A Beginner's Guide to the Stock Market

by Matthew R. Kratter

“You sell to the bid, and you buy from the ask.”

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

Some smart people came up with the idea of the ETF ("exchange-traded fund"). An ETF trades just like a stock. You can buy or sell it all day long in your brokerage account. Each ETF represents a certain index. So the ETF for the S&P 500 trades under the ticker SPY. The ETF for the DJIA trades under the ticker DIA. And the ETF for the Nasdaq 100 trades under the ticker QQQ.

Another way to index is to buy a low-cost mutual fund like the Vanguard 500, which only charges you an expense ratio (annual

fee) equal to 0.04% of your investment. By comparison, the SPY ETF charges a 0.0945% expense ratio, but allows you to trade in and out of the stock during the day. Mutual funds like the Vanguard 500 only allow you to buy or sell shares once a day based on closing market prices.

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.

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.

An even easier route might be to just buy some B-shares of Berkshire Hathaway

(ticker: BRK-B). One share of stock in this company will cost you $203.27 today.

there's one important lesson that we can all learn from Buffett's investing style. You want to own businesses that have good pricing power. This means that they can raise prices without losing customers.

The single most important decision in evaluating a business is pricing power. If you've got the power to raise prices without losing business to a competitor, you've got a very good business. And if you have to have a prayer session before raising the price by 10 percent, then you've got a terrible business.

Until you become an advanced investor, don't ever buy a stock with a P/E of 10 or less.

Low P/E stocks are almost always pricing in future bad news. Don't ever expect to find good stocks in the bargain bin— unless perhaps you are at the end of a multi-year bear market. Even then, you are often better off buying a higher-quality company that has a higher P/E.

Blockbuster was trading at a P/E of 2 because its earnings were about to completely disappear.

if you are going to be a good investor, you need to learn how to

think like Wayne Gretzky: you must “skate” to where earnings are going to be, not to where they have been.

A low or falling stock price will make it difficult for the company to attract top talent. In this way, stocks don't just reflect a company's current prospects, but also play a role in determining a company's future prospects. A company with a high or rising stock price can use that stock to buy out competitors and pay for top talent. That's what Facebook did with WhatsApp and Instagram.

If you are Warren Buffett investing in a mature company, the P/E does matter. If you are holding a growth stock for a few weeks or even months, nothing could matter less than the P/E.

I like to buy growth stocks that are hitting new 52-week highs, or even all-time new highs. This may seem counter-intuitive to some. Isn’t it risky to buy a stock that is at all-time new highs? Doesn’t that mean that it has further to fall? If you study the greatest growth stocks of the past, you will begin to notice that they spend a lot of time trading at all-time new highs. This makes sense simply because any stock that goes up a lot must (almost by definition) spend a lot of time trading at new highs.

Why would you ever want to miss out on one of these runs, simply because of a bias

against high P/E’s or a fear of buying a stock at an all-time new high? There is, in fact, something wonderful and magical about a stock at an all-time high: Ev...

By contrast, when a stock has crashed or is constantly hitting new 52-week lows, there are many investors and traders that have been left holding the bag. If the stock then tries to rally, these investors will be happy to get out by selling their shares at their break-even price. This provides constant d...

the short-sellers. These are traders who have shorted the stock (probably because "it has such a high P/E") and are betting that it will go down. At a new all-time high, everyone who has shorted the stock previously now has a losing trade on their hands. They are sweating bullets.

And there's only one thing that they can do to stem their losses: they must "cover" their shorts by buying back the stock. This buying

only adds more fuel to the fire, driving the stock higher, and forcing o...

One way to find them is to constantly scour the list of stocks at 52-week highs or new all-time highs, which you can find here: https://www.barchart.com/stocks/highs-lows/highs?timeFrame=1y

The next step is to look at a daily chart of each stock. I want to make sure that the stock is trading above its 50-day moving average; and that the 50-day moving average is above the 200-day moving average.

Never buy a growth stock if the stock is trading below its 200-day moving average, or if the 50-day moving average is trading below the 200-day moving average. If either of those two criteria are true, the stock is in a downtrend.

Also, I like to look for growth stocks that have a market cap of $5 billion or less. It takes a lot less money to push a $5 billion stock higher than it does a $500 billion market cap stock.

Many large mutual funds and hedge funds cannot even look at a stock if its market cap is less than $5 billion. If you can enter the uptrend early, when the stock has a market cap of less than $5 billion, you will be well-positioned if the stock trades higher. Once the stock reaches $5-10 billion, there is a whole new set of institutional buyers who will begin to take notice. As they purchase shares, it will drive the rocket stock even higher.

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 s...

I also like to look for growth stocks with a high short interest. “Short interest” is the quantity of shares that have been sold short by those who believe that the stock will go down.

Short sellers are not, however, infallible. And when a stock with high short interest starts hitting new highs, short sellers will be forced to buy back their shorts, whether they were right about the company’s fundamentals or not. When they do, the stock will often explode higher. High short interest is simply more fuel for a rocket stock’s ascent. That’s why if a growth stock is hitting new 52-week or all-time highs and it also has a “Short % of Float” that is greater than 10%, I get very interested. As the shorts get squeezed, a stock like this can sometimes move up 30% or more in a very short period of time.

Knowing when to sell (at either a loss or profit) can be more difficult. Here are some of the criteria that I like to use: 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.

Exit (with a profit or loss) when the stock closes below its 50-day moving average. Use this method to capture shorter moves. Exit (with a profit or loss) when the stock closes below its 200-day moving average. Use this method to capture longer moves. Exit (with a profit or loss) when the 50-day moving average ...

Use a 10-day or 20-day exponential moving average (EMA) as a trai...

position if the stock has a daily close b...

You can also scale out of a profitable position. Sell 25% of your position every Monday for 4 weeks in a row, or something similar. That is a good way to lock in some profits, while still keeping some exp...

Just be sure to never add to a losing position. Pick a stop loss level when you enter the trade and stick to it. Only losers average losers. Rocket stocks ...

I usually like to risk no more than 1% of my trading account on each stock trade. Let’s say that I am trading a $100,000 account. In that situation, I will risk only 1% of my account, or $1,000. If I enter the stock at 100 and the 50-day moving average is at 95, that means that my risk is 5 points on the stock (100-95). In that case, I should only buy 200 shares of stock. If I buy 200 share...

Here's a day trading strategy that works to capture moves like this: 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.

Write down these “5 Commandments” on a sticky note and put it on your computer screen: 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.

If you stick to stocks that are trading above their 200-day moving averages, or that are hitting 52-week highs, you will do much better than trying to catch falling knives.

A penny stock is any stock that trades under $5. Unless you are an advanced trader, you should avoid all penny stocks. I would extend this by encouraging you to also avoid all stocks priced under $10.

low-priced stocks are most often associated with lower quality companies. As a result, they are not usually allowed to trade on the NYSE or the Nasdaq. Instead, they trade on the OTCBB ("over the counter bulletin board") or Pink Sheets, both of which have much less stringent financial reporting requirements than the major exchanges do.

Reaction to the news is always more important than the news itself.

Reaction to an earnings report is always more important than the earnings report itself.