Understanding the Basics of Stock Day Trading

Opinions about day trading vary widely. Some people swear it is the best way ever to make a profit in the stock market...others, including the SEC (Securities and Exchange Commission) advise strongly against day trading, insisting it is too risky. As with many things having to do with investing and the stock market you will hear all kinds of things about day trading. The trick is to sort the information out.

But what exactly is day trading and why do so many advise against it? Day traders literally trade everyday, all day, buying and selling sometimes very rapidly. They hope to see a stock going up, for instance, quickly buy a block of that stock and then sell it again as soon as it has risen enough to make a reasonable profit. If everything works right the trader makes a profit every day from the normal movement of stock prices up and down.

Day traders try to concentrate on certain stocks that are particularly suitable for day trading. The most important thing is that the stock must be one that is highly liquid, which means it is bought and sold often. This allows the day trader to buy and sell easily. Liquidity varies with market volume and the size and nature of the business. In general almost all stocks on the major exchanges are more than liquid enough for day trading purposes.

To be suitable for day trading a stock also needs to be sold in sufficient volume that the buying and selling activity of one trader won't affect the market price of the stock. Day traders usually buy and sell big blocks of stock so a good day trading stock needs to have at least 500,000 shares traded a day. Day traders also look for stocks that have high volatility, which means that the price goes up and down rapidly. A stock with a rapidly changing price is perfect for day trading. The ideal is at movement of at least $2 a day.

A day trader also needs to be able to find sufficient real time information of the orders for a stock. This is sometimes called price transparency or market depth and lets the trader know how much stock they can probably move in a certain period of time. Traders need to have access to the NASDAQ level II quote screens in order to gather this information.

There is nothing illegal about day trading but it can be extremely risky. Almost all day traders are working with borrowed funds which they hope to increase through their buying and selling. If the NYSE and the NASDAQ classify someone as a "pattern day trader" then that trader must trade through a margin account with at least $25,000 as a deposit in it. The broker who handles the account will require that further deposits be made if the trader's holdings drop too far in value.

Because day trading is so risky the Securities and Exchange Commission has devoted quite a bit of energy to spreading warnings about the practice. Their fear is that people will become involved without understanding how much money they can lose in a very short time.

Anyone who decides to try day trading can expect to suffer huge losses as they try to learn how to do it successfully. Very few will succeed and make money in day trading. No one should ever try day trading with money that they cannot afford to lose without any problems.

Day traders are not really investors. They buy and sell over the span of time as short as seconds or minutes. They never hold stock after the close of the trading day because the risk of overnight price changes is too great for them. Day trading is really speculating; some call it gambling.

Be sure to avoid websites which promote day trading by talking about the great profit potential and then offer you 'expert information' or 'hot tips' for money. The recommendations are usually actually paid for themselves and the advice is worthless.

Stop wasting time and money looking for the latest Stock Market Quotes tips, tools, and techniques by visiting http://www.YourInvestmentOptions.com - a popular website that specializes in providing the most up to date info on stock trading and investing for traders of all experience levels.

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Trading Jim Cramer's Mad Money Picks

Before you jump into following Jim Cramer's Mad Money stock picks, it would be very insightful to track his picks so that you can have a detailed and unbiased record of how well they perform, both short-term and long-term. This is also important in order to assess the best strategies to use when considering either a trade or an investment from one of his suggestions.

What one must really understand when looking to invest in Jim Cramer's picks is that although most of his picks are meant as longer term opportunities, however, in the short-term, many of these picks can easily get overbought - especially when all his followers decide impulsively to buy at the same time. This is absolutely the WORST time to consider buying the stock! Although Cramer may be right longer term, the only reason it moved that day is because of his many followers jumping aboard hoping to make a quick buck, and unless new buyers come in very soon for some other reason, the stock will likely trade right back down to where it started.

Consider what Jim Cramer himself is telling you. He will not buy or sell a stock within 5 days of mentioning it on the show. Now, inherent in that statement what he's also telling you is that for a long-term portfolio he doesn't need to act any faster than that. In fact, he can gain valuable insight into the stock based on how it performs after it is mentioned on the show. For example, if a stock jumps after he mentions it, and every time it does try to dip back new buyers come in and bring the stock back up, that is an indication that his thesis - possibly long-term - but now more importantly in the shorter term - may very well be "right on the money", and possibly a good time to initiate a position.

If, however, the stock merely jumps and falls right back with little or no new buying interest coming into the stock, that is also just as telling that perhaps this stock is just not ready yet, and now anyone who jumped aboard into the spike will bring the stock lower as they all liquidate their positions at increasingly losing prices. These will likely be the same people who the go on to send Cramer hate-mail. When all of this pressure capitulates into a panic in the stock, THAT is the time to consider your long term stock purchase/investment!

Through analysis of his picks at sites such as http://www.booyahboyaudit.com and http://www.madmoneyrecap.com, combined with the right shorter-term tools and analytics (try the free alert and charting tools at http://www.yourika.com/tymAlertsMadMoney.html and http://www.yourika.com/MadMoneyCharts.html), you'll discover that it's best to wait for the dust to settle after a stock gets pumped up and watch for a few days to see how trading unfolds. In fact, it may even set up an excellent shorting opportunity for more advanced traders to consider.

Cramer does have many good ideas and he definitely knows about stocks, and for that I too enjoy watching him and listening for new ideas that may interest me. But add a little common sense to the equation and you are on your way to a real winning plan.

Alexander Paul Morris, the designer and creator of tymoraPRO, serves as President of Yourika Corp. He is a trader, programmer, and mentor widely renowned for his ability to analyze market behavior and to program systems and alerts that assist in capturing trading opportunities based on patterns of fear and greed that continually repeat themselves in the marketplace. A 14-day free trial of the platform is available to those visiting http://www.yourika.com.

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Get Started Online Trading

Online stock trading is an exciting way to make money online. You have a lot of control over the whole process and not just because you choose the stocks you invest in. You control how much you invest, how fast, how much risk you take on and many other factors. To get started quickly, consider where you fall on some key variables.

First, what kind of investing do you want to do? If you are just getting started and don't know much about investing, you may want to focus on traditional stock buying and selling. There is a lot of money to be made here in both good and bad markets. Once you have some success and develop some confidence, you can move on to more advanced trading with short selling, options and swing trading.

Second, how much money do you want to invest with? It is always important to protect your principal, no matter how much you invest. But there is a big difference if you are investing $20,000 or $1,000. The larger your principal, the more you should diversify your investments and spread them out among high-risk/high-return stocks and more conservative stocks. If you are investing $1,000, you are putting much less at risk and can focus in on a particular area and try to develop some expertise there.

Third, what are your objectives? If you are wanting to take control of your retirement account, you want to do conservative, long-term investing? If you are wanting to double your money fast, you should focus on stocks that make dramatic price moves. How you answer this question will determine the kinds of stocks you invest in. For a conservative approach, you want to focus on NYSE issues or mutual funds that move slowly and somewhat predictably. For the higher risk, fast gain approach, you could look at penny stocks and other small caps.

Download my free guide, "7 Steps to Online Trading Profits" to learn how to get your online trading going fast and profiting quickly at http://www.BeginningOnlineTrader.com

Daniel B. Johnson is vice-president of a wireless communications company based in Dallas. He maintains a successful online trading career on a part-time basis to earn an additional income stream.

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Discover How to Find Good Penny Stocks That Will Be Profitable

We all know that the only way to make money with penny stocks is to find the profitable ones that will actually rise in price once you have purchased them. The hard part about this is that penny stock investing can be extremely difficult because of the nature of penny stocks. They are some of the most volatile stocks and so it can be risky to throw a lot of money at them. Many investors are not aware of this and walk blindly into penny stocks investing without the proper tools. Needless to say, they usually lose money.

Millions of dollars are lost every year by newbie investors who tried to strike it rich in penny stocks but failed because of either lack of experience or lack of the right system or tools for investing in these special stocks. Even some expert investors are having trouble because these stocks are so crazy at times. Most people just need some sort of system to show them which stocks to invest in. That way, they could drastically reduce their risk as they are no longer just relying on their possibly naive judgment. If you really want to succeed in penny stock investing then finding a good penny stocks system is probably your best bet.

The best ones out there shows you exactly what stocks to pick and when to pick them. They also must be easy to use and understand, that way you will be able to quickly and efficiently utilize the system. If you can master the investing tool you are using, then there is no limit to how much money you can make investing in good penny stocks.

There is one system that meets all of these requirements and more. It minimalizes risk, it finds the best penny stocks, and is easy to understand and use. In fact, it does most of the work for you! This system, called Doubling Stocks, is quite possibly your best opportunity to finally make money with good penny stocks. Without Doubling Stocks, your penny stock investing future may be a bleak one. If you use Doubling Stocks, there is almost no way for you not to make a profit. Click here now to discover more about this proven, money making penny stock system.

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Buy Stocks Online With Practice

Buy stocks online and learn what buying stocks and trading is all about without spending lots of cash from the beginning. In reality you literally own part of a company that you decide to buy stocks in and you could make that company a success with the capital amount that you are willing to invest.

With that in mind it is often a good idea to start out in the stock buying market with one of the various virtual stock market accounts that allow you to practice and learn how to buy stocks online before you go into the real world of buying. These simulated stock market accounts are normally free to sign up for and will allow you to practice your investing skills just like you would with an online trading account but instead of using real money you trade with virtual cash. These simulated trading accounts allow you to try out almost any trading strategies online with no risk of losing your real money.

Buying stocks is a serious investment so to be able to learn and practice with one of the many simulated trading accounts is extremely useful for beginners who have never placed a trade right down to the more knowledgeable investors who may be looking to try out and practice some more advanced investment strategies. The experience of trading in the stock market is both exciting and stressful so using the virtual trading accounts will set you up emotionally for the sometimes roller coaster ride of investing in the real world.

Start practicing your stock buying skills today with these virtual trading tools and you could be investing within minutes using your virtual online trade account. You are able to practice different real strategies in different real time markets but all with fake money and not having to spend a cent. The various tools available will simulate the whole process for you giving you plenty of investment practice and confidence when the time comes and you are ready to buy stocks online in the real world with real money.

Justin Sawyer is a writer from South Africa, offering advice on investing for beginners and writing regularly for http://www.thebestinvestments.co.za investing information portal.

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5 Tips For Choosing Small Cap Value Stocks

Small cap stocks need not be hot tip penny stocks or speculative growth stories based on an idea and a prayer. There are plenty of quality, undervalued small cap stocks out there, and this article tells you how to find them.

1) Find the Big Fish in Small Ponds

It is fundamentally difficult for small capitalization stocks to build and maintain a competitive moat. For one, these companies do not have the economies of scale that large, multi-national corporations have developed that gives them the ability to squeeze suppliers on price, spend hundreds of millions on marketing, or afford huge sums for research and development. Many small companies do indeed grab market share by being first to market with new technology or ideas, but this advantage rarely lasts. In the best case, the company is purchased at a premium by a larger competitor. At worst, the company is copied and then priced or marketed out of existence. The outcome for these companies is speculative, and we do not want to be speculators but investors.

So how do we find small caps with a reasonable competitive advantage? One way is to find companies that dominate very small, limited markets. This is known as the "Big Fish in a Small Pond" scenario. Because of the limited market opportunity, larger firms generally don't bother to compete there. This can allow a relatively small company to control the market, consistently able to raise prices and perhaps move into closely related industry. The outcome of this is high returns on capital for long periods of time. Of course, we don't want to buy these until they are cheap!

For an example of this, consider Winnebago (WGO). At under 500 million market cap, this is clearly a small cap stock. Motor home manufacturing is not a lucrative market with wide appeal. Because of this, few new competitors bother to enter it - only about 10 companies control the market. Winnebago is the big fish in this small pond, with over 20% share. Because of this, the company has been able to maintain (and even increase) pricing, continue to build brand equity, and reward shareholders with dividend hikes and buybacks. Winnebago has averaged well over 20% return on equity for over 10 years - a sign of a potential competitive moat.

2) Management Matters

In general, Wall Street overvalues management. Businessweek and Forbes paste the faces of successful CEOs all over the front page in recognition of a few quarters of beating estimates. But there is ample evidence that previously great managers have limited effectiveness when running a poor business. See Alan Mullaly at Ford (F), David Neeleman at Jetblue (JBLU), or Eddie Lampert at Sears (SHLD).

With small caps, the story is different. Here, managers often wear several hats and are responsible for strategy and implementation, making great minds even more important. A great strategy can easily fail if not well implemented. Even more evidently, great implementation of a poor strategy is a sure path to small cap failure.

To value management, look for founder CEOs that own a large stake in the company - preferably 10% or more. This aligns their interests with yours. Founder CEOs of small caps with strong profitability records likely have a good strategy and have been successful putting it to work. Beware of small caps with vagabond management or those that use shareholder capital to give themselves generous salaries or perks.

3) Debt is Dangerous

This one is obvious - excessive debt is especially dangerous when dealing with small caps. Some large companies can afford to carry large debt loads, as they are virtually assured of future cash flows and can easily survive major economic downturns. Hershey (HSY) is a good example of this.

Few small caps have the luxury of knowing that their cash flows can survive virtually any economic situation. Also, banks sometimes consider small companies more risky, and price debt at higher interest rates for them. Therefore, every dollar of debt owed requires a higher return on capital than a similar dollar of debt in a big, stable corporation. Clearly, debt is a bigger burden for small caps.

Ideally, you want to pick small caps with no debt whatsoever. Minimal debt can be helpful, but be wary of stocks with a debt-to-equity ratio over 30%.

4) Diversify

When investing in widely diversified stalwarts like Johnson and Johnson (JNJ) or GE (GE), each of whom has been around over 120 years and controls multiple product segments, there is almost no chance of losing all of your investment. With small caps, on the other hand, even the most carefully chosen pick can easily see it's business opportunities disappear. Most of these companies rely either on a single product or a small selection of products in a very focused market. The lack of product diversification is dangerous because if that one market is affected by any adverse factors (from technology changes, new competition, even changing consumer tastes), the small cap company can be dragged down with it. Thus, lack of product diversification is the single biggest risk in small cap investing.

Take for example a MFI stock, Select Comfort (SCSS), the maker of the Sleep Number bed. Just a year and a half ago this company looked like a great buy, driving returns on equity well over 30% and growing revenues and earnings in the 20% range (and with no debt to boot). But a number of challenges all hit the company at once. The housing market went into a deep decline, competitors like Tempur-Pedic (TPX) gained ground, and soon Select Comfort found it's only product under siege. Sales and earnings tanked, and the stock has dropped from the mid-20's into penny stock range.

For these reasons, you MUST diversify when buying small caps. Even the most attractive opportunities are not immune to stock price swan dives.

5) Never Forget the Fundamentals

The last rule may seem obvious, but it's a rule nonetheless - don't forget the fundamentals! Particularly, look for a reasonable history of above average returns on capital (15-25% return on equity, 25% or higher return on invested captial), and solid free cash flow margins (at least 5%). Any fad stock or technology leader can generate high returns on capital for a year or two, but only a company with a sustainable market and business model can maintain these returns for 5 years, preferably more. As always, don't be lured by earnings growth alone... if the company is making sales it won't be able to collect on, those earnings are no good. Focus on cash flow instead of earnings.

Another great sign in a small cap is the payment of dividends. Dividends are a very underrated part of total stock returns. In his book The Future for Investors, Wharton professor Jeremy Siegel calculates that reinvested dividends would have accounted for the majority of S&P 500 index returns over the past 60 years. Not only this, but the payment of dividends is tangible proof of a company generating excess cash flow. Instead of blowing those extra cash flows on overpriced acquisitions, they are paid out to their rightful owners - the shareholders. Paying out this excess cash also optimizes return on capital.

Don't be Afraid of Small Caps!

Many investors are lured away from small caps by their financial advisors. Some reasons for this are legitimate - small caps require a lot more research time and are subject to more risk. However, the rewards are well worth the effort. The Magic Formula screen is filled with both quality and questionable small cap stocks. Some of these will fade into obscurity, and some will rocket back to their true value - and keep going up.

Steven Alexander is the founder and editor of MagicDiligence ( http://www.magicdiligence.com ), a website dedicated to researching and recommending stocks appearing in Joel Greenblatt's Magic Formula Investing screen.

AFP - Lehman Brothers declared itself bankrupt Monday and Wall Street rival Merrill Lynch had to be taken over in a new financial earthquake that sent global markets into a slump.

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