A Beginner's Guide to the Stock Market

by Matthew R. Kratter

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

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

A liquid stock is defined as a stock where you can buy or sell a lot of shares without moving the stock too much.

An index is simply a collection (or "basket") of stocks.

Dow Jones Industrial Average (DJIA).

Another well-known index is the Nasdaq 100, which contains mostly tech companies.

ETF ("exchange-traded fund").

earnings per share (EPS)

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.

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

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.

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.

a small float means that not all of a company's shares are available to be publicly traded.

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.

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.

A penny stock is any stock that trades under $5.

"Sell in May and go away."

order of importance to me are: (1) the long-term trend, (2) the current chart pattern, and (3) picking a good spot to buy or sell. Those are the three primary components of my trading.

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