A Beginner's Guide to the Stock Market

by Matthew R. Kratter

The stock market is the greatest opportunity machine ever created.

I skate to where the puck is going to be, not to where it has been.

“You sell to the bid, and you buy from the ask.” The distance between the bid and the ask is called the "bid-ask spread." A liquid stock like Microsoft (MSFT) or Apple (AAPL) will have a bid-ask

And please don’t ever trade an IPO using market orders. That is the ultimate newbie mistake. More on that in a later chapter. . .

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.

It's extremely difficult to get rich owning a price-competitive business. If you sell corn, oil, or generic clothing, you have a lot of competition, and your margins are razor thin.

Apple laptop or a pair of Nike shoes, there's only one place to get them. That's why Apple and Nike can charge premium prices.

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

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 in. It is full of companies with giant debt loads, falling revenues, or outdated products like faxes and typewriters. And probably a few frauds as well. So stay away.

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

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

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.

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.

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.

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.

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

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 go up fast, but they can also go down fast.

$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 shares of stock, and the stock falls 5 points, I will have lost $1,000 or just 1% of my total account size.

An IPO ("initial public offering") occurs when a formerly private company decides to take on outside investors. It does this by either having insiders (founders, company executives, venture capitalists, and other institutional investors) sell some of their shares to the public, or by having the company create new shares that can be sold to the public.

So if you ever buy shares of an IPO, remember who you are buying from. You are buying from smart insiders who know everything about how the company operates, its strengths and weaknesses, and its future prospects.

As companies stay private longer before having an IPO, the bulk of the gains go to the private market holders.

The second way to approach IPOs is from a trader's perspective. An IPO with a small float has the potential to go up or down a lot, which makes it a great trading vehicle.

Reaction to the news is always more important than the news itself. And so, by extension: Reaction to an earnings report is always more important than the earnings report itself.

John Maynard Keynes: "Markets can remain irrational longer than you can remain solvent." Dennis Gartman: "The markets will return to rationality the moment that you have been rendered insolvent."