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Buying Stocks and Shares

Buying stocks ands shares can be tricky business. Investors who practice fundamental analysis may opt to practice value investing, growth investing, or perhaps dividend investing. Other investors may opt to practice technical analysis if they are interested in short term stock trading. In today’s article we will discuss three different types of fundamental analysis investing strategies that investor’s practice.

When buying stocks and shares many investors opt to practice value investing. They do this by picking stocks that were previously hot stock market picks, but that have recently fallen and can therefore be purchased for less. This investing strategy requires extensive research into companies and a lot of patience with the markets. They look for those companies who stock price has fallen temporarily, but anticipate that the stock price will go back up once the company’s financial issues are resolved. In addition to stock price, value investors take into consideration the earnings growth, dividends, cash flow, and book values for the companies of interest.

Investors also look to practice growth investing when buying stocks and shares. This means that they look for companies that are likely to grow their sales and their earnings. A lot of beginner investors practice this method as a way to introduce themselves to the stock market. Growth investors look for those companies that are expected to increase their sales and income by at least 15% the following year. The stock price of the company typically indicates how profitable investors think that a company will be in the future. Investing in growth companies typically involves investors investing in young, upcoming companies predicted to become leaders in their industry. These companies began with very little capital but were able to push through and become very profitable companies as they attracted investors.

Dividend investing when buying stocks and shares happens when investors buy stock that can pay a cash dividend based on the number of shares that they own. Investors who practice dividend investing actually make a profit while they hold the stock because dividends are typically paid out quarterly to investors. They look for dividend paying stocks for those companies that are likely to continue to pay cash dividends and also for those companies whose stocks can provide capital appreciation. Additionally, many investors practice dividend reinvestment. Rather than receiving quarterly dividends directly in cash, investors will reinvest their underlying equity. This allows investors to bypass brokerage commissions because their investment is immediately invested back into the company for the purpose of price appreciation and compounding.

Whether you decide to practice growth investing, value investing or dividend investing, or a combination of these strategies, the most important thing you must do is create at stock trading plan. Buying stocks and shares is very tricky and the most successful investors know that they must create a stock trading plan, follow it and stick to it. This is especially relevant for those investors who are looking to practice more than one type of investing. Creating a stock trading plan is just as important as diversifying your portfolio and should be done for every type of investing, no matter the complexity.


Market Direction: How can you tell the difference between a reversal and a bounce? Easy! A bounce in a downtrend may not have all the parameters required to constitute a full-scale reversal. There may not be a candlestick signal. The stochastics may not be in the oversold condition. A buy signal may not show confirmation. The primary factor is the candlestick signal. There will always be up-moves in a down market. A bullish candle may appear but it does not necessarily mean that it is a bullish candlestick buy signal.

Witnessing a bullish signal, as seen in the Dow on Friday, a Bullish Engulfing signal, provides much more credibility the potential reversal has occurred. When it occurs while the stochastics are in the oversold condition, that produces better probabilities a reversal could be occurring. What is required to show confirmation of a buy signal? Evidence of Bulls are still participating! That could be seen today in the positive trading in the markets. The first signs of evidence was the premarket futures showing great strength. Later in the day, the fact that the Dow and the NASDAQ were going to close well above the tee line produced more elements for analyzing that a full-scale reversal may have occurred.

Dow

For the past few weeks, trades have been more oriented towards the short side. When is the logical time to take profits? When all the signs indicate that a bottom reversal signal in the markets may be appearing. Friday's Bullish Engulfing signal produced a lot of potential reversal signals in individual stock prices. This makes for  a relatively easy trading strategy for taking profits in the short positions. Any positions that created a potential reversal signal, especially when the market indexes showed a strong reversal signal, should have instigated liquidating  part of those positions. What is one of the biggest hangups most investors have? Taking profits! Why is this a case? Because most investors, after they have a good profit in a price move, have a great fear of taking profits and then watching the position continue to move in the same direction.

There is a very simple way to mentally relieve that problem. Because we do not want to look stupid by coming out of a position too early, there is a simple process. As illustrated in the short position of Tupperware Brands Corporation chart, a Doji was formed in the oversold condition during the reversal on Friday. Closeout half the position. This modifies the fear of coming out too soon. It leaves for a very easy follow-up decision. If prices open higher the next day, confirming the buy signal, closeout the other half of the position. The combination of the execution prices should have provided profits at fairly close to the low end of the trading range.

TUP

On the other hand, if the price continues to drop after covering half position, at least we can mentally rationalize that we are still making profits on half the position even though the other half of the position was closed. We closed part of the position when the probabilities said it was time to close.

A true reversal signal in the market indexes allows for the entering of new long positions when the buy signals appear and have good confirmation. This was evident in the HK chart, when the bullish hammer/Harami appeared on Friday, the logical buy would have been seeing additional buying on Monday. The positive futures and the gap up in HK made for good evidence that bullish strength was coming back into the price after Friday's buy signal.

HK

Keep in mind, candlestick signals reveal when the "probabilities" indicate the right times to buy and sell. We may not know why the buying has all of a sudden come back into the market, but that is not important. To make profits, the number one concern is to identify 'when' the buying comes back into the markets.

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Good investing,

The Candlestick Forum Team


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