to investing, might be concerned about a stock market crash and that they might lose money in the market. This is entirely true. But, the market doesn't have to crash for you to lose money. You can lose money in stocks regardless of the overall direction of the market. It's up to you to study the market and only you can protect your capital by being prudent and following a set strategy to maximize the return. The stock market can provide higher returns but along with those potential returns comes extra risk that you might lose money.

That being said, if you start to study the market, you'll find that the United States has two of the most active stock markets in the world -- the New York Stock Exchange and the NASDAQ. Both of these markets provide ready access to buyers and sellers and you can check stock market quotes any where in the world.

There are many stock markets in the world, including an Indian Stock Market, Australian and China. I was amazed to learn that. For our purposes, there are plenty of investment opportunities right here on the stock market exchanges in the United States.

Friday, November 13, 2009

How Can I Start Investing In The Stock Market Without A Broker

To begin a stock market investing program, the first question many people, myself included, ask is "how can I start investing in the stock market without a broker?" The actual mechanics of investing without a broker is easy but making money is the hard part. That's why the first thing you must do before you invest a cent, is to pick an investment strategy. Once you've done that, your next job is to know it inside and out. You must devote time to learn your craft. If it were easy to make money in stocks, everyone would be doing it. The key factor in your success or failure is the time you devote to learning and refining your strategy.

For the person just starting to invest in the stock market, there are two basic strategies to choose from -- will you be a growth investor or a value investor. In my opinion, a growth investor is someone who looks for strong earnings that will propel a stock's price higher. A value investor looks for stocks that are basically on sale or underpriced compared to the actual value of the company.

For me, after studying both strategies, it wasn't a question of which one I could use to make money with, it was a question of which one I could make money fastest with. Both will work and either strategy I can implement without a broker. I was swayed heavily by William O'Neil's book, How To Make Money In Stocks.

In it, he outlines how he choses companies based on strong earnings and sales. More than that though he also talked about having specific times to buy AND sell your stocks. This is a distinction that I think is critical because most brokers will tell you to "buy and hold" your investments. But, even the best stocks go down in value. Why ride them down in price if you earned a profit? You must learn to take profits instead of letting Wall Street con you into watching them disappear.

You do that by setting specific sell rules which he outlines in his CANSLIM investment strategy and publishes daily in the Investor's Business Daily. The two he recommends are:
  1. Sell every stock that goes down 7-8% in value
  2. Sell every stock once it's gone up above 20% (unless it shot up that high in the first 8 weeks, then you hold it)
The goal by establishing these two rules is that you can be right once in three tries and still make money investing in the stock market. He likens it to a baseball player hitting .300. By being right once in 3 attempts, you can learn how to invest in the stock market profitably.