Basics market stock
I. ESTABliSHING A GOOD OBJECTIVE
Often such things as retirement, children's college education, a house or a new car are stated as objectives for investing. Even they are quite general, although they are more specific than a lot of money. Retirement and children's education have built-in time periods; however it is a good idea to break these large blocks of time into smaller segments like one to five years.
II. CATEGORIES OF STOCK
When stockbrokers open new accounts, they are required by the New York Stock Exchange to know their customer. That means they need to know certain details about the person's investing experience, financial status and most important investment objectives. In order to standardize objectives into mutually understood concepts, they usually list four categories for investment:
• Income: Investments that engender income from dividends or interest payments.
• Growth: Investments that demonstrate price growth usually newer companies that pay no dividends.
• Total return: Investments that will see both price growth and income from dividends.
• Speculation: Investments for short term trades that result in quick profits.
Income, growth, total return or speculation all financial investments fit into these categories.
Income Stock
Traditionally, income stocks are most often utilities, especially electrical utilities. They are usually conservative investments with steady streams of income and are typically financially stable. Although there is always risk involved with common stock investing, income stocks should have some of the lowest risk. Sometimes they are colorfully referred to as the widow and orphan stocks, meaning investments for people who cannot afford to lose money.
Obviously dividends are a priority when an investo's objective is income. Dividend growth and dividend stability are likewise important. Looking at the average annual growth of dividends over at least a five year period can give the investor some idea of how much growth to expect in the future. In order for a company to pay out dividends, the growth of revenues and income are important.
The primary sources of income can be a concern in some areas. The Detroit area might have trouble if the automotive industry is in a slump. The Silicon Valley area of California might have trouble when the computer industry is slow. The source of income is a part of risk; more specifically, the risk of slower growth.
III. AVOID OVER TRADING
For some people, the trading of stocks, options or other securities can become an addiction similar to gambling. It can be like a nickel or dime stock machine: Win a few jackpots and keep putting the coins back until they are gone. It is like betting on one more horse to make up for the losses or to extend the winnings.
As with other gambling addictions, trading addicted people are usually not making any money. At best they tend to break even, which only adds to their compulsive activity. The day is just not complete unless they can make one or two stock or option trades.
Every brokerage firm has a few stories of a stock or option trader who became addicted to trading. The stories usually involve fairly large sums of money after a few years time. Eventually, the trading addicted investor runs out of money or the brokerage firm's compliance department steps in and puts a halt to the activity. Compliance departments are quite diligent in this regard, although it is difficult for them to watch every account closely.
The securities industry regulatory organizations consider overtrading and churning to be nearly the same activity. Most people think of churning as a stockbroker initiated activity, but the end result is the same. The activity generates commission charges for the stockbroker and the brokerage firm. Unsuitable trading, where recommendations are not in keeping with the customer's financial condition, investing sophistication or investment objectives is a related activity.
For overtrading to constitute churning, the broker must exercise control over the trading in the account and abuse the customer's trust by engaging in transactions that are too much in volume and frequency, considering the character of the account.
Overtrading can be difficult to control, especially with increasing access to the market through the internet. The flexibility, convenience and accessibility of information can encourage the investor to trade more frequently. When working with a brokerage firm, carefully checking records can help the investor prevent overtrading. Taking the time to analyze the trades on a monthly statement can help the investor stay in control of the amount of trading.
IV. DIVERSIFICATION
Portfolio diversification is the placing of financial assets into significantly different investments in order to increase the chances for large profits, protect against loss and simplify the analysis and selection process. Significantly different investments do not mean buying the shares of three different computer companies. Seagate Technology, Intel and Apple computer might be good computer companies, but investing in these stocks alone would not constitute good diversification. If one invests in a good computer company, a food company and a department store company, the mix is diversified. Although they are bound by general economic conditions, the diversification is into a growth industry, a defensive industry and a consumer products industry.
One rationale for diversifying is that having more shots at the profit target enhances the opportunities for profits. It is often difficult to know where the next rapid economic growth will appear. Investing in the stocks of companies in different areas of the economy should increase the chances of participating in surges when they occur.
V. liMIT ORDER CONTRADICTS DESIRE TO SELL
The main reason it is best to trade at the market is simply that the market moves quickly. Order qualifiers such as price limits or all or none do not have the same priority as market orders and might not be filled. Directions can quickly and unexpectedly change, leaving the investor twisting in the wind with a limit order.
The idea of placing a buy or sell of securities as a market order is to obtain an immediate execution at the best available price. If the investor nitpicks over a few cents per share, opportunity is lost and the ensuing cost of frustration and time lost is high. Such costs can easily be higher than any movement in the stock price while the market order is being placed. Do the analysis make the decision, ser he strategy and stick with it when placing the order.
The only time to avoid using a market order is when a price is rising rapidly. If an investor is interested in a company whose stock price is rapidly moving up but the investor desires to have some control over the buying price, a limit order or better can be entered. The term or better is normally assumed, but in this situation its intent is to confirm that a limit order is being placed above the current trading price.
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