A Beginner's Guide to the Stock Market

by Matthew R. Kratter

A dividend stock will usually make a cash payment into your brokerage account every 3 months. That cash payment is called a dividend.

You just need to spend less than you earn, and invest the rest in dividend stocks.

When you own dividend stocks, the cash hits your brokerage account every 3 months, whether you have a job or not.

3% is what we call the stock's “dividend yield.”

A successful company will raise its dividend every year.

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.

In order to pay a dividend, a company needs to be making money itself.

Dividends are usually paid out of a company's free cash flow.

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

Just copy him.

An even easier route might be to just buy some B-shares of Berkshire Hathaway (ticker: BRK-B).

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.

value investing is about buying something for less than it is worth.

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

earnings per share (EPS)

TTM P/E (trailing 12 months price to earnings ratio)

Companies that are growing their revenues or earnings quickly ("growth stocks") tend to have P/E's above 25.

Companies that are in trouble often have P/E's below 10.

Today people often confuse value investing with buying stocks with low P/E's.

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.

Paying a cheap price for a stock that is going to zero is never a good deal. We call these situations "value traps." They look like good values, but they turn out to be traps.

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.

When you are just getting started, it is probably easier to trade growth stocks and momentum stocks.

I hope that after reading this you will never buy a stock just because it is "cheap" or has a low P/E.

A growth stock is simply the stock of any company that is expected to rapidly grow its revenues or earnings.

Ignore the high P/E.

Great companies that are rapidly growing will always trade at high P/E's.

Companies with high P/E's are pricing in high growth in future earnings.

Every single holder of the stock has a profit.

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. That looks something like this:

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.

a stock gaps up to new highs after a strong earnings report, that can be a great buy signal.

“Post-Earnings-Announcement Drift” (PEAD),

Growth stocks perform much better when the entire stock market is also in an uptrend.

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.

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).

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.

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%.

When a stock keeps hitting new 52-week lows and it has a high short interest, you want to stay away.

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.

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 meth...

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 keepi...

I usually like to risk no more than 1% of my trading account on each stock trade.

An IPO ("initial public offering") occurs when a formerly private company decides to take on outside investors.