All stocks
There are multitudinous ways to analyze companies and their common stock, but only one thing is important to the investor: a swell in price that is higher and faster than secure fixed income investments. This might relate to how well the business operates, but it is not always the case. There are poorly run businesses whose common stock is quite successful. Some of the successes in the airline industry illustrate this fact.
The contrary is also true: Some well run businesses are terrible stocks. The company or its product line might be too small to be interesting to the stock market. This is why finance professors frequently do poorly when investing. They can find good companies, but the stock market does not like them.
Some facts of trends, both of the stock market and individual stocks is essential. In relation to trends some knowledge of support and resistance can quickly tell the investor what is likely to happen in a sudden current movement. Looking back at three year, five year and sometimes even 10 year price trends can give some excellent training in finding support and resistance levels.
II. IT IS ALWAYS A BULL MARKET
In the longest of long runs, of course it is always a bull market. If it were not there would not be anyone buying stock.
And it is not always a bull market for every publicly traded company. Sometimes companies that have been leaders in the past lose their ability to compete in an ever changing marketplace. Other companies are poorly managed and some never have much of a chance; therefore selection is important and often difficult but is the essence of prudent investing.
Investing for long term growth is always less risky than trying to make a fortune in the next couple of weeks. Especially when an investor is just starting out, it is important to choose stocks on the conservative side. Leave the speculation to those who can afford it or have experience losing. An approach such as this will save money and keep interested in the stock market, which is still the most consistent money making investment in existence.
III. LOOK FOR DIVERGENCE IN TRENDS
The stock market rarely has a normal day. Upon close analyses, each day is unique, with its special pattern of change. One day, technology stocks will be hot and oil stocks as the biggest gainers. One day the Dow Industrial Average will be up 60 points and the outlook for business development will appear favorable. The following session has the market correcting 100 points on the Dow, with growing inflation becoming a real threat.
IV. A TREND REMAINS IN FORCE UNTIL IT CHANGES:
A trend is a line drawn on a graph by connecting the points representing the closing price levels of a stock or point levels of an average or index. Trends of the stock market and of individual prices are an important part of investment analyses. Technical analyses and stock traders follow trends religiously. Even fundamental analyses keep an eye on trends for the same idea of strength and direction.
V. LOOK FOR INSIDER TRADING
Insiders of a corporation are the decision makers and strategy formulators. They are the directors, the officers and the high level line personnel. If anyone knows what is going on in a company, it is the managers who are directly involved in the upper level decision making process.
VI. KNOW THE BEST TYPE OF ORDER
There are many different types of stock orders an investor can place. Some are of debatable value and are seldom used. Following are simplified descriptions of some of the basic types of orders.
A. Market Order
B. Limit Order
C. Buy Stop Order
D. Sell Stop Order
E. Stop Limit Order
F. Market If Touched (MIT)
G. Market on Open
H. Market on Close
VII. INSTITUTIONS SHOW WHERE THE ACTION IS NOW
Institutional investors are professional money managers for corporations, pension funds, mutual funds and other investment companies. Their strategies may be long term or short term and they implement these strategies by moving the market by buying and selling stock. Fund managers might do their own analysis or hire others to do the basic analyses for them. Every business day they deal with large amounts of money. Obviously they have advantages not available to the individual investor. Possibly the biggest advantage to the institutional investor is the large amount of money available to them. Because of this, they can make larger trades, thereby profiting from small price moves and they can afford to make more mistakes.
When it comes to analyses, the only real advantage field by the institutional investor is experience. According to securities laws, information is made available to the public at the same time. The only exceptions are corporate insiders who were involved in the decision making process. However, they must report any transactions to the Securities and Exchange Commission.
VIII. IT DEPENDS ON SUPPORT AND RESISTANCE
Understanding the basic concept of support and resistance informs the investor of the significance of stock market moves. It can send a signal of strength or weakness in a specific move. It can tell the likelihood.
Support is a point in a declining stock market where buyers start buying. Resistance is the point where sellers start selling. When a market declines, analysts look lower for the next area of support. The strength of an area of support is determined by how many times the level stopped former declines. If it stopped only once, it is weak support. If market declines stopped at the same level more than once, it is stronger support. When the market falls through strong support, it has a tendency to drop much further.
Resistance the opposite of support is a level where stock market advances stopped in the past, where stock buyers stopped buying. If advances were stopped only once or may be twice, it is weak resistance. If several advances were stopped, it is stronger resistance. When the market breaks through resistance, it tends to rise much higher. Sometimes support or resistance levels are at precisely the same point. Other times they are not so exact but rather are a range of support or resistance. Keep in mind; these are tendencies, not guarantees. The stock market does what buyers and sellers determine, not necessarily what someone thinks it is supposed to do.
IX. THERE IS A BEAR MARKET COMING
Of course, there is always the specter of a bear market on the economic horizon. It is as true as the fact that some investors believe the Dow Industrial Average will drop below 2,000 again. Many who believe the bear is hiding around the corner do not even have a clear definition of what makes a bear.
A bear market is a time when securities prices are steadily declining for a period of weeks, months and sometimes years.
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