Many investors like to use the daily charts to help them them investment decisions on a particular stock. However there is no question that weekly and monthly charts can provide you with even better trading signals because you eliminate a lot of the day to day market fluctuations.
There are several ways you can use these longer term charts. A common strategy is to use them purely to identify the long-term trend before using the daily chart to gain a good entry point. For instance if the weekly and monthly charts are both in a strong upwards trend, then a good time to buy would be whenever the price is temporarily oversold on the daily chart.
Another strategy is to simply use the weekly or monthly charts themselves to time your entry points. For example a strategy I like to use from time to time is to buy into shares where the EMA (5) has crossed upwards through the EMA (20) on either the weekly or monthly chart.
This tactic can result in some huge gains because whenever these crossovers occur on the longer term charts, you will often get sustained trends in the overall direction of this crossover. These resulting trends can last several months and even several years in some cases. This is particularly true of the smaller growth companies.
You always have a good exit point as well because you can safely leave the trade open until the EMAs cross over again in the opposite direction. It's also easy to cut your losses because if the crossover fails to create any momentum in the price and they cross back down again, then you can simply exit your position with a small loss.
So as you can hopefully see, the weekly and monthly charts can produce some excellent investment opportunities when you use them in conjunction with your favourite technical indicators. It's certainly easier than just using the daily charts because these can fluctuate wildly from day to day and it can be hard to get your entry and exit points right.
The basic rule is that the longer time frame you use, the more you can rely on technical analysis. Of course a lot of investors nowadays simply do not have the patience to hold onto shares for several months or years, but if you are looking for some fairly safe long-term profits, then I can strongly recommend you make full use of the weekly, monthly or even quarterly charts for those big long-term gains.
Tuesday, June 30, 2009
The History of the Stock Market
With all the press the economy and the stock market are getting these days, it makes us wonder when and how the stock market began. It is believed that the stock certificate that's the oldest in existence was issued in 1606 to a company in the spice business. Though the company fell apart in 1799, heavily in debt, the stock share is worth a great deal more now than its original value, due to the fact that it is a collectible. The business of stocks and securities began in the Old World, (Netherlands, Spain, France and England), but when the English colonists came to America this great plan came along with them.
In America, Alexander Hamilton was the first U. S. Secretary of the Treasury. It was his idea to promote the development of stock exchanges in America. His likeness, in the form of a statue, sits in the American financial district, known as Wall Street in New York City.
AMEX and NYSE
In 1817 the New York Stock and Securities Board was formed which is now known as the New York Stock Exchange, followed by the American Stock Exchange in 1842. At the time of George Washington's inauguration as President of the United States, New York was the nation's capital.
Both Wealth and Devastation Resulted
History recalls that the stock market became a very popular vehicle for investing large sums of money by the 20th century. And, enormous amounts of money were made by investors, namely one J. P. Morgan who created U. S. Steel through a gigantic merger.
And, as today, there were times of panic, such as 1907 when millions in securities were sold within a few short months, causing stock prices to plunge.
The era known as "The Roaring Twenties" came to an abrupt end with the market crash of 1929. Within a week, the market tanked, leaving many formerly rich people penniless. Some even committed suicide by jumping from their building windows. This depression, as it was called, lasted until 1941 when World War II began. The most recent crash in 1987 was known as Black Monday, when the point drop on the Dow Jones Average was 508. However, on Monday December 1st, 2008, the market dropped 680 points as the economy, once again, weakened and a recession was acknowledged.
Today's Economic Crisis - more history in the making
Many billions of dollars have been lost in the stock market since the recent downturn in the economy. Those hardest hit have been retirees living on the income from their 401k's and IRAs. Some who were formerly millionaires are finding themselves looking for ways to make ends meet to hold onto whatever retirement savings they still have. Market volatility has, and always will be, one of the risks of putting "all your eggs in one basket." Therefore, in order to make wise investments, it is smart to stay diversified in your holdings.
In America, Alexander Hamilton was the first U. S. Secretary of the Treasury. It was his idea to promote the development of stock exchanges in America. His likeness, in the form of a statue, sits in the American financial district, known as Wall Street in New York City.
AMEX and NYSE
In 1817 the New York Stock and Securities Board was formed which is now known as the New York Stock Exchange, followed by the American Stock Exchange in 1842. At the time of George Washington's inauguration as President of the United States, New York was the nation's capital.
Both Wealth and Devastation Resulted
History recalls that the stock market became a very popular vehicle for investing large sums of money by the 20th century. And, enormous amounts of money were made by investors, namely one J. P. Morgan who created U. S. Steel through a gigantic merger.
And, as today, there were times of panic, such as 1907 when millions in securities were sold within a few short months, causing stock prices to plunge.
The era known as "The Roaring Twenties" came to an abrupt end with the market crash of 1929. Within a week, the market tanked, leaving many formerly rich people penniless. Some even committed suicide by jumping from their building windows. This depression, as it was called, lasted until 1941 when World War II began. The most recent crash in 1987 was known as Black Monday, when the point drop on the Dow Jones Average was 508. However, on Monday December 1st, 2008, the market dropped 680 points as the economy, once again, weakened and a recession was acknowledged.
Today's Economic Crisis - more history in the making
Many billions of dollars have been lost in the stock market since the recent downturn in the economy. Those hardest hit have been retirees living on the income from their 401k's and IRAs. Some who were formerly millionaires are finding themselves looking for ways to make ends meet to hold onto whatever retirement savings they still have. Market volatility has, and always will be, one of the risks of putting "all your eggs in one basket." Therefore, in order to make wise investments, it is smart to stay diversified in your holdings.
Small Profits are Better Than No Profits At All
Once you have learned to know the traps and pitfalls of trading in the stock market, (Usually by bitter experience) you can then more readily avoid them.
Making small mistakes are par for the course when you first begin to trade. It is quite easy to enter the incorrect stock symbol or wrongly set a buy level price too high.But these are excusable.
The traders main concern is to avoid making the mistakes that are due to bad judgment rather than just basic errors. These are the “lethal” mistakes which can ruin a traders trading career.To make sure that these pitfalls don't occur, you will have to watch yourself very closely and stay alert.
Greed is a visible but serious mistake which most traders make some time or other in their trading career. No one is immune.
Actually most traders are naturally greedy, since the main reason that they are trading in the first instance is in order to make more money. Wanting to make more money is Quite natural, but wanting it too quickly can be dangerous. When a trader first begins to start trading, they want to get rich,but they want to do it all in one trade. And that’s when they lose and come unstuck.
All a traders trading success comes from trading consistently. Unfortunately there are many newbie traders out there who sincerely believe that their fortune will be made in just one awesome trade, This is just a pipe dream and a dangerous one at that..
Experienced traders soon realise that the best, and usually the only, way to make a fortune in trading is by sheer consistency and nothing else. Their fortune will in all probability be made in small amounts. Unfortunately most traders will go for the big gains, which will inevitably result in big losses which is very detrimental to their trading capital..
It is a natural instinct that traders are more interested in greater profits per trade. For instance what would you rather have – a twenty dollar bill or a five dollar bill? The answer is really very obvious. But when it comes to trading, it’s not really that simple.
If you don’t take the five dollar bill, you may lose twenty dollars of your own money, or possibly more. The main thing to remember is this. Even though you can’t take the Twenty dollar bill immediately, you can take four five dollar bills over a longer period of time. And the end result is exactly the same – twenty dollars.
The point that I am trying to make here is that small steady profits add up. I am not saying you’ll never have a big winning trade. In Options trading for example, it’s quite a common occurrence to make profits of 100 in just one trade. So, it’s not entirely impossible to get the big profits.
It is just being unrealistic to expect big profits all the time and its not something you should count on all the time. For if you continually expect profits like this all the time and will not accept nothing less, all you’re doing is setting yourself up for guaranteed disappointment.
The guaranteed key to profitable trading success is by making small but consistent profits. Consistency is the key, because if your profits are consistent and predictable,therefore, you will learn with experience when to exit exactly with a profit.
And one last tip resist that temptation to stay in “just that little longer, for just a little more.”be content with small profits.
Making small mistakes are par for the course when you first begin to trade. It is quite easy to enter the incorrect stock symbol or wrongly set a buy level price too high.But these are excusable.
The traders main concern is to avoid making the mistakes that are due to bad judgment rather than just basic errors. These are the “lethal” mistakes which can ruin a traders trading career.To make sure that these pitfalls don't occur, you will have to watch yourself very closely and stay alert.
Greed is a visible but serious mistake which most traders make some time or other in their trading career. No one is immune.
Actually most traders are naturally greedy, since the main reason that they are trading in the first instance is in order to make more money. Wanting to make more money is Quite natural, but wanting it too quickly can be dangerous. When a trader first begins to start trading, they want to get rich,but they want to do it all in one trade. And that’s when they lose and come unstuck.
All a traders trading success comes from trading consistently. Unfortunately there are many newbie traders out there who sincerely believe that their fortune will be made in just one awesome trade, This is just a pipe dream and a dangerous one at that..
Experienced traders soon realise that the best, and usually the only, way to make a fortune in trading is by sheer consistency and nothing else. Their fortune will in all probability be made in small amounts. Unfortunately most traders will go for the big gains, which will inevitably result in big losses which is very detrimental to their trading capital..
It is a natural instinct that traders are more interested in greater profits per trade. For instance what would you rather have – a twenty dollar bill or a five dollar bill? The answer is really very obvious. But when it comes to trading, it’s not really that simple.
If you don’t take the five dollar bill, you may lose twenty dollars of your own money, or possibly more. The main thing to remember is this. Even though you can’t take the Twenty dollar bill immediately, you can take four five dollar bills over a longer period of time. And the end result is exactly the same – twenty dollars.
The point that I am trying to make here is that small steady profits add up. I am not saying you’ll never have a big winning trade. In Options trading for example, it’s quite a common occurrence to make profits of 100 in just one trade. So, it’s not entirely impossible to get the big profits.
It is just being unrealistic to expect big profits all the time and its not something you should count on all the time. For if you continually expect profits like this all the time and will not accept nothing less, all you’re doing is setting yourself up for guaranteed disappointment.
The guaranteed key to profitable trading success is by making small but consistent profits. Consistency is the key, because if your profits are consistent and predictable,therefore, you will learn with experience when to exit exactly with a profit.
And one last tip resist that temptation to stay in “just that little longer, for just a little more.”be content with small profits.
Friday, June 19, 2009
Ready To Make Money In The Stock Market? Here's The Perfect Opportunity!
The stock market has "crashed" as of late and this has sent many investors scrambling for the exits. So many people have seen the slumping economy and thought to themselves that the world was coming to an end. This fear has caused the market to fall far lower than it ever should have and know is the opportunity to cash in on other peoples irrational behavior.
Now don't get me wrong - the stock market should have gone down. The financial system has some major problems and the economy as a whole has faced some struggles. But the market has gone done close to 50% - a far larger drop than the economic factors should have caused.
Think about it - is a company such as General Electric really worth 75% less than it was a year ago? Of course not! Not enough has changed in their business model to warrant such a drop. Sure, economic times will lower their sales and their cost of borrowing is a little higher, but this doesn't mean they are all of a sudden worth only 25% of what they were one year ago.
Fear and emotional responses of investors play a massive role in stock prices. The term "herding" refers to a group of people simply following the masses and acting in the way others are. This is exactly what has happened in the stock market.
People have read horror story after horror story about the markets and seen other selling and have simple followed the crowd. This selling pressure has resulted in a far larger drop than what should have ever happened.
Here's the good news though - you can know jump in the stock market and take advantage of this mispricing. In recent times, the markets have been experiencing slow upward growth and although there is pessimism that remains, the fear and mass selling is no longer playing the same role. This points to the bottom of the downswing.
Now's the perfect time to catch the markets and profit from their upswing. Gradually, positive ecomonic news is being released and the markets need to rebound and correct the mispricing that this fear has caused. If you get in now, you will catch it at the perfect time. And it's very likely that the opposite will occur - investors will be overly excited about the rebound which will cause an even greater upswing.
Bottom line, don't be cautious to invest in stocks! This is truly a "once in a lifetime" opportunity that will make you a tidy profit if you take action.
Investment Tips - Averaging Up and Averaging Down
Among today's investors there is so much controversy; is averaging up or down right, or is it the wrong thing to do? If a situation arises where you have the opportunity knocking will you average up or down? I will give some pros and cons of both of these issues.
Averaging Up: Averaging up is when you increase your position in the same stock after you are already in a winning position. Done properly, averaging up can significantly increase gains within your portfolio. A good reason for averaging up on a winner may be to increase your Book Value so when you do profit take there will be less gains that will be taxable. This investment strategy would generally be used to increase your position over the longer term. Life is grand as long as the stock continues to increase.
On the down side, it is very difficult to identify the point at which you should add to your position. If you add too large of a second position and the stock falls back a few points, you may move from a winning position to one of a loss. A safer way to average up would be to make many smaller position additions over time, this will make a pull back of a few points more tolerable.
Averaging Down: Averaging down is sometimes very difficult to stay away from. I use the term "sitting on my hands" so I will not jump into a further position when it is losing already. Averaging down is speculative but can be very rewarding if you are lucky. You must watch that you do not invest in the stock that continues to go lower and never recovers. Keep your mind fresh at all times before averaging down. Many fortunes have been lost from averaging down however if you have a strategy that works for you, use it with good judgement.
It is not wise to use margin, funds you cannot afford to lose or funds that you will need to have access to in the near future. Each investor has their own risk and reward tolerances and prior to investing it is strongly recommended to have stop loss and profit taking policies in place.
These are just a few pros and cons of averaging. It can work for you, but can also work against you. Invest smart and never invest all your finances to average up or down in a position.
I look forward to seeing your success.
5 Tips to Investing Successfully in the Stock
Here is a simple 5 Step process to help get you started out on the right track..
1. Finding a stock.
This is the most obvious and most difficult step in stock trading. With well over 10,000 stocks to trade in a good guideline is to consider first in which sector you wish to trade in first.
Of course you would be looking at a sector that is receiving good media coverage and in which the stocks concerned are going in in value.It stands to reason that you would not be looking too hard at a sector that was experiencing a severe downturn.
Once you have decided in which sector you want to invest in, you can then commence to start researching for a stock.
It is always best to have a system of rules already in place that will be used before buy each stock.
2. Fundamental Analysis.
A lot of short term traders might argue with the need to do any Fundamental Analysis at all, however knowing the stocks past history and the latest up to date news regarding the stock can be very crucial.
A good example would be the earnings season. If you are planning on buying a stock that has missed its earnings target the last 3 quarters, I dare say caution might be very wise.
3. Technical Analysis.
This is the part where the indicators play a part. Stochastics, the MACD, volume, moving averages, RSI, CCI, support levels, resistance levels and all the rest. Whichever batch of indicators you choose, whether they are lagging or leading, may entirely hinge on where you get your information from.
Keep it very simple when you first start out, for using too many indicators in the first place is a guarantee to achieve big losses. Get comfortable using one or two indicators first. Learn their intricacies thouroughly, and you'll be on the road to making more profitable trades.
4. Follow your choices.
Once you have committed to a couple of trades you should then start to manage them properly. For instance if the stock is meant to be a short term trade you would then obviously be watching it more closely for your exit signals. If it's a longer term trade you then of course need to set up different time frames such as weekly or monthly checkups on the stock.This effectively frees you up and gives you more time to do other things.
You can use this time wisely for keeping up to date with the news, determining your price targets, set stop losses, and keeping an eye on other stocks that you may want to purchase in the future.
5. Keeping an eye on the bigger picture.
This is best achieved by following the particular sector in which you bought your shares .For instance, if you are expecting a share price to go up on an oil stock you purchased and nearly all of the other stocks in oil sector are also rising, then this is cofirmation that you may have made the right decision.
But of course the reverse holds true as well. If the oil sector is starting to show a decline then it might be a good idea to take your profits and run. By knowing in advance and being aware which sectors are hotting up or cooling off stacks the odds in your favour.
For more information on Researching and other related articles go to our Education Section here at Asxnewbie
You just never know which GEM of information might turn up which could lead you to your next profitable trade.
Stock Trading Basics - What Are Your Stock Trading Goals? -
When it comes to stock trading, most of the new stock traders are unsuccessful because many jump right into the world of stock trading with both feet without doing any research. It is advisable that you attain some degree of stock trading skill before you plunge into the stock market and do remember that in stock trading - the risk of losing your money is a inevitable
Before you plunge into the world of stock trading, do your research and find out more about the world of stock trading and how the stock market works. Determine what are your goals, what do you hope to achieve in stock trading? Will you use the profits to fund a college education? Buying a home? Do you want to retire early? Knowing what your goals are will help you make smarter stock trading decisions along the way!
Too often, people trade stocks with dreams of making lots of money in a sort period of time. It is rare but it also possible. It is not advisable to start stock trading with high hopes of becoming rich overnight. However, if your stock trading goal is to get rich quick, you should learn as much about high-yield, short term stock trading as you possibly can before you start investing in stocks
It is strongly advisable to talk to a financial planning adviser before you dive into the stock market. Your financial planning adviser will help you determine which stocks to buy for you to reach your financial goals. Your financial planning adviser can advise you as to what kind of returns you can really expect and how long it will take for you to reach your specific goals.
Again, remember that in stock trading, it is not just about calling a broker and telling them which stocks to buy. It takes a certain amount of research, skill and knowledge about the stock market and stock trading if you hope to trade stocks successfully.
Stock Trading Basics - What Are the Different Types of Stocks?
Most first time stock traders will be confused by the different types of stocks in the stock market. This confusion will cause most first time stock traders to buy the wrong stocks or turn away from the stock market altogether. Knowing what types of stocks are available in the stock market and what the individual types of stocks means is important if you want to succeed in stock trading
Most often, you will come across the term "Common Stock". Common stock can be purchased by anyone, regardless of income, age, or financial background. Common stock is an important part-ownership of the company that you are investing in. The value of your stock will rise as the company grows and earns money. Alternatively, the value of your stock will fall when the company goes bankrupt or does poorly. Common stock holders have the power to elect the board of directors but they are not involved in the daily operations of the business.
Apart from the common stock, another type of stocks is the stocks that are divided into different classes. In one company, the different classes of stock are often called Class A and Class B. The stock owner of the first stock class, class A will be awarded more votes per share of stock than class B stock owners. This ability of creating stocks of different classes in a company was created in 1987. Stocks with different classes are not called common stocks and most investors will avoid these types of stocks.
The Preferred Stock is the most appealing type of stock than the other stocks. Preferred stock is not actually a stock because it is a mix of a bond and a stock. If the company goes bankrupt, preferred stock holders can lay claim to the assets of the company and the proceeds of the profits from a company goes to the Preferred stock owners followed by the Common stock owners. Most of us would prefer the preferred stock of a company but be aware that the company has the right to buy the stock back from the stock owner and can stop paying dividends altogether
Most often, you will come across the term "Common Stock". Common stock can be purchased by anyone, regardless of income, age, or financial background. Common stock is an important part-ownership of the company that you are investing in. The value of your stock will rise as the company grows and earns money. Alternatively, the value of your stock will fall when the company goes bankrupt or does poorly. Common stock holders have the power to elect the board of directors but they are not involved in the daily operations of the business.
Apart from the common stock, another type of stocks is the stocks that are divided into different classes. In one company, the different classes of stock are often called Class A and Class B. The stock owner of the first stock class, class A will be awarded more votes per share of stock than class B stock owners. This ability of creating stocks of different classes in a company was created in 1987. Stocks with different classes are not called common stocks and most investors will avoid these types of stocks.
The Preferred Stock is the most appealing type of stock than the other stocks. Preferred stock is not actually a stock because it is a mix of a bond and a stock. If the company goes bankrupt, preferred stock holders can lay claim to the assets of the company and the proceeds of the profits from a company goes to the Preferred stock owners followed by the Common stock owners. Most of us would prefer the preferred stock of a company but be aware that the company has the right to buy the stock back from the stock owner and can stop paying dividends altogether
Safe High Dividend Stocks - Where to Find Them
How difficult is it to find a safe high dividend stock in 2009?
The Wall St. Journal recently reported that, in 2009, S&P 500 companies' dividend reductions and suspensions are nearly equal to dividend increases, (60 increases vs. 51 reductions/suspensions).
Compare this to 2007, when there were 129 dividend increases vs. only 2 dividend cuts/suspensions, and you can see why income investors in 2009 face big challenges finding safe dividends, let alone high yield dividends.
Indeed, 8 of the Dow 30 blue chip stocks have cut their dividends in the past year, and even the revered S&P "Dividend Aristocrats" group has seen an unprecedented rise in dividend cuts, and an historic lack of increases. The 2009 Dividend Aristocrats group has had 5 cuts and 32 unchanged dividend payouts, vs. no decreases from 2003-2008. In 2006-2007, all 52 stocks in this group increased their dividends, and in 2008 their were 41 dividend increases and 11 unchanged.
So, where can you go to find a dependable dividend yield? Many value investors start their search with the Dividend Aristocrats, which features companies with 25 consecutive years of increased dividend payouts.
Intuitively, it's logical to assume that companies that can increase their dividends for 25 years or more must have strong business models, with steady cash flow, in order for them to keep paying shareholders in this fashion.
However, as noted above, circumstances can change dramatically, so, investors hunting for safe high yields should look closely at the most recent performance of stocks in this group.
In 2009, there are 15 Dividend Aristocrat companies that have increased their payouts so far. Looking a bit closer shows us that the Consumer Staples group has the highest concentration of companies with dividend increases:
Consumer Staples (4) Consumer Discretionary (3) Industrials, Materials, and Utilities, (all with 2); Financials and Health, (both with 1).
The actual dividend yields currently vary from a low of 1.3% up to 9.3%. As you'd expect, there are many household names in this elite group - 3M, Abbot Labs, Archer Daniels, Coke, etc. Many of the companies in this group are industry leaders, and have been in business for several decades.
To determine which of these dependable dividend-paying stocks is a good fit for your portfolio, you have to analyze many factors, such as which sector(s) you feel will prosper, or at least maintain their payouts in the coming years, the various company fundamentals, such as return on assets (ROE), return on equity (ROE), current ratio, debt to equity ratio, and return on capital. In addition, look at where these stocks are, relative to their 1-year and historic prices. Where are they in their price cycle - are they making new highs, and on how much comparative volume?
Top Dividend Stocks - Best Sectors in 2009
Standard & Poors recently reported that the “percentage of dividend income as personal income has steadily increased from 2.8% in 1988 to 6.7% in 2007”, a plus-200% gain. During this same period, interest income has shrunk from 15.03% of personal income to 10.41% in 2007. Personal dividend income will continue to increase in importance, generating even greater demand for income-producing stocks in the coming years, fueled by the increased numbers of investors owning equities, and by the coming surge in boomer retirees.
Unfortunately for us dividend yield seekers, our hunt for dividend income has become harder than ever in 2009, as record numbers of companies eliminate or drastically reduce their payouts in order to conserve cash, and sectors we once depended upon for income have imploded. Just when the retiring boomers need dividend income more than ever, the dynamics of this game have changed drastically, taking away some of the key players.
The financial sector used to account for more than 30% of the dividend payouts on the S&P, but now account for only 9.6%. All told, financials account for 31 of the 51 reductions and suspensions this year, and not one financial company remains in the S&P list of the top 25 dividend payers in 2009.
In fact, the ranks of dividend paying stocks have thinned out so dramatically that the top 28 dividend-paying stocks account for more than half of the dividends paid out in 2009.
Here's a list of the top 5 dividend paying stocks for 2009, ranked by total cash payouts? It turns out that 3 of them are energy companies, 1 is a telecom, and 1 is a conglomerate:
1. Royal Dutch Shell (RDS-A, RDS-B) – Pays out $9.8 billion/ year and currently yields 6.77%.
2. AT&T (T) - Is sporting a current dividend yield of 6.44%. Its $1.64/share annual dividend equals $9.6 billion per year that shareholders receive.
3. General Electric (GE) –Even though GE cut its 3rd and 4th quarter dividend payouts from $.31 to $.10/share, it will still pay out $8.6 billion in 2009. GE’s $.82/share annual payout currently equals a 5.87% yield. GE’s shares have risen over 100% during the current rally.
4. Exxon Mobil (XOM) pays out $8.1 billion a year. The annual dividend rate for this company is $1.60 a share, for a 2.43% current yield.
5. Chevron Corp. (CVX), has an annual dividend/share of $2.60, which equals a total annual payout of $5.3 billion. The stock’s dividend yield is 3.82% at the current price.
Two themes, among many, that define these companies are their industry domination and their steady histories of paying dividends. Obviously, GE has had its problems with its lending arm during the downturn, so you'd have to decide if you think their mix of businesses can ride out these problems.
The 3 oil companies might cause some investors to debate whether oil is headed down further or back up, when the economy turns around. Judging by the way oil prices have moved up this week as "less than bad" economic news continues to come in, investors seem to be betting that oil will be going back up when things turn around.
So, what if you want the yields on some of these dividend stocks, but you're afraid of another market pullback, or, you think the prices are too high?
There are 2 ways you can attack these problems, both of which I'll discuss in Part 2 of this series.
Is Now a Good Time to Invest?
The right time to get back in the market may be just around the corner. With global economies sinking, sometimes dramatically, it can be a scary thought to put your hard-earned money on the line. However, a smart investor will realize that golden opportunities are appearing if proper research is done.
If you look at a long-term chart of the Dow Jones average, you will see that it is currently at some of the 2002-2003 levels. It has dropped dramatically since the financial collapse of 2008-2009, but it is still in familiar territory. It may take another two years or more for a large upswing in the markets, but at least we hope that the Dow will not drop below 7,000 points. That may bring hope and some peace of mind about starting to invest again.
Dollar Cost Averaging
The concept of Dollar Cost Averaging comes to mind in the current market situation. It is the process of buying stocks or similar investments on a regular basis, such as once a month, using a fixed amount of money. When prices are low, you are able to buy more shares. When prices are high, you buy fewer. In this way, you are able to take advantage of temporary low prices. This is especially helpful for long-term investments, such as retirement accounts. It may go against human nature to buy stocks when everything is falling and red but in fact it can lead to a bigger payoff if done correctly.
Don't Wait Too Long
As soon as you believe the markets will not drop much more, that is the time to start investing. When an upswing begins, it may happen so fast that you will miss a good portion of it. There are literally billions of dollars of cash on the sidelines, just waiting to go back into the market when the time is right. You can imagine what impact that might have on prices because of a surging demand but limited supply of stocks and mutual funds. Don't wait too long!
Which Companies to Buy
There are a lot of low-priced stocks right now. Don't jump into any old stock just because the price is low. There may be good reasons for it, such as the company being dangerously close to bankruptcy. One popular example is GM. Their stock price has dropped incredibly far. Is it a good deal? The government will probably not allow them to go into bankruptcy because that could have catastrophic affects on the country. Even if they survive, though, they may not thrive, and the stock price might hold its value or drop even more. Nobody can predict the future of GM. This is just an example of how difficult it can be to make a trading decision at the present time.
You also need to consider how the company is adapting to the economy. Are they offering low-price items to their customers? Are they reducing expenses significantly, such as layoffs, to stay in business? Do they have access to enough credit to stay operational? These are very important questions to consider before making a trade.
Will the Economy Get Worse?
This is probably the single most important factor that traders are considering right now. Why put your money into investments if they are just going to drop again? The government is trying hard to stabilize the economy, but there are many experts who believe there is more doom and gloom in the future, with more foreclosures, bank failures, and lost jobs on the way. A lot of this depends on how the government handles the situation and how the public perceives their actions. If the public believes things are stabilized, they will begin to spend and invest again, businesses will have more money and they can hire more people, and the economy can begin to thrive again. When this will happen, nobody knows for sure. Hopefully in 2009 it will, but it may be 2010 or later.
Stock Market Investing: Long-Term or Short-Term?
To have a pre-disposition to buy and hold stocks for the long-term can be an extremely expensive frame of mind. The long-term market trend is up, but in a volatile stock market, the long-term gain is often laden with risk and not nearly as great as many short-term gains. Risk vs. return has greatly increased for the long-term stock market investor. People argue that tax consequences are their reason for holding. That argument lacks weight. It is very difficult for some people to break away from old habits and patterns of thinking about the stock market. Those who are unwilling to learn from market crashes are doomed to repeat the lesson.
A few years ago, investors were told that to buy and hold for the long-term was the wise course of action for investors because the long-term trend of the market is up. If you took any other approach, you were a speculator at best and a gambler at worst. Brokers and mutual fund managers were the most vocal proponents of this investment philosophy. The media also joined the chorus and the concept became a part of the "accepted" market lore. Investor thinking, in this regard, lost elasticity. What was overlooked was that selling a stock that has entered a phase of heightened risk actually reduces portfolio risk, whether it has been held a year or not. It is important for us to have clarity about the main issues relating to the length of an investor's holding period.
The new volatility of the market is probably here to stay. The current reality of the market is that in a given year stocks will often undergo multiple price swings in which the magnitude of those short-term swings is often equal to or greater than the magnitude of its 1-year price movement. Even stocks that lose money if held for a year may be very profitable at several times during the year. Unless the long-term expected gain is much greater than the average return on stock investments, it is a high-risk gamble to retain a stock that has moved up 20% in only 2 months once its charted growth rate has started to show signs of breaking down. The probability is that holding on to such a stock to meet a 1-year long-term tax requirement will cost way too much. When stocks move up rapidly, it is common for them to vigorously and abruptly "correct" to the downside once they begin to break down. It's like a crowded auditorium in which someone yells, "fire!" Everyone wants out at once. Potential buyers then become like those outside the auditorium waiting to get in. When they see all the people rushing out in a panic, they naturally decide to wait and watch rather than entering. Thus, while the potential buyers wait, the stock plummets.
The potential reduction in the investor's tax rate resulting from a long-term holding period is not sufficient to make up for the substantial risk of loss. If you have a 20% gain, why not take it rather than lose it? Selling in less than a year is fairly easy to justify under these conditions. Though the figures can vary depending on how you file, even at the highest tax rate it would still make more sense to sell under such circumstances (tax rates may be somewhat different when you read this but the point remains the same). For example, even if your income were $500,000 a year and you had no deductions, 3 short-term gains of $18,000 or 2 of $27,000 would net you more after taxes than one long-term gain of $40,000 taxed at 15%, regardless of how you file. That is, taking several small short-term gains in a choppy market can be more profitable than hanging on to a stock in the hope of obtaining a larger long-term gain. Furthermore, in an environment where the long-term gain is unlikely to be obtained (and where the gains already achieved are likely to be siphoned off by the market), it makes even more sense to lock in the profits already obtained once a stock begins to break down.
Stocks do not move in a linear fashion. Stockdisciplines.com traders have found that if a stock is up 20% in 5 months, it is unlikely to be up 40% in 10 months. It is more likely to be up 8% in 10 months or even down 10%. Hence, the key to higher net returns is to base investment decisions not on the nature of our tax code but on the proper weighing of risk against reward. If all things were equal, it would generally be better to hold for the longer term. This is obvious, and it is our own preference. However, all things are rarely equal and stock patterns do break down. When a stock begins to drop, the preservation of capital is much more important than getting a lower tax rate. Those who invest by the tax code rather than by the signals given by the stocks themselves often end up paying less in taxes because they don’t make any money. They get the deductions they long for (a lot of losing positions) but not the profits. The priority should be to make money in the first place and after that to have your CPA help you keep it from being taxed away.
The fact is that no one can say for sure that none of the stocks in a given portfolio will plummet out of existence (even if they are all blue chips). Of course we would all like to buy nothing but steady climbers and leave them in the portfolio for a year or more to get the long-term capital gain tax benefit. Five years would be even better because it would reduce transaction costs. However, the market and your stocks do not care about your wants, needs, or tax status. Also, transaction costs can be minimal. At one well-known discount brokerage firm, for example, it is possible to sell out a position worth $50,000 for only $7. If the stock price is $40 a share, the brokerage commission for this trade would come to little more than half a penny per share. This cost is insignificant relative to the loss that could be incurred by keeping a loser.
If we buy a stock and it starts to break down shortly after we purchase it, we must admit that either we were wrong or that the unforeseen has occurred. Certain conditions and requirements had to be met by the stock and/or the company for us to buy it in the first place. If those conditions no longer exist, we must sell. Our prime consideration in a volatile environment must be to preserve assets, even if we have to sell a stock the day after we bought it. On the other hand, if we achieve a return of 20% in 6 months and the stock is still strong and still close to support, we will continue to hold because we have not been given a reason to sell. The same would be true if we had held the stock for 5 years and our gain were much greater. The stock itself, or the market, will tell us when we must sell. Volatility-adjusted stop losses are extremely useful in this regard.
There is no way to know in advance how long a given stock should be held. We should not invest on the basis of what we think ought to be but on the basis of what is. Though a 1-year minimum holding period is desirable for tax considerations, it is meaningless and arbitrary in the context of market behavior. In fact, rigidity in our thinking along these lines can be very costly. Of course we want to hold a stock as long as we can, but rate of growth and risk should not be ignored. A stock that has proven itself incapable of breaking through overhead resistance no longer has growth potential, and continuing to hold it involves risk of loss (the risk/reward ratio has changed). In fact, risk of loss will increase as others conclude the stock will not go higher.
It is difficult to leave behind old concepts of investing. It is one thing to be aware that a particular stock has given a sell signal and another to break loose from old ways of thinking in order to act on that signal. This is something that takes time to internalize to the point where it is automatic. A good, well-articulated discipline can be an effective trainer in this regard. There are, after all, lessons to be learned from every plummeting stock and every market crash. Investors must learn to allow stocks and the market to give their own signals. When those signals are given...we must learn to listen.
Copyright 2009, by Stock Disciplines, LLC. a.k.a. StockDisciplines.com
Online Stock Market Resource Provides Reviews for Investors and Stock Traders
The Wall Street in New York has always been the epitome of the American industry, but due to the usefulness and popularity of online resources, the internet is now, unofficially, the home of various stock trade tools and advice.
Bringing the Wall Street to the internet is stock market trading website, Daily-Stock-Tips.com. The website is not a newcomer to the stock marketing world and it has assisted stock traders in the past with its extensive listing of helpful and recommended stock trading tools and advice.
Daily-Stock-Tips.com features an updated list of recommended stock market tools as well as product reviews of recommended online resources for trading and the stock market. These tools and resources are certified tools used in the stock market today and are one of the most reliable tools today.
From the roots and definition of the Stock Market to its analysis, Daily-Stock-Tips.com never fails to provide the product reviews as well as online resources to better understand the trend and technical aspects of stock trading.
On the website, you will find an updated list of product reviews which are categorized for Stock Analysts, Stock Investors, Stock Sharing as well as Investing. The easy and detailed categories make it easier for visitors and users to find the product they need to further help them with their stock market trading needs.
FOREX reports and tools can also be found on the website along with Day Trading, predictions, and market charts as well as other stock market related necessities. The website also features a quick sidebar where tools and guides can be found. The website ensures the convenience of its visitors by bringing the tools and strategies straight to them. Simply put, investors and traders are a click away from the best tools and reviews used by traders, buyers and brokers across the globe.
Other than programs and advice, users may also find E-books and manuals on the website. Product reviews of these e-books and manuals are also provided for free on the website.
Although the website sports a fairly simple website design, the features of Daily-Stock-Tips.com are “vast, reliable and safe.” A significant number of stock traders within the country have made Daily-Stock-Tips.com a partner in their daily stock market affairs.
The website caters mostly to stock traders, buyers, and investors but it allows free access to anyone willing to learn the latest trends and predictions for the stock market. It can be accessed freely through its domain URL Daily-Stock-Tips.com and is open to all IP locations across the globe.
The art of investing in equity
There are a multitude of investment options in today’s financial world. However, equities still remain one of the most profitable ways to invest your money. As surprising as it may sound, the fact is that a large number of investors have no shares in their investment portfolio. It can be for a variety of reasons. The main reason cited by many is that they simply do not know how to pick a good share. Picking a good share at a good time is the key to success in the share market. There is no reason though that you cannot turn yourself in to a seasoned investor yet!
Reversed fortunes:
Companies are just like people. Sometimes they go through a rough patch and sometimes they get a break. Listed companies lead a very public life, so keep your eyes and ears open and you will know when a company’s fortune is headed for an about turn. Read the balance sheets while doing your research. If you find that the company’s losses are declining steadily and it is showing consistent signs of improvement, you may consider purchasing the shares of such a company. Do not be swayed by sudden changes, as it could be detrimental.
Mergers and Acquisitions:
The economies of scale, better synergies etc. are all the buzzwords you hear around a merger. It is true that mergers do create new opportunities for investors. During mergers investors are provided with a chance to get more value and often after the merger better administration of the company does provide good results.
International factors:
Just consider the rising cost of fossil fuels and petroleum products. This is an international trend that has an implication on several industries. As an example, the airline industry suffers from the rising cost of aviation fuel but at the same time oil retailing companies the world over make a steady profit. Keeping a sharp eye on the global trends today is a necessity if you want to invest in the stock markets. It may help you pick up better stocks in this global economy.
The government and its role:
The government plays a vital role in the economy. It is a regulator, investor and owner and has many more diverse roles. One of the most important roles of the government is policy making. A government’s policies can have a beneficial or an adverse impact on an industry. Keep following the latest on what is happening on this front and you are already a wise investor.
Eureka, I have found it!:
Innovations fuel growth. Just consider Apple computers and the iPod. Apple was down in the doldrums not that long ago and the innovation of an easy to use and trendy music player changed its fortunes. People who recognized the company’s streak for new innovations and held on the stock were richly rewarded. There are similar stories closer to home. Investing your money in an innovative company or a company that follows the latest trends may be one wise way to invest your money.
Beyond the horizon:
Looking further has always been one the most fundamental keys to successful investment in stocks. If you are able to think not just about how a company is doing now but also how it will fare in the future, you will emerge a sure winner. Putting your money in shares is just about analyzing existing information and using your intuition and perception to try and gauge the future. An informed investor is a happy investor. Take notice of all the tiny details and you will see how they are all connected. So put some time aside and try to pick a stock now for your future. Chances are you will not be disappointed.
A High Yield Asset That Proves Money Grows On Trees
Who says that money doesn't grow on trees? Did you know that timber was one of the ONLY assets that appreciated in 2008? Just take a look at the high yield stocks in the diversified timber REIT sub-industry, and you might just might launch into a verse of Monty Python's "Lumberjack Song"...
One Timber Reit which emerges in a screen for high dividend yields is Potlatch Corp., (PCH). A figure that many investors use when analyzing timber companies is the amount of acres/share. At Potlatch's current price of $26.77, you get approximately 38-39 acres/share, plus you get the rest of the business for free, (land sales & development, and wood products manufacturing).
Potlatch recently announced a cutback in timber harvesting, due to soft market prices, but is maintaining their dividend of $.51/share/quarter, for a 7.62% yield.
You can juice PCH's high dividend yield even further, by selling January 2010 covered calls, essentially earning an extra, or "double dividend". Please note that each call contract controls 100 shares of the underlying stock. Here's how it would work, based upon 100 shares.:
1. Buy 100 shares PCH at $26.77
2. Sell 1 Jan 2010 $30 call for $2.20
3. Collect $1.53 in dividends, ($.51/share for the final 3 quarters of 2009).
4. At Jan. 2010 expiration, one of two things will happen:
Scenario A - Assignment: If PCH's price rises to or past $32.20, your 100 shares will be sold/assigned at $30.00, giving you a capital gain of $3.23/share, in addition to the $3.73/share call premium and dividend income you received.
OR
Scenario B - Static Return: If PCH doesn't rise to or past $32.20, (which equals the strike price plus the call premium of $2.20), you'll keep your 100 shares, and also the $3.53/share income, which lowers your basis to $23.24. At this point you could repeat the process again, if prudent.
The details for this 8-month trade are:
Breakeven: $23.24/share
Upside Trigger Price: $32.20
Static Call Yield: 8.21% Call Premium: $220.00
Dividend Yield: 5.72% Dividends Paid: $153.00
Total Static Yield (Call + Dividends): 13.93% or 20.95% annualized
Potential Assigned Yield: 13.93% $373.00 on sale at $30.00
Total Potential Assigned Yield (Total Static + Cap. Gain): 27.87%
The 8-month 27.87% yield equals an annualized yield of 41.8%
So, we started out with a high dividend stock yielding 7.62 %, then we locked in an additional 8.21%, (12.3% annualized), plus we set ourselves up for a total potential annualized yield of 41.8%.
In addition to more than doubling your yield, this strategy also lowers your breakeven considerably, providing you with 13.93% downside protection. One other benefit to this strategy is that you know exactly what your upside potential profit is.
It's enough to make you yell "Timber!"
Stock Market Investment
To have a pre-disposition to buy and hold stocks for the long-term can be an extremely expensive frame of mind. The long-term market trend is up, but in a volatile stock market, the long-term gain is often laden with risk and not nearly as great as many short-term gains. Risk vs. return has greatly increased for the long-term stock market investor. People argue that tax consequences are their reason for holding. That argument lacks weight. It is very difficult for some people to break away from old habits and patterns of thinking about the stock market. Those who are unwilling to learn from market crashes are doomed to repeat the lesson.
A few years ago, investors were told that to buy and hold for the long-term was the wise course of action for investors because the long-term trend of the market is up. If you took any other approach, you were a speculator at best and a gambler at worst. Brokers and mutual fund managers were the most vocal proponents of this investment philosophy. The media also joined the chorus and the concept became a part of the "accepted" market lore. Investor thinking, in this regard, lost elasticity. What was overlooked was that selling a stock that has entered a phase of heightened risk actually reduces portfolio risk, whether it has been held a year or not. It is important for us to have clarity about the main issues relating to the length of an investor's holding period.
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Fingala.com is India s leading financial information source. We provide news, views, videos, forum and expert analysis on equity / stock markets, sensex, nifty, commodities, personal finance, mutual funds, insurance and loans.
The most exciting and interactive International Investing game. Fingala The Money Game is a simulated real Market Game aimed at giving viewers and investors an easy and interactive platform - using the Internet to understand and invest in the stock market without fear of losing their investment. The objective of this interactive stock market game is to educate and help investors in understanding how the stock market functions and thereby put their learning to test without losing real money. Participants need to register and start to play on different Stock Exchanges of the world.
Have You Insured Your Stocks?
Many people think of options trading as very risky and suitable only for the "high rollers". In this article we will demonstrate one of the ways options can be used in conservative financial portfolios.
The basic definition of a put option is that it gives the owner the right, but not the obligation, to sell 100 shares of the underlying stock at the strike price anytime before expiration. If I buy 100 shares of Apple Computer (AAPL) at $136.50 or $13,650 and buy one contract of the Oct $135 put for $10.50 or $1050, I have a total investment of $14,700. This position is called a married put; we are long the stock and long the put (long means we own the stock or option; short means we have sold it and have an obligation to buy it back). If AAPL goes up in price, my stock will appreciate but my put will expire worthless. On the other hand, if AAPL decreases in price, my put will increase in value and make up for a portion of my loss on the stock price, i.e., the put acts as insurance for my stock.
A married put is analogous to your homeowners insurance; you paid $1000 at the beginning of the year for insurance to cover your home in case of damage from fire, storms and so on. At the end of the year, your home was not damaged and you lost the $1000 you paid for insurance. On the other hand, if a storm had caused $20,000 of damage to your home, the insurance company would have paid to have it repaired and you would be glad you had paid that $1000 bill for the insurance.
The married put is similar; if the stock price does nothing, our put expires worthless and we did not need our insurance. In this example with Apple, the insurance cost us $1050 (the cost of the put option). But if you are watching the evening news and see Steve Jobs being escorted from his office by FBI agents in handcuffs, you begin to worry. The next morning, APPL opens at $92, but we look at our account online and see a balance of $13,700 - we are only down $1000 or 7% when our stock has collapsed by over 30%; those may not be the exact prices, but you get the idea. Some of our stock price loss has been covered by the put.
Let's use our time machine and travel back to July, 2007. You own 100 shares of Google stock (GOOG) that you bought over a year ago, and have a nice gain in the stock. In June and July of 2007, GOOG was moving up strongly and was trading at about $548 on July 19th. You realize an earnings announcement is coming after the market closes and want to protect your gains, but still be able to take advantage of any gains that might occur after the announcement. To form a married put position with your 100 shares of GOOG, you buy the July $550 put for $14.20 or $1420. GOOG missed the market estimates for its earnings and the stock closed at $520 on July 20, a $2800 loss in one day on your stock position. But the put option you bought for $14.20 is now worth $30, so you gained $1580 on your put option, reducing the $2800 loss on the stock by over 56% to $1220.
However, buying puts on each stock would be rather tedious if I want to protect my entire stock portfolio. In that case, using index options that roughly match your portfolio is one answer. If my stocks are large companies in the Standard and Poors 500, then the OEX put options (the S&P 100) might be a good fit; the SPX options (S&P 500) represent a broad range of stocks, including many mid-sized companies. The NDX options (NASDAQ 100) would be a good choice for a high technology portfolio, since this index is made up of the largest 100 companies in the NASDAQ. The best portfolio insurance might be a mixture of SPX and NDX put options, proportioned in accordance with the stock holdings.
The essence of the married put strategy is buying insurance on your stock position. If the stock price drops, your gain on the put position offsets much of the loss on the stock. But if the stock trades up in price, you can enjoy all of that gain minus the cost of the put.
The married put strategy is conservative, but there is no free lunch in the markets (or anywhere else in a free society). Our downside protection, in the form of the put, costs us a small amount to establish. So, if our stock only moves up a little bit each month, we may only break even after paying for our put. But when the big crash comes, I may feel much more comfortable because my stocks are insured.
The basic definition of a put option is that it gives the owner the right, but not the obligation, to sell 100 shares of the underlying stock at the strike price anytime before expiration. If I buy 100 shares of Apple Computer (AAPL) at $136.50 or $13,650 and buy one contract of the Oct $135 put for $10.50 or $1050, I have a total investment of $14,700. This position is called a married put; we are long the stock and long the put (long means we own the stock or option; short means we have sold it and have an obligation to buy it back). If AAPL goes up in price, my stock will appreciate but my put will expire worthless. On the other hand, if AAPL decreases in price, my put will increase in value and make up for a portion of my loss on the stock price, i.e., the put acts as insurance for my stock.
A married put is analogous to your homeowners insurance; you paid $1000 at the beginning of the year for insurance to cover your home in case of damage from fire, storms and so on. At the end of the year, your home was not damaged and you lost the $1000 you paid for insurance. On the other hand, if a storm had caused $20,000 of damage to your home, the insurance company would have paid to have it repaired and you would be glad you had paid that $1000 bill for the insurance.
The married put is similar; if the stock price does nothing, our put expires worthless and we did not need our insurance. In this example with Apple, the insurance cost us $1050 (the cost of the put option). But if you are watching the evening news and see Steve Jobs being escorted from his office by FBI agents in handcuffs, you begin to worry. The next morning, APPL opens at $92, but we look at our account online and see a balance of $13,700 - we are only down $1000 or 7% when our stock has collapsed by over 30%; those may not be the exact prices, but you get the idea. Some of our stock price loss has been covered by the put.
Let's use our time machine and travel back to July, 2007. You own 100 shares of Google stock (GOOG) that you bought over a year ago, and have a nice gain in the stock. In June and July of 2007, GOOG was moving up strongly and was trading at about $548 on July 19th. You realize an earnings announcement is coming after the market closes and want to protect your gains, but still be able to take advantage of any gains that might occur after the announcement. To form a married put position with your 100 shares of GOOG, you buy the July $550 put for $14.20 or $1420. GOOG missed the market estimates for its earnings and the stock closed at $520 on July 20, a $2800 loss in one day on your stock position. But the put option you bought for $14.20 is now worth $30, so you gained $1580 on your put option, reducing the $2800 loss on the stock by over 56% to $1220.
However, buying puts on each stock would be rather tedious if I want to protect my entire stock portfolio. In that case, using index options that roughly match your portfolio is one answer. If my stocks are large companies in the Standard and Poors 500, then the OEX put options (the S&P 100) might be a good fit; the SPX options (S&P 500) represent a broad range of stocks, including many mid-sized companies. The NDX options (NASDAQ 100) would be a good choice for a high technology portfolio, since this index is made up of the largest 100 companies in the NASDAQ. The best portfolio insurance might be a mixture of SPX and NDX put options, proportioned in accordance with the stock holdings.
The essence of the married put strategy is buying insurance on your stock position. If the stock price drops, your gain on the put position offsets much of the loss on the stock. But if the stock trades up in price, you can enjoy all of that gain minus the cost of the put.
The married put strategy is conservative, but there is no free lunch in the markets (or anywhere else in a free society). Our downside protection, in the form of the put, costs us a small amount to establish. So, if our stock only moves up a little bit each month, we may only break even after paying for our put. But when the big crash comes, I may feel much more comfortable because my stocks are insured.
How To Purchase a Share?
Stock markets can certainly be a risky game sometimes. We definitely know that we should pick up stocks when the price is low but how can we predict a stock’s price?
One good suggestion is to weigh the current price of the stock against its “value in the market at the time”.
What is the difference between the price and the value of a stock?
Basically, during trading the price is determined by the market at that particular moment. The price can change in minutes i.e. it fluctuates. The value of any given stock is the value (worth) of its core business. It is highly stable when compared to the price of the stock, as the worth of companies cannot vary overnight. It is a good choice if you can buy the share at a lower price than the share’s actual value price. For e.g. the share’s value price is 200 and the current price is just 100 you can get the same share at 50% discount. The probability that the shares actual value can drop below 100 is quite rare.
Warren Buffet and Benjamin Graham are known as great legendary investors and the above mentioned theory also known as ‘margin of safety’ is found in their teachings. First and foremost read the all the financial statements that relate to the stock that you want to purchase.
If you want some good advice that may help you in the long run then just go through these suggestions
1st method
The Net liquid assets per share should be evaluated.
Net liquid assets per share = (Current assets – liabilities) divided by number of shares.
Where current assets are sum of cash, liquid investments, debtors etc.
The thumb rule: according to Warren Buffet, you should preferably pay around two- thirds of the value of the stock and preferably not more than that.
2nd method
Look at the PE growth ratio, where PE growth ratio = (Market price/ Earnings per share) divided by Annual EPS growth.
And Annual EPS growth = (EPS (Current year) – EPS (previous year's) x 100) divided by EPS of the previous year
Thumb rule: if the PE growth ratio is lower than 1, then it means the share is undervalues, if it is higher than 1, then it is overvalued and if it is 1 then it is an indication of a reasonably valued share.
PE: it gauges the safety margin
Let us suppose that a share at price of Rs 550 is bought by you. The EPS of the share is Rs 50. So after a year you only earn 50 Rs in the investment of Rs 550 which is a return of nearly 9%. A bank deposit can also fetch you this amount and it is risk free. So in the above case the safety margin is nearly nil. So to minimize the risk, we should opt for a higher gap. The thumb rule: according to Warren Buffet this gap has to be n the range of 1.25-1.5 %.
It is seen that that in a prosperous bull trading market, practically all the shares are up and investors do end up paying a higher price for the share. So it is cumbersome to find stocks that have a high safety margin
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