Trading Tips

As tempting as it is to just dive into trading, it’s important to know a few things first. Knowing these “rules of the game” ensure you’re going in with sufficient knowledge to profit more often than you lose on a trade.

With just three simple numbers, however, you can get most of the knowledge you need to know if a trade is worth making or not.

If you’re trading on a fundamental basis, for instance, you should look at a company’s PE ratio. That’s a simple calculation of showing a company’s current price, divided by its last 12 months of earnings. 

While PE ratios can vary across companies and industries, it can give a quick “gut check” to determine if there’s a value worth buying or not. You can also compare the PE ratio to the stock market as a whole.

That’s a valuation-based trade. Traders looking for faster profits or to make more leveraged options trades have other numbers that can give them a better idea of where a stock is heading in the short-term. 

A company’s relative strength index, or RSI, is a great tool there. The RSI can tell a trader if a stock is going up or down, and whether other traders are continuing to buy or not. With an RSI, you can also get a quick gauge as to whether a company is overbought or oversold—making for a quick indicator of when to get out of a winning trade before it becomes a loser.

Finally, swing traders can find opportunities looking at companies making new 52-week highs or lows. Value investors can focus on the lows, and momentum investors can make trades on companies making new highs on the logic that the trend will continue.

Combining these numbers, as well as some of the more complex numbers the market throws your way.

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While most investors think of the potential returns possible, they do so at the danger of overlooking the flip side to the equation: Risk. All investments have risks. It may be the risk of a bond losing value over time due to inflation. It may be the risk of owning a company that goes bankrupt. 

Risks can vary, and knowing how to manage those risks is critical.

While financial analysts think they can plug some numbers into Excel and know a company’s expected risk—usually by referring to an asset’s volatility, or “beta” in Wall Street lingo, risk is a more nebulous concept than what can be captured by numbers alone. 

An investment that has low volatility only has that when looking at past data. Many companies with slow movements during a bull market may get swept up in the fear of a bear market—as was the case with slow-moving companies in bland, boring businesses in 2007 and 2008. There’s a reason why an investment prospectus will often state (in the smallest font possible) that past returns are no expectation of future returns—yet many investors think they are.

Most investors starting out have a bigger risk, however. They tend to misread position sizes in their portfolio. While buying what’s called a “round lot” of 100 shares may make some sense, with many higher-priced shares of companies, it may end up creating a lopsided portfolio that’s a poor fit for the market’s natural gyrations. Worse, it may mean putting more money into a poorer-performing position while smaller portfolio holdings have better percentage returns.

Risk management is at the core of investing. There are many ways to look at it, but understanding how a position may perform during an extreme event, no matter how unlikely it seems, and keeping portfolio positions reasonable, can do much to take some of the biggest investment risks off the table.

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The stock market can do a lot of things efficiently. It can digest news about a company’s performance in seconds, for instance.

But it also picks up on the fear or greed of traders. If traders think a company is going bankrupt, they won’t wait to sell, and shares may end up going bankrupt as a result of a self-fulfilling prophecy.
 
Likewise, a lot of high-tech companies that went public in 2019 fizzled after their IPO as more investors were able to weigh in on their high valuation relative to the money (if any) that these companies were likely to make.

While the market throws out a lot of data about the economy and companies in particular, no number can truly give an idea as to whether the market is pricing in fear—sending prices generally higher than they should be—or greed, where prices are lower than they should be. That’s where judgement comes in, and a willingness to think about the market logically.

Investors who can ignore their own emotions, and even act against them, buying during periods of fear when others don’t want to buy, and selling when everyone looks at the recent rally as just a starting point for future profits, will do better over time by taking advantage of that one trend.

Traders who follow this strategy are more likely to buy bargains, giving them an edge and margin of safety on their trades. These traders are also likely to sell into the frenzy, getting out with a great profit and leaving a little bit of upside left for traders right before the top of a trade.

It’s a far cry from many traders who buy something that’s going up simply because it’s going up—or traders who buy more of something going down in the hopes that it will recover soon.

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7 High Yield Dividend Stocks: 

How Stocks Are the Best Game in Town For Income

When most people think of the stock market, they think of big price swings 

that can make—or lose—a fortune quickly.

While that’s certainly a component to it, smart investors know that price 

moves higher, or capital gains, are just part of the investment equation.

In fact, capital gains are only about half the market’s performance in your 

portfolio over time.

The other half? Income.

The stock market is a place to buy and sell fractions of businesses. Some are 

great, some aren’t. But the successful ones usually like to ensure that their 

owners, the shareholders, receive some of the profits along the way.

That usually comes in the form of a cash payment called a dividend. Most 

companies that pay them do so quarterly, although some do so as little as 

annually, but some do so as often as monthly. There’s a wide variety. 

Best of all, studies have shown that, over the course of an investment 

lifetime, dividend income from your holdings, reinvested into your portfolio, 

can generate as much as half of your portfolio’s total. And, of course, once 

you get into retirement and need a steady stream of income, that cash can 

be diverted away from reinvesting and into your pocket. 

Dividend-paying stocks tend to be steadier and less volatile than smaller, 

faster-growing companies... but they’re also likely to stick around, reducing 

the risk of a big loss. But combine all those factors together when thinking 

about a lifetime of investing, and it’s clear that a focus on dividend-paying 

companies alone in your portfolio will lead to better overall investment 

results.

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What Investment Beginners 

Really

 Need to Know About Investing

There’s a lot of excitement around investing—and rightly so. It’s possible to 

build a fortune. But it’s also possible to lose your shirt. 

If you’re just getting started—or if you’ve tried to start in the past and can’t 

seem to get any momentum going—investing can seem intimidating at first.

There’s a lot that goes into it besides your money, after all. Investing also 

carries with it all the hopes and dreams, and also the fears that you may 

have.

That’s why one of the most important things to do when starting to invest is 

to actually start. Put some money to work in a company you like, even if you 

only have a few hundred dollars. Once you’ve made that commitment, rather

than waiting to build up a cash balance of some arbitrary amount like 

$1,000, you’re in the game.

Once that happens, you’re able to see for yourself what works and what 

doesn’t work in investing in a way that no article or video can show you with 

your money truly at work. 

And, by starting small, you’ll learn from your mistakes with smaller amounts 

of money at risk. Investors who start by putting a large amount of their net 

worth into one stock are taking on a huge risk, but by starting small, the 

invariable losses in investing will show you what went wrong with your 

investment ideas without permanently holding you back.

Finally, many small investors don’t use leverage correctly. While riskier, there

are ways to use leverage to improve your portfolio returns without increasing

the amount of risk involved. Instead of buying 100 shares, for instance, you 

could buy one call option. 

Sure, maybe for the same money as 100 shares, you could afford 10 call 

options, but knowing when to substitute options for shares—rather than 

putting as much as possible into a leveraged trade—can make a huge 

difference to your investment success.

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Trading Tips Offici

Trading isn’t for everyone. Most active investors fail to beat the market’s 

average return. That’s because they make a lot of mistakes. While that’s an 

inevitable part of investing, failing to learn from those mistakes and build on 

successes can end up costing traders even more.

One of the most important things a trader can do is think about risk. After all,

every investment has a tradeoff between a risk and a reward, and most folks 

start by seeing the big dollar signs that represent a fat reward. 

But when you’re just thinking about the potential upside, you may be blinded

to the dangers that lie in a potential investment. Avoiding as many losing 

investments as possible is a great way to ensure your long-term success in 

the trading world.

Second, most investors don’t know how to set appropriate limits. They may 

load up their portfolio heavily with incredibly risky companies, without 

balancing out smaller trades. Or they may have just two or three stocks in 

their portfolio when they should be trading with more on a regular basis to 

ensure any single position doesn’t blow up the portfolio.

Finally, most investors fail because they get impatient. The market moves on

its own time, and if you’re expecting to buy on Monday and profit by Friday, 

you’ll often be disappointed. But if you think a move is coming in a stock, 

you want to give yourself enough time for that move to play out. That’s the 

way astute investors play the market to win, time and time again.

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Study after study on the market indicates that investors in smaller companies often get a return premium over time.

There’s some common-sense explanation behind that superior return. Bigger, more established companies may get all the attention in the market, and investors may have already paid up to own a big, established, blue-chip name. But smaller companies that could become the next great blue-chip firm still remain off-the-radar, and consequently far cheaper than they have any right to be.

But there’s another way smaller investors tend to profit in excess of investors in larger companies. Through a process called industry consolidation, over time the number of companies that are needed to serve an industry will naturally shrink. Unprofitable companies will go by the wayside, and small profitable companies will be bought out at a premium to bigger companies looking to grow quickly.

This process plays out with varying speeds in various industries. Today, there are only three major automakers in the United States, and a few small players. But there used to be hundreds of automotive companies when the industry was starting out and growing at a rapid pace.

The trend is playing out well in the financial space. 35 years ago, there were nearly 14,000 different bank companies. Today, there are around 4,000. In the next 35 years, if this rate of consolidation holds, there will be a few hundred.

Investors looking for smaller banks can find better valuations than some of the larger, more established players. And they can find companies that are looking to grow by acquiring competitors. It’s a win-win situation, if you know what metrics to look for.

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If you just follow the stock market, you may have missed the biggest financial news in years. That news is the rise of negative interest rates—or bonds that pay investors less in total than what it costs them to invest.

In the past, you may have bought a bond with a par value of $100 for, well, $100. And after receiving interest, you’d get back your $100 value, ensuring a total positive return. Negative yields occur when bond prices are so high that, even after all interest payments are made, you don’t get back $100 for every $100 you put in.

The rise of these negative-yielding bonds is underway, and could spread to other places besides some government debt markets they’re in now. If that’s the case, then the bond market could give investors some great returns over the next few years as bonds priced at $100 and required to pay back $100 may go to a price of $110 or higher!

Of course, negative yielding bonds go against everything we know about finance and capital formation. It’s uncharted territory, and when bond yields are negative, investments with no yield, like precious metals, start to look attractive. That may be part of the reason for gold’s strong performance so far this year.

Finally, in a negative-yield world, any stock that pays a dividend can produce a positive yield and return over time. This push for lower bond yields may entice investors away from bonds and into the stock market—and give stocks the mother of all rallies!

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Hurricane season is in full swing this time of year, and once again the east coast is in the crosshairs.

It’s something that’s happened before, and will happen again. While the unpredictable weather can sometimes cause billions of dollars in damages in a few short days, astute traders can take advantage of these developments to make an extra profit from it as well—as long as they’ve planned ahead carefully and are prepared.

For instance, it’s easy to see long lines at gas stations and grocery stores ahead of storms. And companies that sell electric generators, storm shutters, and other supplies tend to likewise see their shares advance more than the general stock market ahead of a big storm.

And companies with risk exposure to an affected area, like a home insurance company, will see its shares drop. How far that happens depends on the likely impact and the value of all the properties in the area. But markets tend to price it in quickly.

Investors looking for a short trade during hurricane season should buy put options on certain insurers as soon as it looks like a storm may hit—chances are it will drop substantially. However, shares will rally somewhat after a storm when the damage assessment is done.

Adding some of these trades to your portfolio during a storm will give you some small, but predictable gains. And with the use of the options market, you can leverage those gains for the best results. Understanding what moves—and when—during a pending disaster can give you an investment edge and a trading strategy that comes up during the summer months.

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Hindsight is 2020. While it’s easy to look back on a great trade that you passed up, investors make a much more common mistake.

They tend to use recent trends and extrapolate them out forever.

The problem with that strategy is that investment looks like the best opportunity after it’s already had a great run. Early investors already made their money. And no company can always be on the growth path. There will be times to change course and even restructure, sell, or close a business.

Investing is about looking forward. While looking at recent financial data can give some clues about likely near-term performance, it doesn’t tell you anything about how the market will value a company in the future.

For instance, in the 1990’s, tobacco stocks were facing billions of dollars in litigation over the health problems caused by cigarettes. After agreeing to one of the largest fines in history, the sector was able to retrench and head higher.

For starters, the government outlawed advertising by the industry—saving the big tobacco companies billions of dollars that could go back to shareholders. And secondly, the government taxed cigarettes just high enough to collect revenues while being just low enough to discourage folks from quitting.

But in the early 1990’s, that outcome was far from certain, and investors using a rear-view mirror approach wouldn’t have found the big opportunity there.

Many of today’s attractive companies will go out of favor. Or we’ll learn that they weren’t all they were cracked up to be in terms of sales or profits. Likewise, many companies out of favor today may post surprisingly good returns in the future now that current expectations are so low.

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