My question is this. If the professionals are so good at what they do, then how come they don’t tell us to lock in our gains?

The proverbial “buy and hold” stock market investing strategy is a myth and an easy out for Wall Street to never have to tell you when to sell. The simple fact is that all stocks regardless of how good they may appear to be, will eventually come down in value. The stock market is littered with stocks that traded at all time highs and now trade at all time lows. Why is this? Well, a stock’s price is a function of it’s supply and demand. The more demand for a stock, the higher the price and the lower the demand, the lower the price. You’d think that this demand would come from investor’s like you and me. But, our individual purchases are a drop in the bucket compared to where the real demand comes from — big institutional investors. When they decide to take a sizable position in a stock, they invest millions and increase demand for a stock substantially which in turn increases the price. And, when they sell this decreases the demand which in turn decreases the price. This is the key reason that even good stocks go down in value, the demand dries up and moves onto another stock.

When they want to unload their stock they need buyers — because they aren’t buying anymore — so the price doesn’t come down too fast and that’s when you, surprise, surprise, start hearing  about how great the stock is and are encouraged to buy it. This also tells me why your brokers don’t tell you when to sell as well. Who is their bigger customer, you or them? It’s simple economics. The big institutional money doesn’t follow their own advice. They actually pick a time to sell and do it while Wall Street tells you to buy and hold. This is so they can keep the price of particular stocks propped up. If they told you to lock in gains and sell with the big money, then they would be working against their best customers.

So what is a small investor supposed to do?

The first thing I would do if you are like people I knew who lost big money, is fire your broker. They’ve proven they are not up to par. The next thing I would do is start researching two specific investing strategies and pick one that you are most comfortable with and then run with it. The first book I would read is “The Intelligent Investor” by Benjamin Graham. He was a mentor to one of our most famous investors today and that is Warren Buffett. The other strategy I would check into is William O’Neil’s “How To Make Money In Stocks”. O’Neil is famous for being publisher of the Investor’s Business Daily. I personally prefer the CANSLIM strategy over being a value investor.

The thing is that if you want to be successful in the stock market, investing today provides you the opportunity to create wealth you never knew you could. The only thing is that you need to study the market and apply what you learn. No one is going to hand it to you. You are going to have to first pick a strategy and then next start applying it. Will you make mistakes? Yes, but do you think you can do as well as losing half of your money? I don’t have to tell you what I think.

Trading and investing with penny stocks carry many pros and cons. The risk associated with trading penny stocks is very high. If an investor thinks that he or she can blindly pick a company, buy a bulk of shares and watch them ride off into the sunset, they are mistaken. More often than not, a stock’s value falls below a dollar for a good reason, generally due to the company’s fundamentals failing pretty badly. Penny stocks are some of the most volatile on the market, often moving 10% or more in a day in either direction. While these stocks look cheap, think of what happens when a stock valued at $.50 falls to $.40, that’s a 20% drop. That would be similar to a $50 stock falling to $40, clearly not a positive move. Penny stocks can just as easily fall to zero as they can double or triple. The pros of penny stocks, is that when they do rise, they rise exponentially, often providing returns you would otherwise never see.

The only way that such a stock could be lifted back up is by a company turnaround, or a buyout. The odds are that the company will go under more often than regain its prominence. This is where research will help you choose the right company to invest in. Did this company become a penny stock because the CEO was ruining the company? Look for new management with a good record of success at previous companies. Did the stock fall because their product was not selling? Look for new product lines that fill a need that other companies have not met yet. Did the company fail, but the product is still strong? Look for a potential reason for the company to be bought out by a larger company interested in their product.

There are several reasons why a penny stock can rise; you need to watch closely at every move the company makes to see where your buying opportunity is. Biotech and pharmaceutical penny stocks are more difficult to predict than the run of the mill penny stock, so there is more research needed on the part of the investor. One of the best things to look for in this type of penny stock would be test drugs. What kind of drugs is the company testing? Is there any competition in the market for this drug? If there is not, then a positive test result can catapult the company’s stock higher.

photo credit: pfala

When you have decided upon a stock, you need to look for a broker to purchase your shares through. Most brokers charge a commission in the range of $10 for one order. These brokers often include additional commissions on stocks that are valued at less than $2, often coming to an additional 1/10 of a cent, which does not sound like much, but it does add up. Also important to consider is that your commission can significantly cut into your profit. If you spend $100 on your shares, and have to pay $10 commission, you are already 10% down on your trade, and you need to sell at some point for another $10. Buying larger quantities of shares can help you cut that percentage down, but don’t risk too much of your money either, do whatever you feel comfortable with, be balanced.

Penny stocks carry the potential for some excellent gains, or some significant losses. Knowing that you may well lose much of your investment when buying penny stocks can help you to cope if you are wrong on your choice. On the other hand, the possible profit will keep you excited to check your investment over the course of time. It may be advantageous to buy more shares later on, if you see the stock fall further and have confidence it will still rise. Patience is the key, and be balanced about keeping risk to a minimum in your portfolio.

To understand the no load mutual fund, we must first understand what a loaded funds is. A load is a fee that is charged to an investor when they buy or sell a mutual fund. A load that is charged upon the purchase of a fund is known as a front end load. A load that is imposed on the sale of fund is a back end load. The money from this load goes to the broker as a compensation for selling the fund. If the fund does not have these load fees, it is known as a no load mutual fund. Pretty simple, huh?

So, you know what no load mutual fund is now. What good does this do you? What is so great about these funds? I have written before about reducing expenses when investing. The more expenses that you pay, the less of your own money that you get to keep. No load mutual funds help reduce these expenses in investing. Now, this does not mean that no load mutual funds are expense free. However, since they lack the front and back end loads, they are much lower in expense.

It should be readily apparent when researching funds which ones have loads and which ones do not. Most mutual fund providers have many no load mutual fund options. Keep in mind that pretty much all passive index funds are no load. Since I recommend investing with these passive funds in the first place, this topic might be slightly redundant. However, if you still prefer going with managed funds, finding managed funds with no loads will help you save money in the long run.

So, these funds are relatively straightforward and simple. This means that you have no excuse for not demanding load free funds when you are investing. Some will tell you that funds with loads can afford to pay for better managers, however, there is little research support that this is the case. Any marginal advantage that the money manager might have is wiped out by the extra expenses that you incur when buying a loaded fund. Keep it simple, keep it no load. That is all

So, what are municipal bonds?  Quite simply, these are bonds floated by local governments to fund public projects and such.  Basically, when you buy one of these bonds, you are lending money to a local government.  In exchange for this, you get paid a certain interest rate.  Since these are local securities, the federal government can’t tax them.  Many times, the income from these bonds is also free from state and local taxes.

photo credit: Jef Nickerson

As you might imagine, if your marginal tax bracket is quite high, the tax savings from these might be quite significant.  These bonds offer much lower pre tax returns, but the post tax return for those will high incomes can make them well worth it.

If you are considering investing in municipal bonds, consider the whole picture.  Figure out what your tax bracket percentage is.  This is the amount you will be paying in tax on income from traditional corporate bonds.  Divided the expected yield of a taxable bond by this amount to get your after tax yield.  Compare this with the rate of return from the municipal bond.  If your tax bracket is likely to remain the same into the future, go with whichever option provides the best overall yield.  For those with lower tax brackets, municipal bonds will probably not be worth it, but it is worth looking into.

So, this covers the basics of buying tax free municipal bonds.  There are many complicating factors when it comes to tax issues, so if you are in doubt, please consult an accountant who can figure out what you really owe.  However, if the taxes work out to your advantage, be sure to take advantage of the savings these bonds can provide you with.

Sound nice?  This kind of lifestyle is the promise of those selling stock trading systems.  According to these people, by analyzing stock market data according to their proprietary system, you can predict the direction of the stock market and make a fortune while working only a few hours a day.  Quite a nice gig, if you can get it.

photo credit: trader_john

The problem with this is that it is complete bullshit.  That’s right, none of these stock trading methods work.  It might be a sad thought, but the short story is that you should stop listening to those glistening sales pages, and think through the facts a bit.  Let’s consider what you are being offered.  These people have discovered a system that makes vast amounts of money for very little effort.  Rather than hoard the system for themselves and enjoy living a tropical island lifestyle, they are instead going out of their way to sell the system to people like you for a relatively small fee.

When you think about this, it doesn’t really make much sense.  If the system works, why give it away?  They would be much better off keeping things a secret, since any “system” that might actually exist will quickly stop working once people know how to exploit it.

Aside from this issue, I have to question whether such systems exist at all.  Since the stock market is based on the current status of companies and the emotions of investors, it doesn’t really make sense that looking into past pricing and volume information would leave any insights into the future of the market.  Looking for these patterns in the stock market charts is the equivalent of a fortune teller looking for the future in a pile of tea leaves:  she might get it right occasionally, but it really isn’t something to base the rest of your life off of.  The same goes for these types of stock market systems.

Of course, I’m always willing to be proven wrong on this one.  If anyone wants to show me how they have made consistent, long term money using some sort of a stock trading system, I would be happy to look into it.  For the moment, though, I think I will keep investing my money in normal, boring stock market strategies.

Think about it this way.  When you buy a share of stock, you are a part owner of that company.  Every single day, people are waking up in the morning, and working for that company to increase its value.  Your money is being grown by the labor of many people adding value to the economy every single day.  Of course, stocks do go down, and companies do lose their value, but when you look at stock market investing at this very fundamental level, it is a sound concept.  Unlike investments like gold or real estate, stocks grow through the power of human industry, which is the only real way to increase value.  Resources are finite, but the human power to create is infinite.

So, if you are a beginner, do not fear the market.  Learn the basics, but don’t let that stop you from getting started.  As with any type of investing, time is your friend when it comes to stocks.  The power of compounding growth will earn your far more returns than any genius stock picks you may or may not make.  However, to enjoy the benefits of this growth, you need to start as soon as possible.  Even if you have no idea what you are investing in, you can still buy a mutual fund today and get started with something.  I don’t advocate gambling, but as discussed above, the market is not gambling.

Beginners should also take care not to be swayed by fads, trends, and outright scams.  Use your common sense, and remember that get rich quick schemes almost never are.  Be boring has its benefits when it comes to investing, so just stick with the basics.  Following new, sexy investment options will almost never make you money.

These are just a few pieces of advice I have for stock market beginners.  Keep reading, keep learning, but don’t let your lack of knowledge deter you from taking that step and getting started.

Invest In Mutual Funds

For many people, this is probably the best option.  By investing in mutual funds, you are reducing your involvement with your investments, freeing up your time for other activities that are more important to you.  There are two major types of mutual funds:  managed, and unmanaged.  Managed funds employ a professional fund manager to buy and sell investments within the fund.  In exchange for this service, he receives a salary, collected as a fee from the purchasers of the mutual fund.   The idea here is that he will make more money for the fund than he costs it in management fees.

Often, though, this is not always the case, and this is where unmanaged funds come in.  Unmanaged mutual funds, rather than having a manager picking the stocks, blindly follow a certain stock market index.  For this reason, unmanaged funds are often called index funds.  The most common index for funds to follow is the S&P 500, but there are funds which follow pretty much every other major index out there.  The low expenses (no fund manager, you see) can make these an excellent invest choice.  I’ve written before about investing with index funds, so be sure to read up that to learn more.

Invest In Stocks and Bonds

If you’re looking to take a more active role in your investing plan, you can research and purchase individual stocks and bonds.  If you choose well, you can grow your money quite effectively.  In order to take this approach, you will need to learn how to buy and sell stocks, as well as determine the best stocks to buy.  If you can do this effectively, individual stocks and bonds can be a very good investment strategy.

Invest In A Business

Want to get really active in your investing?  Try investing in a business, either yours or someone else’s that you are extremely familiar with.  This is often the very fastest way to grow your money, but it is also the riskiest.  Unless you are very familiar with what makes money and what does not within your business, be careful about  throwing money at it.  Money doesn’t do you much good without a solid profit plan.  If you do it right, though, no other investment will give you the same return as a good business can.  However, you will spend much more time managing this sort of investment than any other.

Conclusion

As you can see, there are many different ways to invest money,  each with their own associated risks levels and rewards.  To determine the best investment strategy for you, be sure to take a good hard look at your own risk tolerance and the amount of time you are willing to spend.  With that being said, don’t over think things so much that you never start investing!  Make a decision, and start investing as soon as you can.  Time is your greatest asset in the world of investing, so use it wisely.

If you’re looking to start investing with penny stocks, you will need to find a broker.  This might seem easy, but not all brokers are good for buying penny stocks.  The reason for this is that many brokers will impose high fees for trading penny stocks.  Since one of the keys to investing is to keep fees as low as possible, you will want to find a broker that does not have any fees for penny stocks.  This is easier said than done, but is important if you want to save money on your trades.

If you have a broker that doesn’t charge fees, than buying penny stocks is just like buying any other sort of stock.  Just be careful, the world of penny stocks in unforgiving for those who think they have things all figured out.  Take your time, do your research, and don’t get greedy.  Fail to do this, and you will lose money.

Of course, the real challenge when it comes to purchasing stocks is determining the best stocks to buy.   As you might imagine, I don’t have any simple answers for you here.  At best, I can give you some general strategies that work for a lot of people, and you can do your own research and see what works best for you.  I make no claims as to the general effectiveness of these methods, so use at your own risk.  With out of the way, here are some popular stock selection strategies.

photo credit: quinn.anya

Value Investing

Value investing could well be called the “school of Warren Buffet,” though it was actually originally outlined by Buffet’s mentor, Benjamin Graham.  In his book, Security Analysis, Graham lays out the classic rules of stock picking based on value.  In this school of thought, investors are trying to beat the market by selecting stocks that are undervalued at their current market price.  This is determined by a careful analysis of the company’s balance sheet, with estimates made of the future earning potential.  If the company’s future earnings potential is more than the stock price would indicate, the stock is considered a good value.  A simpler form of this approach is to buy stocks with a low price to earnings ratio (P/E ratio).

Growth Investing

In this school of investing, the best stocks are those that have the best growth potential.  Stocks are picked on companies that appear to be ready to grow greatly in the future, as determined by the investors research.  These types of stocks will rarely pay out dividends, as they are investing every cent back into growing the company as fast as possible.  Many investors do well with this investing style.

Penny Stock Investing

This is not a strategy pursued by most real financial professionals, but is quite popular with many individual investors.  According to this school, penny stocks are the best to buy since they incur great percentage changes when compared to normal stocks.  When a $75 stock moves up by $.50, that’s a small change.  When a $2 stock moves up by the same amount, that is a much bigger gain.  However, stocks can move down as well, and predicting the direction of penny stocks isn’t as easy as some gurus would make it sound.  Still, people do make money investing with this style.

This is just a basic overview of how many people determine the best stocks to purchase.  There is no one right answer, so be sure to keep learning everything you can.  After all, your hard earned cash shouldn’t be put just anywhere.  Form a solid investment plan, stick with it, and reap the results.

Like a savings account, you are restricted to six withdrawals per month, and only three checks.  Some even have restrictions above and beyond that of normal savings accounts, such as high minimum balances.   As a result of these restrictions,  you get a better rate of interest.

Like a normal bank account, money market accounts carry FDIC insurance from the government,  insuring your deposit up to $200,000 as of the time of this article’s writing.  This is an important protection against the potential failure of the financial institution.  This makes money market accounts quite safe.

A money market deposit account differs from a money market fund.  A money market fund is like a mutual fund, where the funds deposited by the investors are invested on the behalf of the depositors by a fund manager.  These funds do not carry the protection of FDIC insurance like the deposit accounts do.  Still, these funds can be a good place to keep cash in an investment account, a topic we will discuss more later.

So, I hope this helps you understand money market accounts a bit better.  It’s not strictly related to stock market investing, but knowing where to keep your cash is an important part of an investment strategy.  In other articles, we will discuss the use of money market accounts and funds for keeping your cash handy for when you need it later.