The Basics Of Stocks

01
January

It’s a known fact that the best place to make money is in the stock market. That might sound like great news, but it’s also the best place to lose money. That being the case, it’s extremely important that you know what you’re doing if you’re looking to trade or invest in stocks. The following information will provide you with a good deal of information on what strategies to use, as well as how to get started. We will start slow and then work our way toward more pertinent information.

There are many rules to follow when trading stocks. One is to never get emotional. This is why many people are now using computer programs to trade. Even if they’re great traders, if they’re human, they’re going to get emotional from time to time. However, computer trading programs aren’t perfect. They can’t digest the importance of world events like a human can. Another rule is to always use limit orders opposed to market orders. Limit orders are better because you set the price that you are willing to buy or sell a stock for. If you use a market order, the price will be determined on the open market. This means you could potentially want to buy a stock for $10 and end up paying much more. This is completely unnecessary and should be avoided at all costs. A third rule when trading stocks is never to listen to tips from others. The reason for this is simple. Either they’re going to be wrong or the communication is illegal. While you might have an opportunity for some profit, it’s better to be able to sleep at night.

The stock market has three major exchanges. These are the DOW, NASDAQ, and S & P 500. The Dow is made up of 30 blue chip stocks. These stocks are slow movers that often pay dividends. A dividend is a payment you receive on a quarterly basis, whether the stock moves up or down. Dow stocks are also advantageous because they have a tendency to withstand turbulent markets – relatively speaking. Dow stocks include Proctor & Gamble, Exxon Mobil, and McDonalds. The NASDAQ is a tech-heavy exchange. These stocks have much more volatility. In other words, they will move up and down much faster. Most of the big tech companies like Microsoft, Apple, and Oracle, have stellar balance sheets. They have tons of cash and no debt. This should be looked at as a positive and cause these stocks to run, but it actually has the opposite effect. Since everything is already terrific, traders don’t see an opportunity for improvement or growth. It’s companies that are paying off debt, are new with lots of potential, or coming out of bankruptcy with a vengeance that will make the biggest upward moves. Technology is a tricky sector and should be avoided by amateurs. The S & P 500 is made up of 500 stocks. While the Dow is what the public refers to for market health, professional traders refer to the S & P. This makes sense considering there are 500 stocks in the S & P and only 30 in the Dow. It’s a much better indicator.

If you’re the risk-taking type that wants to get involved in trading, make sure you begin with a tight stop, something like 4%. In other words, always set a trailing stop for 4%. This means that when you buy a stock, once it goes down 4% from any point, the stock will automatically be sold. This is a great way to protect capital, and capital is everything. In case you’re wondering, it’s possible for a stock to be up 40%, or any amount, prior to it automatically selling on a 4% trailing stop. The only way a trailing stop will not work is on a gap down, which refers to negative news sending a stock price plummeting. This means it will bypass your 4% sell target. This is a rare event and most common in the biotech sector.

If you’re the patient type and prefer long-term investing, the key is fundamentals. You can go with blue chips and collect dividends. Another option is to search for young companies with very little debt and a ton of cash. These companies are always prime takeover candidates. If a company you have stock in gets bought, you can make between 20% and 50% in a day. The key here is patience. The company you own a piece of isn’t going to get bought because you just bought shares. You will often have to wait years. However, sometimes you will get lucky.

Regardless of what approach you take, make sure you’re diversified. If you buy stocks in the same sector, you’re asking for trouble – a lot of it. By being diversified, you will be protecting yourself. You will be hedging your bets.

Follow the information above to save years of experience and thousands of dollars.

This post was written by

jason – who has written posts on Budget Clowns.
Father of three and married to a lovely women. Always looking for ways to save money, and invest it properly for my children's future.

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