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Hi (friend's name), A friend of mine just launched a business that helps people become self directed investors and I thought of you since I know you are interested in the stock market. If you decide to buy his product you'd get a program he paid thousands of dollars for and sells it for less than 100$! I guess he's going for volume...;-)

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Hi (friend's name), A friend of mine just launched a business that helps people become self directed investors and I thought of you

The program itself is worth thousands of dollars (he paid close to $10K for it!) but he sells it for less than 100$! I guess he's going for volume...;-)

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In the stock market realm, one way to protect all your gains from purchased stock and to limit the amount of losses is to place a trailing stop order which sets the stop price at a certain amount. If the stock market prices rise, then so does the stop price, however, if the stock market prices decrease, the stop price remains the same. This allows the investor to set a limit on the maximum possible loss he or she is willing to accept, however, the amount of gain is limitless.

Pretend that you have just purchased 100 shares of Company M for $50 per share and you want to lock in the profit but limit your losses so you set the trailing stop 2 points below. Much to your surprise, the price of shares from Company M starts to increase up to $655 during one month. Because you issued a trailing stop order, the price has adjusted just as it should, to $653, which is 2 points below $655. Once it hits $653, the trailing stop order is activated and a market order to sell 100 shares from Company M is placed in order for your broker to receive the best possible price on Company M's stock. Thus, this works to protect your initial investment as well as to ensure that you will gain a profit.

Because of the way the trailing stop order is set up, you, the investor, do not have to monitor on a daily basis how a stock playing out. Therefore, you are able to simply invest your money by purchasing stock in a company that you feel comfortable with, place a trailing stop order on it, and then sit back, stress free allowing the investment to grow. Also to be noted, the trailing stop order is free to use, so do not allow your broker to forget to mention it to you and do not forget to use this investment option because it is there help you. However, there is not one particular strategy in place in order to keep a stop price from being activated. It is suggested that if you have invested in long-term stock options to set your trailing stop loss at 15% or more, but if have invested in a short term stock option; you would want to set your trailing stop loss at around 5%. Another restriction on the trailing stop order is that you may not use them on certain stocks, such as penny stocks. The higher the risk on the stock purchase, the less of a chance you will have to use your trailing stop order.

As a final note, only use the trailing stop order when you actually own stock that you feel is about to drop. If a particular stock is about to drop, this type of order ensures that you will be able to sell the stock to ensure that you receive a return in investment. As quickly as the stock market fluctuates, it is important to utilize this type of order, especially on stocks that you have bought, but later feel that they will drop in price when you decide to sell them. For instance, you bought let's say you bought stock in a restaurant chain that you felt was going to gain a tremendous amount of profit, however, at the quarterly review of your portfolio, you and your broker discover that your restaurant stock has only gained 2% in four months. This is an extremely lower than the estimated 25% gain that was predicted for this stock. When you bought the stock, you placed a trailing stock order on it in order to prevent your rate of return from dropping. Therefore, you make the decision to sell the stock because, after the consultation with you broker, you feel that the stock is not going to increase any time soon. By placing the trailing stop order on your restaurant stock, you basically ensured that a high rate of return was “locked in” so that you would not lose very much money when purchasing the stock.

Trailing stop orders tend to be a little confusing, however, just know that by placing them on all the stock that you possibly can ensures that you will receive a high rate of return. It's like an insurance policy on your purchased stocks.

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Even those who are not very familiar with the world of the stock market have probably heard of Warren Buffet. He has been called the most successful investor of all time. He netted over $42 billion personally with an investment partnership he started with only $100.

While he has been sometimes categorized as a “value stock investor” his method was actually a bit different. He focused on the quality of stock as well as the value. Robert Hagstrom, a senior vice president with Legg Mason Capital Management, presented Buffet’s method in the book “The Warren Buffet Method” over 10 years ago. Hagstrom wrote the book because he believed that the average investor could learn from Buffet’s method.

Buffet’s incredible story begins with a small investment partnership established in 1956. In the mid-1960s, this partnership acquired a failing textile company. Buffet was able to bring this company’s net worth from $22 million to $69 billion.

The Buffet method is broken down into 12 tenants that form the basis for evaluating any investment, from stocks to entire companies. One of the key points in the method is that it is necessary to do some hard work (like research and projections) in order to know the investments thoroughly before any money exchanges hands.

The twelve tenets are really questions to ask yourself before making an investment. According to Buffet via Hagstrom, the first consideration is “Is this business simple and understandable?” Buffet did not invest in any technology stocks for the simple reason that he did not understand them. If you understand the business you are investing in (or outright purchasing) you will be in position to see the problems and possibilities as they arise. Secondly, ask yourself “Does the company have a consistent operating history?” Viewing the viability of the business in its previous operation can forecast future trends.

The third tenant is “Does the business have favorable long-term prospects?” This question is a gentle reminder that wise investors hold stock in good companies for the long term. Looking to the future of the companies reveals the true value of the investment.

Next, “Is the management rational?” Buffet places a great deal of importance on evaluating the management of the company. He pays attention to how the excess profits of a company are used. Additionally, he asks “Is the management candid with shareholders?” He believes that many company executives hide behind the company and do not fully disclose information to their shareholders. A manager who readily admits any mistakes made is more honorable and trustworthy. Following the theme of management related questions is “Does the management resist the institutional imperative?” Essentially this question evaluates the manager’s ability to act with character rather than cave-in to the peer pressure to do what other managers are doing.

The next question for evaluation is “What is the return on equity?” Buffet focuses on return on equity rather than the more popular ratios. This is because he feels earnings figures can be manipulated. The long term return on equity will have a more powerful effect than simple earnings.

The 8th tenant is “What are the company’s owner earnings?” His calculations of owner’s earnings include estimates of future capital expenditures. The 9th tenant is “What are the profit margins?” If a company makes sales but does not profit, then the company is a failure. Buffet avoids companies with large expenses because in his eyes it reflects a lack of discipline in the management of the company.

The 10th tenant is “Has the company created at least one dollar of market value for every dollar retained?” This is a test of correct capital allocation. If the company is holding onto cash but is not helping its shareholders than something is wrong with the management strategy.

The final two questions are “What is the value of the company?” and “Can it be purchased at a significant discount to its value?” Buffet calculates the value of a company as the total of the net cash flow expected to occur in the life of the business. By buying at discount, an investor will assure that any discrepancies in his calculations will be covered.

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Investing is the most important thing that you can do to secure your financial future. Trading stocks is a centuries’ old practice and with a good brokerage firm, you can benefit from investing in stocks. There are, however, some common investing mistakes that people make that can result in huge losses and missed opportunities. In order to benefit from the stock market, here are the most common mistakes and tips to avoid them.

The first most common mistake in investing in the stock market is waiting too long to start investing. The perception of investing is that it is reserved for older, financially established people who can invest large sums of money. This is a misconception that is limiting people from tapping into the power of investing. Waiting just ten years can make a huge difference in the total gains that one can make over their lifetime. For example, investing just $2000 a year (that’s just $170 a month) starting at the age of 26 can yield $2,114,379 by the time you are 75. This is with an Annual Return Rate (ARR) of 10% per year steady through the life of the investment. The same investment, with the same ARR, made ten years later at the age of 36 will result in a return of only $802,895 at the age of 75. That is a 1.3 million dollar difference. If you are not able to invest as much as $160 a month, set aside $25 per month. Even this small amount can have a large impact over time.

It is shocking that many people will put more time and research into choosing an MP3 player or home theater system than they will researching the stocks they will invest in. It is imperative that you take the time to understand the financial history of the companies you wish to have shares with. Make sure that you understand what you are buying and how it will benefit you in the long run. It is also important to keep in mind that you must remain objective when choosing stocks. Stocks that you have researched well and carefully selected are more likely to increase than ones you choose based on a “feeling.” Put your emotions aside and consider your options carefully. Taking time to research and investigate is also important when choosing your financial advisor. Consider meeting with a few candidates and evaluating their approach to investing. If you are meeting with someone on a recommendation, make sure that the person who recommended the advisor is someone who is qualified to do so.

Another common mistake is confusing gambling or speculating with investing. Investing in stocks is part of a long-range financial picture and not a get-rich-quick scheme. While there certainly are high yield quick return programs out there, it is wise to limit your participation in those programs. Day trading is one of these types of programs. When someone is involved in day trading they trade very rapidly in and out of stocks in order to profit daily from marginal changes in the market.

This practice may seem easy to profit from but it actually results in more losses for investors than gains. Similarly, some try investing over a short period of time in very risky stocks. A short-term investment of six months to a year in a “hot stock” does not belong in a well-thought out financial plan. True investing should be done in quality companies over a period of several years. Finally, listening to someone who has a “hot tip” is a quick way to lose a lot of your investment. Research any tips you get carefully and only invest if the numbers pan out, no matter how much others insist that this is the stock to have.

Finally, you need to remember to diversify your investment portfolio. Loading it up on one company’s stock is unfortunately a common practice for many investors. Additionally, having too much stock in one specific industry can also be a recipe for disaster when the market changes. Spread your money over several different companies and different industries for the best long term investment.

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