Sunday, November 21, 2010

Buying Stocks For The First Time

If you are intimidated about buying stocks for the first time, you are not alone. A lot of people are intimidated by the stock market and are just not really sure where to begin. Most of the research I've read online spends a great deal of time teaching the beginner how to set up a brokerage account, how to fund it and execute a trade. But, the real trick to being successful at investing starts with some basic fundamentals that begin before you invest a dime of real money.

The first thing that I suggest is that you pick a strategy. Aimlessly buying stocks based on tips from friends, watching Cramer's Mad Money will probably frustrate you because you are basically investing without a plan in mind. The nature of the stock market is that it punishes those who don't study it and learn from their mistakes. Don't let this be you. When it comes to stock market investing strategies, there are three basic ones. They are growth, value and income investing. I'd also throw momentum investing in there as well, but I myself consider that a form of growth investing. Of these types of strategies, I prefer growth and upon doing my research to find a suitable strategy have adopted the CANSLIM approach developed by William O'Neil. Do some research and find an investing technique that you like. Once you've done that, put the blinders on and don't look back. Start your process to master it.

Let me walk you through the steps I took before I bought my first stock. The first thing I did was read everything about I could about my strategy and wrote down the steps I would need to take on daily basis to implement it. I worked on one step at a time. For example, one of the first things I needed to do was determine the direction of the stock market. My investing strategy calls for me to only invest in a market that is an uptrend. I spent several months working on understanding how to watch the market indexes before I did anything else.

After that, I needed to start screening for stocks that met my criteria. There are thousands of stocks to choose from and your goal is to narrow down the number of stocks that you need to look at on a daily basis. You do that with a stock screen that helps you find the stocks that meet what you are looking for.

Once I narrowed that down, my next step was to start looking at charts to see the best buy points for the stocks on my watch list. This is proving to be the most challenging areas of CANSLIM. To gain the experience that I needed, I started using a stock simulator to learn the mechanics of how to buy stocks. I then would watch the performance of these stocks to see if I needed to sell them because they had dropped in value or because they had reached a predetermined profit target.

Even with a simulator, this is not an easy task. I know that I had a stock recently that went up 29% and instead of selling it, I watched the gain evaporate. I did sell it at a 10 percent gain but I learned from my mistake and will sell a stock like that the next time I see that situation.

Once you've streamlined your process and started gaining experience practicing, the next step is to do the same thing with real cash. It's at this point, I'd open up a brokerage account. Personally, I use TD Ameritrade. Keep in mind that it will take a few days to get it funded.

So there's what I would do if I were buying stocks for the first time. Pick a strategy, start practicing, make some mistakes and then repeat the process with real money. Good luck on your stock market investing program.

Thursday, November 4, 2010

Why I Think You Should Be Investing In The Stock Market Today

I guess that I want to go on record here and say why I think you should be investing in the stock market today. Yesterday, the Federal Reserve decided to pump $600 billion dollars into US Treasuries. I thought the timing of the decision was especially interesting coming a day after the elections. Anyway, it's my feeling that this will decrease the value of the dollar. A weaker dollar in my opinion will lead to the stock market to go higher. Because of this I am bullish on investing in the stock market right now.

The markets are a global market place and because of that I also think that the value of the stock market represents it's global value at any given time regardless of currency. Here's how I look at it. If the Fed yesterday came out and said they changed the value of the dollar to 50 cents, wouldn't it stand to reason that if yesterday you charged $10 dollars for your product, you'd double it to $20 dollars immediately. You would after all, want to still have a value of $10 for your product.

While in the United States, the value of the dollar is all what we in the United States perceive it to be, those in the rest of the world see it as a bargain and this will affect prices in two ways. One it will increase global demand. Two, the people selling their stocks will know that it's worth is actually being misrepresented. These two factors mean that the stock market will probably go up in my view.

The only problem with my theory is that the market could have already priced in the news of the Fed's decision. While I think that this is possibly the case, I actually think they will end up buying more Treasuries than they announced.

So, let's see how things play out. Keep in mind that when you reviewing your stock market investing plans, to always keep an eye on the current outlook and only invest when the market is in a confirmed uptrend. Because my opinion doesn't matter. What does matter is what the market says on a daily basis - not me.

Wednesday, November 3, 2010

At What Percentage Drop Should I Sell A Stock?

I’m back today to answer one of my reader’s questions which was at what percentage drop should I sell a stock? I guess the answer to that depends on whether you just bought the stock or have had it for a while and it’s had a run up in price. I take my general rule of thumb from the CANSLIM strategy which is to cut all losses at 7-8% of my purchase price.

In practice however, I think it’s wise to sell a stock sooner if you feel it’s not acting right. By not acting right, I mean that it shows signs of institutional selling (closing lower on high volume). Also, you’d want to sell sooner if the general market direction turns into a correction.

Deciding when to sell after a run up is a little more difficult. I suggest again that you pay attention to the price and volume action of the stock. If the stock’s price declines on more days that it rises, it’s time to take a close look at selling that stock. Also, if it’s had a significant run up in price, don’t hesitate to lock in your gains if you feel something is not right. There are plenty of opportunities in the market.

Ultimately, what you have to do is set some general guidelines and after that you have to let experience be your guide. Here are the steps that I would take to fine tune your skills in buying and selling stocks.

  • Set a hard and fast rule that you will sell any stock if it goes 7-8% below your purchase price.

  • When the current IBD outlook is changed to “market in correction” sell all of your stocks regardless of their gain or loss.

  • Once a stock reaches a 20% plus gain strongly consider selling it.

  • Keep a trading journal that you can review your winners and your losers.

  • Check the chart’s for the stocks you sold a month later, two month’s and three month’s later to see if you sold to soon.

  • To gain more experience, use a simulator.

Most of your problems in determining when to sell can be solved by picking better entry points. Spend your time identifying proper buy points and improving your recognition of chart patterns and you’ll get stopped out less.

I’d also suggest that you focus on what I call your “batting average”. Keep track of all your stock buy and sells. Shoot for a 1 in 3 or better average. I like to classify my trades as follows:

  • Outs: Any stock trades that I have a loss or only a small gain.

  • Singles: Any stock I sell with a 20% gain.

  • Doubles: Any stock I sell with a 40% gain.

  • Triples: Any stock I sell with a 80% gain.

  • Home run: Any stock with over a 100% gain.

When you are new. Focus on hitting singles. You’re working on getting on base. After you’ve gained some experience, pick your entry points better. Review your at bats and see if you could have stretched those singles into doubles.

On the flip side, review your outs and see if you could have recognized when to sell sooner or maybe improved your buy points.

I hope that helps you improve your stock market investing results. Let me know if I can help in any other way.