More on Stocks and Stock Market

[JohnHumbert]

You know, judging by the repsonses and email requests I've been getting, I think I'd better make some clarifications on my other posts.....

The stock market is a big place and encompassing many, many different aspects. And the folks who are in the market have many different motivations. Let me give y'all some personal thoughts and a views.

I tend to classify people who buy stocks, bonds, funds, options, etc. into three main groups. There are INVESTORS, SPECULATORS, and TRADERS.

INVESTORS are folks who have the motivation to build a nest egg and want to have their portfolio grow over time. They have the long view, are not in a hurry to make money, and want to build over a period time. Sometimes, because of their circumstances, they are more interested in not losing (devaluating) their money than making money. There are scores of different types of investors, based upon age, amount of money, etc., etc., etc.

Then there are the SPECULATORS. I classify speculators as big risk takers who want to make some big scores - hit home runs. They may put their money into new companies, or cheap (or penny) stocks - throwing money at many different opportunities hoping to get in on the ground level and make a bundle when/if the stock skyrockets. They don't mind losing money right and left because they feel, sooner or later, they hit a winner. There are many "flavors" of speculators.

Finally there are the TRADERS. Traders are interested in making a living, getting (or supplementing) their income by buying and selling. Their goal is to put money in their pocket every day, week, or month. Their enjoyment comes from playing the game and their reward is making money every month. There are many types of TRADERS, too!

The REIT strategy I outlined before is a TRADING strategy for TRADERS. It is NOT meant or offer as an "investment" strategy and should not be considered for those looking to INVEST. It is also not SPECULATION - at least not in my terms - because it's not meant to score the big one and is based upon some sound principles and rules.

I think a lot of criticism it has drawn comes from those who evaluate it as an INVESTMENT strategy - and in all honesty - it is not right for someone who is looking to INVEST.

For anyone looking to get into the market, you should decide what YOU are, what YOU want to accomplish, and what level of risk you feel comfortable with.

Even within the three groups, there can be different goals and risk. There are INVESTORS who are high-risk, low-risk, etc. Furthermore, what might be considered high risk for an investor may be pretty tame for a speculator or trader. An opportunity that may be low-risk for speculator may be too scary for a trader. Y'all get the idea, right??

OK, that being said - I am a TRADER. I love to trade. I love watching the stocks every hour, every day and finding the short-term opportunities that present themselves from week to week. My motivations are to develop the skills and knowledge to generate an alternate source of income every month. I hope one day to hone my skills and techniques to a level that I do not have to be dependent on my job in the IT industry. My ultimate goal is to semi-retire and guide on the coast and play the market for my bread and butter.

This is NOT easy...it is a JOB, and requires as much effort as any other tough job. It is not for everybody - in fact, it's NOT for MOST people - and I certainly don't recommend it to anyone. You can't just jump into it and follow some techniques that some fool (like me) posts on a message board and be successful consistantly - no matter how great the strategy is. You have to WORK at it, and there is a learning curve - one that I have painfully gone through over the years.

The information I posted on the strategy is far from complete - there is a lot of techniques and work that go into identifying and picking the REITs - there is a lot of things I did not go into, such as averaging down, etc.

The information was directed to those who, like me, are already into trading stocks, or are thinking of becoming a trader. It is fun to discuss, interesting to consider, and provokes thought.

Please, please, please do not read it and decide to trade stocks, rush out to sign up with an online broker and jump into the market. And NEVER, NEVER buy a stock or follow advice from someone on a message board without first doing your own due diligence and making sure you understand all the ramifications of your decisions.

For those who are looking for INVESTMENT advice - Sorry, but I cannot give that to you. Every person has unique circumstances involving available funds, their position in life (just starting out, mid-life adult, or nearing retirement), ability to handle risk, amount of available time for investing, etc. You should sit down with a PROFESSIONAL INVESTMENT adviser and have them get to know you and your situation and make a plan that is right for YOU.

For those wanting to SPECULATE - go away! I dislike speculation and consider it, like Monty and SuperDave said - little more than gambling. I have seen too many people chase a "hot stock" tip, or get caught in a pump-and-dump and end up losing money they really couldn't afford to lose.

However, if you want to talk about TRADING and tecniques and information along those lines, I welcome your replies and emails.

I will also be happy to share some things that I have learned - sometimes the hard way - over the years playing in the market. The next post in this thread will share some miscellaneous tidbits on the market.

[JohnHumbert]

Here some miscellaneous information that some of you might find interesting, shocking, and almost unbelievable about stock brokers and the firms they work for......

First, brokers by and large, don't make a whole lot of money. A few years ago I read a report that indicated the AVERAGE income for a stock broker in the US was only about $39,000 a year. That was the average - certainly there are those that make much, much more - but it also means that there are those that make a lot less!

Brokers that are working for a large brokerage house such as UBSS, Paine-Webber, Schwab, Fidelity, etc. are divided into several tiers. The top producing brokers are working directly with the brokerage house's funds and are making money directly with the firms money. The next tier of brokers are assigned to the major accounts/customers to the firm. For personal accounts, that usually means customers that have $250,000 or more in their account - with some firms it is $100,000 or more.

So who do you think gets assigned to the run-of-the-mill customer with $5,000-$50,000 in their brokerage account? Yup, you guessed it - the lowest tier, newbie brokers. Some of these individuals go on to be great brokers and move up the ladder - and some of them end up working at Wal-Mart in a few years. The vast majority, however, go for years barely scratching out a living. It has been my personal experience that most of those guys tend to GROSSLY exaggerate their position, income, and prowness.

Brokers are salesmen. They will try to sell you stocks - that's their job. Most often, their manager during the weekly meeting will tell them what stocks they are to push that week. Unless you are an elite customer, when your broker calls you and tells you he has an "opportunity" - it is something he/she and all his broker buddies on his row of cubes is pitching to all the list of accounts he has been given that week.

Often, a brokerage firm will try to "make a market" in a stock. They might be working an IPO with a company, or have a contract to broker a stock, or have an excess of a security in their portfolio that they want to get rid of - so the word goes out in the weekly meeting and the grunt brokers start calling their customer lists.

I tell my family and friends to NEVER buy a stock that is phone solicited by their broker. Sometimes it may be a good deal, but much more often is a crapshoot or an outright loser. You should always ask a broker who is soliciting the question "Are you making a market in this stock?". They are required to answer that question - and if they say "yes" - hang up the phone. (Boy, am I going to make a lot of brokers ****** with this one!).

Remember, brokers make their money by selling you a stock - NOT by making you money. It sad to say, but with few exceptions, most of the brokers assigned to small to medium investors don't give a hoot if you make money or lose your shirt - they just want their commission. Pump-and-dumps (pumping up the value/opportunity of a stock and get folks to buy it and then sell it) are an every day occurance - and brokers will RARELY call you to sell.

[JohnHumbert]

Anyone who has stocks in their portfolio should know the minimum basics about placing orders to buy and sell.

The two most common basic types of orders are MARKET orders and LIMIT orders. There are others, but there are usually just combinations of the basic types are usually for most sophisicated customers.

A MARKET order is an order to buy or sell at the current market price, whatever that may be at the INSTANT the order is placed. Price is never garanteed, because the price of a security may change from second to second. What is garanteed is that the order will be executed. MARKET orders are rarely a good thing. Unfortunately, unless you specify otherwise, your broker or online trading account will default to a market order.

A LIMIT order is an order to buy or sell at a fixed price. For buy-orders, the price is garanteed to be no higher than the price specified. For sell-orders, the price is garanteed to be no lower that the price specified. Price is garanteed, but execution is not. Your order may not execute because the price may not be reached, or there may not be enough volume at that price to fully execute the order.

There are several reasons why MARKET orders should be avoided. First, and most obvious, is that you won't know what price you will end up buying or selling at ...and it could be much different that you expect.

I'm going to digress here for a moment and explain a bit on how orders are executed. Most folks believe, even when they are on an online, real-time, account - that their order goes out onto the "public" stock market. This is not neccessarily the case. First, understand that there is not ONE stock market. There are actually many different "exchanges". There's the AMEX, NYSE, the CHICAGO exchange - those are the big ones. There are also many smaller exchanges such as ETRD, BTRD, Inet, etc. - dozens actually.

When you place an order, unless you have a sophisticated trading tool, you have no idea where (to what exchange) your order is routed. It may, in fact, never be routed at all - as most brokerage house have their own "internal" exchange, and may choose to execute your order internally and never route it a "public" market.

Even though a stock may be "listed" on NYSE, it may actually be trading - simultaneously - on several exchanges. Each exchange may have a different BID and ASKING price.

For example, let's take a mythical stock ZZZ you want to buy. At any given time, the market on the different exchanges might look like this:

Exchange BID ASK
NYSE 10.20 10.23
AMEX 10.19 12.20
CHICAGE 10.30 10.31
Inet 8.00 22.00

If you put in a MARKET buy order, depending on where your order is routed, you could end up paying $10.23 or $22.00 per share. If you put in a MARKET sell order, you could get $8.00 /share, or $10.30/share. No kidding!

Now, in reality, most brokerage services have some kind of "smart" routing that at least attempts to route your order to "best" exchange - but it's not garanteed. You might get screwed on the price. Maybe not as bad as $8.00 vs. $10.30 - but that does happen sometime.

In addition, if the brokerage house has shares of ZZZ in their own portfolio, they may elect to sell you the shares from their "internal" exchange and just register the buy/sell on the public exchange. This is done quite frequently. It is not uncommon if a user places a MARKET order for the brokerage house to sell it's own share to the customer at a bit higher than "public" market and then replace their shares by an (limit) order on the "public" market a few cents cheaper.

So, in most cases, a MARKET order should not be used - LIMIT orders are the way to go - almost always. When does it make sense to place a MARKET order. Well, I can think of only one reason - when you absolutely, positively, have to sell your shares NOW - no matter what the price.

Another side tidbit to all this about orders. You should never choose the option to automatically re-invest dividends (for securities that pay dividends). Here's why: If you choose this option, on the day the dividend is paid, the brokerage house automatically will place a MARKET order on your behalf to buy additional shares. Traders know this - and they know what days dividends will be paid. So sharp traders will raise their asking price on the morning of those days, because they know at whatever the price they raise their ask to - some guy with an automatic re-investment option WILL buy the shares at WHATEVER price they ask. So your automatically re-invest shares are almost always purchased at a little bit more premium price. For example, if you got paid a 7% dividend, you might get it "shaved" to only 6% because the share price will be artificially inflated on the day the dividend is paid. Better to have the dividend paid as cash to your account, and you manually placing a LIMIT order during the quarter at a point when the price is at it's lowest. The exception to this advice is if the automatic re-investment does not incurr any brokerage fees and the amount of the dividend purchase is small enough that paying a order fee would not be cost effective.

[JohnHumbert]

I am not particularly fond of mutual funds. They have their place, I guess, for certain investors...but I've not seen too many people have long term success with them - and unfortunately, most folks use them as long-term investments. Of course, there are many who will disagree with me - sometimes justly so - and point out great success with their fund.

That's fine...but before you choose a fund, there are some interesting facts that most folks are not aware of - and it might make a difference in picking a fund for you.

Mutual funds are typically marketed as broad/diversified collection of stocks that follow a general market or sector.

For example, someone might offer a fund that is based upon Oil & Gas, or Currency, or Telecommunications, or whatever. The prospectus for the fund show the percentage of funds in what areas, sectors, and/or sometimes specific stocks.

People buy these funds because they believe that is where their money will be invested...or is it?

Let's say CompanyX offers a mutual fund that is based on Widgets. The prospectus says 90% of the money is invested in the 4 best Widget producing companies and 10% is kept in cash. You figure that is pretty straight-forward and true.

Well, it may not be true at all! You see, according to goverment rules, most funds only have to have the money invested according to the prospectus at certain times of the year - the times when the fund is audited. Usually once a quarter - sometimes only once or twice a year.

The rest of the time, the fund manager (FM) may invest the funds in anything they choose. Instead of Widgets, the FM may take 50% of the money and buy high-tech, high-risk, high-gain communication stock. When it comes times for an audit, he must move the money back to stated area - but he is free to move it out again after the audit.

No kidding! It's done more often than you'd care to believe.

Now here's the scary part ....

(Now if someone wants to refute me on this, please go ahead, some of my info/understanding may be a bit sketchy- but point me to some concrete proof and not just say "I don't believe that's true" - cause I'm getting my info from some pretty credible source - but they are just people and may not have explained it accurately to me).

If they makes a killing on that other speculation they used fund money for - they don't have to pass all the profits back to the fund. In fact, the way I heard it, the FM can get a lot of it himself directly into his pocket in the form of bonuses and incentives. All they have to pass back to the fund is the profit they would have made if they had kept all the money in Widget stocks.

If they lose money on that speculation, then it's simply "so sorry, our fund didn't perform as expected".

What I do KNOW to be true (because I have tracked the flow and have a successful trading strategy that is based on the information) is that just before an audit date, you can watch that individual stocks that make up certain funds do a steady rise as fund manager scramble to re-acquire the shares to meet audit requirement/percentages.

Of course, this kind of behaviour is not done in all mutual funds. Some are managed very straight-forward on the up-and-up. But some are not.

And it is not neccessarily a bad thing either....sometimes it is to the shareholders advantage that FM's do this - it can actually mitigate risk.

However, just be aware that it can happen...and your money may not be where you think it is.

[kenny]

What is the reason for these posts, altruism? Maybe you should start a newsletter.

[austinag]

http://media.wiley.com/spa_assets/site/dummies/globalimages/spacer.gifhttp://media.wiley.com/spa_assets/site/dummies/globalimages/spacer.gifhttp://media.wiley.com/product_data/coverImage/94/07645568/0764556894.jpghttp://media.wiley.com/spa_assets/site/dummies/globalimages/spacer.gifhttp://media.wiley.com/spa_assets/site/dummies/globalimages/spacer.gifTrading For Dummies
By Michael Griffis, Lita Epstein, MBA

ISBN: 0-7645-5689-4
Format: Paper
Pages: 384 Pages
Pub. Date: August 2004



Just go and buy this book, probabaly contains most of the info John is discussing and also more information than he would be able to post here because of bandwith restrictions.. I will say this in closing, if anyone thinks that they can sit at home, study charts, trade on E-trade etc and actually beat the street in the long run, I think you are greatly mistaken. Individuals are the last to know what is really going on in the street. Most folks should put their money into several funds, continue to invest monthly, if possible, and forget about it.

[Mr. Breeze]

Kenny, there are several in here that have a interest in stock trading. John was asked a lot of questions from a previous stock question post and is doing his best to answer them. We all would probably like a venue where we could post and ask each other questions about the stock market.

[JohnHumbert]

Gee, Mont was so kind to create a whole forum for Investments and Finance!

Anybody have any questions left? Or did my massive postings answer everyone?

I would be happy to talk about any related topic - but I am knowledgable (a little) in only certain areas.

[Spiderweb]

Can you explain more of you strategies? What is your daily routine? What software is good for research? It sounds like you write some of your own? Are there certain data bases you use? Or are you able to pull everything from the exchanges? Are there any good stock services? Please explain trailing stops, stop limits and margins these are not well explained by my online broker. What is a good starting strategy or plan for low dollar traders? My goal may be foolish but I try to just make a small amount per trade or break even and if I do better then that’s great.

[hadley21]

I could of used some tips a bunch of money ago! I take the long road everywhere~ see you at the end!

[Fin-Addict]

thanx for the info John!!!!!!!!!!

[Red]

What I do KNOW to be true (because I have tracked the flow and have a successful trading strategy that is based on the information) is that just before an audit date, you can watch that individual stocks that make up certain funds do a steady rise as fund manager scramble to re-acquire the shares to meet audit requirement/percentages.


That is the type of trend to make money on, John, thank you. Perhaps we can document a collection of tested theories here for us 2cooler financiers. If you do not mind, I'd enjoy hearing some of your stock choices you follow in this strategy so I may do some homework on 'em.

I've only been trading for about 3 months, in between my full-time job of advising and funding residential mortgages. One thing I am seeing and making money on is rising stock prices leading into earnings, and seemingly becoming more common as well is falling prices after (usually a few days or weeks) earnings. (I was rec'd to short RMBS yesterday, but didn't---check out its more than wild chart today, 4-20.) I'm still learning so do your own homework. Stocks in the headlines as strong companies, ex. GOOG, build momentum going into earnings.

One stock I have traded with regards to this is AMTD. Three weeks ago Management of AMTD announced they would beat the high range of the earnings estimate, equalling about 27% above the 22 cents expected. Its stock rose only 6%, though, so I bought, and sold, after a quick 4% gain later.

Within 7-10 days or so the stock was lower again almost as if all was forgotten. I re-bought and sure enough as earnings are getting nearer and back in the new, the stock is gaining upward momentum. I still think there's some room for Monday am's announcement.

I'll share more trends as I learn them. They may or may not be of assistance. As a Trader or Investor please add what you think you have learned.

One of these days I too will have the guts to 'short' some. I think there's some denero to be made doing this following earnings announcements.

[FishingMike]

Thanks for the info John! I learned quite a bit. I'm interested in seeing a response to Spiderwebs questions.