A Beginner's Guide to the Stock Market

by Matthew R. Kratter

This is because every stock has a bid price and an offer (or "ask") price. The bid is the price at which someone is willing to buy the stock. The offer is the price at which someone is willing to sell the stock. Memorize this phrase right now:

“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. Liquid stocks in the U.S. usually have a bid-ask spread of just a penny or two.

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

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.

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.

https://www.barchart.com/stocks/highs-lows/highs?timeFrame=1y

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.

You can use this link to look up the float for any stock: https://finance.yahoo.com/quote/LYFT/key-statistics

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%.

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.

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.

https://www.nasdaq.com/markets/ipos/

When I want to trade a recent IPO, I usually just watch it for a couple of weeks, to get a better feel for how it is trading. If I feel that the S&P 500 is about to go down, I will often short a recent IPO that has a small float (assuming that I am able to borrow the shares to short). If the S&P 500 goes down 10%, a new IPO might go down 50-75%.

Likewise, if the S&P 500 has been going down for a few months and my indicators tell me that it is near a bottom, I will often buy a recent IPO with a small float. If the S&P 500 rallies 10%...

Let's start with an example. On 26 February 2019, the gaming company Sea Limited (ticker: SE) closed at 16.20. In the after-market hours, the company reported much better than expected earnings. How do we know that the earnings were better than expected? Because the next morning the stock opened 15% higher at 18.64. The stock continued to move higher for the rest of the day, closing at 21.99. In other words, after gapping up, the stock still moved up another 18% during the day.

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.

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.

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

If you have made a mistake, cut your losses quickly and move on. Never let a trade turn into a long-term investment. Don’t average trading losses. Don’t throw good money after bad. Never add to a losing position, but feel free to add to a position once it starts to make money.