One of the most popular strategies of coping with your investment risk is diversification. Simply put, diversification means to spread your risk out among more than one companies, sometimes in multiple industries, instead of placing your entire eggs in one basket. This helps to scale back the chance that every individual stock has for your portfolio, thereby protecting you from sudden news that would ship the stock of a selected stock down. this is the reason many professionals advise people to put money into index funds that monitor markets like the S&P 500, because they are comprised of 500 companies from differing industries.

One instance of why diversification is so necessary is evident in the collapse of Enron organization. Many staff of Enron had been placing 100% in their retirement financial savings into Enron stock, and from the looks of things everything was picture perfect. alternatively while the fraudulent accounting practices at Enron came public, the stock collapsed, and lots of employees ended up dropping a majority if not all of their retirement plans. it is a classic instance of placing your whole eggs in one basket and the devastating impact of what can happen if you are wrong. you can also say, “Enron was just one bad example, but if i might all my cash in a stock like Apple, i might be wealthy.” Well you may well be right using that instance, but the function here is to control risk in case you are mistaken. For each one profitable stock like Apple, there are masses if not thousands of losing companies, and you have to have to have a system in position to give protection to you if your incorrect.

One false impression that many people have is the belief that the more they diversify the less their account can be hit when the market is going down. the issue is that three out of four stocks follow the course of the marketplace, and if the financial system enters a recession like it did in 2008, nearly all stocks will be hit without reference to what number of industries you diversify into. While it’s true that certain stocks won’t get hit as badly in an financial downturn, it won’t be enough to mitigate the losses from other more economically sensitive stocks you own. this is why numerous professionals say they’re “raising cash”, which means that as an alternative of diversifying into extra stocks to protect themselves, they’re selling stocks and letting the proceeds sit in cash until marketplace conditions strengthen.

Another factor to believe is that when you have less than 10 stocks, some professionals suggest that none of them should be from the same sector. An instance could be in a portfolio of ten stocks, you shouldn’t have three of those ten in Exxon (XOM), Chevron (CVX), and Conoco Phillips (COP) as these are all oil and gas plays that tend to move in the similar direction. therefore you wouldn’t actually|really|truly be diversified as 30% (3 out of 10) of your positions are in the energy sector and if energy stocks go down, a large chunk of your portfolio will go down with it. this concept has been popularized on a segment referred to as “Am I Diversified?” on the CNBC tv show Mad Money. Throughout this segment viewers call in and ask Jim Cramer if they’re diversified with the five stocks they currently own. If any two of the five stocks are in the similar business, Cramer will suggest they sell one of them and buy stock in another industry like financials.

Over-Diversifying

Another thing to bear in mind is the dangers of over diversifying, or in different words owning too many stocks. you will want to be able to do the homework for corporations you own in addition to do research on possible long run investments. If you hold 20 companies, it’s going to turn out to be nearly unattainable for you to stay on top of the inside track and successfully take care of those 20 stocks. the risk is that your research may become less rigorous and therefore lead to you missing the early flags that would help determine when to buy or sell a particular stock. Therefore with a view to effectively manage your portfolio, focus your time on narrowing down your list to the very best companies to help avoid the trap of over diversifying.

One of the most important questions facing voters before every presidential election is which candidate will do better for the United States economic system over the period of their presidency. While a “improving” financial system can mean various things to different people, a easy gauge for the U.S. financial system is the stock market. Increasing stock prices are typically an indication of increasing growth and could have many positive implications for the economy like a lower unemployment rate, increased capital funding provided by American companies, and higher private wealth in the form of larger retirement and 401k accounts. For the purposes of this post, we are going to use the S&P 500 to evaluate the stock markets performance.

As you’ll see, the stock marketplace has greatly outperformed under Democratic management with reasonable returns of 8.9% as opposed to the 0.4% average returns under Republican leadership. Then again there are a few fascinating caveats that should be mentioned before leaping to the conclusion that Democratic candidates are automatically beneficial for the stock market. In the event you exclude Herbert Hoover, who used to be president during the great depression, the Republicans average return increases to 4.7%. Another interesting observation is that there are four Republican presidents (Bush Sr., Eisenhower, Ford, and Reagan) who’s averaged annualized gains are over 10% as opposed to just one for the Democrats (Clinton).

All this knowledge above is in line with data brought together via the New York Times on 10/10/2008. Since then, President George W. Bush’s term came to an end (1/20/2009), and President Obama has had over 3 years of executive control in the White House. That is why I sought to collect the most latest data set to see where we stand currently.

Looking at the up to date information, President George W. Bush’s return did not change much from the data in the above illustration. He ended his 2nd term on 1/20/2009, at which the S&P 500 had lost negative forty percent, or negative five percent annualized. Whether or not it was a mere twist of fate or as a result of the anticipated policy change, the stock market bottomed around two months after President Barack Obama took office. From 1/20/2009, to the date of this writing,3/23/2012, the S&P500 has gained 73.5%, or 24.5% annualized.

Conclusion

Take what you are going to from the data introduced here. If we look strictly through the numbers, the stock market has massively outperformed below Democratic management in Washington. Most of this outperformance is as a result of our two latest Democratic presidents, Bill Clinton (15.2% annualized) and Barack Obama (24.5% annualized). Alternatively, the Republicans have had double the number of +10.0% annualized presidencies with four presidents compared to the Democrats two.

What is Technical Analysis

Technical analysis is a technique of selecting stocks to buy based on a stocks price and volume action. The key tool that will help technicians make stock investment decisions is a stocks price chart. Every stock, whether it be Apple (AAPL) or Google (GOOG) has a stock chart. This stock chart can present information such as the past price performance of the stock, volume (stock turnover) that took place a given time frame, and many other indicators. Ultimately by evaluating all these indicators on the stock chart, technical analysis can help a trader or investor make inferences about what a stock could do later on.

What Technical Analysis Isn’t

In its most pure form, technical analysis is the complete opposite of fundamental analysis. Technicians could care less with the intrinsic value of a business based on metrics like earnings per share, revenue growth, balance sheet analysis, etc. While many times the stocks with the top fundamentals will also have fantastic technical chart patterns, technical analysis is not as concerned with the fundamental side of the equation. A business may have decreasing sales within an extremely competitive environment, but if the stock chart shows a specific pattern, many technical analysts will be looking to purchase the stock to capture any potential upside.

Benefits of Technical Analysis

One of the biggest advantages of technical analysis is that it can provide a great method of risk management. When you buy a stock, the reason you purchase it is because you feel that at some point in the future it will likely be worth a lot more than you purchased it for. According to your time frame (time between when you buy and sell the stock), your profit target for the stock may be different. What you ought to ask yourself prior to into any trade or investment is, “What if I am wrong?” This is when risk management is needed. Using technical analysis as a tool for risk management is a good tool for investors and traders of all levels. Trend lines, moving averages, and support/resistance levels are all tools that you can use on a stock chart that will help you identify when to sell your stock should you be wrong.

A moving average such as the 50 day moving average (most common average used) charts a stocks average price over the last 50 days on a chart and helps to recognize the overall trend (up or down) of the stock. A very simple risk management tool that longer term trend traders use is that they’ll continue to hold a stock provided that it is above its 50 day moving average (see examples at How to Buy Stocks HQ). This is definitely not a hard fast rule, because there are several pitfalls and nuances of such a strategy, which I will look to elaborate further on in the future. Nevertheless for now, the important thing to understand is the fact that technical analysis supplies a good way for a trader to keep their emotions in balance by letting the stock charts decide if you should buy, sell, or hold.

Disadvantage to Technical Analysis

While there are basic rules to technical analysis that most traders agree upon, just following these rules won’t guarantee you make money over the long haul. You will notice that because so many others consider themselves technicians, that many times these rules are made to be broken. When everyone is watching the same thing on a stock chart, you can typically expect the opposite to happen even though it is going against conventional wisdom.

Buying Stocks Using Technical Analysis

Typically there are three things on stock chart that every technician looks for when looking for which stocks to buy: 1. Consolidation or basing pattern 2. Low volume pullback 3. High volume breakout. You will find loads of various basing patterns that technicians consider, but two of the most popular are “cup and handle” and “flat base”. In simplest terms, these are formations that show up on a chart that can give clues concerning where a stock could be headed in the future. Low volume pullbacks show that as a stock goes down in price, less individuals are willing to sell there shares and can be a good sign that the stock will continue higher soon. Conversely a high volume breakout signifies that there’s a huge interest in the stock as numerous institutions (mutual funds, hedge funds, etc) are attempting to buy as many shares as possible because they believe the stock is going higher.

Conclusion

This post is just a basic primer to get you introduced to basic technical analysis. There’s a lot more we will delve into in future posts like frustrations I have come across using technical analysis as well as methods on when you should sell your stock for profit or cut your losses if you are wrong. One thing to keep in mind using technical analysis, is that you have to know what time period (how long you typically hold a stock for after you buy it) you are using to invest. If you’re a short term trader (hold for a day), you could possibly only look at 5 minute charts in which each green and red bar on the chart represents 5 minutes. While if you’re a intermediate term trader (hold for several weeks to months), you’ll want to focus on daily charts (each bar represents 1 day), or weekly charts (each bar represents 1 week). No matter what timeframe you select, mastering technical analysis takes many years of hard work, studying, and discipline to become consistently profitable.

What’s Fundamental Analysis

Fundamental analysis is a method of deciding on stocks by examining fundamental measurements such as earnings per share, revenue growth, cash on the balance sheet, increasing debt, etc, to determine what you believe a stock will be trading at in the long run. By comparing the value you feel the stock ought to be worth, also referred to as intrinsic value, you could make a decision on if the stock is at a good price to acquire today depending on the current price it’s trading at. Where it may possibly get complicated is in how we determine what a companies intrinsic value is.

What Fundamental Analysis Isn’t

Fundamental analysis isn’t a good forecaster of short term price movements. Usually, fundamental shareholders are intermediate to long term investors simply because they need time for their thesis to play out. Many things can happen within the markets from a day to day perspective, but over the longer term, stocks with positive fundamentals have a tendency to trend higher in price and reap rewards for longer term holders.

Advantages to Fundamental Analysis

The principle advantage to using fundamental analysis is that you can have real confidence behind the stocks you hold. By learning and analyzing a stocks long term story, you are able to better understand the vision of where the company may potentially be in the future. If you find great fundamentals like increasing earnings per share and revenue growth, you are more likely to keep the stock for the big 50 to 100% gains without having to be shaken out by small 5-10% pullbacks that come along the way. Another advantage is when you’re employing a “value” approach, fundamental investors are usually the first to purchase extremely beaten down stocks that may net big percentage gains over the subsequent years. Provided you can find stocks that are trading at deep discounts, aka have good “value”, you can take advantage of incredible stock returns before a stock even comes on the radar of a technical analyst.

Disadvantage of Fundamental Analysis

Fundamental analysis can be extremely risky if you don’t use proper risk management. Calculating a companies intrinsic value involves some type of prediction or anticipation of what an organization will earn later on. One cloud that hangs over all predictions of future estimates is the economy. When there is a tough economy, like there was in 2008, future earnings estimates of almost every company should come down and so you will need to adjust your expectations of a stocks future price. Unless you manage your risk, or possess a spot where you cut your losses, you may end up riding stocks down to $0.00 as many did with banking stocks in 2008. It is therefore really important to keep up to date on the fundamentals of the stocks you hold for any likely negative headwinds.

Buying Stocks Using Fundamental Analysis

There are various methods and strategies to find out what a stock should be worth, but a straightforward metric that can be used to determine the value of a stock is a Price to Earnings equation. The Price to Earnings equation is simple and appears like this:

Stock Price / Full Year Earnings Per Share = Multiple

or

Multiple * Full Year Earnings Per Share = Stock Price

Stocks are forward looking so it is vital that you take a look at precisely what the future estimates are in order to discover what expectations happen to be being factored into a stocks share price. Using the second equation listed above, you can see that if you can establish a estimate of what a stocks future earnings per share is going to be, after which multiply it by a certain multiple, you can get a rough estimate of the potential upside of a stock. Precisely what multiple will we assign to a stock? Well there are numerous ways of thinking here but the most common can be a market multiple or perhaps a multiple in line with the companies growth rate.

A market multiple is the multiple that the market, for this example the SP-500, is trading at. The SP-500 happens to be trading around a 14 multiple, so we can use that as a conservative number. However a more accurate model to calculate a stocks multiple is usually to look at the stocks growth rate. A conservative approach here is to employ a multiple that is equal to a companies future growth rate. An example would be a stock growing at 20% should use a 20 multiple to account for the growth rather than the 14 multiple that the SP-500 is trading at.

Using Yahoo Finance’s Analyst Estimates section, you can type in a stock’s ticker symbol and find out information like the analysts future earnings per share and growth rate estimates. Exploring the below image you can see that next years earnings estimate for Apple (AAPL) is $47.76 . In the bottom pane you may also observe that its growth rate next year is projected at 11.4%.

Using the calculation above you can calculate the following price target as 11.4 * $47.76 = $544.46. Apple’s closing price as of 3/8/2012 was $541.99, therefore you could reason that Apple was fairly valued at that time with not a lot of upside. Nonetheless its also crucial to notice a companies earning history to see if it usually beats analyst targets or disappoints. As you can see in the middle pane labeled “Earnings History”, Apple is recognized for solidly beating even the highest of analyst estimates. If we assumed that Apple would carry out the same down the road, we could use the high wall street analyst of $53.00 as opposed to the average that we used previously. In this instance we receive 11.4 * $53.00 = $604.20. This would indicate a possible upside for Apple at around 11.5%. There is always more to the story than a stocks Price to Earnings equation, but this is meant to be a introductory example to one of many methods that professionals employ to calculate a stocks future price on a fundamental basis.

Bottom line

Fundamental analysis at its core is a great place to start to help narrow your watch list of stocks from the 1000s of choices to the limited number which are worthy of buying. Although there are various methods of fundamental analysis like growth investing and value investing, being familiar with a companies services or products, along with its prospective future earnings is essential for longer term investors. Profitable investors coming from all backgrounds, may it be Warren Buffet using a value approach, or William O’ Neil utilizing a growth approach, have included fundamental analysis into their investing methodology and have gone on to be incredibly profitable in the markets.

Good job on the conclusion to acquire more information for how to buy stocks!

You may be thinking, “Why must I learn to buy stocks?” and also “I don’t have enough money to get started on investing.” To respond to the first question, I’d state that learning how to buy stocks provides the most significant potential long run reward more than any asset class. $1 invested in 1925 would be worth more than $100 in 2010, while storing your $1 in gold or maybe t-bills would’ve yielded you lower than $10. The least beneficial performer nonetheless was in fact cash; keeping money in U.S. dollar’s would’ve resulted in an unfavorable real return resulting from growing inflation. The real kicker here, would be that the huge gains witnessed from learning how to buy stocks could have been multiplied a thousand-fold using more aggressive investing techniques over that same time period of time. At How to Buy Stocks HQ, My goal is to talk about some of these investing techniques so novices can take the 1st step towards figuring out how to buy stocks online today.

Now to the other assertion made above, my response would be that while you might need a minimum account balance in order to open an account in an online brokerage firm, these minimum requirements and costs associated with buying stocks have never been cheaper. Do not let fees and minimum balances prevent you from finding a feasible method regarding how to buy stocks online. Online brokerages similar to Zecco.com allow you to open a trading account without any minimum balance and fees of just $4.95 for each trade. Brokerages like Interactive Brokers have a minimum balance of $10,000, but have fees just $1.00 every trade.

Another option that numerous new traders consider when initially learning how to buy stocks may be to paper trade. A paper trading account is simply much like your regular brokerage account other than it is actually using fake money. This enables new investors to identify a working approach concerning how to buy stocks and develop his or her confidence just before placing actual money behind a stock purchase.

There are numerous options to select from when selecting an online brokerage, and we’ll look to detail a number of the most common ones in a future post. What is important to consider away today is that the minimum amount required to get started buying stocks has never been lower, hence please don’t hold out and miss potential future opportunities.

A good trading system is about much more than just selecting stocks. Certainly that is important as well. However, a good trading system will provide the ability for you to protect against losses, manage your money, add proper leverage when necessary, and also select a stock selection maximizing your reward and minimizing your risk.

The guess work is taken out of the way for you. The stock is purchased when criteria is met, the amount of stock purchased is also based on certain criteria. The stock is sold when criteria met, and there are protective measures against a stock’s demise, and where possible and appropriate leverage is created to maximize the returns without taking on more risk than you can handle.

This trading system will be talked about in 5 additional parts in addition to this intro. This post is designed to explain the trading system, its functions and how it operates.

1) Exit strategy. Every good system trader will first know the exit strategy. It doesn’t matter what vehicle selection you use, if you have no exit strategy, you’re stuck. The trick is to understand that unless you want to get trapped in an investment you have to know when you’re getting out.

A good exit strategy has both loss protection, and profit taking, and sometimes even a 3rd stop. The first 2 might be a maximum loss, and a maximum gain before taking profits, while the 3rd one will be a trailing stop that rides the gains up, and will sell the remaining shares. There are other exit strategies such as hold forever and write covered calls against it to collect income, or protective puts in place of a stop-loss.

2) Protection. Although #1 covers most of the protection, there are several other ways to protect yourself. Protection is vital to allow you to stay in the game. Many people know that if you lose 20% you need a 25% gain to make up for it. Losses not only can result in a series of losses that wipe you out, but they also hinder your ability to gain in the future. a 95% loss for example requires a 2000% nearly impossible goal to make up for this loss. So even if you flip a coin and have a 50% chance of gaining 200% or 50% chance of losing 95% of it, you should probably not take it if all your money is at risk, because it doesn’t have the downside protection A series of wins followed by 1 loss would prevent your ability to stay in the game. Even though those odds SEEM fair, they are not without proper protection. Protection ensures that you won’t have that 95% loss, and it absolutely restricts that loss to a fixed amount, rather than take 100% risk.

Such forms of protections are writing calls, in this situation you are given a premium so if the stock tanks to zero in a worst case scenario you’d still end up with the premium, this is minimal protection, and only protects a marginal amount of decline before the losses continue. The other form of protection would be buying a protective put. This actually in fact does protect against catastrophic losses. The lower your stock goes if/when it crashes, the more you make from your put or puts. You are the one paying a small amount in order to protect against any sort of decline below the designated price. The lower this price, the cheaper the option. If a stock is at $50 and you buy a protective put at a strike price of 40, you will NOT be protected against losses from 50 to 40, but beyond that you will be protected to the downside.

These are somewhat more sophisticated forms of protection. Basic forms of protection are diversifying, and perhaps being short. If you buy a stock at $100, and you short one in the same sector at $100, if the whole sector goes up, you are betting not that the market will go up, not that the sector will go up, but that stock A that you are long will outperform stock B in a bull market, and stock B will under perform stock A in a down market. This offers protection although it may limit the gains as well, Plus, you actually have to be right in your thesis.

In addition, if you are short, and the stock market booms, you may get a margin call and be forced to sell. Also, if you do not use money management, you are at risk of a short term swing requiring you to sell all of your shares of the stock that went up, in order to pay for those that you were short that went up, and if you can’t cover your short, your entire account is in jeopardy of being wiped out.

So rather than being short, I recommend replacing it with buying put options, although this has lots of risks involving time decay as well that you must understand before investing. Using a business entity such as a C Corp or a LLC is another form of protection that can protect you potentially against higher taxes, and personal financial trouble such as a bankruptcy on your record if you intend on using forms of leverage such as loans.

3) Money Management and Control. A good trading system will have a form of control. it will allow you to not give up that control when things go bad. In other words, it allows you to manage your money. Money management is very important. Perhaps one of the most important things is position sizing. If you buy $10,00 of stock for one stock when you only have $10,000 in your account this is very poor money management. Continue to do this, and eventually you will suffer a large loss which will be great, and it will be very difficult to gain enough to make up for it. In addition, if the price goes lower depending on your system, you may want to give yourself flexibility. Extra cash on the sides is another form of money management. It doesn’t have to be cash per say, but some form of safety. Various forms of currency, sometimes some gold, bonds, and money market accounts that are all fairly liquid would be a few examples.

4) Leverage Leverage is about using your abilities to gain, the strength of your trading system and various tools to minimize risk, and increase gain. When you take on leverage, you should be able to reduce your position size in comparison to your capital, and still have a similar reward or gain.

Forms of leverage include options, the further out of money option you purchase, the more leverage you have if that stock does make a strong move. You can also sell options to raise capital to invest in some cases.

Another from of leverage is a loan. Whether it’s a credit card, a home equity loan, going on margin, or a business loan for an asset holding company, or even taking a company public and using the capital to invest, the idea is to gain money at x% and to invest it and make a greater return than x%. if you can do this, and manage money well, and protect yourself, Your gain is only limited to the amount of capital you can borrow at the maximum of slightly less than what you expect to gain. Generally however, if you use a loan, you should have a form of cash flow or income that will cover the costs of the loan just in case your investment goes wrong. That’s another form of money management while using leverage. Money management should be treated much differently under different forms of leverage.

5) Finally, the stock selection vehicle. You need some method to select your vehicle, based on this and your other factors you will determine time horizon and a methodology of trading. The system will help you choose your trading stocks, and exactly what to do with them. You can play around with different trading systems, but generally you should first attempt a good exit strategy and make sure your controls on parts 1-4 of your trading system are sound, and try tweaking them

Stock Trading Systems that are well defined will leave very little room for error. If you learn to use a trading system, you can choose to enhance the essential skills it takes to making your trading system better.

Unfortunately, many day traders are slaves to the computer screen and can miss a moment. Focus on building the better trading system, and not placing the better trade, and you will give yourself some valuable time. If you are really using a system, you don’t need to be the one to place the trades, and can instead higher someone to do the work for you. You can use that extra time to improve your system, or find new ways to invest, or learn how to become a better trader.

You can learn other tips like this at the System Trading|Stocks Trading Systems blog, which is full of tips for day trading, options, swing trading, momentum trading, and advice on building a trading system.