Learn Stock Market Trading

1. Cut your losses. Let your profit run.

Always remember to set stop loss point.

2. Learn from your losses.

Make each loss as a lesson to enrich your investment experience.

3. Don’t be greedy.

People always turn their large profits into losses because of greedy.

4. Never leverage in a losing position.

Most of people try to leverage in losing position. It’s a BAD idea.

5. Observing.

Standing aside is a good idea when you cannot judge which the coming direction is.

6. New mindset to beat the market.

Nowadays, fast money is the new market trend, long term trading already out dated.

7. Discipline and patience is the key to win.

Don’t chase high if you are not sure when will the market reverse.

8. Apply only few strategies to suit different stocks.

Using too many strategies will make you confuse.

9. Narrow down your focus.

Do not try to focus on too many stocks at once. Limit to 6-7 counters.

10. Find a good mentor.

A good mentor is the golden key to your investment success.

Dr. Steven Lee (Ph.D) is # 1 Best-Selling Author of Creating Wealth in Stock Market

Get your free ebook “Money Fish” from http://www.DrStevenLee.com

Market Capitalization

A company’s market capitalization (or “market cap”) is calculated by taking the number of outstanding shares of stock multiplied by the current price-per-share. It is the amount of money you would have to pay if you bought every share of stock in a company.

The price that an investor pays for a security. This price is important, as it is the main component in calculating the returns achieved by the investor.

For example, if an investor buys XYZ at $35, then this would be the purchase price. When looking at the return on the investment, the investor would compare the purchase price of $35 to the price the investment was sold at or the current market price for XYZ.

Share

Certificates representing ownership in a corporation. Shares are also known as stocks or equities.

P/E Ratio

The P/E ratio is how much money you are paying for $1 of the company’s earnings. If a company were currently trading at a P/E of 20, an investor would be paying $20 for $1 of earnings

The P/E looks at the relationship between the stock price and the company’s earnings. You calculate the P/E by taking the share price and dividing it by the company’s EPS.

In other words, if a company is reporting a profit of $2 per share, and the stock is selling for $20 per share, the P/E ratio is 10 because you are paying ten-times earnings

[$20 per share dividend by $2 per share earnings = 10]

In general, a high P/E suggests that investors are expecting higher earnings growth in the future compared to companies with a lower P/E.

However, the P/E ratio doesn’t tell us the whole story itself. It’s usually more useful to compare the P/E ratios of one company to other companies in the same industry, or to the market in general, or against the company’s own historical P/E.

It would not be useful for investors using the P/E ratio as a basis for their investment to compare the P/E of a technology company (high P/E) to a utility company (low P/E) as each industry has much different growth prospects.

Price / Earnings To Growth – PEG Ratio

A ratio used to determine a stock’s value while taking into account earnings growth. The calculation is as follows:

PEG Ratio = Price to Earnings ratio / Annual EPS Growth

PEG is a widely used indicator of a stock’s potential value. It is favored by many over the price/earnings ratio because it also accounts for growth. Similar to the P/E ratio, a lower PEG means that the stock is more undervalued.

Keep in mind that the numbers used are projected and, therefore, can be less accurate. Also, there are many variations using earnings from different time periods (i.e. 1 year vs. 5 year). Be sure to know the exact definition your source is using.

Short Selling

The selling of a security that the seller does not own, or any sale that is completed by the delivery of a security borrowed by the seller. Short sellers assume that they will be able to buy the stock at a lower amount than the price at which they sold short.

Selling short is the opposite of going long. That is, short sellers make money if the stock goes down in price.

So this comes back to the question of how Wall Street does value stocks. The first thing Wall Street does is toss out the idea of the totality of the cash flows in future years and focus on the much less volatile accounting earnings measure of an arbitrary year (usually one year ahead, but this can vary based on the earning profile of the company). Dividing the current price of the stock by this “forward earnings” gives us the price to earnings or “forward P/E” ratio you will often hear quoted on TV. While it is not the only measure used, it is certainly the most prevalent as it is simple. When you hear someone saying “The market is fairly valued trading at roughly 18 times earnings” this is what they are referring to. The problem with this measure is there is very little intellectual justification as to what exact number is appropriate. The most common of these are either looking back at historical values in history or a simple comparison relative to interest rates (the so-called “Fed Model” which compares the earnings yield of stocks to that of bonds, failing to separately account for both the increased volatility of stocks and the ability of the earnings to grow over time).

For a particular stock, the analyst usually looks at companies with similar growth rates or similar companies in different industries to find “comparables” which are then either tweaked higher or lower based on factors such as quality of management, size or stability of earnings. The problem is that this becomes the tail wagging the dog because everything is just viewed relative to everything else, not necessarily where they should be based on sound principals of finance. The big answer as to who really controls market valuation is that it is the retail investor, many of which do not know the first thing about stock market valuation, that really determines the market price. This is especially true today now that mutual funds have made it a practice to keep as little cash as possible on hand and will let inflows and outflows alone mostly control their net portfolio position. Stock market valuations are not the main factor driving the market, but it is the overall liquidity environment, a fact that was painfully obvious in the late 1990s when analysts betrayed their cluelessness on true market valuations by coming up with measures such as price to revenue or “price per click” to justify what was in reality just a liquidity bubble as emotional greed permeated the market.