Getting Started in Stock Investing and Trading

Michael C. Thomsett

• Publisher: Wiley
• Year: 2010
• Print ISBN: 9780470880777
• eBook ISBN: 9780470937143
• Edition: 1
• Topic: Business
• Subtopic: Stocks
• Index: Business

An up-to-date guide to the complex world of equities

Getting Started in Stock Investing and Trading walks investors and traders through the essential information they need to know before they decide what kind of participant they want to be in equities. The book is filled with the key strategies and tools and offers a comprehensive guide for those entering this marketplace. The author does not argue that one method is better or more appropriate than another. Rather, he reveals the various methods and lets investors decide for themselves. The book covers investment risks, value investing, market strategies, trading methods such as day and swing trading, technical indicators, and diversifying your portfolio, and

• Offers a thorough overview of strategies and tools that investors need to profit from the volatile equities markets
• Provides examples, charts, and timely additions that reflect recent changes in the equities markets

Other titles by Thomsett: Getting Started in Bonds and eight editions of Getting Started in Options. This book is another title in The Getting Started series, which makes complex issues easy to understand.

Part 1

Investing

Chapter 1

Investment Risks

Investing in stocks is an exciting, action-packed, fast-moving idea that for decades has excited many people—even those with little money to invest—with the possibility of building wealth.

It is possible to make money in stocks, but it is also possible to lose. The whole question of risk—exposure to losses due to a variety of causes—determines how slowly or quickly values change and which kinds of stock positions you end up taking. There are many industry sectors in the market, and each has its own risk characteristics. Some are especially sensitive to changes in interest rates, and others exist within a very specific market cycle of changes in profits.

risk

exposure to loss resulting from numerous market, economic, and company-specific causes.

Do you know the range of risks you face as an investor? Some people think that the sole risk they face is directly related to profitability. If you make a profit, you beat the risk; if you have a loss, you lose.

While this distinction is at the core of most investment plans, it is not the whole story. Every investor wants to earn a profit on every investment decision made. However, experienced investors also understand that it's a percentage game. You are going to have some losses along the way, and the key to succeeding is creating profits that are higher than the occasional loss, and for which the dollar amount is much greater.

Key Point

No one is able to create profits in every instance. The key to success in the market is experiencing more profits than losses.

cycle

an economic tendency for sales volume and profits to change predictably due to economic or calendar timing. Among the best-known of market cycles is that experienced in the retail trade, which goes through specific seasons of high and low sales volume based on consumer buying habits.

This chapter examines a number of different risks every investor faces. It is not simply a matter of profits versus losses, but a more complex series of conflicts between supply and demand, timing, influences in and out of the market, and the economic climate. In other words, many things affect your portfolio and add to or take away from your spectrum of risk whenever you have money in the market.

Market Risk

Most people understand the most obvious form of risk, known as market risk, or exposure to declining prices. This is only the first of many risks every investor faces and needs to manage.

market risk

the risk that prices will decline, reducing the value of stocks, potentially for many months; market risk is the best-known and best-understood form of risk.

Managing risk refers to how you structure your investments to maximize profits while minimizing the chances of losses. This requires careful selection of stocks based on sensible criteria, avoiding putting too much capital into any one stock, and continually monitoring the market to spot changing trends. It also requires that when considering any one company as a possible investment, you know what trends to examine and how to determine market risk based on the indicators you pick and track.

Key Point

The purpose in setting up a portfolio wisely is not in completely avoiding risk, but in deciding how to manage it.

Will the value rise or fall? Realistically, you should understand that a stock's market value may either rise or fall. As apparent as this seems, some investors assume that their entry price is the “zero” point and that prices will rise from that level as soon as a buy trade is entered. This ignores the reality that prices can also fall. So managing market risk comes down to how well you select stocks and, equally important, how well you time the decision to buy. The better you are able to pick stocks appropriate for you and to determine when to buy shares, the less exposure you will have to market risk. The price changes are caused by many factors, but as a general rule, the concept of supply and demand determines the value of shares.

shares

part ownership of a corporation that is listed publicly. Shares are bought and sold over public exchanges. Owners of shares are entitled to receive dividends and common stock owners are allowed to vote on matters of corporate management. Shares of stock rise and fall in value every day based on the ever-changing levels of supply and demand.

Market risk is the ultimate expression of supply and demand. After you purchase shares, many changes can occur. If the demand for a company's shares is quite strong, prices will continue to rise; if demand is weak, prices might fall. When the supply and demand for shares are about equal, the price tends to stay within a narrow range. This condition, known as consolidation, is best described as a time of indecision. No one can tell whether buyers or sellers are in command and, as a result, it is impossible to predict whether the next price direction will be upward or downward.

Market risk is easily observed in hindsight. Everyone can see when they should have bought shares and, just as important, when they should have sold. For anyone interested in creating a long-term portfolio of profitable holdings, there are ten general guidelines for managing market risk:

1. Research a company before buying stock.

2. Look for changes after you buy shares.

3. Be aware of market cycles for the sector.

4. Know a company's position within the sector, remembering that the leader tends to outperform other companies.

5. Develop a list of criteria you consider most essential for narrowing down your choices.

6. Use past trends to predict how the future might look.

7. Give up some short-term opportunities gladly, in exchange for longer-term certainty.

8. Pick a wise plan and don't veer away from it.

9. Establish clear short-term and long-term goals and use these as guides for the decisions you make.

10. Never make a decision just because the majority is making the same decision; be a contrarian investor.

supply and demand

the economic forces that set prices for publicly traded stocks. When buyers want more shares than are immediately available from sellers, the excess demand drives up prices. When sellers want to ...

Table of contents

• Cover
• Half Title Page
• Series
• Title Page
• Copyright
• Introduction
• Part 1: Investing
• Part 2: Trading
• Part 3: Combining Investing and Trading
• Glossary
• About the Author
• Index