The Give And Take Of Stock Trading

If you only listen to the slang, you would think that the stock market is like swapping cooking recipes…. “If you’ll give me your recipe for your mom’s Apple Pie, I’ll give you mine for Baked Eggplant.” The phrase “stock trading” in market talk means to buy or sell shares. While the technical explanation of a system that can manage the stock trading of over one billion shares per day would be staggering, there is still a general explanation of how to invest in stocks.

There are two basic forms of stock trading. They are:


There is a concerted effort to move more trading to the computers and off the trading floors. This effort is meeting with resistance. Most markets, most notably the NASDAQ, trade stocks electronically. The futures’ markets trade in person on the floor of several exchanges, but that’s something to discuss at a different time. Here are the benefits of successful trading done electronically:

  • The electronic markets use large computer networks to match buyers and sellers, rather than human brokers. Many large institutional traders, such as hedge funds, mutual funds, and so forth, prefer this method of trading.
  • For the individual investor, you frequently can get almost instant confirmations on your trades, if that is important to you. It also facilitates further control of stock market online investing by putting you one step closer to the market.
  • You still need a broker to handle your trades – individuals don’t have access to the electronic markets. Your broker accesses the exchange network and the system finds a buyer or seller depending on your order.

Exchange Floor

If you think of traditional stock market basics, you are probably visualizing the floor of the New York Stock Exchange. When the market is open, you see hundreds of people rushing about shouting and gesturing to one another, talking on phones, watching monitors, and entering data into terminals. It could not appear any more out of control. At the end of the day, the markets work out all the trades and get ready for the next day.
Here is a step-by-step walk through the execution of a simple trade on the stock market floor:

  • You tell your broker to buy 100 shares of ABC Corp at market.
  • Your broker’s order department sends the order to their floor clerk on the exchange.
  • The floor clerk alerts one of the firm’s floor traders, who find another floor trader willing to sell 100 shares of ABC Corp.
  • The two agree on a price and complete the deal. The notification process goes back up the line and your broker calls you back with the final price. A few days later, you will receive confirmation of the transaction in the mail.

The markets handle tremendous amounts of stock market information. They are fast and efficient and they provide traders with the ability to find and make transactions in the blink of an eye. Even with beginner investing, stock trading can be as easy as mom’s Apple Pie.

Stock Exchange

In order to understand what the stock exchange is, it is important to first understand what an exchange is. An exchange is an institution that hosts a market where stocks and bonds, options and futures, and commodities are traded. It is where buyers and sellers can come together during specified hours to trade on business days. Rules are enforced by the exchange for you to learn depending on which exchange you choose to use when you begin investing in the stock market. A few exchanges include the American Stock Exchange, the London Stock Exchange, the NASDAQ, and the New York Stock Exchange (NYSE). These are among the most popular exchanges. There are also rules that are enforced by them and include regulations on the brokers and firms that work with them.

The origination of the Stock Exchange can be dated back to the 17th century. It is said that a group of stock brokers started to set up grounds on their own at the corner of Thread Needle Street and Sweetings Alley so that they could begin to buy and sell securities. By the 19th century the two primary functions of the exchange included buying stock, selling stocks and shares and also raising money for new ventures.

A stock exchange also provides facilities for the issue and redemption of securities and also provides for the payment of income and stock dividends. In order to be able to trade a security on an exchange, a company must be listed. Companies that are not listed on an exchange are sold Over the Counter (OTC). These companies are typically smaller and riskier because they do not meet the requirements to be listed on a stock exchange. This is actually the usual way that bonds are traded.  In dealing with Over the Counter trading brokers and dealers have to negotiate directly among themselves via the internet or via the phone. (There are no traders waiting to buy or sell unlisted securities). The National Association of Securities Dealers (NASD) monitors the transactions to ensure there is no illegal activity or stock price manipulation. The securities that are traded on an exchange include shares issued by listed companies, bonds, unit trusts, and other investment products. The original offering to investors of stocks and bonds is completed in the primary market, while the trading is completed in the secondary market. The stock exchange is the most important component of the stock market and is determined by supply and demand. Supply and demand is influenced by many factors that in turn affect the stock prices.

Of the stock exchanges, the NYSE is the largest and the oldest in the world. It is because of this and the fact that it is the exchange in which most major U.S. Blue Chip companies trade in, that it tends to control policy in playing the stock market. Blue chip stocks are issues of companies who are well established in their industry and who also have a reputation of producing earnings and paying stock dividends over a long period of time. Small cap stocks (as opposed to blue chip stocks) are.issues of companies that are not as established.

Penny Stocks – Finding Risk And Reward

Penny stocks, .maybe just reading that phrase sounds the alarm of every stock buying tip you’ve ever received. They are risky, you can lose a fortune and they are merely scams to take your money. No matter what the complaint, many people are strongly opposed to investing in these shares and the companies that they represent. Yet a simple Google search will find you millions of hits on the phrase “penny stocks” and almost everyone knows someone who has either lost or made a bundle chasing the “next hot stock” in the penny stock world. With all of the interest, what is the fear, or fascination, with penny stocks?

A Definition of Penny Stocks

The best definition for penny stocks in the stock market comes from the Securities and Exchange Commission. According to the SEC, the term “penny stock” generally refers to low-priced (below $5), speculative securities of very small companies. To quote the SEC: “Penny stocks generally have market caps under $500M and are considered extremely speculative, particularly those that trade on low volumes over the counter. The Securities and Exchange Commission goes on to warn that, “Penny stocks may trade infrequently, which means that it may be difficult to sell penny stock shares once you own them. Because it may be difficult to find quotations for certain penny stocks, they may be impossible to accurately price. Investors in these stocks should be prepared for the possibility that they may lose their whole investment.” This is not, nor ever will be, something a senior citizen wants to do with there retirement investing nor an investment for the causal investor.

Now you can see the fear factor but what is the attraction that can even draw in successful traders? For many people, penny stocks are Las Vegas, the lottery and the pot of gold at the end of the rainbow all rolled into one. For every average guy (or girl) that can’t buy Google stock at $500 or more per share, there are millions that can buy 5,000 shares of MEW Industries at $0.15 per share. Is MEW Industries going to make money? What do they make? Will they even still be in business tomorrow? Like plunking $3 into a slot machine or buying that lottery ticket with all of your favorite numbers, penny stocks give everyone the chance to make it big. The opportunity to turn your 5,000 shares of MEW Industries from a $0.15 stock to a $100 is just to appealing to most people as finding their way to the nearest casino.

The Risks Of Penny Stocks

Quite simply, the ultimate risk with penny stocks is that you can lose your entire investment; that statement right there should wake you up a bit! The risk to reward ratio for these stocks shows that while the possibility of great reward is there, the risk is very great as well. Lack of information to perform technical analysis, financial instability of the companies and scam artists all make penny stocks a virtual minefield of investing. Remember that after its fall from grace, WorldCom actually traded as a penny stock for a while and people actually bought it! In addition, using tricks like the “pump and dump,” unscrupulous traders with try to falsely lure investors with promises of a tremendous growth in a stock at which time they dump their shares for a large profit and leave the other investors holding the bag.

The key to investing in penny stocks

If you want to take a shot at it investing in penny stocks, caution has to be your rule.  First, don’t invest more than you can comfortably afford to lose and that doesn’t mean emptying your account with your broker! Select a reasonable amount as your risk premium. Second, make sure your trading plan is up to date and reflects the dangers of this type of investing.  Finally, learn before you invest! This is always true but more so when you are dealing with a marginal form of investing. Find companies that you can actually research and you will do much better.


Penny stocks are not for everyone. As appealing as they might be, the risks involved require that an investor dig into the data to protect him or herself from the associated stock volatility. So do your research, chart your targets, rub your lucky rabbit’s foot and proceed with caution!  Penny stocks can take you on a very exciting ride!

Picking Stocks For Tomorrow Using Japanese Candlesticks Today

When picking stocks, your energy and time are better spent not worrying about the big ones that got away. Instead, the best investment advice I can give you is to use these two important personal commodities to find tomorrow’s winning stock picks.

If you are looking for individual sectors or stocks as investment options, start by thinking about what people are going to need more of in the near future and try picking stocks of companies that are leaders or trying to become leaders in those areas.

Some investors don’t want to mess with their portfolios and just want to try a small short-term gamble on something. This is perfectly OK, and probably prudent. The important thing is to know the difference between long term investing and short term investing because your stock picking goals with the two will probably be different.

A short-term speculative play with a loss of 10% might be too much of a loss because the idea of these plays is to get in and out very quickly because of stock volatility. And if you take hits of 30% to 40%, it won’t be long before your speculative capital is gone. Your long-term investments could probably survive a 20% drop in value if you are holding them for over 10 years.

Today is the time to think about the next big market downtrend because successful traders know it has to hit sooner or later. Some of the big name growth stocks may seem too high today, but for whatever reason, if they begin to head lower you should start to consider at what price level you would enter them and commit to buying them.
And remember that some people cannot make investment decisions because they think they can never do enough fundamental and technical analysis research in order to be confident about picking stocks. Face reality, we can never be absolutely sure of our stock picks because all of our investments involve some element of chance, greed and fear.

As long as you don’t put your entire stock trading plan in jeopardy, you may want to occasionally try picking stocks based on one of your hunches. Many times your instincts are right and when they are not, you can use this knowledge to learn how to invest better and make wiser stock picking decisions in the future.

Trading Stock Options

Trading stock options is very different from trading stocks. The main difference is that stocks give investors a small piece of ownership in the company, and options are contracts that give investors the right to buy stock or sell stock at a specific price by a specific date. When trading options, there are always two sides for every transaction that take place, including the buyer and the seller. This means that for every call or put option that is purchased, there is always another person selling it. When trading stock options, there are three choices for each investor. The investors can trade options, exercise the options and buy or sell the underlying security, or investors can use options as a hedge against a loss.

This article discusses how to do all of the above. First, when trading stock options the investor must understand that there are two pieces of information to take into consideration. It is important to understand that the price of the underlying stock directly affects the price of the option, therefore moving it up or down. It is also important to understand that the amount of time remaining on the option affects the price, meaning that as time runs out, the option becomes less attractive. For many investors, trading stock options means never taking possession of the underlying security. It is important to note as well that supply and demand also affect the option price.

When exercising the option, this means that the investor can take possession of or sell stock at the fixed price of the option without regard for the current market price of the stock. The investor must be sure to exercise that option before it expires, when options trading. Lastly, trading stock options as a hedge, allows the investor to use options as insurance against a loss if the investor if worried about a stock price dropping.

The other option to hedging is to implement a stop-loss order with your broker so that you can sell the stock if it falls below a certain point. Trading stock options is seen by investors as a very risky way to make money. It can be tricky because even those stocks that seem to continue to rise very quickly can suddenly drop. That being said, there is always the possibility of total loss, when simply stock trading. The important lesson to learn is that you must educate yourself and know that you will lose from time to time. Many investors suggest that you should only plan to lose money that you can afford to lose.

They suggest that if you can lose only 20% of you account at a time when trading stock options, then you should use no more than 20% of your account on any single stock options trade. Like all types of investing you must proceed with caution if you are a beginner. Trading stock options is a very complicated form of investing and is one that you can lose your money in very quickly if you don’t know what you are doing. Good investing, The Candlestick Forum Team

Stock Market Investing Software Is Not Required with Candlestick Analysis

Stock market investing software is constantly searched for. Everybody wants a stock market investing software that will solve their investment problems. Unfortunately, there is not a stock market investing software that will solve investment problems. Candlestick signals provide the information needed for extracting consistent profits out of the markets. If you learn how to use candlestick signals effectively, you will not need to depend on any stock market investing software ever again. The information conveyed in candlestick signals allows an investor to evaluate all markets and all market conditions. Most stock market investing software works well in specific market conditions but not in others.

Analyzing what the signals reveal creates a foundation for understanding what market trends are doing at any given time. Having the ability to mentally anticipate what the signals are revealing for the future is a much stronger investment format than depending on stock market investing software. The candlestick signals revealed in the Dow, in this recent market trend, has allowed investors to partake in some very strong stock moves. Having the ability to anticipate what should occur after a candlestick signal, produces opportunities to take profits at the best times or to continue holding a position when a confirmation signal does not occur. Evaluating what to do based upon the candlestick signals is  the application of common sense. What should occur after a candlestick reversal signal? Knowing that information permits an investor to close out a trade or not close out a trade, whichever is indicated after the signal occurs.

Analyzing the patterns and the potential targets that a price should produce becomes much more accurate when utilizing the signals. What should occur in an uptrend when an overbought condition reveals a candlestick sell signal? Confirmation of the sellers taking over. What should be construed if there is no selling confirmation? That the trend is still in existence. Using some very simple techniques in candlestick analysis keeps an investor from closing out a position too early. Non-confirmation of a candlestick signal reveals as much important information as confirmation of that signal. If you learn the 12 major signals, and what should occur upon seeing those signals, then an investor’s investment abilities become dramatically enhanced. Click here for the 12 major signals package now available in quick download.

When to take profits – One of the huge benefits provided by candlestick signals is illustrating very simple stop loss techniques. These stop loss techniques can help an investor take profits at the logical areas. One of the biggest problems for most investors is knowing when it is time to sell. The candlestick signals allow for some simple stop loss techniques. As illustrated in the ERS chart, the price had moved dramatically over the past few months. When would be time to sell? The same question is asked when a stock price is heading straight down. When is it time to buy?  The same rationale is applied for either question.

One simple technique can be applied to an uptrending stock. When does the exuberant buying appear in a stock price? When you get near the top. What illustrates the exuberant buying is coming in? Witnessing gap up in price in the overbought conditions. One simple stop loss technique when seeing a gap up in price in an overbought condition is to put your stop at levels that would indicate a high probability that a candlestick sell signal could form. For example, if  price gaps up in the overbought area and continues to go higher, put your stop loss at the open price. If it gaps up in price and immediately starts selling off, put your stop loss at the previous day’s close. The rationale for these levels would be that if the price came back down through those levels, there is a high probability that a candlestick sell signal can occur. Even if the price came down through those levels and then went back up, the probability of a doji or a hanging man signal could occur.

Best Investment Advice

When reading articles on trading websites and in an occasional investment newsletter, you see it over and over. Subscribers are looking for that one “fantasy” stock pick that will make a $500 investment turn into enough money to make them wealthy. Others say they have a fool poof investing system, except that when you test it for yourself, you find that it only works in a bullish market. And why aren’t there as many day trading/investing systems around now as in the late 1990’s?

What is rare though, are investors who actually have an investment plan based on solid stock investing concepts. A precise set of rules telling them when they should buy, how long they should hold, and where to place their stop loss. This is what separates the successful investors from the rest. How much should an investment strategy like this cost? Only a few minutes of your time!

It’s not difficult to let your emotions get in the way of your stock market investing strategy. Happiness results when our research pays off with a profit, and sadness and frustration occur when we go against our own logic and place that sell order. We’ve all been there. Unfortunately, we’ve done that quite a bit. It’s important to remember that the best investment strategy is to preserve capital. It makes sense when you read it, but how many times have you watched a minimal loss turn into a much more significant loss just because your instinct told you it would move higher?

And how many times did you turn the loss incurred above into an even greater loss? A 50% loss means you have to acquire a 100% gain just to break even. While the world of penny stock investing supplies opportunities, few of them will give you a 100%. With medium to large cap investing, it takes a lengthy period of time with a successful company to get that 100% return. Stop turning your small losses into larger ones by not adhering to your stock trading plan. What should you include in your best investment plan?

1. Starting capital. It’s important to become familiar with how much money you are putting at risk on a typical day. It’s a possibility that you could invest in a business, and find out later that day that its shares are being delisted. Just because you invest a few thousand dollars at the beginning of the day, doesn’t mean you will have the equivalent sum at the end of the day. Set limits based on an amount you are comfortable with. Preserve capital.

2. How much money are you prepared to lose per trade? Successful investors ask themselves this before they invest. For example, if $1000 is an acceptable amount for you to lose today, it becomes easier to determine where your stop loss should be.

3. Where is your stop loss? Are you setting your stop loss based on share price? Are you setting your stop loss based on the total amount you are prepared to lose today? Are you setting your stop loss based on a percentage of the trade or a percentage of your trading capital? Do you have a plan for a trailing stop loss?

4. Entries – at what point do you enter a trade? Is it based on a price? Do you try to time the bottom of a trend? Are you placing a buy stop to take advantage of momentum? Did you hear exciting news about a particular company this morning? Did you find something of interest in one of your stock market newsletters?

5. Did you sleep well last night? If you’re having a lousy day and wished you would never have gotten out of bed? Don’t starting trading in a bad mood and lose all of yesterday’s gains!

Small Cap Stocks – Are The Rewards Worth The Risks?

For anyone that remembers the old days of television cartoons, the image flashed through your mind when you read the title. Wile E. Coyote is running along, looking for his supper, when he is blown off the road by the speedy Road Runner. It is hard to imagine turning that analogy into a discussion of the stock market, but that’s exactly what we are going to do.

Small-capitalization companies, also known as small-cap stocks, are the stock market’s version of the Road Runner. While there are small-cap stocks that are in stock sectors that make them slower than large-caps, these companies generally are the ones that usually make Wall Street news for their explosive earnings that create double-digit returns for their investors.

Where are the little guys and are they big spenders?

There are several market indexes that track small-cap stocks, most notably the Russell 2000 and the Standard & Poor’s 600. While you can search for small-cap stocks on these indexes, the general rule is that a company is considered a small-cap stock if its market value is below $1 billion.

As a rule, small-cap stocks represent companies with similarly small revenues. Typically these are companies that are just starting out or they are in a position to expand their markets. For example, in 2004 the hamburger restaurant Red Robin experienced a 100% increase in both its stock price and its market value, the latter climbing to $780 million. Because it was small, the company was able to grow much faster than its large-cap cousin, McDonalds, which “only” saw a 27% increase. It remains to be seen what Red Robin will do in the future, but performance like their 2004 results would be an incredible asset to your stock portfolio.

Are small-cap stocks worth the pain?

Now we will have a quick stock market lesson; one of the basic stock investing concepts is that where there is great reward, there will likely be great risk accompanying it. This is true of small-cap stocks. The companies can rapidly climb the ladder of success but they can also fall off of it and take the investor with them. Small-cap stocks experience much more stock volatility than their large-cap cousins and because of this, they are far more risky.
In addition, small-cap stocks tend to suffer more during economic hard times than large or mid-caps because as investors sense a downturn in the market, they tend to rely on the blue-chips, or large-caps, to weather the difficult times. This alone makes them less appealing to those who are long term investing.

And now for the good news!

There is a positive spin to the risk of small-cap stocks. Unless you are only looking for long-term investments, small-caps can be a valuable part of your portfolio diversification. While you should follow your trading plan and use a stock trading system like Japanese Candlesticks, if you add small-cap stocks as one portion of your portfolio, you can enjoy their rapid growth and profitability without losing everything on one bad investment.

In addition, young investors who have time to be more aggressive with their savings should find small-cap stocks to be an excellent way to increase the value of their portfolio. It is still important to emphasize the need for fundamental and technical analysis even in the early days of investing. Why lose a small fortune in the beginning when you don’t need to do it? With due diligence, everyone can benefit from out-running Wiley Coyote with small-cap stocks!

Exchange Traded Funds

Exchange traded funds offer a very wide range of investment opportunities and they represent the shares of ownership in either unit investment trusts or in depository receipts. Depository receipts hold the portfolios of common stocks that track the performance and the dividend yields of specific market indexes. Exchange traded funds, also known as ETFs, are like closed-end and open-end index mutual funds and they trade like stocks.  They provide the investor with the opportunity to buy and sell a selection of stocks in a single security, just like when selling or buying stocks per share. Exchange traded funds are actually traded on an exchange, such as the NYSE, instead of being directly purchased from the issuing company, like mutual funds.   Exchange traded funds offer a very easy way to diversify a small investment and they have many benefits over mutual fund investing.

Benefits of Exchange Traded Funds vs. Mutual Funds

  • There is no minimum investment other than the market price of one share for ETFs.  Mutual funds often have a minimum of investment of $2,500 making portfolio diversification difficult for new investors.
  • Exchange traded funds typically have lower fees than traditional mutual funds. There is no redemption fee required at liquidation and the commission charged to buy or sell stock is similar to that of a stock trade.  Index funds are also no-load and are commission free.
  • Tax efficient.  The structure of exchange traded funds gives the investor a tax advantage over mutual funds.  Since they are traded on an exchange, the ETF investor sells to other investors and there is no underlying security that is sold. There are also no capital gains that are distributed.  Mutual funds however, must sell underlying securities upon redemption, and the capital gains are distributed to the owners of the funds.  This can result in taxable gains and losses that are passed on to the investor when investing in mutual funds.
  • Faster liquidation of a position for exchange traded funds.  They also allow the ability to set a limit order allowing for flexibly trading that a mutual fund could not offer. They can also be more liquid that the individual shares that they hold and more specifically for an ETF that holds small cap stocks that are thinly traded, or bonds other than U.S. Treasuries.
  • Pricing. The purchase and selling of exchange traded funds happen at market prices instead of end-of-day net asset value, used by mutual funds. They can be continuously priced throughout the day allowing the investor to react to open market conditions on an intraday basis. As result an ETF can be purchased at a premium or at a discount to the value of the underlying assets

Exchange traded funds provide small investors with more choices and they also force the investor to conduct more research on markets that they previously had no experience in. They also enable those individuals who are working to build a strong portfolio through diversification, to invest smaller amounts of money at first.  If you are interested in ETFs continue to do research and learn about the ins and outs of investing in these types of funds.

Mutual Funds

Mutual funds are companies that pool money from many investors and invest the money in stocks, bonds, short-term money-market instruments, into other assets or securities, or a combination of each of these investments. They have a fund manager who is responsible for investing the pooled money into specific securities, and they provide the ability for investors to purchase stocks and bonds with much lower trading costs than if they tried to do it on their own. When you are investing in mutual funds, you are buying shares and you become a shareholder.
Investing in this type of fund provides many advantages over stock investing. These advantages are explained below.


This is the number one advantage and allows investors to purchase a large number of stocks. Mutual fund investing provides you with portfolio diversification and it greatly reduces your risk.


The investor is able to receive money produced from this type of investment in a relatively short period of time. Income generated from stocks and bonds can be difficult to obtain and CD’s offer no liquidity at all.


Small amounts of money can be invested at no trading cost.  Investors can also invest at regular intervals and receive the same manager, access and investment, as the wealthy stock brokers since mutual funds are non-discriminatory.

Professional Management

With this type of fund you hire a professional manager who researches and trades the market on a regular basis. They are fairly inexpensive and they usually have a support staff devoted to them as well.
While there are many advantages, there are also disadvantages as well.  A few disadvantages are explained below.

In the Dark

Investors have a hard time finding out the exact make-up of a fund’s portfolio at any given time. They also cannot influence which securities the fund manager buys and sells or the timing of the trades.

Guaranteed Costs

While there are typically no trading costs, investors must still play sales charges, annual fees, and other expenses despite the performance of the fund. They may also have to pay taxes on any capital gains received even if the fund did not perform well.

Uncertainty in Price

Unlike investing in stocks where you can get real-time pricing information, mutual funds only calculate their NAV (net asset value per share) once a day and this typically takes place after the stock exchange closes. The fund unfortunately may not be calculated until many hours after you have placed your order.

Obviously there is much more information that you should know before you begin to invest in mutual funds. The advantages far out way the disadvantages and almost every successful investor will tell you that you need to invest in mutual funds in order to build a strong portfolio. You may also want to learn about topics such as asset allocation, hedge fund investing, and stock charting. These are additional investing concepts that may be of interest to you as well. Happy investing and good luck!