Stock Market

Trading Stocks General Information and Terms Used in Stock Trading by Tom Willett

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Terms

Price Earnings Ratio The ratio of the cost of one share of stock divided by the earnings per share for the past year. If a stock costs $100 per share and it has earned $5 per share in the previous year, the P/E ratio is 20. The lower the P/E the better, usually.
Yield If a stock pays a dividend it has a yield. If a stock is priced at $20 and it gave a dividend that is equal to $1 over one year, the yield is expressed as a percentage; 5%. It is usually given each quarter so to have a $1 dividend in a year it would be 25 cents per quarter for each share you own on a $20 stock.(Keep in mind the stock might pay a dividend but still the stock price could go up or down. If some stock pays a 20% dividend in a year but the stock price goes down 20% you would not make any money by selling. You would lose money on the sale which you could deduct from your capital gains, but you would still pay taxes on your dividend.
Puts and Calls and Options Do not trade puts and calls if you do not know what they are. If you know what they are do not trade puts and calls. It is possible to make a lot of money if you are right with your puts and calls. If you are wrong you lose all your investment and if you are trading on margin you can lose more than you invest. Don't attend seminars where someone is going to explain trading where you make money whether the market goes up or down. It is possible to do that but it is like having a seminar that will teach you how to play golf like Tiger Woods. They can teach you, but you still won't be able to do it.
A Lot Usually stocks are considered to be a lot if you buy 100 shares. 200 shares is 2 lots, etc.
Dow 30 Most stock market reports are related to the "Dow 30." That is a group of stocks which is considered to represent the American corporate situation. If the Dow is up, then the American economy is supposed to be good. Some of the 30 stocks are McDonald's, General Motors, Microsoft and Intel. The stock that has been on the 30 longest is General Electric. The stocks are changed every two or three years when a few stocks are taken off and some are added. There is a method used to reach the number that represents the "Dow," but it is too complex for me to worry about. I prefer to look at The Wilshire 5000 or The S&P 500 to determine how the economy is doing. Another market to watch is NASDAQ which is heavily weighted with tech stocks, and The American Exchange. Your own portfolio will be your best way to judge how your economy is going.
Day Trading If you sit in front of your computer and you don't mind working at it, it is possible to make a lot, or lose a lot of money fast by "day trading." Some stocks, especially low cost $1 to $5 stocks have big fluctuations in their price when certain things are happening. If something might make oil prices go down, airline stocks will go up because of the potential for lower fuel costs. If a computer convention is beginning in Las Vegas on Monday, it might be wise to day trade Intel and Microsoft on Friday because they might make a major announcement when the convention begins. To day trade you buy a stock at say, $2 a share. You buy 5000 shares. The trade costs $18 in and $18 out approximately, so you have to make over $36 to break even. You watch (in real time) the price. You sell if the stock goes to 2 and one quarter. Maybe you sell at 2 and one eighth. If you sell at 2 and one eighth you sell 5000 shares for a total of $10,625 and you deduct $36 for the commission. Your profit is $589. You risked $10,000. Some day traders, perhaps most, trade options on stocks to gain "leverage." Leverage can make you lose all your money much faster. If the price had gone down you would sell at a loss to get out before the day was over. Day traders usually do not hold stocks overnight. Most day traders lose most of their investment. Also they do not have fun because it becomes a job for them. Some do get rich.
Analyst's Ratings Some Wall Street firms give ratings on different stocks. Usually they give a Buy, Sell, Hold, Add, Market Perform, Market Underperform and Pick rating. Ignore them. By the time you hear the rating it is too late. The stock has moved. I usually will buy a stock if it has been downgraded much faster than if it has been recommended. The analysts are that wrong. Good place here to mention the "Dead Cat Bounce." If a stock has been downgraded and has a terrible day, it is likely to go up a little the next day just because people overreacted. That is called a "Dead Cat Bounce."
Dogs Of The DowThe "dogs" are the Dow 30 stocks that pay the highest dividend. That usually happens when a share price drops during a bad year and the dividend becomes a greater percentage of the share price. That means it is still paying the same dividend amount, but the price of each share has gone down. Supposedly, if you buy the 3 Dow Dogs at the end of each year and sell them one year later and again buy the new Dow Dogs, you will profit. It usually works but not always. It is worth checking each Dow Dog any time of the year to see if it looks like a recovery possibility.