CyBerCorp: Its URL is cybercorp.com
CyBerCorp has two free downloadable programs which are designed to allow paper trading using
stock market information from the day before, but using it realtime, or just like it is the current
day's stock market information. There are two programs available. The more basic one is called
CyBerX and the more advanced one is called CyBerTrader. I have downloaded and installed
both of these program on my laptop computer, but I have never used the programs to paper trade
mainly because I am so busy teaching stock market classes and doing my own real trading in the
stock market. The advertising for these programs states that they will allow you to paper trade
just like you would be really trading in all of its opportunities and aspects. That sounded very
appealing to me to do paper trading which simulates real trading very closely like these programs
do. These two programs have downloadable files which teach you how to use each program.
Also, I believe that you will have to download the previous trading days worth of stock market
data from the Internet each time you want to use the program. If you decide to use one or both of
these programs, be sure to read the directions carefully and remember to use your investing
journal just as you would if you were trading with real money.
The Psychological Nature of the Stock Market
When I first realized in 1996 that the stock
market is a cornucopia of psychological interactions, I got really excited. You might well ask
why. After all what is so exciting about a lot of people thinking, feeling and acting like people
usually do? Well, I am a psychologist, and therefore I know a lot about predicting human
behavior from what people think, feel and do in various kinds of situations. And, because one of
my job responsibilities as Managing Director of The Development Center is to raise lots of
money to start a new College/University, a natural opportunity presented itself. I realized that
even though the stock market is very complex and millions of people are involved with it,
because they are all people, their investing behavior can be predicted to a certain degree.
So, I
believed that lots of money could be made by skillfully predicting what groups of investors
would do about certain recognizable situations in terms of buying or selling their stock. As I
began an intense and continuing study of human psychology in the stock market, I found lots of
predictable human behavior situations which mostly reoccur once a year, 4 times a year, once a
month, once a week, every trading day, or even several times a day. Don't misunderstand, I didn't
discover most of these situations, I just read about various other people who had discovered or
refined the data about the human behavior situations and I added my own knowledge to make
them more understandable. Those situations are the heart of the strategies which I teach about in
my classes, a few of which are included in this book.
If you want to make money in the stock market or make lots of money in the stock market, I
believe that you need a simple yet comprehensive understanding of how the stock market
participants typically react to certain situations with predictable buying or selling behaviors.
Remember that all of the facts, figures, charts, graphs, tools, and techniques used in the stock
market are based on human actions (based on human thought and emotion) in relation to money
and stocks. When you know how people usually buy or sell in certain recognizable situations,
that will allow you to buy and sell accordingly before the stock price actually changes up or
down. Never forget though, even with good understanding of how to predict buying and selling
behavior, nothing is perfectly predictable. That is what is called business risk, or informed
careful risk. When you don't have the type of appropriate knowledge and actions about the stock
market which you will learn in this book and can learn in many other places, then you are only
gambling when you participate in the stock market. Most of the following paragraphs in this
chapter will address some basic and very important psychological issues which relate to your
success in investing and trading in the stock market.
Personal Responsibility
The very first thing you need to do to protect yourself from the risks of
investing or trading in the stock market is to consciously take full responsibility for anything and
everything that happens to your money when it is invested or traded. There seems to be a
growing tendency in this country for individuals of all ages to blame their problems, mistakes,
and difficulties on anyone except themselves. I have found that this habit of blaming keeps
people from learning from their experiences. You will prosper best and be the happiest with your
experiences in investing or trading when you accept that it is up to you only to succeed or fail.
That will cause you to be safer with your money, more diligent with your study and watchfulness,
and wiser with your ability to select good investing or trading opportunities.
I can assure you that if you decide to invest or trade in the stock market, you will certainly will
make mistakes, have problems and difficulties, and suffer financially and emotionally because of,
your own mistakes, and the mistakes and malice of other stock market participants at all levels of
the market. In Chapter 11 I will briefly describe what you can expect in
part, in mistakes and malice from other stock market participants. I have very strong opinions
about the extent and wrongness of the malice, but you will be left to decide for yourself if my
experiences and observations have merit about those things. Remember that failure is a
necessary and vital ingredient for long-lasting success, and it most often precedes the success. If
you can't to make mistakes with money or have failures with your financial decisions, then don't
trade or invest in the stock market with the expectation of making money there.
And of course, when you prosper financially by using the things I taught you, I will be happy to
take all of the credit. I was just kidding, you keep the money and the credit too.
Three Basic Psychological Rules For Winning at Investing and Trading
There are three basic
rules to always remember when you are investing or trading in the stock market. These rules are
a personal discipline for you to follow carefully if you really want to be financially successful in
your stock market trading or investing. All long-term successful investors and traders strictly
follow these three rules whether they realize it or not. I will present them here in their order of
importance. Their order is the order for you to focus you best efforts in doing the 3 rules.
Rule #1 first of all is to do all of the things you can to make sure that you don't lose your money
or that at least you minimize your potential loss. Chapter 24 is a summary of the
main safety things I do in my trading and investing. All successful investors and traders make
mistakes for all kinds of reasons (some of which I will discuss in this book). The thing to do
when a mistake is first discovered is to quickly evaluate the situation and if needed take your
bitter medicine right away. The first mistake is the least costly. If you delay, ignore, o r
rationalize the mistake, it will cost you even more eventually. How do I know this? Because I
have made plenty of mistakes of all kinds and I still make mistakes occasionally. Maybe 1 time
out of 20 things work out in my advantage anyway, but almost always, if I don't act quickly to
"take my bitter medicine" (take a small loss) to fix the mistake quickly, I find that I have a much
more costly fix to make later.
The stock market is a very dangerous place in that it is very easy to lose money there. There are
many very skilled, very intelligent, very experienced, and sometimes very unscrupulous people
who are constantly trying to make more money by taking yours. I urge you to learn all about how
to keep you money as safe as possible and then use what you learn vigorously and consistently,
and continually.
Rule #2 is to use an investing or a trading strategy which allows you to get small but frequent
and consistent gains. All successful long-term investors and traders get wealthy with steady and
frequent small gains. They have learned to avoid the psychological trap of seeking large quick
gains with each investment or trade. Those types of gains are possible, but they are harder to take
advantage of than the beginning investor thinks. Instead, they most often provide great
opportunities for more experienced and malicious stock market participants to take your money.
One of the main ways that inexperienced investors and traders lose the most money is not
following rule #1 and rule #2 in that order. Instead they typically are lured to focus on following
rule #3 primarily, which addresses finding great investing or trading opportunities which produce
quick gain.
It is harder than you might think to follow this rule rigorously when all around there are seeming
opportunities to make lots of money quickly. Human greed and laziness are hard things to
overcome in ourselves.
Rule #3 is to be used when you have at least gained a moderate amount of knowledge and
experience with investing or trading. This rule is to look for and take advantage of the very good
investing or trading opportunities which you understand and which come around moderately
often. That means that once every few months or a couple times a year a very good investing or
trading opportunity will present itself. When you have sufficient knowledge and experience, it is
good for you to act quickly to take advantage of the opportunity. That requires that you have
gained the discipline to have kept some (maybe 10%-20%) of your investing or trading money
available to take advantage of the opportunities when they occur. That is also a hard thing for
most new investors and traders to do. Please do not advance to rule # 3 until you consistently
practice first rule #1 and then rule #2.
Profiting in the stock market is both easier and harder than you think. At this point of the
book I will only give limited reasons why this is true. And then, as you progress through the
chapters, paper trade, and gain real money investing and trading experience, you will more fully understand what I mean. First of all, making money in the stock market is easier than most
people think. This is true when you get knowledgeable about how the stock market works, and
when you learn how to recognize the good and fairly safe investments quickly. I have only been
knowledgeable about and experienced with the stock market since 1996. Of course I have had
the great opportunity to do a lot of intense studying, a lot of trading and some investing, and a lot
of teaching and discussion about the stock market since then. I have been delighted to find lots
of really good information among the mostly confusing or contradictory thousands of sources of
information. For your benefit and so that you won't have to do all of the searching I had to do, I
will discuss how to find good information in Chapter 5. I have also found some good
math tools which really help in buying and selling decision making. Those tools have been
around for quite some time and are readily available to you through the Internet for free. When
you understand and carefully apply the strategies, tools, and information you will learn in this
book, you will find that it is easier than you thought to make steady money through your careful
investing and trading.
So, just exactly what is the catch? Well, that is where your and my own undisciplined human
emotions and unproductive habits come in. I refer to these collective emotions and habits as herd
tendencies. The word herd here refers to a herd of cattle or sheep. What gets investors or trader
into trouble the very most are these tendencies. A list of them would include: Greed, Fear, Short
Sightedness, Infatuation, Selfishness, Ignorance, Laziness, Emotional Reactivity, Gullibility,
Thoughtlessness, Stubbornness, Inflexibility, Inattention, Impatience, and so forth. I have yet to
meet a student in any of my stock market classes, any other trader or investor, or the person I
look at in the mirror each morning who does not have some kind of problems with the above
mentioned traits and habits in relation to investing and trading. If you do not learn to overcome
your problems with these things, you will always have difficulties with the stock market. That is
to say you will certainly lose your money. And, as your probably already realize, changing in
these areas is not real easy.
From my personal experience with my own work in overcoming my herd tendencies, and from
instruction about and observation of my stock market class participants progress in overcoming
their herd tendencies, I am certain you can prevail over your own weaknesses and become a
successful investor and/or trader. Just to let you know before Chapter 11, lots of
participants in the stock market understand about herd tendencies among the average investor,
and they use that knowledge to take advantage of them financially. Your knowledge of herd
tendencies will help you avoid many of the dangerous things which have been prepared for you
by irresponsible and malicious stock market participants. That same knowledge will help you
recognize consistently good buying and selling opportunities.
The Universal Psychological Trait of Financial Winners in the Stock Market
There has been
an extensive study of many people who have been financially successful in trading and investing
in the stock market. In that study many different personality traits, life situations, opportunities,
levels of education and intelligence, and other considerations like gender, age, and so forth were
studied to learn what someone needs to win at trading or investing. After much analysis, the
most likely advantages like intelligence, education, social position, and opportunity were ruled
out as being the universal necessities for investing and trading success. Finally, what was
discovered as the only universal characteristic among all long-term successful investors and
traders was that they all deeply believed that they could succeed and that they were willing to do
what it took to do so.
What is really important for you here, is that you take some significant quiet time to reflect on
whether you posses or are willing to develop and strengthen your own universal stock market
success trait. If you find that you have it or are willing to develop it, then proceed to learn and
get experience until you consistently succeed in investing or trading. You will never be perfect
in making all correct decisions , but you will achieve the 9 out of 10 and better correct status. If
on the other hand, you do not have the belief that you certainly will succeed or you are not
willing to work hard to develop that deep belief, I urge you to avoid the stock market or you will
undoubtedly suffer a lot of unnecessary financial and emotion pain.
There is No Loss or Gain Until the Investment or Trade is Finished.
This may sound very
simplistic, but it would surprise you how many investors/traders don't understand what this
means to them personally. I have talked with a lot of individual traders/investors. And, I most
often find that they are susceptible to this common psychological investing mistake, even if they
have heard about it. What happens to a lot of us when we buy a stock with an expectation that it
will rise in price, is that we become emotionally attached to it. When that happens, we are in
trouble already, because, we then tend to make emotional rather than rational decisions about
buying or selling that stock. When the price of the stock goes up, we tend to think that we are
gaining a lot because of the higher price. And we might say some thing like. "I really made a lot
of money on XYZ stock today". And, when the price goes down, we might say something like
"Oh no, I'm ruined, I have lost a ton of money on this stock today."
While it is true, when we are hoping for a stock price gain, that gain in price is good and that we
should protect that potential financial gain and that a drop in price is not good and that we need
to consider ending the trade, we haven't actually made any money or lost any money until we sell
the stock. Long-term successful investors and traders don't get very emotionally involved in the
particular stocks that they are working with. If they are looking for a rise in price, they are of
course pleased when a rise in price occurs and displeased when the price drops. But, they are
more focused on making sure that they make this trade a successful one rather than thinking
about how much they have gained or lost. They know and accept that stock prices go up and
down often unexpectedly. So they don't emotionally count their money while the trade is still
active, much like the gambler in Kenny Roger's popular song "The Gambler" recommends that
"you never count your money until the dealing's done".
This practice of focusing on making careful/good trading/investing decisions instead of focusing
on potential gain nor loss is called emotional discipline. By doing this we are in fact learning to
use rational thought processes instead of being subject to our own herdish emotional reactions
when stock prices have fluctuations in price for or against our expectations.
Success to Failure Ratio represents a condition of investing/trading emotional maturity. What it
means is that we cannot hope to make $1,000,000 in the stock market, unless we can stand to
lose $1,000,000 and still sleep at night. Of course, successful stock market participants are not
expected to be happy about any loss, but they are not disturbed to the point of dysfunction by it
either. For the successful investor or trader, some loss is the expected normal business risk. The
reason for this need for calm in the face of financial loss is that if we don't have it ,we lose our
ability to trade or invest wisely and rationally and become herdishly emotional. That happens
when we pass the point where we can lose money because of some unexpected change in stock
market or a particular stock and still go on to continue making rational investing and trading
decisions.
This same less mature switch from rationality to emotionality affects our positive financial
decisions and results when we make trades/investments with sums of money which we can't
emotionally afford to lose. This means that if buying $10,000 of Microsoft (MSFT) causes us to
worry a lot more than normal when the price temporarily fluctuates down on no news, then we
are trading too much money at once for our level of emotional maturity.
I will guarantee that if you do much trading or investing, you will make decisions which will
ultimately lose you money some of the time. If you are able to overcome your emotional pain
over these failures you will be well on the way to investing emotional maturity. And, if you take
the time to analyze exactly what went wrong or where your decision process was faulty, you will
get continually wiser and will make fewer mistakes. Because the stock market is quite complex,
you will never learn all of its variables and so will make mistakes once in a while. Learn to take
those mistakes in stride and go right back to the market and continue making good investments
and trades.
How much money is enough for me to accumulate through my stock market trading and
investing?
This question must be answered by every individual trader or investor who wants to
use and enjoy the money that he or she has been or will be accumulating over time through
successfully making profits in the stock market. Typically that involves a careful analysis of
one's retirement needs and aspirations. Seriously asking oneself about how much money is
enough to make is also vital for each individual trade and investment. Many people never take
the time to do that, but it is very important to your mental and emotional trading discipline.
The psychological problem for the trader or investor who doesn't know how much to accumulate
overall, is that he or she becomes the slave of the investing or trading process instead of the
master of it. This might happen as follows. As the investor learns to precisely use one or more
of the strategies in this book and continues to learn about the stock market's behavior, he or she
will double his or her original investment at some point relatively soon after starting investing.
Lets say that the original investment was $10,000 (which is purely arbitrary) and that the investor
now has $20,000 in his or her Online brokerage account 6 months later. Do you suppose that this
investor will now stop investing, take this money, spend it, and never invest again? Almost
certainly not! And why is that? Because this investor is delighted with the profit made and how
short of time it took to make it. And so this investor continues to make careful investing
decisions for the next 6 months and manages to double his or her trading account balance again
to $40,000. Well of course this investor could stop now, enjoy the money, and never invest
again. But, will this investor stop now? Almost certainly not! After all, why should one stop
such a great way of making money, just when he or she is really rolling.
Will this investor feel
differently when he or she has increased the brokerage account to $80,000, $160,000, $320,000,
$640,000, and $1,280,000? Probably not. And why? Because it is really exciting to make
money in the stock market, because investors like to continue making money while it is their
opportunity, and because in the heady environment of serious money making it is very easy to
forget that the real purpose of life is to do good in the world, to build good positive relationships
with our family and friends, and to build our individual character, knowledge, and skills. Having
money is nice but money can easily slip away or be taken away from a person. But the
knowledge and skill to make more money is much more stable.
Perhaps you have already learned that money does not give you joy, peace, or understanding. I
do admit that it can help you be comfortable while you are bored, disturbed, and clueless though.
Not knowing how much is enough results in the making of money becoming your master instead
of your servant. It is sort of addictive and very difficult to stop doing when there is not a clear,
specific financial objective which has been committed to beforehand. I hope that you realize
how important it is to determine specifically for yourself how much is enough.
If you haven't
already done so, take time to consider how much is enough for you to do good in the world in the
specific ways that you want to, for you to build good positive relationships with your family and
friends, and for you to build your character, knowledge, and skills for the rest of the time you
reasonably expect to remain living. Don't forget to consider the compounding effect of average
inflation, and the income, capital gains, and estate tax issues. Also consider the cost and safety
of having someone manage your money and tax preparation and who or what you want to leave
any remaining money to when you die.
Knowledge is your #1 advantage and continuing education is essential to continuing
financial success in the stock market.
I cannot emphasize enough that you currently have a
major free advantage for your competition with other stock market participants. That advantage
is knowledge. There has been and continues to be tremendous insights to successful trading and
investing, published and taught for general consumption by the average small investor/trader.
There are many very experienced, very intelligent, and often very immoral and hostile
participants in the stock market. In the past they have excluded the average person from gaining
from the stock market. But, in the past several decades, there has been more and more access
granted to you and I. I believe that the main motive for that new access is to provide those
historic participants a large new source of money to take away from us.
Your major protection from being victimized is to gain lots of useful knowledge about how the
stock market really works, about when and where the best investments are to be found, about
strategies which give you a predictive advantage, and about how to protect your investments and
trades from those stock market participants who are trying very hard to take your money from
you. This can be mostly gained for free or for little money, by using your public library's
resources, by learning where on the Internet the best (most useful and most reliable) information
can be found (see Chapter 5), by select newsletters, by attending some classes, and by
purchase and study of good trading and investing books (see Appendix A).
Because the stock market and its major and minor influences are continually changing, it is
absolutely necessary to continue your education about how it works and when and where the best
opportunities are. It is all to easy to get herdishly lazy and neglect this vital element to all
long-term financial success in the stock market. Part of your growing emotional discipline is to
continue your broad and specific education about the stock market. Don't ever neglect it, or you
will eventually suffer financial and emotional pain. Things which you currently understand and
which are working very well to give you good profits will change over time so that you cease to
understand all that you need to know and so that your current strategies don't work as well or as
often as before.
What it means to make 100% on your investments every year.
In this book I will be talking
about the percentage gains you can achieve through alignment of the planets and use of the
strategies in this book. The most conservative and least productive of the strategies is called The
Conservative Stock Split Strategy. And, its annual rate of return on your investment is
approximately 100%. That of course seems very unrealistic to most people. In fact we can't even
really get an accurate idea of what that would mean for us financially because of its unreality to
us. When you read the strategies in this book and then when you paper trade using the strategies
carefully, you will find that what I tell you about is actually fact. For now keep your scepticism,
and look for hard evidence of what you are learning in this book. If I were you, I would do
exactly the same.
Now, I will give you a fuller view of what making 100% a year means in terms of dollars. If you
start investing in The Conservative Stock Split Strategy according to the strategy rules with
$5,000 (purely arbitrary amount), in one year you will have an investment worth $10,000. In two
years, if you leave all of that money actively in your investment, you will have $20,000. By
continuing this strategy the third year, you will have $40,000 by the end of that year. By the end
of the fourth year, you will have $80,000 and by the end of the fifth year you will have $160,000.
By the end of the sixth year you will have $320,000 and by the end of the seventh year you will
have $640,000. And, by the end of the eighth year you will have $1,280,000. I will stop here so
as to not bore you with this example, but I think you can begin to get the vision of what is
possible for the average investor who is starting with a modest amount of money.
When I was first learning about the financial potential of investing in the stock market in 1996, I
read about making 100% a year first in disbelief and then with growing excitement. Now I know
that that is not only achievable, but I also have learned through my own investing experience that
making 100% a day is possible, repeatable, and even frequently achievable. Of course that rate of
trading return requires large investments in knowledge, vigilance, emotional nerve, and the
ability to make very quick decisions throughout the trading day. I do not currently get that rate of
daily return because it requires too much of me considering my other life involvements in my
family, my church, and teaching others how to prosper. I am getting the rates of return on my
trades that I teach you how to get, and like most of you reading this book I started with just a
little money in the beginning of my trading. I have a fair amount more now in my trading
account because I have been prospered.
What makes stock prices go up, and what makes them go down is my next topic as I near the
end of this first chapter. Many of you may already know the fundamental reason for stock price
movement up and down, but for those of you who don't know here is a simple explanation. The
fundamental reason for stock price movement is change in supply and demand. Even though
there are a lot of shares of the 30,000+ different stocks which trade on United States stock
exchanges, there is still a limited supply. And, supply is also limited by all of the stock market
participants who own stocks and do not want to sell them for one reason or another. As some
sort of good news occurs for a company or the stock price is believed to be too low, and more
stock market investors and traders are attracted to buy the stock, the current owners are also more
reluctant to sell their shares because they then have reason to believe that the price will continue
going up for a while and they can then sell their shares later for more money than they can get for
the shares now. To entice the current share holders to sell, the people who set the prices for
stocks in the stock market, raise the price of the stock. That does entice some to sell their shares
but if there is still a lot more shares which want to be bought, the price must be raised again and
again to entice more stock owners to sell. In this scenario, the supply is held constant or even
reduced because of the new reluctance to sell until later higher prices, and the demand is
increased due to the good news attracting traders and investors, and then the rising price of the
stock to attract shares for them to buy, attracting even more new traders and investors who want
to buy.
When bad news or a stock price which is believed to be too high occurs, and more stock market
investors and traders are motivated to sell their stock, the other stock market participants who do
not own any shares of that stock become more reluctant to buy any shares because they then have
reason to believe that the price will continue going down for a while and they can then buy shares
later for less money than they would have to pay for the shares now. To entice the current
non-share holders to buy, the people who set the prices for stocks in the stock market, lower the
price of the stock. That does entice some to buy shares but if there is still a lot more shares
which want to be sold, the price must be lowered again and again to entice more stock
non-owners to buy. In this scenario, the supply is increased because of the new desire to sell on
bad news or to take profit on too high stock prices, and the demand is decreased, also due to the
bad news and the belief that the price needs to go a good deal lower for the price to be attractive,
And then, the continued falling price of the stock additionally increases supply because it
motivates even more traders and investors who own the stock to want to sell.
To sum this up, when more shares of stock in any publically traded company want to be bought
than normal and/or the current owners of that stock are motivated to keep their shares more than
normal, the stock price rises. Increase of demand and/or decrease of supply cause stock price
increases. And when more shares of stock in any publically traded company want to be sold than
normal and/or the current owners of that stock are motivated to sell their shares more than
normal, the stock price drops. Increase of supply and/or decrease of demand cause stock price
drops. The change in motivation is what you will learn to predict better from reading this book
and/or attending my classes. Look in Chapter 31 for locations and information
about my classes.
Why has the stock market been very bullish for the past several years?
Typically a bull
market, when most stock prices have a fairly steady rise in price, lasts for a few years and then it
is followed by a bear market, during which most stock prices decline, which lasts for 3 to 18
months. We have been having an unprecedented 11 year bull market with only 2 very brief
recent 3 month quasi-bear markets (summer/fall of 1998-Asia Flu; and spring of 2000-Biotech
and then technology/high P.E. slam, or the Tech-Wreak) to slightly slow it down.
From my observations, since 1996 (I was stock market clueless before then), I have found 10 influences in our economy which have fueled and supported the long bull market. These
influences are not mentioned here in any particular order of importance. You will have to judge
that for yourself. First of all there has been a steadily growing investment by the common person
in mutual funds. This has shifted a lot of money to the stock market on a steady basis. This flow
of money to the stock market is fairly stable, because once someone has invested in a mutual
fund, they tend to keep their money in that fund or move it to another fund. All of this steady
influx of new money into the stock market drives prices steadily up because it creates an
increased demand on the relatively stable supply of stocks.
A second bullish influence is the increasing inflow of common person money to discount
brokerage firms and to Online brokerage accounts. This has been stimulated by declining
brokerage commissions and heavy herd oriented advertising to the common person who wants to
make money in a seemingly easier way. This steady influx of money into the stock market has
the same stock price increasing effect that mutual funds do. A third influence is the ascendence
and acceptance of 401(k) retirement funds which are funded by automatic payroll deductions for
a steadily increasing number of employees of most companies. Again the effect on the market is
to cause stock prices to rise because of the increased demand.
The steady rise of two income families has increased the amount of discretionary money which
can be and is funneled into Online trading accounts, 401(k) funds, and mutual funds. A
confidence in investing in the stock market influence has been exerted by our current low
inflation good economy, by mostly declining interest rates, by expanded world market
opportunities for the sale of U.S. goods and services, and by low unemployment. Most of these
bullish influences are probably because the Controllers (see Chapter 11) don't want the bullish
conditions in the economy and the stock market to stop right now. And finally, the rapid and
continuous advances in technology and biotechnology are really positively motivating most
investors to jump on the band wagon to make lots of money as the stock prices of the innovation
technology and biotechnology companies go up and up.
Market, Sector, Industry, Company are the common names used to describe the different
groupings of some 30,000+ stocks which are publicly traded in our stock markets. The largest
group is called the Market. Unfortunately this word is used several different ways and so has
several different common definitions. I will mainly use this word to mean all of the stocks which
are publically traded in the U.S. Another use of the word is the usage which is associated with
daily changes of stock prices such as "the market is up 230 points today" or "the market has been
steadily declining all day". Many people think that this is the same as a reference to all of the
30,000+ stocks, but it generally isn't. What this market reference generally means is the 30 Dow
Jones Industrial Index stocks, which are supposed to represent all of the other stocks in terms of
how investors/traders currently and generally feel about them.
Market also refers to such things as the physical location of different stock exchanges, or other
than stock financial products such as bonds, futures, options, commodities, etc. And market
refers to a single stock sometimes. Greater clarity would really be helpful to the common
investor, but don't hold your breath waiting for it to happen. And, as I said, I will use the word
market to refer to the collection of all 30,000+ stocks which can be publically traded in the U.S.
Sector is the next smaller grouping but it is also used somewhat sloppily, because there doesn't
seem to be a universally accepted standard of how many or which particular stocks belong to a
given sector. Multexinvestor.com divides the 10,000+ stocks its covers into 12 sectors
(technology, services, healthcare, financial, transportation, energy, conglomerates, utilities, basic
materials, consumer cyclical, consumer non-cyclical, and capital goods), but The S&P 500 stocks
are divided into 10 sectors. I have even seen the term sector used to refer to smaller groups of
stocks which are usually call industry groups. Supposedly all stocks should at least loosely but
logically fit into a sector. Sectors of the market rise and fall in investing interest both on the
short term due to opportunity money flow and in the long term due to cyclical/predictable
changes in the business cycle of the economy.
Industry is the term used to describe the next smaller grouping of stocks. It seems to have a
clearer universal meaning, but I could well be wrong about that. An example of an industry
would be the software industry in the technology sector. There may well be the same problem
that sector has of how many companies and which companies belong in a given industry and how
many different industry groups to have.
The grouping of company (the smallest division) is pretty hard for people to create confusing
usages for. It refers to a individual company which has stock that is publically traded.
Common and Preferred Stock are the two types of publicly traded company ownership for sale
in the stock market. Both types of stock are ownership in publically traded companies. Preferred
Stock has certain privileges which common stock does not have, pays fairly large dividends, and
does not rise or fall in price very much over long periods of time. It is a good type of investment
to own if you want a regular income each quarter, or once a year. Almost always when people
talk about buying, selling, trading, and investing in stock in the stock market, they are talking
about Common Stock. It is the common stock which rise and falls in price per share according to
stock market investors' and traders' opinions and beliefs about the value of the companies.
Common Stock is the type of stock I talk about in this book for you to use this book's strategies
with to invest and trade for high rates of profit. Some of the Common Stock which is traded in
the stock market pays a dividend every so often to share the company profits with the shareholder
owners. The dividends are not very large for most of the few companies which pay them because
Common Stock is mainly not meant to pay dividend. D.R.I.P. investing is a type of investing
which uses these dividends to automatically buy more of the company stock instead paying the
dividend to the shareholder. In this book I do not talk about D.R.I.P. investing nor do I talk about
Preferred Stock.
The stock market is like an auction.
Those who run the stock market exchanges are like the
auctioneers. They have ways of getting paid which take a part of your money without you
realizing it. They actually manage to get a lot of your money. Those experts and amateurs who
are selling stocks in the stock market are seeking to get the best price possible. The most
favorable of those prices to the buyers is called the (best) ask. The experts and the amateurs who
are buying stocks in the stock market are seeking to buy them at the lowest price possible. The
most favorable of these prices to the sellers is called the (best) bid. If no one is selling or buying
a stock at a given time those who run the stock market guarantee to buy a limited amount of
shares of that stock at the bid which they set and they also guarantee to sell a certain limited
amount of shares of that stock at the ask which they set. A trade happens when a or several
buyers and a or several sellers agree on a price.
What we refer to as the stock market is not one place. There are three main national exchanges
and several smaller regional exchanges of the stock market in the United States. They open for
normal market trading at 9:30 a.m. Eastern Standard Time and close at 4:00 p.m. Eastern
Standard Time. The oldest of the three national exchanges is the New York Stock Exchange
(NYSE) and is in New York City. This is the one we see on television all of the time with lots
of excited people all talking, shouting, waving, and signaling at once to make the trades which
are made there. The American Stock Exchange (AMEX) also has a physical location, but is not
very exciting to most traders and investors and so seems to handle only a small part of stock
market trading. The NASDAQ is the newest of the three national exchanges but it does not have
a single physical location. It is best described as a network of people with telephones, faxes, and
computers who operate much more efficiently than older, physical location exchanges. I believe
that the NASDAQ actually represents the modern economy and whole stock market much better
than the other exchanges do. It is the exchange which lists most of the technology stocks, new
companies, high growth companies, and smaller companies.
How to make money up, down, and sideways.
On of the most common mistakes which the
amateur investor/trader makes is to rely on the false belief that money is made when the stock
market goes up. In the first place the amateur often believes that the stock market is the same
thing as the Dow Jones Industrial Average (DJIA), which is only an adjusted average price of 30
large/established companies stocks. Then when the DJIA goes up the amateur buys stock and
when it goes down, he or she sells stock. Although many investors/traders do the same thing,
causing many stock prices to rise or fall accordingly, it is basically a foolish, money losing
practice.
Other amateurs believe that stocks should smoothly and continually increase in price. They of
course don't. Following this false belief also leads to loss of money. A third group understands
that the DJIA is not the same as the stock market as a whole and that stocks rise and fall in price
often erratically, but still believes that money is only made as stocks rise in price over time. If
these individuals do a good job of selecting the best companies (see Chapter 19) they will do
fairly well in the long run by just holding the stock which they bought over a long period of time
so that the short term up and down movements of the stock's price are overcome by the long term
gradual increase in the stock's price. And, unless they are the very rare individual (of course
most of us think we are the rare individual, when in fact we are not) who lucks upon a Microsoft
type of company in the beginning of a 10 year rapid growth phase, their long term annual gain is
only a modest 10%-15%. If they did not do a good job of stock selection (for long term increase
in price), they are then unpleasantly surprised when the stock's price is erratic, flat, or suddenly
drops. This behavior is also a sure thing money loser.
The good news is that all of these potential problems can be avoided. The challenge is to get
reality educated, look for and learn to recognize your own false beliefs, and then form new and
correct beliefs about how the market and stock prices really change over time. Remember, I had
to do these things too as has every successful investor/trader. And, I and they continue to do this
on a regular basis so that I can keep up with and even get ahead of the ever changing landscape of
successful investing in the stock market.
Some of the reality of the stock market is that the individual stock prices, industry group stock
prices, sector stock prices, index averages like the DJIA, S&P 500, and NASDAQ 100, and the
market as a whole stock prices all go up some of the time, go down some of the time, and are flat
or go sideways some of the time. And, there are a lot of different things which cause those three
types of conditions in price. This book deals somewhat with most of the major things which
cause those conditions of price. If you learn what is covered well and your strictly follow it, you
should be able to predict most of the price changes correctly 90% of the time or 9 out of 10 times
correctly. It is my recommendation that you at least learn how to make money consistently in the
stock market when prices are going up, sideways, and flat. Hopefully you will also chose to
actually use what you learn to make money in all of those conditions.
The best times and situations I have found to go long or take a long position (buy stock with the
reasonable expectation that the price will rise soon or over the long term) are taught in Chapters
(2, 4, 6, 8, 10, 12, 14, 16, 18, and 20). In those chapters it is also suggested how long to
keep/hold your long position. The best Strategies I have found to use when prices are going
sideways or flat are covered in Chapters 8 and 10. And the Strategies I have found to use to
make lots of money when prices are falling (using short selling of stocks) are covered in Chapters
8, 14, 16, 18, and 20. Look in the table of contents for location of the chapters. In the chapters
mentioned above, there will also be specific directions on how to find stocks which best fit the
conditions of up, flat, or down in price.
Though you may be tempted to use many of the strategies all at once, it is best to learn one at a
time by practicing it with pretend (paper trading) money or real money until you get really good
at it. The reason to learn how to make consistent profits from all three different price situations
is that really good trading/investing opportunities happen in all three price situations and they
don't happen as frequently as most of us would like. When all three price conditions are taken
advantage of carefully, then money accumulations is most rapid and satisfying. When only one
price condition (typically rising prices) is focused on, there are frequent frustrations when
conditions unexpectedly change in the market to cause profit stagnation or reversal. Take it from
me, I found those situations most unpleasant when I experienced them in my learning
experiences.
Well, this is all I want to include in this chapter. Remember to spend regular time learning the
stock market vocabulary and definitions which you can sample in the Glossary of this book. You
may find it boring at times, but if you persist, it will greatly increase your potential to profit from
trading or investing.
The next chapter is a strategy chapter. It is about The Conservative Stock Split Strategy. That
strategy is the most conservative one in this book, but when used correctly, it can yield
100%-200% profits each year.
