A Beginner's Guide to the Stock Market

by Matthew R. Kratter

An inexperienced trader will be tempted to buy a stock like this when it is down, but this is almost always a bad idea.

A liquid stock is defined as a stock where you can buy or sell a lot of shares without moving the stock too much. Liquid stocks in the U.S. usually have a bid-ask spread of just a penny or two.

If you are going to trade before the market opens or in the after-hours market, always use a limit order.

said, a great time to invest in an index like the S&P 500 is during a bear market. If stock prices have been falling for 6 months or more, and there is a lot of pessimism in the air, it might be a good time to invest some extra money into index funds. This is because lower stock prices will allow you to buy more shares of stock for the same dollar amount than you could if stock prices were higher.

It's a good reminder that you don't need to have a high salary to become a millionaire. You just need to spend less than you earn, and invest the rest in dividend stocks.

There's an easy way to own a piece of every Dividend Aristocrat: just buy some shares of NOBL. It is the ProShares S&P 500 Dividend Aristocrats ETF. It trades just like a stock, and you can purchase it using any brokerage account.

P/E is a company’s “price to earnings ratio.”

Until you become an advanced investor, don't ever buy a stock with a P/E of 10 or less. It's just a bad hole to fish

you must “skate” to where earnings are going to be, not to where they have been.

I also like to look for growth stocks, where the float is less than 20% of the total number of shares outstanding. The “float” is simply the number of shares of a stock that are actually available for trading.

Take profits when you are so excited and happy about your trade that you are losing sleep. Take profits if a stock moves up 100% in 2 weeks or less. Take profits when you are up 300% from your entry price. Take profits when all of your friends and CNBC begin to talk a lot about the stock. At this point, the trade has become crowded, and hence much more dangerous.

As we mentioned in the chapter on growth stocks, a small float means that not all of a company's shares are available to be publicly traded. A small percentage of an IPO’s shares are allowed to be traded on the stock exchange, while the rest of the shares are "locked up" and can't be sold for at least 6 months.

To be a long-term investor in an IPO, you need to know something about the industry and also have a correct view of the company’s future prospects. You then need to put the stock somewhere where you won’t be tempted to actively trade it.

Find a stock that is gapping up on good news (like a better than expected earnings report).

Wait 15 minutes after the market's open, and note the stock's price at that time. Put in a limit order to buy the stock at that price. If your order is not executed in the next 15 minutes, cancel your order and walk away. If your order is filled, hold on to the stock for the rest of the trading day, and then take profits a couple of minutes before the market closes that day. Exit the stock early if it trades below the lowest price of that first 15 minutes of morning trading.

Don’t buy stocks that are hitting 52-week lows. Don’t trade penny stocks. Don’t short stocks. Don’t trade on margin. Don’t trade other people’s ideas.

(Mean reversion occurs when a stock moves up sharply from its average trading price, only to fall right back down again to its average trading price).

When you buy a stock on margin, it means that you are borrowing money from your broker, in order to purchase more shares of stock than you would normally be able to buy with just the cash sitting in your brokerage account.

When you buy a stock using margin, the stock and cash in your trading account is held as collateral for the margin loan. If the stock falls enough, you may be required to add more cash to your account immediately (this is called “getting a margin call”), or risk having the broker force you to immediately sell your stock to raise cash. Often this will lead to your selling the stock at the worst possible time.

The best analysts get hired by hedge funds, and you never hear from them again. The worst analysts stay at the banks or brokerage houses, and continue to dispense their mediocre advice. Huge amounts of money have been lost by following their advice.

Focus on a few stocks, and get to know how they trade. Don’t spread yourself too thin by trying to follow too many stocks.

away." Stock market returns from November through April have historically been much higher than stock market returns from May through October. This doesn’t necessarily mean that you should sell all of your stocks and go to cash every May. But it does mean that you should be more cautious when trading during the summer months. Many traders and investors are at the beach, so liquidity is lower and volatility is higher.

If you are looking for a good long-term investment, buy a company that has the highest sales in its industry.

George Soros: "It's not whether you're right or wrong that's important, but how much money you make when you're right and how much you lose when you're wrong."

Buy the strongest stocks that keep moving up. Add to your winners, get rid of your losers, and don't get too greedy.