When you are interested in investing in the stock market one of the first things you will need is a reliable and affordable stockbroker.
At one point in time, a stockbroker was seen as a very high priced person that was extremely hard to understand. In today’s world, stockbrokers have become much different, they have begun to make their services cheaper to obtain and in such a way that is easier to understand. This is an extremely wonderful change for the simple reason that you will not be able to trade in any way, shape, or form without a stockbroker.
One of the major rules within the stock market is that no person is allowed to trade within the stock market unless they are a certified stockbroker. A stockbroker, within the United Kingdom twelve million investor’s trade in the stock market, performs every trade that occurs and each one has enlisted the services of a stockbroker.
So you are probably now wondering, what exactly can a stockbroker do for me?
There is a wide range of abilities and services that any stockbroker can offer you, at the same time there are also various ranges of fees that will be collected from them. Typically, a stockbroker will charge a commission, a set fee, or some combination of the two. In regards to the services a stockbroker can offer you, there are three basic levels that include only execution, portfolio management, and advice.
When a stockbroker only deals with the selling and buying of particular shares, per the instructions you give them, this is generally called execution only or in softer terms dealing only. With this type of service, they do not offer you any type of advice on any action you want perform. Typically, investors that are experienced or novice in investing will use this type of service. Execution only is cheaper and extremely efficient the fees the stockbroker charges can range anywhere between £20 to hundreds of pounds, this will depend on the specific stockbroker you choose.
Portfolio management is extremely detailed and the most expensive type of service performed and dealing with advice is typically a little more expensive than execution only, because the stockbroker will offer advice and views on what is happening within the stock market. The stockbroker at this level of service will also take the time to explain anything you may not understand very well.
Within the portfolio management service, you can separate these into two other categories these are advisory and discretionary. When under the advisory category, the stockbroker will create a proposal of a portfolio for you; however, he or she will not take any action without express permission from you. Within the discretionary category, your stockbroker will completely run all aspects of your portfolio and will give you reports as needs on how the portfolio is working.
In this day and age, a lot of things have changed from how they used to be, which can be new and exciting for most.
Because of the large size of the stock market, beginner investors appear to feel overwhelmed as to where to even activate investing their money. To most people, the stock market presents a messy web of options but does not reveal the highway map of clarity to guide their way along way in their investment adventure. The key to investing in the stock market is to become as educated as it is possible so that you know exactly what is taking place at all times. This helps people to make plausible and sound decisions about their money, thus, dropping the stress involved with investing.
The usual person, when beginning to entertain the idea of investing in the stock market, falls into one of two categories. Class one is the gambler who feels that investing is definitely a form of betting and no question what they do, they are certain that they will drop money slightly than make money. It seems that this opinion of investing in stocks is either formed from friends and family that have been baffled by the stock market or private experience and lost money. If someone has personally made losses in the stock market, it is pretty evident that they were not educated enough at the time of their investment in the stock market. Therefore, they must become educated as to what exactly the stock market is as well as how its system works in order to become a successful investor. Class two, on the other hand, represents the “go-getter” investor, which is an individual who knows that they should invest into the stock market for the safety of their monetary future, but they have absolutely no idea where to begin. The “go-getters” lean towards avoiding their monetary decisions and leave it up to professionals; therefore, they are powerless to justify why they own a certain stock. A usual “go-getter” operates in blind faith, as one stock goes up in value, they more than likely will hold it. The “go-getter” is in poorer shape than the gambler in that they will invest like everyone else and then wonder why they receive an unsatisfactory or devastating outcome. This just proves that the typical person should become thoroughly educated about the stock market as well as stocks before investment takes place.
Essential to every economy is business…businesses that started out as small operations that have grown to become money making giants, raising capital by promoting stock in them to people who want to invest to make their futures financially secure. As small businesses start to grow, one of the supreme obstacles is generating enough money in order to develop into a superior operation. Businesses either scrounge the money in the form of a offer from a bank or venture capitalist, or someone that will invest money into a business in which they feel they will receive a high rate of return, or a reap from their investment into a business, in order to create the currency to expand. The most common choice for a business to gain money for the view of expansion is to take out a loan; however, there is no agreement that a bank will offer money to any given business.
What we have explored up to now is the most important information you need to know. Now, let’s dig a little deeper.
In this case, business owners roam to the stock market for help in the form of issuing stocks. Firm owners relinquish a tiny fraction of control over their business and in reciprocation; the stock market provides that business money that does not have to be salaried back, in order to guarantee expansion. As an added bonus, the business is permitted to “go public,” a saying that means a brand is selling stocks for itself for the first time, so that business owners no longer are required to borrow money from banks because they can merely use their own stocks for getting monies to use for expansion. Thus, as the business grows and sells their stocks to people, the better chance a sponsor has on gaining a return on their investment as opposed to a loss.
As an investor, it is to your advantage to efficiently study each and every business in which you propose to hold stocks. The more facts you know about any certain business, the easier it is to make a plausible decision as to whether you should hold stocks or want a different business in which to work with.
A correction is a beautiful thing, simply the flip side of a rally, big or small. Theoretically, even technically I’m told, corrections adjust equity prices to their actual value or “support levels”. In reality, it’s much easier than that. Prices go down because of speculator reactions to expectations of news, speculator reactions to actual news, and investor profit taking. The two former “becauses” are more potent than ever before because there is more “self directed” money out there than ever before. And therein lies the core of correctional beauty! Mutual Fund unit holders rarely take profits but often take losses. Opportunities abound!
Here’s a list of ten things to do and/or to think about doing during corrections of any magnitude:
1. Your present Asset Allocation should have been tuned in to your goals and objectives.
Resist the urge to decrease your Equity allocation because you expect a further fall in stock prices. That would be an attempt to time the market, which is (rather obviously) impossible. Proper Asset Allocation has nothing to do with market expectations.
2. Take a look at the past.
There has never been a correction that has not proven to be a buying opportunity, so start collecting a diverse group of high quality, dividend paying, NYSE companies as they move lower in price. I start shopping at 20% below the 52-week high water mark, and the shelves are full.
3. Don’t hoard that “smart cash” you accumulated during the last rally, and don’t look back and get yourself agitated because you might buy some issues too soon.
There are no crystal balls, and no place for hindsight in an investment strategy.
4. Take a look at the future. Nope, you can’t tell when the rally will come or how long it will last.
If you are buying quality equities now (as you certainly could be) you will be able to love the rally even more than you did the last time… as you take yet another round of profits. Smiles broaden with each new realized gain, especially when most folk are still head scratchin’.
5. As (or if) the correction continues, buy more slowly as opposed to more quickly, and establish new positions incompletely.
Hope for a short and steep decline, but prepare for a long one. There’s more to Shop at The Gap than meets the eye.
6. Your understanding and use of the Smart Cash concept has proven the wisdom of The Investor’s Creed.
You should be out of cash while the market is still correcting. [It gets less and less scary each time.] As long your cash flow continues unabated, the change in market value is merely a perceptual issue.
7. Note that your Working Capital is still growing, in spite of falling prices, and examine your holdings for opportunities to average down on cost per share or to increase yield (on fixed income securities).
Examine both fundamentals and price, lean hard on your experience, and don’t force the issue.
8. Identify new buying opportunities using a consistent set of rules, rally or correction.
That way you will always know which of the two you are dealing with in spite of what the Wall Street propaganda mill spits out. Focus on value stocks; it’s just easier, as well as being less risky, and better for your peace of mind. Just think where you would be today had you heeded this advice years ago…
9. Examine your portfolio’s performance: with your asset allocation and investment objectives clearly in focus; in terms of market and interest rate cycles as opposed to calendar Quarters (never do that) and Years; and only with the use of the Working Capital Model, because it allows for your personal asset allocation.
Remember, there is really no single index number to use for comparison purposes with a properly designed value portfolio.
10. Finally, ask your broker/advisor why your portfolio has not yet surpassed the levels it boasted five years ago.
If it has, say thank you and continue with what you’ve been doing. This one is like golf, if you claim a better score than the reality, you’ll eventually lose money.
11. One more thought to consider. So long as everything is down, there is nothing to worry about.
Corrections (of all types) will vary in depth and duration, and both characteristics are clearly visible only in institutional grade rear view mirrors. The short and deep ones are most lovable (kind of like men, I’m told); the long and slow ones are more difficult to deal with. Most corrections are “45s” (August and September, ’05), and difficult to take advantage of with Mutual Funds. But amid all of this uncertainty, there is one indisputable fact: there has never been a correction that has not succumbed to the next rally… its more popular flip side. So smile through the hum drum Everydays of the correction, you just might meet Peggy Sue tomorrow.
If you have heard fund managers talk about the way they invest, you know a great many employ a top down approach. First, they decide how much of their portfolio to allocate to stocks and how much to allocate to bonds. At this point, they may also decide upon the relative mix of foreign and domestic securities. Next, they decide upon the industries to invest in. It is not until all these decisions have been made that they actually get down to analyzing any particular securities. If you think logically about this approach for but a moment, you will recognize how truly foolish it is.
A stock’s earnings yield is the inverse of its P/E ratio. So, a stock with a P/E ratio of 25 has an earnings yield of 4%, while a stock with a P/E ratio of 8 has an earnings yield of 12.5%. In this way, a low P/E stock is comparable to a high – yield bond.
Now, if these low P/E stocks had very unstable earnings or carried a great deal of debt, the spread between the long bond yield and the earnings yield of these stocks might be justified. However, many low P/E stocks actually have more stable earnings than their high multiple kin. Some do employ a great deal of debt. Still, within recent memory, one could find a stock with an earnings yield of 8 – 12%, a dividend yield of 3- 5%, and literally no debt, despite some of the lowest bond yields in half a century. This situation could only come about if investors shopped for their bonds without also considering stocks. This makes about as much sense as shopping for a van without also considering a car or truck.
All investments are ultimately cash to cash operations. As such, they should be judged by a single measure: the discounted value of their future cash flows. For this reason, a top down approach to investing is nonsensical. Starting your search by first deciding upon the form of security or the industry is like a general manager deciding upon a left handed or right handed pitcher before evaluating each individual player. In both cases, the choice is not merely hasty; it’s false. Even if pitching left handed is inherently more effective, the general manager is not comparing apples and oranges; he’s comparing pitchers. Whatever inherent advantage or disadvantage exists in a pitcher’s handedness can be reduced to an ultimate value (e.g., run value). For this reason, a pitcher’s handedness is merely one factor (among many) to be considered, not a binding choice to be made. The same is true of the form of security. It is neither more necessary nor more logical for an investor to prefer all bonds over all stocks (or all retailers over all banks) than it is for a general manager to prefer all lefties over all righties. You needn’t determine whether stocks or bonds are attractive; you need only determine whether a particular stock or bond is attractive. Likewise, you needn’t determine whether “the market” is undervalued or overvalued; you need only determine that a particular stock is undervalued. If you’re convinced it is, buy it – the market be damned!
Clearly, the most prudent approach to investing is to evaluate each individual security in relation to all others, and only to consider the form of security insofar as it affects each individual evaluation. A top down approach to investing is an unnecessary hindrance. Some very smart investors have imposed it upon themselves and overcome it; but, there is no need for you to do the same.
If you have always wanted to know more about this topic, then get ready because we have all the information you can handle.
Within the buy to cover orders, there are four options in which to place against your stock purchases. When you buy to cover on a stock order, you are in agreement that you will buy the stock at the latest share price; however, because there is a lag between the time you approve to buy the stock and the actual transaction, a price difference may occur. You could end up paying more than anticipated for each stock, or a considerably lesser amount per stock, which is what you are eager for. You can also buy to cover limit orders, which guarantees that you pay no more than the set limit price. However, if stock prices hold above the limit buy price, this type of buy to cover order will never be executed.
This type of transaction is mainly used by investors who want to get into a certain market. You may also want to buy, to cover stop orders in which case the stop orders become simple stock orders as soon as the value is at or above the stop price. This type of order is used to get you out of an unfavourable stock so that you will not have lost any profits. And, finally, you may want to buy to cover a limit order that converts to limit order only when the share value is at or above the stop price. You have to know each of the buy to cover orders so that you can make educated decisions about your investments.
From one decision period to the next in the stock market game, the markets can move up and down non-stop, which means that prices of shares are at a frequent changing point. You may think about purchasing a certain stock that is at $5 per share, and in the next day, the value per share has risen to $15 per share.
This is where the betting of the stock market comes into play. By erudition the advantages of the buy to cover orders, you can multiply your odds of earning money on the stock exchange rather than of losing money. The most obvious benefit to the entire buy to cover options is that they are in place to make you money, when executed properly. For example, you would not perform a stop loss on a stock that has steadily increased over a 5 month period. If you did this, you would force yourself to squander money to buy the stock in order to cover your mistake. You choose to buy 175 shares of stocks from Albertson’s, a grocery store chain, at $75 each, for an entire investment of $13,125. Over a four month period, you observe that the stocks have gained in profit, and you would like to do something to guarantee that you keep this earned profit. Not knowing better, you put a stop loss of $45 per stock without consulting with your stockbroker. From that position forward, if your stock decreases to $45 per stock, you have to sell it, and any earlier earned profit is null and void. The only chance you have in getting back that profit is if you are swift enough in the non-stop stock market game, to buy the Albertson’s stocks before somebody else does. However, even if you are able to do this, you have still suffered a great loss monetarily.
Educate yourself in the stock market game.
As with any game, there is some form of jeopardy involved, however, when you play the stock market game, you can avert a great deal of distress by simply taking the time to acquire knowledge about all types of orders you are able to place on your stocks. If you require help educating yourself about the types of orders to place on your stocks, you should consult your stockbroker in order to take professional advice before taking matters into your own hands, inevitably forcing yourself to lose some of your invested money’s profit. Thus, it is absurd to invest your hard earned money into any program before you know all the data necessary to make a well-informed, educated judgment.
If you could take the main ideas from this article and put them into a list, you would a great overview of what we have learned.