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Investor’s checklist II.

This is a post from Hello Suckers.

[tag]Wall Street[/tag]

In my previous post of [tag]Investor’s checklist[/tag], I tried to emphasize how an [tag]investor[/tag] can prepare himself for [tag]investing[/tag]. Now (November 2008) we have the best time for such preparation. The [tag]market[/tag] is in correction and nobody knows when this decline stops, so the best to do now is to wait, [tag]save money[/tag], study and work on preparing yourself for next rally. If you are a beginner who has decided to start investing or you are already on the market, you can prepare yourself by:

  1. Saving money
  2. Creating your [tag]emergency account[/tag]
  3. Studying
  4. Creating your [tag]investing journal[/tag]
  5. Creating your investing and [tag]money management plan[/tag]
  6. Open your investing account

In this post I would like to continue explaining [tag]trading basics[/tag], how the [tag]stock market[/tag] works, how you can trade yourself and what [tag]investing tools[/tag] you may consider to use.

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7. How the stock market works

The stock market is a pretty old house. The first stock market as we know it today was established in 1602 in Holland where the [tag]Dutch East India Company[/tag] started selling first stocks of [tag]Amsterdam Stock Exchange[/tag]. Of course there are sources indicating that some sort of the market was established even in 11th century, but Amsterdam Stock Exchange was the first introducing and maintaining regular trading using [tag]short selling[/tag], [tag]option trading[/tag], [tag]banking[/tag], swaps trading and other speculative trading instruments (Murray Sayle, Japan Goes Dutch, 5/2001).

NYSE

Today it is very easy to be on the market. Obliviously you don’t have to be there physically like you could see in a movie Trading Places with Eddie Murphy and Dan Aykroyd. Today, when you open an account with an [tag]online broker[/tag] you will be able to access any stock market in the world online via the Internet. Your online broker will provide you with web-interface trading tools which will allow you:

  • to review your account
  • to review your open positions
  • track your trades and activities
  • execute orders
  • provide with trading tools, research and ideas and many other useful utilities

Before opening an account, while doing brokers’ research as I described in first part of the Investor’s checklist series, ask for all the features you can get with your selected broker prior opening the account.

When you will be opening the account you will have to answer some questions (not only about your [tag]personal data[/tag]) but also about your [tag]financial knowledge[/tag] and status. It is a kind of the protection the online broker protects himself as well as yourself. You will not be allowed to open a highly [tag]speculative account[/tag], [tag]margin[/tag] and/or [tag]option trading[/tag] when you indicate that you have not enough money or you are planning to invest more than you can afford.

How the stock market works? Primarily the stock market is a source of money for companies. Whenever a company want’s money for its expansion, further investment, buying new technologies, they can either borrow the money from a bank, which would be however expensive and it can have a negative impact to a company’s monetary balance, because this money will need to be paid back to the bank and the company will have to pay interest. Easier way for the company may be issuing common stocks and quote them in the stock market. The company doesn’t have to pay interest and doesn’t have to pay this money back, however, if it does their business well, they may start paying dividends (which is a share of the profit of the company and every investor who holds companies’ shares may receive dividends) or they can start buying their shares back. If you want to know more read How Stocks and the Stock market work article for more information. As you may have noted, regular investors and speculators such you and me, are important for the stock market since we bring capital to the companies, [tag]mutual funds[/tag], [tag]pensions funds[/tag] and many others.

8. Information, Information, Information

Without information about stock market, stocks, trends, quotes, etc. you will be blind and unable investing successfully. Where and what data you would need? There are many sources in the Internet today and it is difficult to distinguish between important data and a ballast you don’t need. Beginning investors make a mistake by overwhelming themselves by reading and subscribing to so many sources that instead of improving their results in investing, they get confused and receive sluggish results or losing money. When I was looking for my sources I went into the exact same trap. Today I am as conservative as possible in reading and selecting sources of data. I read only a very limited amount of newsletters, magazines or websites and I only read what I consider important. It was not easy to select what you need. You should learn how to dig for the right information.

eIBD Digital Newspaper and Online Investing Tools

If you are a beginner in investing and you do not know what information to choose and where to find it, you may consider a subscription to some renown magazines or newsletters. I would recommend Investors Business Daily, which can provide with many tools, researches, tables, stock picks, analysis, market status and learning tools about strategies (CAN SLIM strategy). I myself have been using this service for a long time, and since August 2008 I decided to start doing my own research and study of the market. I still read their front page however. At the beginning of my investing career it was invaluable source of information. If you do not want to pay for subscription, you can try digging on your own. There is a plenty of free websites providing you with similar data such as MSN Money or Yahoo Finance or you may be able to get some research tools and data from your broker.

9. Are you ready to start trading on your own?

Before you select the strategy, start training or trading in real life you should prepare yourself psychologically as well. Here are a few tips what you should do and pay your attention when creating your investing plan, loss control plan and strategy:

  1. Make sure you invest only money you can afford to lose.
  2. Always consider your money as lost so you do not touch them, unless withdrawing some gains (I will talk about this in the following articles).
  3. Never use borrowed money and never ever use credit card money for trading.
  4. Don’t over-invest or over-save yourself. Withdrawing money or selling stocks when forced, is the best way how to lose all your account
  5. and never ever allow anybody to trade your own account, listen to tips or hot picks

I will talk more about these items in future articles. Before you start trading with your own money you should get familiar with technical part of the game. You should know basic terminology, how to execute orders, use stop loss orders, etc. This also should be a part of your strategy. Next time I will tell you about strategy I use for trading, how to execute trading orders, using stop loss orders and how to make all this work for you.

to be continued…


Stay tuned for the continuation of Investor’s checklist

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Previous Investor’s checklist articles:






4 responses to “Investor’s checklist II.”

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  3. You’re right. There is always a lot to learn. Investing into funds is quite a bit different strategy than investing into stocks, I guess. Thanks for your kind words.

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