Sunday, October 21, 2012

Stocks - Understanding the Risks

"Rule number one is don't lose your money. Rule number two is don't forget rule number one". (Warren Buffet)

Almost every year, a few penny stocks emerge from obscurity to make huge profits for their investors. Penny stocks which soar in value are often in "hot" industries; industries perceived as fast growing and offering great future potential. In recent years, "hot" industries have included mining, energy, health care, and high tech. Penny stocks can be extremely lucrative when they work out. However, the risks are very high. The vast majority of them fail for various reasons. Generally, playing penny stocks is more gambling than investing.

However, if you are determined to pursue the potentially huge profits penny stocks occasionally deliver and are willing to take the big risks; here are a few tactics I suggest for your penny stock portfolio.

1. Don't invest if your personal life is troubled. The market provides very expensive therapy.

2. Use a separate gambling account to buy penny stocks. This is money you are fully prepared to lose. It is money you will never need for your living expenses, family needs, emergency funds, retirement savings etc. Never mingle it with your regular investments or other accounts. Limit your gambling account to a tiny percentage of your liquid assets such as 1% or less.

3. Use stop loss orders religiously to help limit losses or protect profits. They can be a useful tool, however stop losses will not protect you if your stock loses much of its value or becomes worthless.

This is an example of how they work:

You buy ABC stock at $10 per share. You place a stop loss at $8. This means that if the price of ABC declines to $8, your stop loss order will become a market order and ABC will be sold at $8 or the best available price. However, there is NO certainty of the price you will ultimately get. In a fast declining market, ABC could sell for FAR less than $8. If ABC becomes worthless, your stop loss will likely be unfilled and you will receive nothing for your shares.

You can also use stop loss orders to protect profits if your stock rises in value. Some exchanges do not accept stop loss orders.

4. Never pyramid your profits to buy more stocks.

5. Let your winners ride. Raise your stop loss orders in an attempt to protect your profits. Don't sell just for the sake of taking a small profit.

6. Never buy penny stocks on margin (borrowed money).

7. Invest in companies based on simple ideas, products or services. As legendary investor Peter Lynch put it, "Never invest in an idea you can't illustrate with a crayon".

Friday, October 19, 2012

The Reality of Stock Trading As a Business

Internet Stock Trading

Internet stock trading is the next big level of the trading practice. It took how many years, and absolutely four centuries before the wonderful idea of trading conveniently pushed through and materialized.

Through the years, the systems for market transactions have improved a lot. There are practices that were eliminated, and several others were greatly and significantly modified.

All these because the system and the whole practice needs to be improved and needs to be boosted significantly and rapidly to cope up with the rapidly changing times and economies.

Thus, markets of today are truly the improved and modified versions of the stock markets of the yesteryears. No doubt about that.


Everything is going through a lot of changes. There are new and emerging technologies that are integrating into the current ones.

Most business transactions and systems are also being influenced and affected by these integrations between the technology and the business transactions.

One particular and clear example of such is the online stock market. The market is already interactive and active trading itself, but when it became online, the possibilities and potentials further boosted and sprouted.

Internet stocks make up for more convenient and adjusted stock market trading transactions.

Now, the trader and investor need not physically go the market to spend some minutes or hours trading their stocks. Now, even if they are still in bed, taking their lunch, watching the television, playing golf, or enjoying the out-of-town sights, they can still connect and buy and sell their stocks and shares.

That is the advent of the Internet. Through the years, the Internet has further improved. It need not cable wires now to be accessed. Internet is accessible now through Internet-service providers' wireless facilities, through satellite or through other and emerging technology like the Wi-Fi and the longer range version, WiMax.

Trading via the Internet

There are portals and online sites that facilitate for convenient and effective trading online of stocks and equities.

As mentioned earlier, these sites are provided with the necessary tools and software that would enable the distant stock market investor to make buy and sell transactions for stocks.

Trading through the Internet need not be hard and complicated now. Many of these Web sites are so user friendly, that sometimes you would find that it could be harder to run the Excel program than run the online stock market trading portal.

The features are also very awesome, that for sure, you would hold your breath and discover a lot of new programs and commands for yourself.

Get yourself a copy of these software, which are widely and easily accessible in the market today. Enjoy the thrill and advantage of the emerging technology and trend called the Internet.

Saturday, October 6, 2012

Why Should I Learn to Trade Options?

So you're interested in the market. Know a bit about a few stocks. Even invested in them. So why should you learn about options; aren't they for the professionals? Aren't they dangerous and complex? Shouldn't you stick to what you know?

Well many of us would say that it's traditional stock investing that's complex and dangerous. High frequency trading dominating trading volumes with one firm's algorithm battling another's, usually at the expense of the average retail investor; prices driven as much by offshore events as by company value; and regular wild intra-day swings all contribute to the current difficult trading environment.

However, at the same time, the actual process of trading has become much easier. Markets previously open only to professionals - derivatives, forex, offshore markets etc - are now available at the click of a mouse, at a reasonable commission, to anyone with a computer. So how to take advantage of this increased freedom, profitably?

Well, I'd suggest options are the best, most flexible, market available to the non-professional in today's environment. Why? Well, what's difficult about traditional investing is its restriction on 'betting' on the upwards direction of a stock; success is defined by picking those stocks that will rise.

Even if you choose a good company, buy it at an undervalue price and constantly monitor its performance - in other words you are a good value investor - it only takes a week of bad news from Europe or lower than expected US employment numbers or some other external shock for the stock to fall. There's nothing more disheartening that seeing your well researched investment in the next Apple, say, be somehow derailed by a shock on the Portuguese bond market (or some other such seemingly irrelevant piece of news).

So much for value investing; what about short term/day/technical trading? Many do make good money from the likes of trading technical support and resistance, the short term effect of news events such as the FOMC meetings or even scalping the forex market. However you need a level of training, knowledge and several months, if not years, of losses before you can find a reliable edge. I'm are also rather sceptical of some of the more esoteric methods touted as the holy grail of such approaches (a Head and Shoulders Fibinacci Elliot Wave anyone?).

Which leaves options which are, indeed, often dismissed as too complex, with a requirement for a high degree of mathematical sophistication, for the average investor. However I'd argue that options are actually the ultimate flexible, well, option for expressing a view on a wide range of expected market outcomes. With perseverance and proper assistance I believe any trader can do well.