As an investor, do not feel as if you have to become deeply analytical researching into wee hours of the night about stocks of certain companies as you spend you time drenched in a monsoon of financial statements, spreadsheets, etc. For some people, this complicated, analytical strategy works best, however, it is not the only strategy in place to successful investing with stocks. An easier strategy is the Pyramid Scheme which includes three points that actively work together in order to make all individuals successful in trading stocks.

The Pyramid Scheme

Step One: Keep your number of targets small and make sure you don’t set your expectations too high. For example, you feel that a safe and profitable stock investment would be in snack foods. So, you decided to pick the market leader in snack foods NOT the snack food company with the highest prices to trade stocks. This ensures success for the long-term and not just a get rich fast strategy.

Step Two: Invest in growth industries, one in which will continue to grow for hundreds of years to ensure that you receive a high return on your investment. For example, let’s say that you own 1,000 stocks in a pet food company. It is logical to say that pet food itself is a growth market; however, the particular company in which you bought shares may go out of business tomorrow. So, you decide to trade your shares for a more stable type of business, such as computers. Because computers are the way of our future, it is logical to sell your 1,000 shares in pet food and purchase 1,000 shares in a computer company, such as Dell to ensure growth on your initial investment.

Step Three: Invest in market leaders, companies that seem to have a monopoly in their industry, even if their stocks seem over priced. For example, Microsoft has dominance in the software industry to the point that they are in no danger of losing their market dominance, which simply means more money for you if you choose to invest in a company such as this.

With the Pyramid Scheme you can rest assured knowing that all three of these simple steps work together to form a reliable strategy in which to work with in order to trade stocks.

Another equally as effective strategy for trading stocks is known as the Basic Strategy in which you vow to invest in an even number of shares in an even dollar amount. The reason you must invest in an equal number of shares is because no one can accurately predict which stocks will increase in value, therefore, you are investing on emotion. For example, Stock X is priced at $100 per share so you decide to purchase 10 shares for $1,000. However, Stock Y is only $40 per share, so you decided to purchase 100 shares for a total of $4,000. In the meantime, Stock X goes up $10 so you have just earned $100, but Stock Y goes down $2.00 so you loose $200 which means you are in the red $100. Therefore, you must trade in Stock Y for more of Stock X in order to make a return on your investment.

There are thousands upon thousands of stock trading strategies currently in use, some are free and some you must purchase from certain companies claiming to have the way to make a 1,000% return on investment. It is totally your choice as to what strategy, if any you choose to incorporate into your stock trading. The healthiest advice toward stock trading strategies is to always use your common sense when dealing with your money.

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A share of stock refers to a unit of ownership in a company. If you as an investor own a share of a company s stock, then you are essentially part owner of that company. With that ownership comes various entitlements. As a shareholder, you have the right to vote-in members of the company s board of directors. There also may be voting on other important matters to the company. Additionally, you are entitled to proportionate shares of the company s profits if the company chooses to distribute to their shareholders.

The difference between owning shares of the company and owning a company outright is that the shareholders are protected. This is called limited liability. The shareholders have no liability if the company is prosecuted. For example, if the company you have shares in loses a lawsuit, you are protected. The worst that can happen is that your stocks in the company become worthless. Creditors for the company can t come after shareholders personal assets. If you owned the business outright, this wouldn t be true.

There are two types of stock that are used in the stock market. Common stock is the stock that is held by most individuals who choose to invest. Common stock holders have voting rights, and are entitled to share in the dividends that a company receives. Common stocks are the stocks that are being referred two when you hear of a stock being up or down.

Common stocks have the most liquidity, meaning they are trading daily. This is important because it gives investors the opportunities to buy and sell shares on a daily basis. Many small or little known companies may not trade daily even with common stock, but most, if not all, large companies do offer daily trading.

Preferred stocks, in contrast to common stocks, actually have fewer rights. The difference exists in the payment of dividends. Preferred stock holders have first access to the company s dividends. Companies that choose to offer preferred stock likely pay dividends consistently. The advantage of buying preferred stock is the regular income from those dividends. To take advantage of the power of preferred stocks, look to invest in companies that make big profits.

These dividends aren t, however, the bulk of the company s profits. Smart companies retain some of the profits in acquisitions or to repay business debts. Regardless, profiting from dividends is still one of the best ways to make money with stocks. Although most companies pay dividends by cash, there are some that pay their investors with more stock. Companies that consistently pay large dividends are most likely well established and profitable. The long running history of the company and history of dividend payment is what attracts investors to these stocks. The downside is that the stability does not offer opportunities for growth potential.

Dividends are determined each quarter by the company s board of directors. If, for some reason, the company is doing poorly financially the board of directors can choose to forego paying the dividend. Keep in mind that they are under no obligation to pay dividends to their investors. Dividends are a choice to be made by each individual company. At the quarterly meeting, if dividends are to be paid, the board of directors also sets the dividend rate. This rate is determined on a per share basis.

Dividends normally have four important dates associated with them. The declaration date refers to the date the board of directors sets the dividend. On this date, the board of directors also announces when the stockholders will get their dividend payment (in the form of a check).

The record date is when the company sets forth the list of shareholders that will be paid a dividend. The investor must own stock before this date in order to be paid a share of the dividends.

The ex-dividend date is perhaps the most important. This day is normally between 2 and 4 days before the record date. The ex-dividend date is established to allow the completion of all transactions. Since it usually takes 3 days to settle a regular stock sale, the ex-dividend day allows those pending transactions to be completed. If you want to receive a dividend, the ex-dividend date is the absolute latest you can invest in the company to receive the dividend.

The payment date is the fourth and final date associated with dividends. This date is when the dividend checks are mailed to all shareholders. The payment date is most often two weeks after the record date.

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Pretend that you have just purchased 100 shares of Company M for $50 per share and you want to lock in the profit but limit your losses so you set the trailing stop 2 points below. Much to your surprise, the price of shares from Company M starts to increase up to $655 during one month. Because you issued a trailing stop order, the price has adjusted just as it should, to $653, which is 2 points below $655. Once it hits $653, the trailing stop order is activated and a market order to sell 100 shares from Company M is placed in order for your broker to receive the best possible price on Company M’s stock. Thus, this works to protect your initial investment as well as to ensure that you will gain a profit.

Because of the way the trailing stop order is set up, you, the investor, do not have to monitor on a daily basis how a stock playing out. Therefore, you are able to simply invest your money by purchasing stock in a company that you feel comfortable with, place a trailing stop order on it, and then sit back, stress free allowing the investment to grow. Also to be noted, the trailing stop order is free to use, so do not allow your broker to forget to mention it to you and do not forget to use this investment option because it is there help you. However, there is not one particular strategy in place in order to keep a stop price from being activated. It is suggested that if you have invested in long-term stock options to set your trailing stop loss at 15% or more, but if have invested in a short term stock option; you would want to set your trailing stop loss at around 5%. Another restriction on the trailing stop order is that you may not use them on certain stocks, such as penny stocks. The higher the risk on the stock purchase, the less of a chance you will have to use your trailing stop order.

As a final note, only use the trailing stop order when you actually own stock that you feel is about to drop. If a particular stock is about to drop, this type of order ensures that you will be able to sell the stock to ensure that you receive a return in investment. As quickly as the stock market fluctuates, it is important to utilize this type of order, especially on stocks that you have bought, but later feel that they will drop in price when you decide to sell them. For instance, you bought let’s say you bought stock in a restaurant chain that you felt was going to gain a tremendous amount of profit, however, at the quarterly review of your portfolio, you and your broker discover that your restaurant stock has only gained 2% in four months. This is an extremely lower than the estimated 25% gain that was predicted for this stock. When you bought the stock, you placed a trailing stock order on it in order to prevent your rate of return from dropping. Therefore, you make the decision to sell the stock because, after the consultation with you broker, you feel that the stock is not going to increase any time soon. By placing the trailing stop order on your restaurant stock, you basically ensured that a high rate of return was locked in so that you would not lose very much money when purchasing the stock.

Trailing stop orders tend to be a little confusing, however, just know that by placing them on all the stock that you possibly can ensures that you will receive a high rate of return. It’s like an insurance policy on your purchased stocks.

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Hedging
Hedging is a way of protecting an investment by reducing the risks involved in holding a particular stock. The risk that the price of the stock will drop can be offset by buying a put option that allows you to sell at the stock at a particular price within a certain time frame. If the price of the stock falls, the value of the put option will increase.

Buying put options against individual stocks is the most expensive hedging strategy. If you have a broad portfolio a better option may be to buy a put option on the stock market itself. This protects you against general market declines. Another way to hedge against market declines is to sell financial futures like the S&P 500 futures.

Dogs of the Dow
This is a strategy that became popular during the 1990s. The idea is to buy the best-value stocks in the Dow Industrial Average by choosing the 10 stocks that have the lowest P/E ratios and the highest dividend yields. The companies on the Dow Index are mature companies that offer reliable investment performance. The idea is that the lowest 10 on the Dow have the most potential for growth over the coming year. A new twist on the Dogs of the Dow is the Pigs of the Dow. This strategy selects the worst 5 Dow stocks by looking at the percentage of price decline in the previous year. As with the Dogs, the idea is that the Pigs stand to rebound more than the others.

Buying on Margin
Buying on margin means to buy stocks with borrowed money usually from your broker. Margin gives you more return than if you were to pay the full cost outright because you receive more stock for a lower initial investment. Margin buying can also be risky because if the stock loses value your losses will be correspondingly greater. When buying on margin the investor should have stop-loss orders in place to limit losses in the case of market reversal. The amount of margin should be limited to about 10% of the value of your total account.

Dollar Cost and Value Averaging
Dollar cost averaging involves investing a fixed dollar amount on a regular basis. An example would be buying shares of a mutual fund on a monthly basis. If the fund drops in price the investor will receive more shares for his money. Conversely, when the price is higher, the fixed amount will buy fewer shares. An alternative to this is value averaging. The investor decides on a regular value he wishes to invest. For example, he may wish to invest $100 a month in a mutual fund. When the price of the fund is high he puts a higher dollar amount in the fund and when the price is low he spends less money. This averages out his investment to the original $100 per month. Value averaging almost always outperforms dollar cost averaging as a percentage return on the money invested. When used as part of a broader trading strategy it can help secure the growth of your investment fund.

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What does trading stocks mean?

Buying and selling of stocks is referred to as trading in the financial market.

You have to approach a broker in order to trade. You can trade either electronically or on the exchange floor.Exchange floor scene must be familiar to you;the NYSEhas been on television as part of news coverage innumerable times. It is here that your broker arranges for your shares to be ordered. . The floor clerk locates the floor trader from whom the shares can be bought. Once the price is agreed upon, the deal is finalized.

Electronic transaction isvery common today. It is an efficient and fast method of stock trading. Here too you require a broker but you receive confirmations almost immediately .Inonline investingyour broker will connect to the exchange networkand search for a buyer or seller according to your order.
How are the stock prices determined?
Thestock pricescannot be predicted, they depend on various factors like political unrest, if thereis a huge demandfor a particular share at a given time, prices can fluctuate, any event that could adversely affect the companywill also cause the share prices todrop.

Before you decide onwhich stock to buy you must answer the following questions.

Do youknow the company well enough?
What is the company’s reputation in the market?
Have you gone through their annual report?
Do you have the confidence to invest in this company?
Is some negative newsabout the company circulating?
How are analysts predicting the future?
How is the management of the company?
What are their growth prospects?
Am I aware of the insider activity?
Is it an internationally renowned company?
How is their marketing strategy?
Have therebeen any changes in the managementrecently?
How consistent has been theirperformance?
Has there been a sudden shift in their production?
Whenever you invest you should be aware of your limits and remember not to exceed them. Share market involves a lot of risk , risk taking could either lead to fortunate gains or to bankruptcy.
You should avoidinvesting money more than you can actually afford.
Know about your investment well and do not blindly depend upon your broker.
Follow regular stock market quotes to keep yourself abreast ofthe market swings.

The share providesyouwith an earning power, gives youpartial ownership of a companyandthe freedom to buy or sell at any moment. But if you are a novice instock trading you need to play safeand equip yourself with alot of information. Unless you are a seasoned player you should invest onlyaftersurveying all the alternatives and never go beyond your risk tolerance.

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While he has been sometimes categorized as a value stock investor his method was actual a bit different. He focused on the quality of stock as well as the value. Robert Hagstrom, a senior vice president with Legg Mason Capital Management, presented Buffet s method in the book The Warren Buffet Method over 10 years ago. Hagstrom wrote the book because he believed that the average investor could learn from Buffet s method.

Buffet s incredible story begins with a small investment partnership established in 1956. In the mid-1960s, this partnership acquired a failing textile company. Buffet was able to bring this company s net worth from $22 million to $69 billion.

The Buffet method is broken down into 12 tenants that form the basis for evaluating any investment, from stocks to entire companies. One of the key points in the method is that it is necessary to do some hard work (like research and projections) in order to know the investments thoroughly before any money exchanges hands.

The twelve tenets are really questions to ask yourself before making an investment. According to Buffet via Hagstrom, the first consideration is Is this business simple and understandable? Buffet did not invest in any technology stocks for the simple reason that he did not understand them. If you understand the business you are investing in (or outright purchasing) you will be in position to see the problems and possibilities as they arise. Secondly, ask yourself Does the company have a consistent operating history? Viewing the viability of the business in its previous operation can forecast future trends.

The third tenant is Does the business have favorable long-term prospects? This question is a gentle reminder that wise investors hold stock in good companies for the long term. Looking to the future of the companies reveals the true value of the investment.

Next, Is the management rational? Buffet places a great deal of importance on evaluating the management of the company. He pays attention to how the excess profits of a company are used. Additionally, he asks Is the management candid with shareholders? He believes that many company executives hide behind the company and do not fully disclose information to their shareholders. A manager who readily admits any mistakes made is more honorable and trustworthy. Following the theme of management related questions is Does the management resist the institutional imperative? Essentially this question evaluates the manager s ability to act with character rather than cave-in to the peer pressure to do what other managers are doing.

The next question for evaluation is What is the return on equity? Buffet focuses on return on equity rather than the more popular ratios. This is because he feels earnings figures can be manipulated. The long term return on equity will have a more powerful effect than simple earnings.

The 8th tenant is What are the company s owner earnings? His calculations of owner s earnings include estimates of future capital expenditures. The 9th tenant is What are the profit margins? If a company makes sales but does not profit, then the company is a failure. Buffet avoids companies with large expenses because in his eyes it reflects a lack of discipline in the management of the company.

The 10th tenant is Has the company created at least one dollar of market value for every dollar retained? This is a test of correct capital allocation. If the company is holding onto cash but is not helping its shareholders than something is wrong with the management strategy.

The final two questions are What is the value of the company? and Can it be purchased at a significant discount to its value? Buffet calculates the value of a company as the total of the net cash flow expected to occur in the life of the business. By buying at discount, an investor will assure that any discrepancies in his calculations will be covered.

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The value stock investor does not pay less than $2.00 per share and is not interested in bargain basement stocks. They are looking for diamonds in the rough, stocks that have been inappropriately devalued or have not been recognized for their potential. A stock can become inappropriately devalued when an entire industry is punished for one company s mistake. For example, an oil manufacturer s ship causes an oil spill and the stocks for all oil manufacturers drop in the following months. Since much of the market is based on investors perceptions of stock value, an entire industries stock can be devalued from a perceived dip in the value of an industry.

When the market incorrectly values a stock, and there are no fundamental problems with the company, then the market will eventually correct itself to the profit of the value stock investor. To determine the true value of a company s stock, the value stock investor looks at some fundamental qualities. Earnings growth and cash flow are taken to account as well as book value and dividends. These principles are more important than market factors on the stock s price.

For investing purposes, the value stock investor will pay attention to several factors. Every investor has an individual formula that works for him or her to determine the value of a stock. A potential investment should have a Price Earnings Ratio (P/E) in the bottom 10 percent of its sector. Price Earnings Ratio is determined by dividing the current price of the stock by the annual earnings per share. A value stock investor may also look for stocks that have a PEG of less than one. A PEG is determined by dividing the P/E by the potential growth. When a stock has a PEG of less than one this indicates that the stock is undervalued.

Additionally, a value stock investor may take a look at the debt to equity ratio of the company. If this ratio is less than one, this is a sign of a potential investment. A price to book ratio (the share price divided by the book value per share) should also be a ratio of one or less.

After looking at the principles mentioned above, the value stock investor determines if the stock is below its obvious value on the market. Again, it must be stressed the value stock investing is not looking for cheap stock alone. It is a combination of researching and determining the actual value of a stock, and looking for a stock listed below value. The value of the stock must be determined first before the value stock investor can decide whether the stock purchase is advantageous.

Determining the intrinsic value of a stock can be the most difficult part for any investor and especially so for the value stock investor. As the market is starting to lean toward non-tangible industries such as technology and knowledge, it is getting more difficult to determine value. There are several websites available that help value stock investors determine the fair value of a stock.

MorningStar.com offers such a service as well as Reuters. It is important to remember to add a margin of error to the intrinsic value found online. For example, if you have determined through your research that the value of the stock is $50, lower your target to $45 per share just in case that projection is wrong.

If you research wisely, buy carefully and hold stocks over the long term, value stock investing can work for you. This philosophy works best if you take the time to do the necessary research and find those diamonds in the rough.

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As an investor, you must analyze the essentials of investing in stocks by examining the following questions that determine the fundamentals of any given stock for a certain company.

How much have other investors paid for one stock?

How much are investors likely to pay for one stock in the future?

What details will change the investors perspective about the stock?

Through proper inquiry of these questions, you, the investor, will have the tools to make an educated decision about the stock you are planning to purchase.

As an investor, be prepared to rank the return expectations on the stocks that you are planning to buy. For example, if you are planning on buying three different stocks from three different companies, you must estimate how much money you feel that you would earn from each. After you have your estimation, you need to determine if it is logical to purchase these stocks. Pending that you will earn at least 20% more than you invested, it is probably a good investment, therefore, you should consider buying stock in that company.

Once you have efficiently analyzed all of the stock options that interest you, it is time to choose the stocks that best meet your needs for a secure financial future. This is most easily done by keeping a running record of each stock that you feel is a good, virtually risk-free investment. Then, when you are ready to invest, you will have notes to compare in order to decide what option is best for your situation at that time.

Now that you have purchased some stocks that you feel will help to advance your financial future, you need to learn about stock trading. If you feel that your stock is not exactly producing the return you had hoped for, then you may want to consider trading in your stock. Stock trading is great because if you purchase a stock that you are dissatisfied with, then you may want to consider trading it for a stock that you will be more satisfying to your financial needs. In order to simplify the explanation of stock trading, it is simply trading in your current stock for another stock that will produce a higher return rate.

There are two ways in which stock trading can occur. The first method is on the exchange floor, which constitutes images of movies and television portraying how the stock market works with thousands of people rushing around and yelling in an environment of total chaos. Although the chaos occurs, at the end of the day, all trading options are worked out and the employees must get ready for the next day. More simplistically, what takes place is you want to buy 100 shares from Company X so your broker, the person who makes your stock purchases for you, sends your order to their floor clerk, the person that processes your stock order, on Wall Street. The floor clerk communicates with one of Company X’s floor clerks to determine who would like to sell 100 shares of Company X.

Once determined, Company X’s floor clerk and the floor clerk of the person wanting to sell 100 shares to you set a price for the shares. This price is communicated back to your broker who finally notifies you with the final price for 100 shares of Company X. Once you tell your broker that the final price is acceptable, the shares of Company X will be purchased and you will receive confirmation in the mail in about two weeks.

The second method is much less complicated because it is done electronically through computer systems which are much faster as well as more efficient. The buyer must still obtain a broker because the public does not have access to Wall Street’s investment programs, however, once purchased, the buyer usually receives instant confirmation of bought shares via email and the transaction is complete.

No matter how you intend to purchase shares of any particular company, the most important task you, as an investor has, is choosing the right stock that will fulfill your future financial goals.

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The 1980s, similar to the roaring 20s, was characterized by a period of financial growth and excess in the United States. The psychology of the time was spend, spend, spend and rampant consumerism drove the national economy and stock market to record highs.

1986 and 1987 were record years for the stock market. The bull market that started in the summer of 1982 was being carried through to create record markets 5 years later. The market was being primarily powered by hostile takeovers, leveraged buyouts and what seemed to be merger fever. The most important thing for many companies was to raise capital in order to buy other companies. It was thought that companies would grow exponentially by purchasing other companies. In leveraged buyouts, a company would raise capital by selling junk bonds to the public. Junk bonds are bonds that have a high-risk rate, and therefore a high interest rate. The capital from selling the junk bonds was used toward the purchase of another company.

Another common phenomenon was the use of IPOs. An IPO, or Initial Public Offering, is when a company issues stocks for the first time. The burgeoning computer industry was created with many IPOs in the market and people were investing in personal computers because they saw potential for great profit.

This created an inflated market with lots of stock at low and reasonable prices available for purchase. Even the most timid investor was tempted to get involved in the market.

Unfortunately, the bull market also created an opportunity for many scam IPOs and conglomerates to take advantage of uninformed investors. The SEC had its hands busy trying to keep up with the shady companies. In early 1987, the SEC began investigating illegal insider trading. This created wariness in investors and slowed the market. There was also a fear of inflation due to the strong economic growth that occurred in the previous five years. To compensate, the FED raised short-term interest rates to prevent inflation. This effected stocks negatively as well.

Many large firms began using portfolio insurance as a way to protect against further stock dips. This practice uses futures contracts as an insurance policy on a stock portfolio. If the market crashed, people with futures contracts could profit and stabilize the market by offsetting the losses in stocks.

The use of portfolio insurance worried many common stockholders. They saw it as a sign of an impending market crash. Many experts believe that the common perception during the time was that the market was beginning to resemble the 1929 market. This caused panic, and led people to sell their stocks immediately.

The fear became a self-fulfilling prophecy and as thousands tried to sell simultaneously on October 19, 1987, the market crashed because their simply weren t any buyers. Within that day over 500 billion dollars left the Dow Jones index. The effect of the US crash affected every country around the world producing a global market crash.

Many people lost millions in a matter of minutes. Most investors didn t even know why they were selling; they just heard that everyone else was selling and followed suit. Most futures ands stock exchanges were shut down for the day. In some extreme cases, the duress brought on by the loss of massive amounts of money caused some investors to kill their brokers. There were several instances of clients entering brokerage firms and opening fire.

Fortunately, the crash of 1987 did not result in a similar depression. The Federal government stepped in and lowered short-term interest rates to avoid a banking crisis. The market returned to a bull market rather quickly. Companies buying back their undervalued stocks fueled this new prosperity.

The addition of the circuit breakers system is a lasting impact of the 1987 crash. The system prevents stocks from trading if they plummet too quickly. This will prevent any future vertical drops in the market.

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When individuals think of the stock market, usually they immediately associate it with Wall Street, which is the place where the world’s largest financial market was invented and, has since prospered. Amazingly enough, the name Wall Street can be traced back to 1653 when it was set up as a defense mechanism against the Native Americans by settlers of Dutch descent. Little did the people know that the 12 foot stock fence was later to become the world’s largest financial establishment for stock trading. The fence lasted until 1685, when it was torn down so that a street could be built in which the British named Wall Street.

Located in Philadelphia, in 1790, a group of 24 merchants were intrigued by the financial transactions that were taking place on Wall Street, so they met to discuss the possibility of establishing a similar entity in their very own city. Because things were not going so well in New York, where Wall Street is presently located, representatives were sent to Philadelphia to observe the happenings. The New York representatives must have learned quite a bit because they returned to Wall Street and reorganized it, thus, opening a new Wall Street that functioned even better than before!

As is well known, the stock market experienced prosperity during the 1800’s however, during the 1900’s; it took a turn for the worst. In 1929, the stock market crashed meaning that people, who had invested millions of dollars, lost every single dollar! People were in great despair which resulted in suicides as well as plummeting the nation into the Great Depression, a time of financial despair where all people suffered hunger, homelessness, and hopelessness.

Because of United States becoming involved in World War II, however, the nation’s economy began to repair itself, therefore, ending the Great Depression and allowing the stock market to recover. The stock market began again on its road to prosperity and continued in this direction until 1987, when another crash occurred. The stock market crash of the 1980’s was not as detrimental as the one in 1929; however, people still lost millions of invested dollars. In fact, the day of the 1987 crash was the largest single-loss day in the whole history of the stock market!

The 1987 stock market crash prompted the United States government to prepare the nation in the event that a crash like the Great Depression happened once again. The government worked to pass rules in regulations that would help to protect all investors who put their money as well as their faith into the New York Stock Exchange. It is important for the government to become involved in order to provide the investors some protection because in New York City alone, 2.2 trillion dollars in transactions ensue each and every day!

With such a great amount of dollars in the stock exchange, logically, this is the best investment to pursue in order to establish a sound future for you and your family. As history tells, at the beginning of Wall Street, there was great risk involved with investing money; however, as time went on, people began to get more comfortable with Wall Street as they invested more and more of their hard earned money. As more investments were obtained by Wall Street, the stronger the stock market became, thus, when the 1987 crash occurred, it did not affect the economy as well as the nation as harshly as during the Great Depression.

This should ease your mind about investing your money into stocks through Wall Street. Yes, there is a degree of risk involved, as with any investment, however, it seems most logical to invest your money into an entity that is the largest financial institution in the world! The more educated you become about the stock market and how it operates the more you will learn that the stock market is the way to go with investing.

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The federal government isn t setting a very good example with their own debt at $7.2 trillion. This national debt is growing by $1.71 billion per day. Between the government, business and household debt the country has accumulated over $40 trillion in debts. This is up from $13 trillion in 1990.

The stock market will be affected by rising interest rates. As these interest rates rise, it will become more difficult for debtors to pay interest. Many people will either default or declare bankruptcy. When a large amount of people are unable to pay off their debts it affects the entire economy. The stock market is directly affected as both consumers and businesses slow their spending. Banks, in turn, become insolvent from people defaulting on their loans. The credit crisis that has been created in the country can reach a boiling point in many ways, and that point will drastically affect the stock and bond markets.

The housing market boom has been fueled by mortgage rates that are at all time lows. When these mortgage rates rise, as they are bound to do, the real estate market will become bearish. Prospective home owners will be reluctant to accept such high mortgage payments, and the inflated housing prices will begin to drop. In addition, housing prices have become so inflated that many families cannot afford to purchase a home.

The housing market has traditionally been a large portion of the foundation for the US economy. Approximately 25% of the economy is in the real estate sector. This makes sense when one realizes that houses are biggest investments most people make in their lifetime. Housing prices are imperative to the success of many major home improvement and home furnishing companies. Any industry related with building, designing or decorating a home can be negatively affected by a drop in the housing market. Most banks also supported by the home loan interest they receive.

There are several studies that indicate falls in the housing market are worth twice as much as falls in the stock market. If the housing market falls 20 percent it will have the effect of the stock market falling 40 percent. The effect on the overall economy of the nation will be felt on a major scale. Given the overvalued real estate market of today, it would not be impossible for a 20 percent crash to occur in the near future.

The Baby Boomers reaching retirement age will also have a potentially limiting effect on the stock market and US economy. Throughout the 1970s, 1980s, and 1990s, the Boomers created massive capital flows into the stock market because of their interest in investments. As this generation group begins to retire, most if not all of them will begin to cash out their stock investments. Social security will be virtually no help so their only option for retirement funds is to cash their stocks in and invest in bonds.

The problem is that the Baby Boomers are the largest and wealthiest population group. Generation X, who is in position to purchase the stocks the Boomers are seller, is a much smaller generation group. Additionally, their buying power cannot compete with that of the exiting Baby Boomers. The increased cost of living has also resulted in less money for the X ers to spend on investments.

The crash may occur because of the continued outsourcing of jobs. As more people in the country lose their jobs to foreign workers, their inability to pay personal debts will cause them to go bankrupt. In turn, the housing prices will begin to drop as foreclosures become more frequent. Stock prices and trading will be effected negatively and the retiring Baby Boomers selling stocks will also drive prices down. The result is a long bear market.

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However, it is extremely important to be as knowledgeable as possible about all stock trading orders in order to implement them correctly.

Let’s face it! When it comes to the stock market, there are millions upon millions of options as to stocks in which you are able to invest in. Obviously, with any type of investment, the goal should be to gain a profit, and in the case of the stock market, investors should aim to gain enough profit to live financially sound for the rest of their lives. If you are a first time investor, it is highly recommended that you go shopping , so to speak, for a stockbroker that is well educated about the stock market and the effects of orders that are placed on stocks. When you find a stockbroker in which you feel comfortable with, it is time to get down to the business of selecting the proper stocks that will effectively create the financial results that you want with your invested money. However, remember that stockbrokers are only humans, and because they are not all knowing, they are highly to make a mistake. But, not to worry, because if you are educated in stock trading orders, you will be able to repair any mistake made in stock trading.

Let’s say that you are a new investor who has just purchased 150 shares of stock from Wal-Mart. You did this because you enjoy shopping at Wal-Mart and, because you can never find a checkout lane that is empty, you assume that all Wal-Mart stores are constantly this busy. Therefore, you feel that purchasing this stock is a wise investment. Assuming that Wal-Mart stock sales for $1600 per share, your total initial investment is $240,000. Because you are a new investor, you are constantly checking the stock market to ensure that your stock is successful. However, one day, you check up on your Wal-Mart stock and notice that it has drastically dropped in profits. Your stockbroker has been less than helpful lately and you suspect that he is a scam artist. You are worried that you are about to lose all of your invested money, so you go into a panic because you have no idea what step to take next.

However, before initially investing in Wal-Mart stock, you should have become familiar with stock orders, particularly the trailing stop order. Had you have taken the time to learn that the trailing stop order allows you to set a price loss limit in order to reduce the amount of money that you lose. When you purchased the Wal-Mart stock, you should have placed a trailing stop order on your stocks because you could have decided that if your stocks got below a certain amount, they would automatically be sold to reduce your chance of losing your total investment. Therefore, before you purchase any stock with your money, it is a must that you educate yourself about stock trading orders so that you have barrier of protection over your money.

Basically stated, stock trading orders are simply little insurance programs that guarantee a return in profit pending that you know how effectively use each order. By implementing the use of stock trading orders, you are on your way to a successful investing venture that will reap profits on your money.

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The main reason to buy a penny stock is because you hoping for a high return. Because they are cheap, most people are able to purchase quite a large number of penny stocks, thus, if you receive a high return on your investment, you will make a considerable amount of money. For example, you buy 100,000 penny stocks for at $0.10 each, which means you invested a total of $10,000. You decide to sell your penny stocks for $0.40 each, which means you just earned 4 times what you invested and gained a profit of $30,000. That is quite a return on your investment! Therefore, the key to purchasing penny stocks is get in and get ahead of other investors before they learn about the high returns that certain penny stocks are capable of producing.

In order to ensure that the penny stocks you are planning to buy virtually guarantee a high return of investment, be sure to look for companies in which their sales are steadily growing because this means that their profits are steadily rising, too. Also, invest in penny stocks only if the company has an honorable executive team in which expansion is one of their main priorities, that way, you can ensure that a certain company will stay in the stock market. With all these characteristics in place, a solid business foundation is established, therefore, an increase in the price per share of penny stocks is almost inevitably going to increase.

Another important aspect of penny stocks is to buy them when the company is new and in the early stages of business development, especially if you feel the company is going to have great success. Think about when Microsoft was just starting out and they sold penny stocks for $2.50 per share. What if you had bought 100 if those penny stocks? The money that you used to purchase your penny stocks was actually used by the Microsoft corporation to help them expand their business. Thus, due to the fact that Microsoft has exploded into a large, corporate entity, your penny stocks would probably be worth thousands.

With penny stocks, it is all about timing and the expansion of the business in which you purchase your stocks.

Please remember that penny stocks are a major high-risk investment, meaning that the chances of you earning a return on your investment are slim to none.

There are four main reasons for this high risk. First, information about companies who are selling penny stocks is hard to locate, and when information does arise, the sources are usually very unreliable. Penny stocks also do not fulfill the minimum requirements to remain the stock exchange. This is the reason penny stocks are offered by less reliable sources than the stock market, because such a large financial entity does not want the responsibility of liability. Because many of the companies who sell penny stocks are brand new companies, they do not have a history of investment in which an investor can review. Plus, penny stocks have no value, unless by chance the business becomes a large, expanded company that is able to issue a huge return on investment. Therefore, it is vitally important to review both the positives and negatives in the case of penny stocks before making the decision to purchase them.

Penny stocks offer the ultimate gamble when it comes to stock trading. Penny stocks are extremely cheap to purchase and they have a small chance of delivering an extremely high return on investment. But, more than likely, penny stocks simply are a high risk investment gamble in which you lose money.

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Common Stock

Basically stated, a common stock is, well, common! When you hear people talking about stocks in general, it is these types of stocks in which they are referring. It is simply a piece of paper that represents some degree of ownership of a corporation as well as some form of profit from that particular company. Interestingly enough, investors in common stocks receive one vote per stock owned to elect board members, the people who oversee major decisions made for the company as a whole, for a particular company. In the long-term, this type of stock means capital growth for the investor, however, if the company is forced into bankruptcy, the investor will not get paid what they are owed until creditors, bondholders, and preferred stockholders receive their payments.

Preferred Stock

In general, preferred stock is stock that is owned by preferred stockholders in which all of the company’s earnings and assets go directly to the preferred stockholders first. Because preferred stockholders are paid before common stockholders, preferred stockholders choose to give up their right to vote in the election of board members. Therefore, preferred stockholders have no right in the selection process of the company. Preferred stockholders purchase stock in a certain company for monetary gain only in which their main goal in investment is earning a return on investment. However, there are four variations on preferred stock investments.

Voting: Preferred stock members can opt for the right to vote in a company in which they own stock. By doing this, they ensure the power to make sure that they receive all monies owed to them because they are able to bribe people into places of management. For example, Bob is a preferred stockholder who wants to ensure that his profits are paid to him no matter what happens to the company. Bob tells Tom, a man up for board election, that he will make sure Tom wins the election as long as Tom agrees to pay Bob his profits, whether the company goes into bankruptcy or not.

Adjustable Rates: Preferred stockholders receive an agreed upon profit based on stipulations provided by the company.

Convertible Stock: Preferred stockholders have the right to convert their preferred stock into common stock, allowing the investor to lock in their profit while they potentially profit from a rise in common stock. Basically, preferred stockholders are protected no matter what types of investment decisions they make.

Participating Stock: With this type of stock, preferred stockholders not only receive a set profit, but they are eligible for a certain percentage of the company’s earned profit over a set period of time.

Therefore, it may seem that a preferred stockholder position is the way to go, however, with increased power comes more headaches. If you are a beginning investor, it is better to work on common stocks for a number of years before trying to get involved with preferred stocks.

Because common stocks and preferred stocks are so different, companies are not allowed to customize either type of the stocks. The reason for this is that some companies may be corrupt and want the voting power to remain with certain investors. Companies are held under law to make sure that the voting power remains fair among both common stockholders and preferred stockholders.

It is your money and your choice, however, it is suggested that you become educated when playing with the stock market. It is important to know precisely what stocks are as well as the main characteristics of a common stock as well as a preferred stock. As with any investment, the ultimate goal is to gain a profit and this can only be done with stocks if you thoroughly understand them.

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There are two main types of investment clubs. The first is mainly concerned with teaching about investing and the concepts of the stock market. They use simulations rather than real money to illustrate the way that the stock market works. You can learn the principles before you put any of your hard earned money at risk.

Virtual investment clubs simulate actual trades and trading stocks. These virtual clubs are like an investing school. There are several websites available for testing out stock market principles such as MarketWatch s Virtual Stock Exchange. The Virtual Stock Exchange performs market simulations.

Many universities are establishing virtual investment clubs for the purpose of teaching stock market strategies. It provides students with a familiarity for financial terms and the financial institutions available to help them.

Virtual investment clubs can also learn many things beyond investing to learn about the way the stock market works. Many clubs host investment relations representatives to make presentations at their meetings. Brokers are also excellent guests at club meetings for speaking about how brokerage firms work and networking with club members.

Other topics to consider for a virtual investment club are discussing current events and their perceived impact on the market. Studying the Wall Street Journal and learning to find and read the stock market pages is another skill acquired in this type of investment club.

The second type of investment club is the type that actually puts forth money into the market. Their purpose is to pool the money of the group so the members have more leverage in the market than they would if they had invested individually. The investment clubs that actually put forth money form a legal partnership between the members so that each member is protected.

To start a legal investment club, each member fills out partnership agreements. The documents are available from the National Association of Investors Corporation (or NAIC), which is a non-profit organization. Belonging to the NAIC is also recommended because the organization provides special services. The NAIC charges $40 for the establishment of the club plus $14 per member, per year. There is NAIC Club Accounting Software available to keep everything in order for $159.

The investment club will then open a brokerage account with a firm of their choice and appoint a treasurer for the club. The treasurer will maintain and report tax information to each individual member so all members are well informed of what is going on with the club s investment. This also allows each member to report their share of the club s earnings and pay their portion of taxes.

Investing with a club has several advantages. When you are part of an investment club, you are able to get different perspectives on a variety of stocks. Each investment is a group decision and this allows for a broader input on the stocks that are invested in. The club benefits from the variety of experiences and knowledge of the group. Each member gains a broader understanding of the market by hearing which stocks appeal to certain people. The investment club also allows investors to spread their money out over a variety of stocks and therefore, own a portion of many companies.

On the average, investment clubs have 12 to 16 members with each person assuming a different role in the club. There needs to be a president of the investment club to plan and arrange meetings. The vice-president is responsible for helping to run the meetings. A secretary is helpful in taking minutes for the meetings, which helps establish a record for the investment club. The other members of the club are responsible for researching and bringing information regarding different stocks. Most clubs meet once a month to discuss the investments and hear new stock investing ideas.

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The New York Stock Exchange (or NYSE) is a person-based stock trading system. The NYSE does handle a small percentage of its trading electronically, but the vast majority of trading is done on the stock exchange floor. The stock exchange floor is the most common image in people s minds when they think of trading stocks. Within the chaos of hundreds of traders shouting and making gestures, shares are being traded. The process starts when the customer tells their broker to buy 50 shares of Company X at market. The broker then sends the order to a clerk located on the exchange floor.

The clerk finds a trader on the floor and informs them of the order. This trader then finds another trader who is willing to sell 50 shares of Company X stock. All traders on the floor are highly trained and know who is representing which brokerage firm and what stocks are available for trade. Next, the two floor traders agree on a price for the 50 shares and complete the transaction. The floor clerk is informed, who in turn informs the broker of the trade. The broker calls the customer back and discloses the final price. In a few days, the customer gets a confirmation by mail of the transaction. The actual time of the stock trade can take only a few minutes.

While this is a relatively simple process for a single trade, the practice can get a bit more complicated. There are more complex trades that take place on the stock market floor involving larger blocks of stocks. The fact that the New York Stock Exchange market handles one billion shares of trading every day is a marvel of modern times.

While the New York Stock Exchange is a person-based system, the NASDAQ stock exchange is handled entirely electronically. The NASDAQ system uses large computer networks to handle the process of matching buyers and sellers. This is in contrast to the NYSE s process of using live brokers. The advantage of the NASDAQ is that the system is efficient and fast. Large institutional traders, like mutual funds and pension funds, prefer trading with the computerized NASDAQ system.

When an individual investor uses the NASDAQ system, they get almost instant confirmations on all trades. Some prefer this method because it puts the investor in more control of the investing removing the middle man and bringing them a step closer to the market. With NASDAQ there is no need for the floor clerk or floor trader, the computer system handles these tasks. With NASDAQ, however, there is still a need for a broker. Investors do not have access to the exchange market. The broker accesses the electronic network and arranges the trading. They login to the market to find the buyer or seller depending on the customer s order.

With online investing, there are a variety of buy and sell orders that the individual investor can take advantage of in order to gain more control over the process. The most basic orders are market orders, limit orders and stop loss orders.

A market order is the simplest of these orders. It instructs the broker to buy or sell the stock at the market price. These are the most inexpensive orders since there aren t many brokerage fees for market orders.

Limit orders are used to direct the broker to trade a stock at a particular price. The transaction will not be carried out until the requested stock reaches that price. The benefit of using limit orders is that they allow the investor to control their entry to and exit from the market. The one drawback is that limit orders may have much higher brokerage fees than market orders. An investor may be better off watching the market and placing a market order when their stock reaches the desired price.

Stop loss orders live up to their names. They stop further losses from occurring on stocks that are declining in price. A stop loss order establishes a price trigger. At the point that a stock reaches that price trigger, the brokerage will sell the stock. A stop loss order can be seen as a form of insurance to protect the investor from big drops in stock.

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Patterns

One of the most popular patterns is Cup and Handle. Prices start out relatively high then dip and come back up (the cup). They finally level out for a period (handle) before making a breakout a sudden rise in price. Investors who buy on the handle can make good profits.

Another popular pattern is Head and Shoulders. This is formed by a peak (first shoulder) followed by a dip and then a higher peak (the head) followed again by a dip and a rise (the second shoulder). This is taken to be a bearish pattern with prices to fall substantially after the second shoulder.

Indicators

Moving Average
The most popular indicator is the moving average. This shows the average price over a period of time. For a 30 day moving average you add the closing prices for each of the 30 days and divide by 30. The most common averages are 20, 30, 50, 100, and 200 days. Longer time spans are less affected by daily price fluctuations. A moving average is plotted as a line on a graph of price changes. When prices fall below the moving average they have a tendency to keep on falling. Conversely, when prices rise above the moving average they tend to keep on rising.

Relative Strength Index (RSI)
This indicator compares the number of days a stock finishes up with the number of days it finishes down. It is calculated for a certain time span usually between 9 and 15 days. The average number of up days is divided by the average number of down days. This number is added to one and the result is used to divide 100. This number is subtracted from 100. The RSI has a range between 0 and 100. A RSI of 70 or above can indicate a stock which is overbought and due for a fall in price. When the RSI falls below 30 the stock may be oversold and is a good time to buy. These numbers are not absolute they can vary depending on whether the market is bullish or bearish. RSI charted over longer periods tend to show less extremes of movement. Looking at historical charts over a period of a year or so can give a good indicator of how a stock price moves in relation to its RSI.

Money Flow Index (MFI)
The RSI is calculated by following stock prices, but the Money Flow Index (MFI) takes into account the number of shares traded as well as the price. The range is from 0 to 100 and just like the RSI, an MFI of 70 is an indicator to sell and an MFI of 30 is an indicator to buy. Also like the RSI, when charted over longer periods of time the MFI can be more accurate as an indicator.

Bollinger Bands
This indicator is plotted as a grouping of 3 lines. The upper and lower lines are plotted according to market volatility. When the market is volatile the space between these lines widens and during times of less volatility the lines come closer together. The middle line is the simple moving average between the two outer lines (bands). As prices move closer to the lower band the stronger the indication is that the stock is oversold the price should soon rise. As prices rise to the higher band the stock becomes more overbought meaning prices should fall. Bollinger bands are often used by investors to confirm other indicators. The wise technical analyst will always use a number of indicators before making a decision to trade a particular stock.

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The basis for technical analysis is the belief that stock prices move in predictable patterns. All the factors that influence price movement company performance, the general state of the economy, natural disasters are supposedly reflected in the stock market with great efficiency. This efficiency, coupled with historical trends produces movements that can be analyzed and applied to future stock market movements.

Technical analysis is not intended for long-term investments because fundamental information concerning a company’s potential for growth is not taken into account. Trades must be entered and exited at precise times, so technical analysts need to spend a great deal of time watching market movements.

Investors can take advantage of both upswings and downswings in price by going either long or short. Stop-loss orders limit losses in the event that the market does not move as expected.

There are many tools available to the technical analyst. Literally hundreds of stock patterns have been developed over time. Most of them, however, rely on the basic concepts of ’support’ and ‘resistance’. Support is the level that downward prices are expected to rise from, and Resistance is the level that upward prices are expected to reach before falling again. In other words, prices tend to bounce once they have hit support or resistance levels.

Charts

Technical analysis relies heavily on charts for tracking market movements. Bar charts are the most commonly used. They consist of vertical bars representing a particular time period weekly, daily, hourly, or even by the minute. The top of each bar shows the highest price for the period, the bottom is the lowest price, and the small bar to the right is the opening price and the small bar to the left is the closing price. A great deal of information can be seen in glancing at bar charts. Long bars indicate a large price spread and the position of the side bars shows whether the price rose or dropped and also the spread between opening and closing prices.

A variation on the bar chart is the candlestick chart. These charts use solid bodies to indicate the variation between opening and closing prices and the lines (shadows) that extend above and below the body indicate the highest and lowest prices respectively. Candlestick bodies are coloured black or red if the closing price was lower than the previous period or white or green if the price closed higher. Candlesticks form various shapes that can indicate market movement. A green body with short shadows is bullish the stock opened near its low and closed near its high. Conversely, a red body with short shadows is bearish the stock opened near the high and closed near the low. These are only two of the more than 20 patterns that can be formed by candlesticks.

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This is also quite risky though may seem to be less so than day trading. Since it is not even mid-term and you don’t wait for long a time, it is possible that that stock falls as you wait and as you come to the pre-fixed end of your target holding period, you have to sell at a trough. It is also possible that the stock makes a turnaround immediately after you exit, and you either narrowly miss a huge profit or avoid a withering loss.

Before going in for swing trading, one needs to understand the difference between swings and stock market cycles.

A cycle is longer than a swing. A cycle is made of many short swings, up and down. There are swing trading firms making lucrative promises and publishing tall advertisements. Watch out or you may get into some disastrous mistake.

The general principle for winning is the same for all stock market entrants: sell the losers and let the winners ride! Longer term investors make profits by selling their appreciated investments, but they hold on to stocks that have declined, hoping for a rebound. Swing traders often do not have that long a time to get into rebound. They have to infer accurately when it is time to give up a stock within their projected time range.

A personal policy to sell after a stock has increased by a certain pre-fixed multiple often pays off in swing trading. But that way it may never fully ride out a winner. Therefore it is wise to allow for some degree of flexibility within this swing trading period.

It is best not to underestimate a well performing stock by sticking to some rigid personal rule. If you don’t have a good understanding of the potential of your investments, your personal rules may end up being arbitrary and too limiting. Hence before entering this type of trading, do extensive research on the behavior of your selected sample of ‘good’ stocks.

On the other hand, it’s equally important to be realistic about investments that are performing badly. That a stock will bounce back after a lingering decline can never be guaranteed. Hence the best time to sell has to be chosen wisely also, and the wisdom has to be carefully based on research. A standard strategy is to wait till the upswing goes on within the period you remain in the market, and then sell at the end of your chosen end time.

Being an active investor involves knowing the in-s and out-s of buying and selling stock. But for becoming a successful swing trader, there is no substitute to working hard watching and analyzing your personal portfolio. In order to obtain the gains and rewards from swing trading, you need to master the science of timing.

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First and foremost is method. Their methods may differ widely, but the presence of a methodical approach is true for all of them. All successful investors have their respective ways of organizing relevant investment information and take the right pragmatic decision at the right time, be it on investing or disinvesting that is, withdrawing or selling off one’s stock.

Everyone makes a profit on a few deals if they have been in the game for some time. The question is, how do some people make a profit so often? Simplistic advice like ‘keep left’ or ‘follow a witch or a pendulum’ does not really make sense. Nor is there any single fool-proof method regarding investment strategies. If you want to win you have to play, and make the right moves under the rules of the game. The first move is to get and keep track of stock and corporate information properly.

Focus and not emotionality is what successful people have when going into this business. Startups are normally small or moderate, and that is indeed a good thing because successful investors do not make large investments on anything they have not understood adequately. If you invest time to read and observe the market, your time will turn into money.

They analyze their own portfolios and also those of others results, at least in the beginning. They keep written track of the analysis results. Analyzing means figuring out causes and effects of the events intelligently. They are open to mistakes in purchasing and selling of stocks, in speculations on options, on the timings of buying and selling. They initially compare the going rates with some standard mutual fund stock info track such as S&P 500 index fund.

If an investors finds him continuously on the wrong side he should be mature enough to reconsider his approach. He can’t stick to any particular stock because of emotional investments. A successful investor knows that the market ruthlessly ignores any emotional attachment.

It is common to find successful investors who pay attention to the immediate trail of prices of the stocks purchased, but still do not get swayed by 10% ups or downs. They have set pragmatic tolerance ranges for themselves. They are confident but not overly so. They will never play a sitting duck in risky affairs; though they will surely absorb a certain amount of risk. They are quick to distinguish between the ‘no-risk-no-gain’ and ‘too-risky’ lots, and it is often this acumen that makes them successful investors.

They often will move upstream along their documented analysis to reach proper understanding of the stocks they are considering. It is wise to understand one particular stock in every detail, and to use that knowledge to learn the other stocks better.

Work using your head. Remember, Lady Luck does not smile for a lazy bum. And if there’s anything that all successful investors have in common, it’s that not one of them is a lazy bum.

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Investors choose to use the stop loss order in two distinct situations. The investor may use a stop loss order in order to try to reduce the amount of loss that could occur. For example, you purchase 500 shares of stock from Target, a discount store chain, and at the time of purchase you place a stop loss order on the total amount of stocks. Then, you predetermine that you will not sell any of your 500 shares of stock from Target until it gives you a total profit 75% higher than the purchase price. Let’s say that all 500 shares of stock from Target cost you $95 each, for a total of $47,500. You are not allowed to sell these stocks until you make a total profit of $78,375. So, after 5 months of owning 500 shares of stock from Target, you earn that total profit and you sell your 500 shares of stock from Target. By the time the transaction occurs, each stock drops in profit by 25%, therefore, you just saved yourself from losing a return on your investment. The other reason that an investor may choose to place a stop loss order is to protect their profit. You, the investor, are only willing to lose a certain amount of you initial investment, so you place a stop loss order on your purchase.

For example, you decide to buy 25 shares of stock in Company Z, which are priced at $1.00 each, for a total investment of only $25.00. You set a stop loss order on this stock purchase by determining that you are willing to lose only 20% of this total investment. Therefore, when you have lost a total of $6.25, then you are able to sell you stock to ensure that you will not lose any more profit due to the decreasing profits.

As with the trailing stop order, the main advantage of the stop loss order is that you do not have to monitor your purchase on a daily basis. Because you have set a predetermined amount, when it is reached, the action of buying or selling will take place. Therefore, if you hold a demanding full time career, you do not have to watch the stock market daily in order to keep up with each of your purchased stocks.

The main disadvantage to keep in mind is that when your stop price is reached, buying or selling does take place, even if you have changed your mind and you want the investment to remain the same. This can be detrimental if a stock has shown no losses over a period of time. For example, you purchase 30 shares of stock from Company T and you place a stop loss order on it at the time of purchase. As time elapses, you discover that Company T’s stock has shown no losses but has instead should a steady gain in profits. However, the stock has reached the stop price, so you must now sell a profit bearing stock. Thus, in the long-run, because you had to sell this particular stock, you are losing money on your investment.

This stop loss order can provide a massive amount of saving your profits, however, if used when not necessary, you will end up losing more money than you have gained.

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What is the advantage of a diversified portfolio? It offers protection against rapid market losses of any one particular stock. If a portfolio is spread across 20 stocks, if any one of those stocks quickly loses value the effect is less than if the portfolio consisted of that one stock by itself.

When investing it is always a good idea to diversify. The problem for small investors is that they often don’t have the funds to buy a variety of stocks. Mutual funds allow small investors to benefit from diversification with a small amount of money.

Besides stocks, mutual funds can be made up of a variety of holdings including bonds and money market instruments. A mutual fund is actually a company and investors that buy into a fund are buying shares of that company. Shares in a mutual fund are bought directly from the fund itself or brokers acting on behalf of the fund. Shares can be redeemed by selling them back to the fund.

Some funds are managed by investment professionals who decide which securities to include in the fund. Non-managed funds are also available. They are usually based on an index such as the Dow Jones Industrial Average. The fund simply duplicates the holdings of the index it is based on so that if the Dow Jones (for example) rises by 5% the mutual fund based on that index also rises by the same amount. Non-managed funds often perform very well sometimes better than managed funds.

There are downsides to mutual funds. There are usually fees that must be paid no matter how the fund performs, and the individual investor has no say in which securities can be included in the fund. Also, the actual value of a mutual fund share is not known with the same precision as stocks on the stock market.

Mutual funds are often a better choice for the small investor than either stocks or bonds. They offer the diversity that provides cushion against sudden stock market movements and usually provide a greater return than bonds. Of course, mutual funds can also lose value, especially in the short term, so short term investors may be better off with bonds which offer a set rate of return.

There are three main types of mutual funds: money market funds, bond funds and stock funds. Money market funds offer the lowest risk they consist solely of high quality investments such as those issued by the US government and blue chip corporations. Money market funds have rarely lost money, but they pay a low rate of return.

Bond funds aim to produce higher yields than money market funds and therefore carry a correspondingly higher risk. All the risks that are associated with bonds company bankruptcy, falling interest rates also apply to bond funds.

Stock funds usually have the greatest potential for profitable investment but also carry the greatest risk. The risk is more for short-term holders of mutual funds stocks have traditionally outperformed other investment instruments in the long run.

There are different types of stock funds including ‘growth funds’ that attempt to maximize capital gain and ‘income funds’ that concentrate on stocks that pay regular dividends.

Mutual funds are an ideal investment for those with limited funds or investment experience. Choosing the right fund is a decision on how much risk you are willing to take against your expected return on your investment.

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Bonds always carry the risk that the principal amount may not be paid back. Companies with higher credit worthiness are more likely to be safe investments but their coupon rate will be lower than companies with lower credit ratings. Credit ratings are provided by firms such as Standard and Poor and Moody’s Investor Service. Credit ratings range from a high AAA to a low D.

US government bonds are considered to be the safest type of bonds. Blue chip corporations (those with established performance records that span over many decades) are also very safe bond investments. Smaller corporations have a greater risk of defaulting on their bonds, but bond-holders are preferential creditors and will get compensated before stock holders in the event that the business goes bankrupt.

Bonds can be bought and sold on the open market. Their value fluctuates according to the level of interest rates in the general economy. For example, if you hold a $1000 bond that pays 5% per year in interest you can sell the bond at higher than face value as long as interest rates are below 5%. If they rise above 5%, your bond can still be sold but usually at less than face value. This is because investors are able to get a higher interest rate than what your bond pays so in order to offset the difference your bond has to be sold at a lower cost.

Most bonds are traded in the Over-The-Counter (OTC) market which is made up of banks and security firms. Some corporate bonds are also listed on stock exchanges and may be bought through stock brokers. New issues of bonds are usually sold in $5000 increments while bonds bought and sold after the initial issues are quoted in increments of $100. A bond that is listed at 96 is selling for $96 per $100 face value.

Stocks or Bonds

When deciding whether to invest in stocks or bonds, the risks versus the potentials have to be weighed. Stocks have much greater potential to increase in value but they are also more subject to market fluctuations. Investment grade bonds (those with a rating of BBB or better) carry less risk but offer a relatively low yield.

Most investors agree that for the short term, bonds offer greater security and return. The situation changes, however, when time spans of longer than 10 years are considered. The stock market has consistently outperformed bond investments by a large factor. This is because companies continue to increase in value and any short term fluctuations in the stock market are smoothed out over time.

Bonds still have their place in most portfolios, however. They provide a stable investment which helps to cushion against stock market fluctuation. A mixture of investments including stocks from various industries, bonds and other fixed-income investments is the way to provide maximum growth while securing your investment funds for the future.

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One main similarity between bonds and stocks lies in the fact that both are traded in stock exchanges. As it is with stocks, bonds also have a face value that fluctuates according to the confidence level of the investor in the issuer’s ability to repay the bond on promised dateline.

However, contrary to stocks, which are equity securities, bonds as debt securities that have certain specific qualities.

Trading in bonds seems to be quite popular among investors as they are generally taken as a more reliable investment than stocks. There is an sum-assured component in bonds which is absent in stocks. In case of bonds you have a fair idea about when and hw much you’ll be repaid, and while you’re waiting you will earn an interest for having invested in the bond issue.

Bonds usually accrue interest like a savings account, which is payable either quarterly, half yearly, or annually. This may make one conclude that bonds are better investments than stocks. A stock investment market will never promise any interest or for that matter any promise of positive earning at all.

Bonds look better on another count also. They are often convertible in to equity shares.

Like in stocks, there are many varieties of bonds. Bond varieties refer to the rates of interest, distance of repayment terminal time and nature of conversion ratios, while stocks vary according to the size and probable income potential, which have to be calculated by the investor himself.

But this ‘higher worthiness’ is not always very well founded. There are bonds that do not pay any interest but guarantee the full repayment of the principal zero coupons for example. But in a sense that is true with stocks also. The only difference is that you have to be alert to avoid missing the purchase value by agreeing to sell them at the right time. Earning from bonds may vary according to the nature of the bond, whether it is a fixed rate or a floating rate bond.

The main demerit of bonds vis–vis stocks is that a bond can never earn more than its face value, while a prosperous stock can earn large multiples of its face value.

This statement needs to be qualified for convertible bonds, which can conditionally (dependent on the occurrence of certain events) be converted into equity stocks of the issuer, rather than being repaid in money. From that point onward it is identical with any other stock in quality.
Bonds can be advocated to be better than stocks for people who are allergic to risks and are happy with lower earnings. For people ready for financial adventure, stocks are the way to go.

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