A Beginner's Guide to the Stock Market

by Matthew R. Kratter

I believe that you are destined for something greater.

The NYSE is best known for its blue chip (high-quality) stocks like Coca-Cola and McDonald's.

NYSE = blue chip (corporate).

The Nasdaq is best known for its tech stocks like Netflix and Apple.

Nasdaq = tech.

Investing in dividend stocks is one of the best ways to build wealth. The reason it works so well is that you can take the cash from a dividend payment and use it to buy more dividend stocks. Then those dividend stocks will pay you more dividends.

If you keep doing this over many years, you will end up like Ronald Read. He spent the first half of his life as a gas station attendant, and the second half of his life as a janitor at a J.C. Penney department store. He lived a simple, frugal life and funneled much of his earnings into dividend stocks. When he died at the age of 92, he left behind an $8 million fortune, all in dividend stocks.

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, an...

When you own dividend stocks, the cash hits your brokerage account every 3 months, whet...

Coke is a special kind of dividend stock. It is a Dividend Aristocrat, one of an elite group of companies that have raised their dividends every year for the past 25 years. Other Dividend Aristocrats include the Colgate-Palmolive Company, Johnson & Johnson, and McDonald's.

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.

Owning a basket of dividend stocks over a long period of time is one of the best ways to build wealth.

Scroll down and you will see a list of every stock that Buffett owns. For the 2018 letter, you can find this list on page 12 of the PDF. It includes the following stocks: American Express (AXP) Apple (AAPL)

Bank of America (BAC) Bank of New York Mellon (BK) Charter Communications (CHTR) The Coca-Cola Company (KO) Delta Air Lines (DAL) Goldman Sachs (GS) JPMorgan Chase (JPM) Moody's (MCO) Southwest Airlines (LUV) United Continental Holdings (UAL) U.S. Bancorp (USB) USG Corporation (USG) Wells Fargo (WFC)

If you study Warren Buffett for many years as I have, you will begin to notice that his stock picks follow a certain pattern. They are usually strong, well-known brands like Coca-Cola and Apple. He also likes to own financial companies like Bank of America, American Express, and Wells Fargo-- probably because these companies are highly leveraged and so make a lot of money during the good times. They also get bailed out by the government during the bad times.

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

We can say that this stock has a TTM P/E (trailing 12 months price to earnings ratio) of 15. Historically that is a pretty good average P/E for a stock or for the stock market as a whole.

Companies that are growing their revenues or earnings quickly ("growth stocks") tend to have P/E's above 25. So, for example, today Microsoft has a P/E of 27.70 and Amazon has a P/E of 79.

Companies that are in trouble often have P/E's below 10. So for example, today Bed Bath & Be...

Another mistake that new investors make is buying "bargain stocks."

Value investors will always tell you to stay away from companies with high P/E's or companies that are losing money. But if you do that, you will miss out on some of the greatest stock runs of all time. Microsoft, Starbucks, Home Depot, and Amazon all traded at very high P/E's for many years. Amazon still does. But these stocks have gone on to make their holders very rich.

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.

If a stock gaps up to new highs after a strong earnings report, that can be a great buy signal. Due to an anomaly called “Post-Earnings-Announcement Drift” (PEAD), a stock that has gapped up like this will have a tendency to continue moving in the same direction for many days or even weeks. As a small investor, you can ride the wave, as larger institutional investors add to their positions over time and thus cause the stock to drift 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 stock that are actually available for trading.

To calculate the float, you just take the total number of shares outstanding and subtract all closely-held shares (those held by founders, employees, and original investors that are locked up and thus unable to be traded).

You can use this link to look up the float for any stock: https://finance.yahoo.com/quote/LYFT/key-statistics This link is set to LYFT, but you can use it to look up any stock’s float, just by changing the ticker in the URL. The float and total sh...

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. You can find a stock’s short interest here: https://finance.yahoo.com/quote/LYFT/key-statistics Again, you can change the ticker in the URL to examine any other stock. Scroll down the far-right column, and you will see “Short % of Float.” This is simply the number of shares that have been sold short, divided by the float (which we defined above). Some hated stocks will have a short interest as a percentage of float that is anywhere from 10-50%.

We’ve spent a lot of time discussing when to buy a growth stock. That’s usually the easiest part of the trade. 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. Take profits if a taxi driver or barber tell you to buy the stock. 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 crosses below the 200-day moving average. Use this method to capture longer moves. Use a 10-day or 20-day exponential moving average (EMA) as a trailing stop. Exit your position if the stock has a daily close below this EMA. 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 exposure to the stock in case it continues to move higher.

When I'm buying IPOs, I like to focus on more obscure companies, which I often find on this calendar of new IPOs: https://www.nasdaq.com/markets/ipos/

A penny stock is any stock that trades under $5. Unless you are an advanced trader, you should avoid all penny stocks.

Even if you have a small trading account ($5,000) or less, you are better off buying fewer shares of a higher-priced stock than a lot of shares of a penny stock.

That is because 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. Many of these companies have never made a profit. They may be frauds or shell companies that are designed solely to enrich management and other insiders. They may also include former “blue chips” that have fallen on hard times like Eastman Kodak or Lehman Brothers.

To add injury to insult, a penny stock might appear to be liquid one day, and the next day, the liquidity dries up

This has led to the famous expression "Sell in May and go 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. So for home improvement, you want to own Home Depot; for fast food, McDonald's; for toothpaste, Colgate Palmolive; for payments, Visa; for smart phones, Apple; and for social media, Facebook. Once a business sells more than any other company in its industry, it becomes very difficult to compete with. There's no substitute for being #1 in your industry.

Bulls make money, bears make money, but pigs get slaughtered. A greedy trader who ignores his stop losses and other exit signals will give back all of his profits, and then some.