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Monday, August 25, 2008

What Is The Single Most Important Reason A Stock Moves Higher

In stock trading, interestingly the types of answers you get would vary widely, from a great news release to more buying than selling. Although there are those who will debate the issue, for the most part a stock moves higher when buying volume exceeds selling volume. The old law of supply and demand comes into play. Basically, if you own a stock and don't really want to sell it, what would get it out of your hands? A higher selling price, right? Right. So, if we exclude market maker games and dirty tricks, the bottom line is that a stock will gain in price when more people want the stock, than want to sell it.

But you will find the "overall market tone" is a much more accurate measure of whether a stock will go up or down on any particular day. For instance, take a look at a stock with a really great chart. Starting from the bottom left side of the chart, the stock moves up and to the right corner at a 45 degree angle right? Right, but it isn't a perfectly straight line is it? No, along the way, daily pull backs, stall outs, and one day dips are seen all over the place. So, here we have a stock that for lack of a better term is "in demand", and yet there were definitely days when profit taking hit, volume sagged, or it simply dipped on the day.

So, what is the point, you may be wondering? My point is this, "overall market tone" (feeling positive or negative) and individual sector strength is what will determine daily movements even though the overall movement for the long term is to the upside. With that thinking in mind try this one on and see how it fits: The ACME company is making money, it's growing earnings and they have made good statements about the future. A couple analysts have upgraded it and it looks good for a nice steady move higher. Well, chances are that indeed the stock is going to move higher and over the course of a number of months, it could even double its share price. But what will happen to that stock tomorrow if we wake up and the futures are down 85 points and when the opening bell rings, the market is in the toilet? We suggest ACME is going to take a hit for the day! Likewise if ACME is a "chip company" and the chip sector is down on news that DRAM prices have sagged, it probably doesn't matter that the entire market is in rally mode, ACME will probably be falling with its brothers in the chip sector.

So, when you are looking at a stock with an impressive chart and you want to get some of that stock, chances are a poor market day, or an "out of favor" sector day will give you the chance to pick up that stock a few dollars cheaper. The whole reason we are mentioning this is because "sector rotation" happens in a matter of days now. Years ago if the computer sector was in the dumps, it would be there for 3 months. Now, HWP, DELL, CPQ, can be out of favor one day and upgraded the next. That goes for chips, networkers, Internets, etc. Same with the overall market. So, buying into it on the poor market days and/or poor sector days is generally a good bet.

One of the hardest things to do is stock trading just minutes before the closing bell, after it has fallen a gazillion points on the day. In your mind you are thinking, "wow, this thing lost 15 points today, it may lose 15 more tomorrow", and you "could" be right. But if the stock has been moving up nicely and it dropped 15 points because the NASDAQ dropped 150 on the day, was it your stock's fault or the overall market's fault? Right, it was probably down simply because the market was down. Buying it at that depressed price was probably a good idea. When isn't it a good idea? If during a big one day fall like that the stock falls through some key support levels, or it released some type of horrible news. Either of those instances could see it fall a bunch more.

Yes, supply and demand causes individual stocks to move higher or lower in the long haul. But daily events are dominated by overall sector and market health. Remember this and it will help you enter trades at a much nicer price!



By Larry Potter
Larry Potter is a recognized authority on the subject of trading. For a FREE report on HOW TO TRADE FAST and a 2-week trial to Stocks2Watch®, visit: http://clik.to/stocks2watch

Thursday, August 14, 2008

Should You Buy Stocks on Margin?

Sooner or later many investors come across the concept of buying on margin, or using borrowed money to purchase more on stock trading to get extra oomph in their portfolio. But new stock trading investors should think twice before taking the plunge.

Brokers in stock trading are only too happy to lend you money to buy stocks and bonds if you open a margin account. You have to put up only part of the securities' price, and your broker lends you the rest. You just sign a couple of forms, and your broker runs a routine credit check on you. Brokers are eager to approve your application because margin accounts lead to more business and higher profits for them.

You can come out ahead in rising markets because you put up only 50 percent of the cost of your stocks and 25 percent of the cost of your bonds. So your money works at least twice as hard for you. The interest that you pay on your margin loan is not only relatively low but is also deductible from your taxable income up to the amount of your net investment income for the year.

Consider this scenario: It's late October 1998. After a sharp downturn over the past several months, the market has turned up. You find a stock you like. It's speculative, but you're willing to take the risk. The name is eBay. It's part of the red-hot Internet group in which Amazon.com and Yahoo! are doing so well. You have $10,000 to invest in your margin account. The quote on eBay is 50. With margin you can borrow money from your broker to buy additional eBay shares. Using 100 percent of your margin capability, you have buying power of $20,000-$ 10,000 of your money and $10,000 from the broker.

You buy $20,000 of eBay and get 400 shares. The price of eBay's stock soars to 733/8 the next day, and it's off to the races. The price skyrockets to 234 by November 24. You cash out, selling 400 shares and getting back $93,600. By using margin, your profit is $73,600 ($93,600 minus $10,000 of your capital and $10,000 to pay back the loan). If you hadn't used margin, your profit would only be $36,800.

Sound easy? Maybe too easy. You look brilliant. But wait a minute. New investors must be careful when borrowing money from a brokerage and using it to buy additional stock. It's a two-edged sword. If the price of the stock were to go down, the invested money would decline twice as fast. In the stock market crash of 1987, many stocks fell 40 percent or more in just a few days. Any account margined to the hilt suffered horrendous losses.

Margin isn't free: You pay interest on the borrowed money. The rate is marked up from the broker loan rate. A typical interest rate charged in early 1999 was 9.75 percent on a loan of less than $50,000. For larger loans the rate may be as much as two percentage points less.

It's wise not to venture out on margin until you've made several profitable trades. The best time to use margin is during the early phase of a new bull market. Once you recognize a new bear market, though, you should get off margin immediately and raise cash. An account should not be fully margined all the time. When progress is being made during a bull market, heavy margin can be used.

But when a correction sets in you should reduce your margin by selling shares. It's important to remember that it is a market of stocks, not a stock market. You must watch your stock positions and respond accordingly. Don't take solace in the general market averages. During the market retreat that occurred in 1998, many stocks turned lower well before the Dow Industrials revealed serious weakness in July and August.

If your stock trading rises-great! If it rises enough, you could sell some shares, pay off the margin loan and come out ahead. But if the gains in your stock don't cover your interest payments, you lose money. And if the stock price falls, you could suffer in two ways. Not only would your investment dwindle, but you could receive a call from your broker-a so-called margin call-to put up more cash.

A margin call occurs when the value of your collateral falls below a certain percent of your total purchase price-usually 30 to 35 percent. If the worth of your holdings drops under that level, your broker will demand that you deliver enough cash or other securities to bring your collateral back up to the required amount. If you can't deliver sometimes by the next day-the broker will sell your stock, take back what was lent you, and collect interest.

Before you decide to borrow on margin, ask yourself this key question: "Do I believe in the shares so wholeheartedly that I would be willing to borrow money even from a bank in order to own them?" If not, a margin account is not for you. If you do invest on margin, keep a close eye on your stocks. Check the prices often. You don't want a margin call to take you by surprise.


- By Alan Serling

For more information on using margin when investing in stocks visit About Investing Info.

Friday, August 8, 2008

How to Select Winning Stocks in a Down Market

There is an old and true saying, "When the markets go down 75% of stocks go down.". This is the old saying is the glass half full or half empty. I see this statement to mean that 25% of all stocks will rise in down markets.

I never recommend going short on a stock. In a down market I recommend going to cash, buying puts, or if you must invest, buy stocks that will not cave in to the markets pressure. Easier said then done, but I will attempt it here.

Since the stock market is much like the ocean, it goes up and down. Sometimes the waves are strong and suck you under. To stay afloat you need a life preserver. The life preserver I use in the ocean of stocks is Sectors. There is always one sector that seems to move higher when everyone else is being sucked under. Currently (06/30/08) the hot sectors are Energy and Petroleum. The markets are down 14% for the year and these sectors are producing stocks that have gained 400% and more over the last few months.

To identify the hot sectors (you should be hearing about them in the news consistently) you can always look in the financial papers or online website also. Once you have located the hot sectors, look at all the stocks in those sector. Some will be leaders and some will be laggards. The leaders will be the biggest names in that industry/sector. If you look at their charts you will see a pattern of the stock moving consistently higher over the last 6 months or more. These usually make great long term investments during a down market.

Now if you are looking for some great short term profits over a weeks time or a month, here is what you do. Look in the same sectors but look at the laggards (usually the stocks in the $2 to $5 range). Look at their chart and find the ones that look like they have reached a bottom. You don't want to see a chart where the price is getting lower each day. You want to look for one that hit its low point and is either moving sideways or been rising the last week or so. Put these on a watch list. Watch these stocks for one that gains 10% or more in one day on BIG volume. This would make a great short term play.

The reason this works is all in the mentality of the investors. When a sector takes off, it's the leaders in that sector who gain the most. They lead the way. As more and more investors get in on the bandwagon, this sector and the leaders rise in price. Soon more people want to invest in this popular sector. When they look at the prices of the leaders they see three digit numbers. "That's too expensive" they think, but they don't want to be left out either so they buy the laggards. Now all these companies with horrible earnings start to take off. You want to jump in right when they take off. So keep an eye out for the 10% jump.

Here is a warning, like the housing bubble, like the tech bubble, the energy and petroleum sectors will someday pop too and it is the laggards that drop the most first. This is why I recommend them as short term investments only.



- By W. Henry Boyett

About The Author

W Henry Boyett retired from his job three years ago and now trade stocks and options for a living. He shares his picks and knowledge with others so that they too can retire sooner, by trading stocks and options.

To get his latest stock picks and tips, visit http://www.stocklocater.com and sign up for free

Friday, August 1, 2008

Stock Trading Terms You Must Be Familiar With

Every field of human endeavor have its own terminology that is associated with it, the stock market is no exemption. Therefore this article seeks to make you get familiar with some of the day-to-day terms of stock trading.

a. Share. Describes the total share holding of a company divided into bits or slices to be purchased by institutions or individuals.

b. Securities. The unit shares you hold are well protected to the extent you invested by the regulatory authorities. Once a share is created, it cannot be destroyed, stolen, and can only be transferred.

c. Equity. Means the distribution and sales of shares are equitably done i.e. once a price is fixed; it remains the same for everybody irrespective of where you live unlike property investment whose prices are affected by location.

d. Stocks. Describes the total volume of shares held by the individual in company.

e. Rally. Means simply that the stock market goes up from whatever point it stood at when the rally started.

f. Blue Chips. Describes solid, quality stocks on the stock exchange e.g. Nestle, First Bank, Cadbury, Nigerian Breweries, Zenith Bank. The term is derived from the blue chip used in gambling especially in poker, which has the highest value.

g. Correction. When the market has moved rapidly in one direction, then changes (usually not so rapidly) in the other direction.

h. Long pull. How high an investor thinks a stock price will go before they sell.

i. Pull back. When the price rise reaches its peak, slows and then stops and begin to decline or fall back, people begin to sell at this point.

j. Bottom out. When the price has gone as low as it can, investors begin to buy again.

k. Liquidity. When we talk about liquidity on a stock exchange, we are talking about how easily and quickly a company shares can be converted to cash. If it is very liquid, it means is easy to trade in the shares.

l. Bull trend. Upward move or trend. It means the market is going up and is doing well, as reflected in share prices.

n. Bullish. Investor who believes that the market prices are going to go up.

o. Bearish. Investor who believes that the market prices are going to go down.

p. Stag. Investor who wants to make profits from new issues of shares. He buys the shares before they are listed. Then sells them at a higher price soon after they are listed.

q. Automated Trading. Is when the buying and selling of shares is done on a computer? dealers enter buy and sell orders for shares into an electronic trading system on a computer. The computer automatically does a transaction with the best selling and buying prices.

r. Brokers Contract Note. The broker's contract note is very important. It shows everything about the deal that the stockbroker has done for you. It tells you how much you have to pay the stockbroker for the shares he has bought for you. If you have sold shares it tells you how much you will receive for the sale of your shares.

s. Certificate of Stockholding. Shows how many shares you own. It is a very important document. You must keep it safe place.

t. Capital Market. Refers to the Stock market, it is a platform for raising money or capital from the investing public to meet company's financial needs.

u. Money Market. Refers to Banks and other financial institutions that offer loans investment opportunities and capital for businesses



By Efetobor John

Watch out for other incisive and impact articles, in case you want to get other enriching articles go to: http://stocktradingrevolution.blogspot.com

John Efetobor is an Investment Communicator, Analyst, Motivational Speaker, Coach, Trainer, Human Developer, Investor and Businessman. He has a Stock Trading Revolution Blog where he writes informative articles on Stocks, stock trading and other Vital aspect of stock investment Visit: http://stocktradingrevolution.blogspot.com for more information.

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