basic stocks manual 2.- introduction to investing

5-Step Investing Formula Online Course Manual

Introduction to Investing

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© 2005 INVESTools Inc. All rights reserved.

2Section 2 of 11

THE 5-STEP INVESTING FORMULA Introduction to Investing

page 2 of 13© 2005 INVESTools Inc. All rights reserved.

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SECTION 2 Introduction to Investing

Tolerance for Risk .................................................................................. 4

Setting Goals ........................................................................................ 6

Asset Allocation .................................................................................... 6

Tax Exposure ........................................................................................ 7

Brokerage Firms .................................................................................... 8

Introduction to the 5-Step Investing Formula ........................................ 9

Section Contents

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page 3 of 13 © 2005 INVESTools Inc. All rights reserved.

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INTRODUCTION

SECTION 1 Getting StartedLogging into the INVESTools Investor Toolbox Support Links Workshop Review Account Information Subscription Renewal Technical Support Contact an Instructor

SECTION 2 Introduction to InvestingTolerance for Risk Setting Goals Asset Allocation Tax Exposure Brokerage FirmsIntroduction to the 5-Step Investing Formula

THE 5-STEP INVESTING FORMULA

SECTION 3 Step 1: Searching for StocksUsing a Prebuilt Search Navigating the List of Stocks

SECTION 4 Step 2: Industry Group AnalysisTop-Down Analysis Big Chart AutoAnalyzing All Stocks in a Group Best & Worst Industries List

SECTION 5 Step 3: Fundamental AnalysisPhase 1 Phase 2 Price Pattern Volatility Zacks Report Market Guide News AutoAnalyzer™

SECTION 6 Step 4: Technical AnalysisTechnical Indicators Moving Averages MACD Stochastics Volume Support & Resistance Buy Signals Money Management Sell Stop Orders How Many Shares to BuySell Signals Insider Trading

SECTION 7 Step 5: Portfolio ManagementCreating a Portfolio Managing Your Portfolio Paper Trading Account

BONUS SECTION

SECTION 8 Bonus TopicsTurboSearch Index Tracking Stocks / Exchange-Traded Funds Dow Jones Industrial Average— The Diamonds (DIA) S&P 500—The Spider (SPY) NASDAQ—The Qs (QQQQ)

SECTION 9 Introduction to OptionsAdvantages/Risks of Options Leverage Call Options Put Options Covered Calls

SECTION 10 AppendixPhase 2 Stock Scoring Form Phase 2 Quick List for Zacks Report and Market Guide Investment Tracking Record

SECTION 11 Glossary

Course Overview




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Introduction to InvestingTolerance for Risk

Investing in the stock market involves both risk and reward. The rewards are easy to deal with; in fact, you want rewards... the more rewards the better. But it’s different with risk—where it’s possible to lose money in an investment. There are different levels of risks associated with investing and you need to find the level of risk you can manage and that you’re comfortable with.

One of the biggest mistakes new investors make is that they invest money they can’t afford to lose. They invest their grocery money or rent money in the stock market and hope that money will double or triple overnight... instantly solving all their financial problems. But that’s not investing; that’s gambling. If you’re not willing to take the risks of gambling in Las Vegas or other places, why do it in the stock market?

The stock market has proven to be a wonderful place to invest money and to make money over the long term. However, investing in hopes of quickly doubling or tripling your money involves risks and should never be done except with “risk capital”—money you can afford to lose without dramatically changing your financial circumstances if it is lost.

When dealing with your money, focus on things you understand. Most novice investors make the same mistakes again and again because they don’t understand what they’re doing wrong or they don’t have the discipline to stop. The best investors tend to be automatic, meaning they have a plan and they stick to it. This course will give you that step-by-step plan. Throughout this program, we will teach some strategies to help you become more disciplined and automatic in your investing approach.

The biggest enemy of an investor is emotion. When stocks are dropping and your investments are losing value, you may get that pit-in-the-bottom-of-your-stomach feeling. When you get this feeling, it’s difficult to make a good decision (this is when you find it hard to sleep). Instead of making a good, appropriate decision, you tend to become paralyzed and do nothing... the worst possible thing to do. We’ll teach you how to manage that risk going into a trade, which helps take the emotion out of investing.

Keep in mind that investing in the stock market is not a get-rich-quick scheme. If you’re trying to solve a huge financial burden by investing in the stock market, you may be setting yourself up for disappointment.

It’s important to understand that getting into a good stock doesn’t happen by accident. It’s something you have to research and patiently wait for. Just because you take a course or invest in the stock market doesn’t assure you instant success... nor does it assure you of any success, for that matter.

But if you follow the simple, time-proven approaches we teach, you’ll have a greater opportunity to make money over time as you invest in the stock market.




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The Psychology of TradingMost of what we do in the stock market is affected by emotions. It’s amazing the impact what we think can have on the bottom line.

To find out what you think, there is a question you should ask yourself: Who am I? This helps you determine your strengths and weaknesses. The market has a way of pointing out your weaknesses if you don’t find them first. Not only that, but it tends to cost you a lot of money. So shore up your weaknesses before the market does it for you.

For example, ask yourself...

• Am I quick to make decisions or am I analytical?

• Am I a visual person? Do I like to look at charts?

• Can I respond to news and then make a buy or sell decision?

• Can I handle risk?

• How much am I willing to lose on any one trade without losing sleep over it?

• What are my performance goals in the market over the next year... five years... and ten years?

• Am I more comfortable with holding stocks for long periods of time or shorter periods of time?

If you aren’t matching strategies in accordance with your personality and trading style, you’ll ultimately undermine your own success. One of the biggest mistakes people make is that they do not adopt strategies that fit their personality.

If you find that trading doesn’t come naturally, you’re most likely pursuing strategies that aren’t conducive to your comfort level. Pursue strategies that mesh with you, your lifestyle, your family, and your tolerance for risk. If you don’t, you’ll do poorly in the market.

Know Your Tolerance for RiskBecause there are so many risks and different levels of risks involved with different investing strategies, realize your tolerance for risk. Everyone is a little different, so you’ll need to start monitoring your levels as you start investing or getting more involved in investing—whatever the case may be.

Sit down and take an inventory; figure out what your strengths and weaknesses are. Doing this will also help you find your identity as an investor. Once you identify your strengths and weaknesses, you’ll develop a trading style.




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Setting Goals

You need to create your own mission statement for investing. This mission statement represents your investment goals. Whether you’re investing for the long term or short term, having goals gives you focus.

Anyone who invests needs to have goals and objectives. A goal defines what percentage return you want to earn on a particular investment (which varies from stock to stock depending on the duration of the investment).

For example, a common approach to investing is referred to as “buy and hold.” With this strategy, investors take a longer term view of the market. They are comfortable with the 10-12% annual returns the market has averaged over the past 50-70 years. They simply want their money to grow in a market that is compounding at a nice, consistent rate. Their goal is for a long-term gain averaging 10-12% a year.

Be sure you set realistic goals (e.g., to do better than the market and to improve on your return every year) and don’t get discouraged with mistakes. Unfortunately, you’ll likely have some losing trades—even the experts do. Keep the losing plays small, as outlined later in the course.

Most of all, believe you can do it. Thousands of people with no experience in the market have gone through this course and found consistent, market-beating returns. There is no reason why you can’t do the same.

Wealth is rarely an accident and it certainly won’t happen by next week. However, it can happen if you set goals and put in the time and effort to make it all work. The tools and knowledge you gain from this course are the vehicles to get you where you’ve dreamed of going.

The goal of most investors is to buy low and sell high. By consistently applying the 5-Step Investing Formula, you can better attain this goal, which helps you work toward reaching your overall goal of financial success in the stock market.

Asset Allocation

Diversify your portfolio with different types of stocks from different industry groups and sectors—this is called asset allocation. Asset allocation determines how you would answer the questions below:

• How do I allocate money to the different types of investments in the market?

• How much should I have “in cash”?

• How much do I put in interest-bearing investments, like a money market fund or bonds?

• How much should I put into stocks?




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• How much should I put into small stocks? ...Into mid-cap stocks? ...Into large stocks?

• How much should I invest in options?

• How much should I put into real estate?

Knowing what your goals and objectives are can help you determine where to put the emphasis in your portfolio.

Small companies often can be riskier. However, oftentimes these companies are the growth opportunities, as small companies tend to be the undiscovered ones. If you do your homework with fundamental analysis (to be discussed), you’ll find that a small company growing by 60-70% in earnings and revenues could be a good company to buy at an early stage. It could be the next Cisco or IBM... the next “big thing.”

Everyone seems to be interested in options these days. There are conservative ways to use options to insure your portfolio against loss and to also create income and cash flow. In addition, there are more aggressive (and thus more risky) ways to use options as leverage to accelerate returns.

To manage the risk of these more aggressive options strategies, you should initially devote no more than 5-10% of your total account to such strategies. For example, if you have a $100,000 account, put no more than $5,000 to $10,000 into aggressive option plays. As you continue with your education, your knowledge will grow and accordingly you’ll learn of better ways to accelerate your returns—while keeping your risk manageable.

Don’t judge the success of your investing by what you’ve accomplished with your portfolio in a week or two. It generally takes a while to build a solid portfolio. Continually work, progress, improve, and grow your account so that when you finally reach retirement, you’ll have a big enough portfolio to generate the kind of cash flow and income you need to sustain the lifestyle you want.

Tax Exposure

There are tax advantages for investors... legal loopholes in the tax code that can be taken advantage of if you know what they are and how to use them. To discover the possible tax savings you can realize, meet with your accountant. Depending on your trades and how often you trade, you could save significantly.

Portfolio income is the type of income most investors have. It includes interest earned, dividends, capital gains on the sale of investment assets, and mortgage interest received. This income is taxed at ordinary rates and is not subject to self-employment taxes. However, if done wisely, the income can be deducted as an investment expense. Visit with a qualified accountant to find out what can be done to save money in taxes on your investments.




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Brokerage Firms

After you’ve researched a stock and decided it’s an investment you want to make—a process we’ll discuss—it’s time to place the trade. You need to send the order to an exchange where stocks, mutual funds, and options are bought and sold. To do this, you need a broker.

Most orders are placed with a broker. A broker is the person you deal with when it comes to trading stocks—however frequently you make decisions and change your investment portfolio. The term “broker” refers to either a live person who places the trade for you or the online broker, which is accessed with a computer. Using a computer, you don’t actually deal with a person, although you still deal with an online brokerage company.

When you buy a stock in the market, you pay a commission to do so. There is no charge to hold the stock—you can hold it as long as you want. But as soon as you sell it, you pay another commission for the sell. There are almost always two commissions involved in each transaction: one to get into a stock play and one to get out.

Internet technology has improved the entire communication process between investor and broker. Using the Internet, you can view your investing account online to see exactly how much money you have and to get up-to-the-minute statistics on your account as it quickly updates after a change or trade is made. If you withdraw money or buy stock, it is reflected online and available for viewing so that you can constantly know your account status.

There are three different levels of brokerage firms (most are Web accessible):

1. Full-service brokers

2. Discount brokers

3. Online brokers

You pay more money in commissions for full-service brokers, but the return for doing so is that they offer more services, information, and resources.

Discount brokers offer minimal services in return for lower commissions. They are very popular with people who are looking to save money on commission fees but who still want some of the services normally associated with a full-service broker.

The last level of brokers is the online broker. These brokers have gained recognition since about 1994 by developing tools and resources on the Internet that allow investors to trade and transact business in the stock market much quicker, easier, and cheaper than ever before. In return for a minimal level of service, customers save money in commissions, reducing trading costs dramatically.

Most INVESTools Investor Education graduates use the Investor Toolbox for all of their research. They focus on the efficient execution and low commissions when looking for a broker.




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Opening an AccountTo invest in the stock market, you need to open a brokerage account with the firm that best meets your needs.

To open a brokerage account, you need to fill out an account agreement. This agreement spells out the risks and safeguards of trading with the specific broker. It also goes over the nature of your relationship with your broker and clearly defines the nature of the services to be provided. Once you’ve completed the account agreement, you’ll need to make a monetary deposit (the minimum amount of the deposit varies from broker to broker) to open your account and begin investing. You are then charged a commission per trade, which varies from firm to firm.

Introduction to the 5-Step Investing Formula

The five steps of the 5-Step Online Investing Formula are as follows:

1. Searching for Stocks

2. Industry Group Analysis

3. Fundamental Analysis

4. Technical Analysis

5. Portfolio Management




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Step 1 of the formula is to search for an investment. This step helps you find stocks in a repeatable process. It allows you to search the entire database of over 12,000 stocks using a set of easy-to-use, prebuilt search criteria. When you run a search in its most basic form, it returns 25 stocks for evaluation. More advanced searches will be outlined near the end of the course.

Step 2 covers industry group analysis, where you perform top-down analysis to find stocks. You will learn how to focus on the strongest industry groups in the market and how to find the best stocks in those strong groups. You will also learn how to see where the institutional money is flowing in the market week by week using our proprietary industry group tools.




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Step 3 narrows the list of 25 stocks using a process called fundamental analysis or Phase 2. With this step, you decide whether or not a stock belongs in your portfolio. It involves a specific set of repeatable steps that takes the emotion out of choosing stocks and helps you approach the market like a professional.This step has largely been automated by the Investor Toolbox. What would literally take you hours of research using other financial Web sites takes a matter of seconds with the Investor Toolbox. It does the tedious, time-consuming work for you.

Step 4 is technical analysis, which explains the buy and sell signals that appear on a stock chart. This step includes the green and red signals on the following indicators: moving average, MACD, and stochastics. It also looks at support and resistance, as well as volume. Technical analysis helps you know when to buy and sell a stock.




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Step 5 consists of monitoring and managing stocks you own or stocks you would like to own. Here you’ll look for sell signals on the stocks you own and look for buy signals on the stocks you want to own. You can also check the news on all the stocks you’re working with (which can influence signals) and automatically score stocks through the Step 2 fundamental tests. The Investor Toolbox Portfolio Management is also an easy way to set price alerts and buy and sell signal alerts, and to look at various reports on stocks.

Now, let’s get started. Open up section 3, which explains step 1 of the 5-Step Investing Formula: Searching for Stocks.




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© 2005 INVESTools Inc. All rights reserved. Neither INVESTools or its subsidiaries nor any of their respective officers, employees, representatives, agents or independent contractors are, in such capacities, licensed financial advisers, registered investment advisers or registered broker-dealers. Neither do they provide investment or financial advice or make investment recommendations, nor are they in the business of transacting trades. Nothing contained in this manual constitutes a solicitation, recommendation, promotion, endorsement or offer (buy or sell) by INVESTools, or others described above, of any particular security, transaction or investment.

Warranty disclaimer: The content included in this manual and the Investor Toolbox Web site is provided as is, without any warranties. Neither INVESTools no any of its subsidiaries or affiliates make any guarantees or warranties as to the accuracy or completeness of, or results to be obtained from using, any of its products or services (including any content therein). INVESTools and its subsidiaries and affiliates hereby disclaim any and all warranties, express or implied, including warranties of merchantability or fitness for a particular purpose or use. Neither INVESTools nor any of its subsidiaries or affiliates shall be liable to you or anyone else for any inaccuracy, delay, interruption in service, error or omission, regardless of cause, or for any damages resulting therefrom. In no event will INVESTools nor any of its subsidiaries or affiliates be liable for any indirect, special or consequential damages, including but not limited to lost time, lost money, lost profits or lost good will, whether in contract, tort, strict liability or otherwise, and whether or not such damages are foreseen or unforeseen with respect to any use of our products or services. In the event that liability is nevertheless imposed on INVESTools or any of its subsidiaries or affiliates, such parties’ cumulative liability for damages under any legal theory shall not exceed the amount of fees you paid for the particular product or service. This warranty addresses specific legal rights; you may also have other rights, which vary from state to state. Some states do not allow the exclusion or limitation of incidental or consequential damages, so the above limitation or exclusion may not apply to you.

The principals and employees of, as well as those who provide contracted services for, INVESTools have not promised, represented or warranted that you will earn a profit when or if you purchase securities. It is recommended that anyone trading securities should do so with caution and consult with a broker before doing so. Past performances of any principals and employees of, as well as those who provide contracted services for, INVESTools or any of its subsidiaries or affiliates may not be indicative of futur performance. Securities used as examples presented in this manual or the Investor Toolbox Web site are used for illustrative purposes only and do not constitute a recommendation to buy or sell individual securities. They should be considered speculative with a high degree of volatility and risk.

Trading securities can involve high risks and the loss of any funds invested; trading options can result in the loss of more than the original amount invested.

No part of this manual may be reproduced in any form, by any means, photocopying, electronic or otherwise, without written permission from the publisher.


basic stocks manual 2.- introduction to investing

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