Learn The Stock Market And How to Trade

Here is my third part of stock market 101 – 101 facts and thoughts about investing in the stock market.  I hope this has intrigued your brain a little about other aspects of investing than you may be currently focused on.  If you have any questions or suggestions for post please let me know either buy email or by commenting below.

1. The market can remain irrational longer than you can remain solvent.  Please let me know where this quote comes from, it’s one I find myself reminding MYSELF about as I’m telling people that some stock price is ridiculous for reason x, y, or z.
2. Under current known conditions for stocks, the longer you hold a position the more likely you will end up positive on the investment.
3. Diversification reduces risk to a point, then it only reduces returns.
4. Investing in non-correlated investments reduces risk with less of an impact on returns.
5. Remember to consider the impacts of inflation when looking at investment time frames.  4% returns sound good until you figure in 3% inflation.  4% doubles your money every 18 years, however if after inflation your real return is only 1% your money value, or spending power only doubles every 72 years.
6. The rule of 72 – Take 72 and divide it by your yearly % return to figure out how many years to double your investment.  Example – 6% yearly return: 72/6 = 12 or your money will double about every 12 years.
7. Try figuring out your own inflation versus what the government says it is.  Look at your bills and see how much they have increased over the last year.  For some people it may be less, others more.  I drive a lot so when gas prices fell I had much more spending power.  Others, high food prices may be affecting them more.
8. When looking at returns and stock prices don’t think in absolute numbers.  One $500 stock or 100 $5 stocks still cost you $500 to buy in.  If both stock prices increase by 1% you’ll earn the same money from either stock.  You want to look at percent gains or losses in general.
9. Don’t feel you have to be 100% invested all the time, make sure you have the ability to jump in on great opportunities when they come around.
10. Don’t feel you have to reinvest your dividends in the same company you get them from.  Just because a stock was a good buy a year ago doesn’t mean it is now.
11. Reading about investing is good, talking about investing is better.  When you have to explain your reasoning to others or answer questions you’ll refine your thinking to the next level.
12. When you buy a stock without margin the most you can lose is 100% – however, when you short sell a stock there is infinite loss potential (well – until the broker calls you)

Alright, this 101 stock concepts is getting hard.  Mostly because it’s difficult to remember what I already said.  The other hard part is some of these ideas have fired me up to write some more post on them.  So following my previous pattern maybe I’ll get 6 more done tomorrow

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This is a continuation from yesterday’s post Stock Market 101. However, the info isn’t in any order so feel free to read this post first if you weren’t here yesterday.

Now Stock Market Tidbits you need to know 51 – 101 (though listed 1 – 51 for my convenience):

1. Short selling isn’t just betting a price will go lower, but you’re actually borrowing someone else’s   stock to sell it, then buying back stock for them when you cover your short
2. A short squeeze occurs when demand pushes prices up enough that the short sellers must get out to save capital, having short sellers getting out drives the price higher potentially forcing more shorts out of the market.
3. You must have a margin account to short sell
4. Usually a stock must be over $5 a share to be valid for short selling.
5. Long squeezes are the opposite of short squeezes.  As the price drops people’s stop losses hit, causing them to sell, dropping the price lower.
6. DRIPs are when you receive your dividend in shares of the same company usually without commission.  Also you can often purchase into drips with minimal or no commission.
7. A falling knife is stock that is falling quickly.  The metaphor is buying falling stocks to get cheap prices can be like catching a following knife – you may end up getting hurt.
8. Back up the Truck (BUTT) – is a term to tell someone you are buying what you can afford to throw at it.
9. Initial Public Offering – The IPO is when a stock is first offered to the public to purchase stock.  Often done in an auction format before being traded on an exchange.
10. A limit order tells the broker at what price you’d be willing to purchase shares.  A good tool that is sadly not used enough.
11. The P/E is the price / earning (per share) ratio.  Good for comparing one company to another.
12. The PEG is the Price / (Earning*Earning Growth) – this is really good if you (or anyone) could accurately predict earning growth.  I like PEG less than 1.0 – but this varies from sector to sector.
13. EPS – is the earnings per share.  You can put about anything in the financial reports on a per share basis to think about what you are purchasing for the price.
14. I love when I find cash per share greater than the price of the stock! (Yes it happens)
15. An unrealized gain or loss if the loss or gain you feel when your investments go up or down, but you haven’t sold them yet.
16. A realized gain / loss is the gain or loss you get when you do sell your investment.  This you have to pay taxes on.   (Or get to write off taxes.)
17. A long term gain or loss is a realized gain/loss that you held the investment for at least 1 year. (Often taxed at a lower rate)
18. There is a settlement period when you’re trading different investments.  There is a time lag of a couple of days between when you pay for a stock and you “technically” recieve the stock.  Check with your broker for guidelines/ fines for selling again within that window. 
19. Shareholder Equity (SE) = Assets – Liabilities
20. Remember just because something is listed on the books as an asset or a liability doesn’t mean it is for the company – try to use common sense.
21. Inventory is listed as an asset, but it ties up money that could be used for something else other than sitting on a shelf
22. Accounts Payable is counted as a liability, but it’s still money sitting in the companies pocket rather than in a supplier’s. 
23. Think about financials, don’t just follow them.
24. Markets go up – and down – if you put small amounts of money in the market consistently you will dollar cost average.
25. Dollar Cost Averaging is buys you more shares for your money when the price is low and less when the price is high.
26. Another style made famous by the quote “buy from the scared sell to the greedy” has you sell a small piece of your investment continuously as the price rises and buy a little consistently as the price falls.

Ok, I guess I’m just a tease, because I still have 25 to go, but anticipation makes everything better

See you tomorrow.

Between the discussions of derivatives, butterfly option spreads, buying penny stocks and dividend arbitrage play sometimes we (including myself) need to get back to the stock market basics. Remembering what investing is truly about will help even the advanced investor remember what truely drives the market. So without further ado here is

Traders in a Stock Market, Chicago Me… Buy From Art.com

101 stock market basics.

1. A share is a representative of a piece of ownership in a company.
2. Stock is the collective term for shares.
3. If you sell a share someone HAD to buy it.
4. If you buy a share someone HAD to sell it to you.
5. If there is was no buyers, technically on that moment the stock is worth 0.  (IBM during Black Monday)
6. The large markets have market makers who buy and sell to make money and keep things liquid.
7. Liquidity is how easy you can buy or sell shares.
8. The ask is how much a market maker will sell to you for.
9. The bid is how much a market maker will buy from you for.
10. The spread is the different between the ask and the bid and this is how the market maker makes money.
11. A bull market is when stocks are climbing consistently.
12. A bear market is when stock are declining consistently.
13. A dividend is a return of money to the share holders.
14. Dividends are currently taxed at a lower rate that regular gains.
15. The dividend yield is what percentage of your money invested will be returned to you per year in dividends.
16. Ex-dividend date is the date you must own the stock in order to receive the next dividend.
17. Payout ratio is what percentage of cash flow (sometimes earnings) a dividend is going to use up.
18. Authorized Stock is the number of stocks that will exist representing ownership in the corporation.
19. Restricted Stock can’t be traded on the open market, it must be approved by the SEC.  This is usually owned by insiders.
20. Letter Stock is another term for Restricted Stock.
21. The float is the number of shares being traded on the open market.
22. Outstanding shares is the number of float stock plus restricted stock.
23. A stock split is when a company cuts the worth of a share in half by doubling the number of stocks.
24. Stock splits are often done to increase volume of liquidity.
25. Reverse Stock Splits are when a company increase the worth of a share of stock by reducing the number of shares to all equally.
26. Reverse splits are often done to keep stocks out of the penny stock range.
27. Stock buy backs occur when a company buys back stock off the open market or from restricted stock and retires it.  This reduces the outstanding shares.
28. Stock issues occur when a company takes treasury stocks and sells it on the open market or to an insider increasing the number of outstanding shares.
29. Stock issues is also called share dilution.
30. NYSE is the New York Stock Exchange
31. To be on the NYSE earnings must be more than 5 million and have more than 2 million shares to trade.
32. NYSE stock symbols can have 1, 2, or 3 letters.
33. NASDAQ stands for National Association of Security Dealers Automated Quote System
34. NASDAQ stocks have 4 letter names.
35. Option names have their expiration date and strike price coded in the name.
36. Stock shares can be grouped.  Commonly called Class A and Class B stock, they are usually the same except for different voting rights.
37. Preferred shares generally have no voting rights, but receive their dividend first and must be paid in full if missed before common stock recieves any.
38. The market cap is the worth of a company if you were to buy it completely out of outstanding shares.  Share Price X Outstanding Shares
39. Volume is how many shares are traded over a given period of time.
40. The higher the volume the higher the liquidity.
41. Fundamentalist believe that the worth of a stock price is correlated to the metrics of the business and economy.
42. Technical Traders believe that everything that can be known about a stock is priced into the stock and the movement of the price tells more about the future price than the fundamentals.
43. Many people are a hybrid of fundamentalist and technical traders.
44. Resistance is a price point which appears to stall the climbing of a stock price.
45. Support is a price point which appears to stop the falling of a stock price.
46. Remember it’s not a line on a chart that creates support or resistance, it’s a price point that encourages buyers to buy or sellers to sell.
47. Exchange Traded Funds (ETF) are buckets of stocks that are sold using a single stock.
48. Commissions is the cost of making a stock purchase.
49. Slippage is the percent of earnings lost due to commissions and the spread.
50. Stop – Loss is a tool to automatically sell when a price gets too low (or too high if you’re short selling)

Ok, that’s enough stock market today.  I’ll finish the rest of the stock market 101 investment how to tomorrow.  I find as I read through the list I’m reminded of times I made a bad investment because I overlooked something as common as too high a payout ratio or excessive stock dilution.  We’ll see stock market 101 part deux tomorrow.