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How to Invest in the U.S. Stock Market
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Getting Started.
This section
is for beginners in the stock market.
It will describe some of the ways that you can use to
invest or trade. If you don't know if you want to invest or trade, go to
Before You Invest section before continuing
here.
This assumes you have the money somewhere, and all you need now is the how to:
In order to be successful in investing/trading you need to decide if you or
someone else is going to do the managing of the account. That is, do you want to
handle the research, buying and selling of the stocks and funds or do you want
someone else to do that for you.
Whether you do it yourself or not you still need to setup an account with
either a fee-only Financial Planner or a Securities Brokerage House. At this
time, this site does not recommend Financial Planners or brokerages. You
can search the Internet using these words 'financial planner' and 'stock broker'
to find the appropriate party. To learn more on how to invest in the stock
market for beginners, go to the
How
to invest, 101 for beginners.
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Some
companies have adopted the Direct Stock
Plan (DSP) which allows individuals to buy and sell shares directly through
the company, bypassing brokerage firms and their fees. In many cases you can have the dividends you receive from the
company automatically reinvested into more shares through a Dividend
Reinvestment Plan (DRIP).
Direct Stock Plans (DSP):
Some
companies allow you to purchase and sell stock directly through them without
having to pay commissions to a broker, although you may have to pay a small
fee for this service.
Some companies require that you
already own stock (at least one share) in the company or are employed by the
company before you can participate in their DSP. You may be
able to buy stock by investing fractional dollar amounts rather than having
to pay for an entire share. In some cases you could have an
account debited on a regular basis to make investments in the plan. Some
plans require a minimum amount of investment or require you to maintain
specific minimums in your account.
Each company that has DSP will explain
on their website all the requirements and what amount
they charge for the service- the fee charged is usually a fraction of the
cost a broker would charge.
DSP plans will not allow you to buy or sell your securities at a specific
price- they batch transactions and buy and sell shares at established
periods- weekly or monthly and normally at an average market price.
Dividend Reinvestment Plans (DRIP):
Dividend reinvestment plans let
you take advantage of reinvesting your dividend back into shares of the company
instead of receiving cash.
The rules and restrictions in these plans vary depending on the kind of plan
and the company offering the plan. Before you decide on DSP, read the company's
disclosure information (prospectus) to learn how its particular plan
works. The plan will tell you how to enroll, the number of shares needed to open
an account, any charges that may apply, and the minimum or maximum you can buy
or sell, the dates when you can invest, and how to withdraw, transfer, or sell
your shares.
Most of the companies that have DSP have Internet sites that can provide you with
information about their plans or tell you who to contact for more information.
Some companies have assigned their transfer agent to administer the DSP.
There are literally hundreds
of well known companies that have DSP and DRIP investing plans that
will allow the individual investor to acquire their stock and to reinvest
dividends.
With a little research on your part, you can find these
companies on the Internet by searching for: direct stock purchase plans investor
relations.
DSP is a great way to invest in NYSE and NASDAQ companies and
save on transaction fees...
Related:
Buy stocks directly from companies
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That's a question a lot of people ask today. You can
make money in the stock market even when the market is selling-off. It's what you
buy. Stocks that do great when the rest of the market is down are stocks that
counter the market. There are sectors in the market that tend to do well during
market downturns. It can be difficult to find those stocks and even if you do
there are no guarantees that they will continue to go up. These stocks sometimes
will do great while the general market is down but once the market turns-around
and goes up these stocks can go down. There are no perfect stocks.
Unless your into stock research ( and this doesn't always work, i.e.., Enron)
you may want to get advice from a trusted source. There are some trustworthy
sources out there that can be used to determine what stocks to trade or to
invest in. Once you decide on stocks or even funds that you want to buy, wait and
buy when the market is favorable. I know the argument of timing the market, and
also know the argument on dollar-cost averaging, but let's face it, who wants to
buy a stock at 20 just to see it sell-off to 10. There has to be a better way.
That's where the Barometer comes in. By looking at the Barometer you can tell
where the market is and where it came from. It cannot forecast the market and
tell you absolutely where it is going but it can tell you where it is likely to
go. Check it out- see for yourself. Also the Market Memo is a memo about the
likelihood of the market being in a negative, positive, or neutral environment.
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HOW TO TELL WHEN TO BUY AND SELL
Is this a good time to buy, sell, or hold stocks and funds?
Historically the chance that the market will turnaround and reverse direction
are pretty good. The market never goes straight up or down, it goes in cycles
and the length of the reversals are not always even. That is, markets do not
normally go up and down in even numbers. They don't go up 5 days turnaround and
go down 5 days. The length and direction (up or down) tells you if the market is
positive or is in a negative state. Here's an example. If the market is positive
and generally advances for 5 days and reverses direction and goes down for
several weeks, you might come to the conclusion that the market is in a negative
environment. Basically, that’s how you decide the market environment, by those
ups and downs and the length of the direction it goes (the number of days).
Investors are not able to rely on stock market analysts anymore because it is
almost impossible to know what the analyst's agenda is and whom he/she really
works for. Would your trust them with you money? Investors have the same
questions as they have always had. Is this a good time to buy? Are we at the
bottom? Will the market go down anymore? Are we at the top? Is this a good stock
or fund? You have to understand the market environment and you must know the
company you are willing to commit money to. Same thing with funds, you must know
the fund management team and understand what it is they invest in.
I could point out many reasons that this isn't a good time to begin or
continue buying stocks. However, there are always stocks to buy, even when the
market is tanking you can find those nifty handful of stocks that will disregard
what the broader market is doing and forge ahead. The trick is to identify them.
That's not easy. Professionals buy and sell all day long and by judging their
performance, they too have problems managing their portfolios. In fact, just
look at the record of those fund managers from 2001 to 2002.
SO WHAT DO YOU DO
Begin by determining the mood of the market. The market in 2001-2002 was a
tangled mess that you didn't think would ever recover. If the economy didn't
convince you things were tough, then how about all the companies that falsified
the accounting books (Enron, Worldcom, etc.). Not to mention terrorist attacks
and the like. Turmoil in the world never seems to get better, it seems to get
worse. How much more bad news can there be, you ask?
Always remember the stock market is foreword looking. It really doesn’t care
about the present, although it does react to daily news. For the most part the
market looks to the future, maybe 6 to 9 months, and determines if now
would be a good time to buy/sell or hold based on where the market thinks
the market will be in the future.
MARKET TURNAROUND
Look for a turnaround in the market when you least expect it. When the news
becomes unbearable and you think that it will never get any better, always
remember that the market at some point will began discounting present-day bad
news because the market at some point will focus on the future. During this
initial phase of a bear market turnaround you will begin hearing that CEO's are
seeing a little more light at the end of the tunnel and expect that next quarter
may be better. Also listen for company buy-back news. Companies will begin
buying shares of their own company in anticipation of a market bottom. The
opposite is also true. Look for the market to decline especially after a major
rally, when the news couldn’t get any better and you're exuberant, remember
August 2000? Another key sign that normally occurs before a turnaround is when
companies begin selling their own stock. Always remember the market most likely
will go the opposite direction you would think it should. That's why most
seasoned traders and investors will tell you to keep your emotions out of it.
There are things you can do to decide for yourself if the market is close to a
turnaround.
- Look for trend changes, like the Barometer shows you. The Barometer is a
picture of the overall market and you can visually see if the market is
negative or positive. You can even pick a market bottom and top by watching
for trend changes.
- Another way is to put a ruler to a chart and pretty much see for yourself
if the trend is down, moving sideways, going up, or breaking a trend. Chart
the DOW and NASDAQ for a couple of months and see for yourself. You can chart
FUNDS in the same manner.
- Listen to those reports from CNNfn and CNBC about company buy-backs and
sells. If the company seems to want to acquire or sell their own stock, that
has to tell you something. They didn't get rich by making mistakes or lagging
behind.
ACTION PLAN
Make decisions based on a solid plan. Don't make rash emotional decision.
When you develop your action plan, take these steps into consideration.
- Decide what kind of trader/investor you are. Determine why you are
investing.
- Determine the total portfolio amount you want to start with. Make
sure you won't need the money any time soon.
- Determine how you plan on picking stocks/funds that you're
interested in. Will you use analyst recommendation and then check it out
yourself? Will you pick stocks based on value? Company buyback news? Company's
Dividend news? Popularity? What drives you to buy this particular stock? Above
all, if after you have selected the stock you think you want to buy, make sure
you know what the company does, what they make, and how they earn their money.
If you cannot understand how they make money, stay away.
- Once you have an idea of what you want to buy, determine your entry
strategy, how much you're willing to pay. You need to answer the following
questions. Will you buy a stock based on analyst entry-point recommendation?
Will you chart the stock and determine yourself based on MACD, Price-channel,
or money flow? How much are you going to invest in this particular stock? (A
rule of thumb might be no more than 10 percent of your total investment
portfolio).
- The big one. Determine your exit strategy. Everybody has a problem
with this one. Before you buy the stock, document the selling price. And when
it gets to that price sell it. It may be you are a long-term investor. If
that's the case you may not want to set an exit price but an exit date.
- Determine how much cash in the portfolio you want to maintain.
Determine if you will add more cash each month or is this a closed portfolio.
That is, you'll not add funds to the portfolio.
Last piece of advice. Have fun with it. Don't get emotional, but be
levelheaded and follow your plan. Continue learning and modify your plan if need
be. If you treat this as a business (meaning do everything you can to be
successful like a business would) and you follow you planned strategy you'll be
successful over the long run.
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Think about why you buy stocks and mutual fund. No one buys in hopes that when
its sold it will be lower in price- a loss. Unless you need a
tax loss, you most likely buy stocks and funds to make a profit.
The more certain you are about a stock or a fund and its future, the more likely you
are to buy it, if you're in the market to buy.
So the more certain you are about a particular stock or fund, the more
likely you are to buy it. The opposite of certainty is uncertainty.
The more uncertain you are, the less likely you are to buy.
Uncertainty doesn't have to be directly related with
just the stock or a fund, but could have to do with the environment. Example. Lets say you're looking at
fictional company 'XYZ', and XYZ, has in the past, grown 50
percent a year and is projected to continue that growth. Also assume that the market for
XYZ
products are very good- you might buy some of the stock.
Let's say you complete your research on XYZ and a CNBC breaking
news headline grabs your attention that says certain overseas countries
are talking about building their own XYZ plant. Now
they may or may not build that plant, but at this point there is some
uncertainty.
Throw in to the mix- Rumors that war is about to break out in another country
that heavily imports XYZ products, and now you have another uncertainty. The uncertainty can
be just about anything that could impact the companies stock directly or
indirectly.
That is the nature of being uncertain, you just don't know.
That's why the market can fluctuate violently sometimes.
It's like getting sick. If you get sick you begin to feel bad.
The worse sick you get the worse you feel. Once you begin to get better, you
probably begin to feel better. Same thing with stocks. The worse it gets for a
stock, sector, or the market, the more you stay away. Unless the uncertainty (sickness) is
terminal (Enron), at some point- it gets better. The less uncertain (the better you
feel) it gets, the better chance the stock, sector, the market will rise. At some point the stock, sector,
market (after enough selling) will find a base of support from which
prices rise, all other things equal.
If you have lots of time on your hands, you can track all of this
yourself and you can determine when it's time to get in- most likely it is when
you don't want anything to do with that stock, or the sector, or the market- is
when you should consider getting in.
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