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Stocks & Mutual Funds Information |
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Trading Education: The Best of Both Worlds!
I made my very first investment in the stock market when I wasten years old. Ever since then I have been hooked! Now I checkout hundreds of trades each year with the same excitement andenthusiasm, and each time try to find that one market at theright time that could dramatically create wealth. If you would've been fortunate enough to invest $1,000 inMicrosoft when it first came public, that initial investmentwould be worth close to $300,000 today. In the last 10 yearsAmerica Online has been up 12,000% and it has come creashing lower as well! Although statistics like this are advocated regularly by journalists and brokers the majority of investors have a very difficult time staying in an investment for that long of a period of time even though they know they are in a good company The financial markets are a never ending source of temptation trying to lure you into a new position with each passing second. The belief that the grass is always greener in another market is a distraction that every investor eventually has to contend with. Even if you are a MUTUAL FUND investor the fact is that you are always looking for the BEST return available. Years ago when I worked as a broker I was confronted with thisdilemma. One of my clients told me that he knew the BIG MONEYwas made in holding on for the LONG TERM but that he likedtrading the short term swings. He asked my advice and I had tothink long and hard for several days before I could respond. Eventually, I presented him with the following strategy thatliterally combines the best of the TRADER and INVESTOR worlds.Traders are looking for the quick hit and run. Investors seektheir advantage by looking at the long term. Long terminvestors quite often benefit from allowing dividends to bereinvested into purchasing more stock in the company and thevery real possibility of the stock splitting in the future. Ifyou combine both of these apparently opposite perspectives youend up with a very unique viewpoint that eliminates a lot ofstress associated with decision making. This strategy willbring home the perspective that within every seed that you plantin the financial markets lies the promise of ten thousandforests. I refer to it as my FOREST STRATEGY! It is anotherway to make your short term efforts as a trader pay youdividends by also recognizing the importance and significance oflong term investing. Let's say that your initial investing capital is $10,000.1) Find a company, preferably in the Standard and Poors 500Index that you understand and are familiar with. If you wantto narrow down your group you can select companies that are inthe Dow Jones Industrial Average which include only 30 stocks.These are established companies with long financial historiesthat can be researched to your hearts delight. 2) Study the companies Price Earnings Ratio. Where is the PriceEarnings ratio now? What has been The highest and lowest pointsof the price earnings ratio over the last five years? Look tobuy a company with a historically low price earnings ratio thatis a leader in its industry. Use the Price Earnings Ratio as aguide. Don't try to pick bottoms.3) Look at a chart of prices to see what has happened recentlyand to determine where a good buy point is. 4) Place your trade with the intention of a 10% profitobjective. Once you reach your profit objective, sell enoughshares in the company to remove your initial $10,000 investmentand only leave your $1,000 profit in that stock. 5) Repeat steps 1-3 as you search for another company to tradefor a 10% profit and plant the Remainder for the long term. 6) Repeat, Repeat, Repeat. The drawback on this type of trading is that when you are with agreat company you do give up a lot of upside. However, if youlook at the PROBABILITIES how many IBM's, Aol's, Yahoos! OrMicrosofts are there out there in relation to the entireuniverse of stocks? What I personally like about this style oftrading is that it eliminates the GREED factor that mostinvestors have of trying to hold on for the top tick. Secondlyit also allows you to build a nice diversified portfolio.Thirdly, trading becomes a very fun game with potentiallylucrative long term implications. It is very possible to tradethis way once a month planting a seed in a quality company thatcan easily become a Forest of Wealth for you. Some trades might take the better part of a year to pan out.Some trades might achieve your profit objective in a matter ofweeks or days if you are really fortunate.. Keep in mind thatyou still have to manage your risk on each and every trade. Letme be perfectly blunt, if you don't manage your downside therewill not be an UPSIDE... It is acceptable to use any of theRISK Management Techniques that I advocate by doing PartialCovered Calls and other Option Selling Techniques. When donecorrectly those techniques can dramatically accelerate yourreturns. I must admit that I truly enjoy this type of trading. (Mybroker likes it as well as it generates many more commissionsfor him.) However, part of the reason that this method sitswell with me is that I hardly pay any attention at all to myprofits after I take them. It becomes very stress free to knowthat you have increased your wealth 10% and are just interestedin planting seeds all over the financial landscape in companiesthat meet your criteria. I must however stress the point thatyou make sure that you are aware of the downside. This methodis by no means RISK FREE....but for the individual who likes totrade and invest simultaneously it truly is ideal. Guard your investment principal at all costs and let your profits run. Just one more way to look at thebigger picture. Kind of like a Johnny Appleseed meets thefinancial markets. Many extremely successful investors do thiswith Initial Public Offerings as well.Study away.and remember,let's be careful out there. Dowjonesfully- Harald Anderson is the founder and Chief Analyst of eOptionsTrader.com a leading online resource of Options Trading Information. He writes regularly for financial publications on Risk Management and Trading Strategies. His goal in life is to become the kind of person that his dog already thinks he is. http://www.eOptionsTrader.com.
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