Prosper Newsletter: October 2007 > Stock

You understand that the following information is educational in nature and is not intended to be legal, accounting, or tax advice. You are responsible for your own financial decisions and should consult your own legal, accounting, and tax advisors before making your financial decisions.

Stock Market Basics

There are a few things that every beginning investor should know before entering the stock market.

The first thing to remember is that there are different 'order types' when dealing with stocks. Here are some details on the types and what they mean:

Market Order—this lets you buy or sell a security, stock or option immediately. You are not usually as concerned with the exact price; you just want to get the order in and done right away.
Limit Order—you set the maximum price you are willing to pay for a stock, or the minimum price that you are willing to sell at. A limit order lets you set limits on costs and market conditions, but does not guarantee that you will buy or sell anything.
Trailing Stop Order—this is a great little piece of technology. With a trailing stop order you see an amount you are willing to let the stock move against you. For example, you purchase a stock for $10.00 and set a trailing stop at $0.50. If the stock turns and runs straight down it will sell you out at $9.50. However, if it goes up to $11.00 and then goes down it will sell at $10.50. A trailing stop remembers the highest price and sells you out at the margin you select from that point.
Stop Limit Order—this is similar to a trailing stop order, but it becomes a limit order once the price reaches your limit. If the stock gaps down you could end up never selling the stock even though it has met your stop order. This order type is most likely not your best way to go and it can dangerous.

Orders are usually good for a specified time, either that day or until cancelled. If you place a day order, if the order did not go through you would have to place a new order the next day. Market orders are always day orders, because they will execute the same day.

There is a website that you can reference and research stock charts. Pull up the website www.stockcharts.com. Click on "free charts", then "SharpCharts" and put in a stock symbol to see a basic stock chart on a particular stock.

The stock chart contains some basic information about the stock and contains the following information:

Open—this is the price the stock was trading at the beginning of the day, when trading opened.
High—the price of the highest trade of the day.
Low—the price of the lowest trade of the day.
Close or Last—the price of the last trade of the day before closing.
Volume—how many shares traded that day.
Change—how much the stock was up or down for the day, usually including both dollar amounts and percentages.

When you look at the bar graph or candlestick chart, you can find out a lot of information. Each candlestick represents one day of trading. The red candlesticks indicate down days, and the black candlesticks are up days. The candlesticks each contain the basic information of the stock quote information mentioned above. The candlesticks for up days show the opening price at the bottom. The top shows the closing price. The down candlesticks are just the reverse—the top shows the opening, and the bottom the close. The wick sticking out the top or bottom shows the trading range of the day. The wick sticking out the top indicates the high price of the day. The bottoms show the low trade of the day. If there is not a wick sticking out, then the opening or closing prices were the highest or lowest trade of the day.

The longer the candlestick is, the more change there was during the day, and typically the more volatility there was during the trading day. A black candlestick means that the stock opened higher that day than it closed at the previous day of trading.

A blue line indicates a 50-day moving average. A red line indicates a 200-day moving average. In the upper left hand corner the chart will tell you what level the moving averages are at. In the bottom of the chart you have some bars that are black or gray, red or pink. The pink represent down days and the grey indicate up days. These indicate each day's trading volume, showing you graphically how many shares have traded for that day. Sometimes there will be a green line going across the volume area. This indicates a 60-day moving average of average daily trading on this stock. This can be helpful, because if you see a big spike in the volume, this can tip you off and you want to do some research and see what the reason is for the spike.

To trade stocks you must have an account with a broker. A lot of brokers offer online services that allow you to complete the trade electronically. Others still require paperwork. There are many ranges of services offered by brokers as well. You can go with a full service account where they are there to guide you in the choices you make and provide information. These brokers also charge a higher commission. There are also 'discount' brokers. Often it is in your best interest to use a broker in the mid-range of commissions. This gives you lower commissions but also gives you some support if you need help or if you had a bad trade. Sometimes the discount brokers will charge you just to call them, so don't go with a broker based on price alone. Check out their full offerings and services and pick something that works with you. Some brokers may not offer all types of orders either. Just make sure when you are searching for a broker that you get one that meets your needs.

There are really hundreds of ways to look at and rate a stock. The more research you do, the more you learn about the company and trading in general, the better you will be able to pick good stocks.

I just realized that Monday will mark one month since I placed my first live trade. I have realized a net gain of 43% on my initial capital, while the Dow is currently down 5% from its close on July 13. So, in my first month of trading I've outperformed the market by nearly 50%. I wonder if Bear Stearns is hiring...

Brian H.
Aurora, CO

The stock market is a very volatile place, especially if you have been in it during the last couple of months. So, how can we keep our calm during these times and not lose money? Consistency! By being patient and doing the same things over and over. If you are patiently watching the latest news and your indicators, and only making trades when they tell you to; if the indicators are telling you the stock is going down, you will want to buy a put. If the indicators are saying the stock is going up, you will want to buy a call. You can make money either direction. Don't try to anticipate the indicators; rather let them give you a clear entrance point. In a volatile market you may want to take a profit quickly because you don't know what the market will do tomorrow. Yet, Warren Buffet has two rules of trading: Rule #1: Don't lose money in the market. Rule #2: Don't forget rule number one. With that, take advantage of big market swings and don't be afraid of the volatility. Wait patiently for the perfect trade and you will find it. Happy Trading!

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