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Reluctant Millionaires

Strategies For Wise & Effective
Stock Market Investing and Trading

by

Brian L. Nowell, Ph.D.



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Chapter 1

Getting Started



Paper Trading Practice

If you are not investing or trading with your hard earned money yet, or even if you already are, an excellent way to immediately begin to improve your financial success in the stock market is to practice investing and/or trading with pretend money. This is often referred to as paper trading, and I will refer to it as such in this book. While it is true that the experience that you get from investing or trading with real money is much quicker and much more powerful than the experience you will get from paper trading, the emotional pain from making mistakes is a lot more manageable with paper trading, because there is no real loss of money. By the way the use of the word trade means a complete stock transaction, which either starts with buying a stock and then selling it or starts with selling a stock and later buying it back.

An absolute necessity for getting valuable paper trading experience is to keep a written record of your stock selection reasoning, your investing/trading decisions, your impressions about the progress of your investment/trade over time, your financial outcome when you decide to end your paper investment/trade, and the reasons why things went as you expected or contrary to what you expected. Some people record these things in a simple notebook and others use more formal forms and tables to keep track of their paper trades. These records are often called investing journals. For the table I use for my stock market classes see Appendix E. Feel free to enlarge, copy, and modify that table as much as you want to. By writing down the above information for each investment or trade you will have a much clearer picture of what you are doing right to gain you money and what you have done wrong to lose your money. Learning to keep good records is valuable for paper trading and is essential for successful trading with real money.

How To: Practicing (paper trade 5 stocks)

  1. Pick 5 companies to invest in or to trade in the short term. If the companies are not publicly traded (shares available to buy and sell by the general public through the stock markets), then select another company. Many companies are privately held, so their stocks are not for sale to the general public.

  2. Explain (on paper) exactly why you selected each of the companies. This does not mean "I picked IBM to make lots of money". What I mean is such things as (there is a recent favorable news article, I like or use their products, my broker recommends this one, this company has a very strong financial fundamentals (see glossary), this company is better than its competitors, this company has consistent popularity with other investors

  3. Get the correct stock symbols for each company and record them in your investing journal. If you are not familiar with stock symbols, they are groups of 1 to 6 letters of the alphabet which serve as short names for the over 30,000 stocks which are available for public trading on our domestic stock exchanges. These symbols can be obtained for free by calling any discount or full service stock broker.
    Mainly don't use a newspaper to find the symbols because most newspapers make up their own shortened names for stocks and they don't have space to list most stocks. Symbols can also be obtained by going Online to any web-site which offers stock quotes (use the symbol search or company lookup link to find the correct symbol). If there are multiple symbols for a given company, select the simplest one which is associated with the most appropriate/correct company name. The Yahoo Finance home page (
    finance.yahoo.com) is a great place to look up symbols and to get lots of other useful information (which will be explained in detail later in the book).

  4. Get the current per share price for each of your chosen companies (bid, ask, or last trade). You can get that information from a broker or Online in the same place you looked up the stock symbol. When you are Online, put the stock symbol in where the page says Stock Quote or something similar to get the current price.

  5. Invest all of your $10,000, pretend money only, divided among the 5 stocks as you choose. You cannot buy parts of shares so figure the cost in terms of whole shares (i.e. 12 shares of International Business Machines (IBM), 22 shares of Cisco Systems (CSCO), etc). Remember to subtract $10-$80 from your money each time you buy or sell any stock for each company.

  6. Check the news and stock prices for your selected companies each day and record the closing price as well as any news about each company.

  7. Next, sell and buy these and any other stocks you choose at will to get profit or avoid loss. If you buy and sell any other stocks, keep the same kind of good records about them in your investing journal.

  8. Continue paper trading, hopefully correctly using the strategies which I teach about in this book until you have the confidence that you can successfully make money and avoid most losses using real money.


Other Ways To Paper Trade

Yahoo Investment Challenge: Its URL (address) is finance.yahoo.com

The Online home page of Yahoo Finance (quote.yahoo.com) has a link below the blue band and on the left called Investment Challenge. This is a stock trading game in which anyone can participate for free. The game restarts every month, and each participant is given $100,000 pretend money to trade with. The objective of the game is to earn as much money as possible in one month. The rules really restrict the kind of trading a person can do, but the game uses the actual stock market stock price information each day to calculate participants base buying and selling prices.
In this game you can see the trades that the other players are making if you want so that you can think about what they are basing their buying and selling on. The game doesn't tell you that but with some thought you can understand some of the decision reasoning of most of the participants. The game automatically deducts a standard commission each time you buy or sell. If you use the game, read its rules carefully and be sure to keep your investment journal. The rules are fairly easy to understand, but are limited and a little different from real trading for the convenience of the game. The game is designed for people who prefer the aggressive type of stock market involvement known as trading (fairly rapid buying and selling of stocks). Investment Challenge offers cash prizes to the winners each month. The game is free, but may require you to give some general information about yourself to register to play the game.

E-Trade Game: Its URL is etrade.com

E*Trade runs a popular Online brokerage company web-site where lots of individual investors do their trading and investing. E*Trade also has a stock trading game. E*Trade's home page (etrade.com) has a link to its game on the bottom left side called E*Trade Game. There is also a link in the center of the page under the red colored E*Trade Highlights.

The E*Trade Game is free but requires you to give some general information about yourself to register to play the game. Like Investment challenge, there are enticing rewards to encourage you to play. This game offered a Lexus IS300 and a variety of other prizes each month for the winners. When you register you can also get free realtime quotes , a free e-mail account, access to a stock market chat room, 24 hour access to Ask E*Trade to get answers to stock questions, and a site to manage your real or pretend stock portfolio if you want. Only the trading histories of the winners are kept at this web-site for anyone to view. Unlike Yahoo's Investment Challenge the E*Trade Game allows margin buying and short selling and there is no delay in fulfillment of the stock buy or sell.

CyBerCorp: Its URL is cybercorp.com

CyBerCorp has two free downloadable programs which are designed to allow paper trading using stock market information from the day before, but using it realtime, or just like it is the current day's stock market information. There are two programs available. The more basic one is called CyBerX and the more advanced one is called CyBerTrader. I have downloaded and installed both of these program on my laptop computer, but I have never used the programs to paper trade mainly because I am so busy teaching stock market classes and doing my own real trading in the stock market. The advertising for these programs states that they will allow you to paper trade just like you would be really trading in all of its opportunities and aspects. That sounded very appealing to me to do paper trading which simulates real trading very closely like these programs do. These two programs have downloadable files which teach you how to use each program. Also, I believe that you will have to download the previous trading days worth of stock market data from the Internet each time you want to use the program. If you decide to use one or both of these programs, be sure to read the directions carefully and remember to use your investing journal just as you would if you were trading with real money.

The Psychological Nature of the Stock Market

When I first realized in 1996 that the stock market is a cornucopia of psychological interactions, I got really excited. You might well ask why. After all what is so exciting about a lot of people thinking, feeling and acting like people usually do? Well, I am a psychologist, and therefore I know a lot about predicting human behavior from what people think, feel and do in various kinds of situations. And, because one of my job responsibilities as Managing Director of The Development Center is to raise lots of money to start a new College/University, a natural opportunity presented itself. I realized that even though the stock market is very complex and millions of people are involved with it, because they are all people, their investing behavior can be predicted to a certain degree.
So, I believed that lots of money could be made by skillfully predicting what groups of investors would do about certain recognizable situations in terms of buying or selling their stock. As I began an intense and continuing study of human psychology in the stock market, I found lots of predictable human behavior situations which mostly reoccur once a year, 4 times a year, once a month, once a week, every trading day, or even several times a day. Don't misunderstand, I didn't discover most of these situations, I just read about various other people who had discovered or refined the data about the human behavior situations and I added my own knowledge to make them more understandable. Those situations are the heart of the strategies which I teach about in my classes, a few of which are included in this book.

If you want to make money in the stock market or make lots of money in the stock market, I believe that you need a simple yet comprehensive understanding of how the stock market participants typically react to certain situations with predictable buying or selling behaviors. Remember that all of the facts, figures, charts, graphs, tools, and techniques used in the stock market are based on human actions (based on human thought and emotion) in relation to money and stocks. When you know how people usually buy or sell in certain recognizable situations, that will allow you to buy and sell accordingly before the stock price actually changes up or down. Never forget though, even with good understanding of how to predict buying and selling behavior, nothing is perfectly predictable. That is what is called business risk, or informed careful risk. When you don't have the type of appropriate knowledge and actions about the stock market which you will learn in this book and can learn in many other places, then you are only gambling when you participate in the stock market. Most of the following paragraphs in this chapter will address some basic and very important psychological issues which relate to your success in investing and trading in the stock market.

Personal Responsibility

The very first thing you need to do to protect yourself from the risks of investing or trading in the stock market is to consciously take full responsibility for anything and everything that happens to your money when it is invested or traded. There seems to be a growing tendency in this country for individuals of all ages to blame their problems, mistakes, and difficulties on anyone except themselves. I have found that this habit of blaming keeps people from learning from their experiences. You will prosper best and be the happiest with your experiences in investing or trading when you accept that it is up to you only to succeed or fail. That will cause you to be safer with your money, more diligent with your study and watchfulness, and wiser with your ability to select good investing or trading opportunities.

I can assure you that if you decide to invest or trade in the stock market, you will certainly will make mistakes, have problems and difficulties, and suffer financially and emotionally because of, your own mistakes, and the mistakes and malice of other stock market participants at all levels of the market. In Chapter 11 I will briefly describe what you can expect in part, in mistakes and malice from other stock market participants. I have very strong opinions about the extent and wrongness of the malice, but you will be left to decide for yourself if my experiences and observations have merit about those things. Remember that failure is a necessary and vital ingredient for long-lasting success, and it most often precedes the success. If you can't to make mistakes with money or have failures with your financial decisions, then don't trade or invest in the stock market with the expectation of making money there.

And of course, when you prosper financially by using the things I taught you, I will be happy to take all of the credit. I was just kidding, you keep the money and the credit too.

Three Basic Psychological Rules For Winning at Investing and Trading

There are three basic rules to always remember when you are investing or trading in the stock market. These rules are a personal discipline for you to follow carefully if you really want to be financially successful in your stock market trading or investing. All long-term successful investors and traders strictly follow these three rules whether they realize it or not. I will present them here in their order of importance. Their order is the order for you to focus you best efforts in doing the 3 rules.

Rule #1 first of all is to do all of the things you can to make sure that you don't lose your money or that at least you minimize your potential loss. Chapter 24 is a summary of the main safety things I do in my trading and investing. All successful investors and traders make mistakes for all kinds of reasons (some of which I will discuss in this book). The thing to do when a mistake is first discovered is to quickly evaluate the situation and if needed take your bitter medicine right away. The first mistake is the least costly. If you delay, ignore, o r rationalize the mistake, it will cost you even more eventually. How do I know this? Because I have made plenty of mistakes of all kinds and I still make mistakes occasionally. Maybe 1 time out of 20 things work out in my advantage anyway, but almost always, if I don't act quickly to "take my bitter medicine" (take a small loss) to fix the mistake quickly, I find that I have a much more costly fix to make later.

The stock market is a very dangerous place in that it is very easy to lose money there. There are many very skilled, very intelligent, very experienced, and sometimes very unscrupulous people who are constantly trying to make more money by taking yours. I urge you to learn all about how to keep you money as safe as possible and then use what you learn vigorously and consistently, and continually.

Rule #2 is to use an investing or a trading strategy which allows you to get small but frequent and consistent gains. All successful long-term investors and traders get wealthy with steady and frequent small gains. They have learned to avoid the psychological trap of seeking large quick gains with each investment or trade. Those types of gains are possible, but they are harder to take advantage of than the beginning investor thinks. Instead, they most often provide great opportunities for more experienced and malicious stock market participants to take your money. One of the main ways that inexperienced investors and traders lose the most money is not following rule #1 and rule #2 in that order. Instead they typically are lured to focus on following rule #3 primarily, which addresses finding great investing or trading opportunities which produce quick gain.

It is harder than you might think to follow this rule rigorously when all around there are seeming opportunities to make lots of money quickly. Human greed and laziness are hard things to overcome in ourselves.

Rule #3 is to be used when you have at least gained a moderate amount of knowledge and experience with investing or trading. This rule is to look for and take advantage of the very good investing or trading opportunities which you understand and which come around moderately often. That means that once every few months or a couple times a year a very good investing or trading opportunity will present itself. When you have sufficient knowledge and experience, it is good for you to act quickly to take advantage of the opportunity. That requires that you have gained the discipline to have kept some (maybe 10%-20%) of your investing or trading money available to take advantage of the opportunities when they occur. That is also a hard thing for most new investors and traders to do. Please do not advance to rule # 3 until you consistently practice first rule #1 and then rule #2.

Profiting in the stock market is both easier and harder than you think. At this point of the book I will only give limited reasons why this is true. And then, as you progress through the chapters, paper trade, and gain real money investing and trading experience, you will more fully understand what I mean. First of all, making money in the stock market is easier than most people think. This is true when you get knowledgeable about how the stock market works, and when you learn how to recognize the good and fairly safe investments quickly. I have only been knowledgeable about and experienced with the stock market since 1996. Of course I have had the great opportunity to do a lot of intense studying, a lot of trading and some investing, and a lot of teaching and discussion about the stock market since then. I have been delighted to find lots of really good information among the mostly confusing or contradictory thousands of sources of information. For your benefit and so that you won't have to do all of the searching I had to do, I will discuss how to find good information in Chapter 5. I have also found some good math tools which really help in buying and selling decision making. Those tools have been around for quite some time and are readily available to you through the Internet for free. When you understand and carefully apply the strategies, tools, and information you will learn in this book, you will find that it is easier than you thought to make steady money through your careful investing and trading.

So, just exactly what is the catch? Well, that is where your and my own undisciplined human emotions and unproductive habits come in. I refer to these collective emotions and habits as herd tendencies. The word herd here refers to a herd of cattle or sheep. What gets investors or trader into trouble the very most are these tendencies. A list of them would include: Greed, Fear, Short Sightedness, Infatuation, Selfishness, Ignorance, Laziness, Emotional Reactivity, Gullibility, Thoughtlessness, Stubbornness, Inflexibility, Inattention, Impatience, and so forth. I have yet to meet a student in any of my stock market classes, any other trader or investor, or the person I look at in the mirror each morning who does not have some kind of problems with the above mentioned traits and habits in relation to investing and trading. If you do not learn to overcome your problems with these things, you will always have difficulties with the stock market. That is to say you will certainly lose your money. And, as your probably already realize, changing in these areas is not real easy.

From my personal experience with my own work in overcoming my herd tendencies, and from instruction about and observation of my stock market class participants progress in overcoming their herd tendencies, I am certain you can prevail over your own weaknesses and become a successful investor and/or trader. Just to let you know before Chapter 11, lots of participants in the stock market understand about herd tendencies among the average investor, and they use that knowledge to take advantage of them financially. Your knowledge of herd tendencies will help you avoid many of the dangerous things which have been prepared for you by irresponsible and malicious stock market participants. That same knowledge will help you recognize consistently good buying and selling opportunities.

The Universal Psychological Trait of Financial Winners in the Stock Market

There has been an extensive study of many people who have been financially successful in trading and investing in the stock market. In that study many different personality traits, life situations, opportunities, levels of education and intelligence, and other considerations like gender, age, and so forth were studied to learn what someone needs to win at trading or investing. After much analysis, the most likely advantages like intelligence, education, social position, and opportunity were ruled out as being the universal necessities for investing and trading success. Finally, what was discovered as the only universal characteristic among all long-term successful investors and traders was that they all deeply believed that they could succeed and that they were willing to do what it took to do so.

What is really important for you here, is that you take some significant quiet time to reflect on whether you posses or are willing to develop and strengthen your own universal stock market success trait. If you find that you have it or are willing to develop it, then proceed to learn and get experience until you consistently succeed in investing or trading. You will never be perfect in making all correct decisions , but you will achieve the 9 out of 10 and better correct status. If on the other hand, you do not have the belief that you certainly will succeed or you are not willing to work hard to develop that deep belief, I urge you to avoid the stock market or you will undoubtedly suffer a lot of unnecessary financial and emotion pain.

There is No Loss or Gain Until the Investment or Trade is Finished.

This may sound very simplistic, but it would surprise you how many investors/traders don't understand what this means to them personally. I have talked with a lot of individual traders/investors. And, I most often find that they are susceptible to this common psychological investing mistake, even if they have heard about it. What happens to a lot of us when we buy a stock with an expectation that it will rise in price, is that we become emotionally attached to it. When that happens, we are in trouble already, because, we then tend to make emotional rather than rational decisions about buying or selling that stock. When the price of the stock goes up, we tend to think that we are gaining a lot because of the higher price. And we might say some thing like. "I really made a lot of money on XYZ stock today". And, when the price goes down, we might say something like "Oh no, I'm ruined, I have lost a ton of money on this stock today."

While it is true, when we are hoping for a stock price gain, that gain in price is good and that we should protect that potential financial gain and that a drop in price is not good and that we need to consider ending the trade, we haven't actually made any money or lost any money until we sell the stock. Long-term successful investors and traders don't get very emotionally involved in the particular stocks that they are working with. If they are looking for a rise in price, they are of course pleased when a rise in price occurs and displeased when the price drops. But, they are more focused on making sure that they make this trade a successful one rather than thinking about how much they have gained or lost. They know and accept that stock prices go up and down often unexpectedly. So they don't emotionally count their money while the trade is still active, much like the gambler in Kenny Roger's popular song "The Gambler" recommends that "you never count your money until the dealing's done".

This practice of focusing on making careful/good trading/investing decisions instead of focusing on potential gain nor loss is called emotional discipline. By doing this we are in fact learning to use rational thought processes instead of being subject to our own herdish emotional reactions when stock prices have fluctuations in price for or against our expectations.

Success to Failure Ratio represents a condition of investing/trading emotional maturity. What it means is that we cannot hope to make $1,000,000 in the stock market, unless we can stand to lose $1,000,000 and still sleep at night. Of course, successful stock market participants are not expected to be happy about any loss, but they are not disturbed to the point of dysfunction by it either. For the successful investor or trader, some loss is the expected normal business risk. The reason for this need for calm in the face of financial loss is that if we don't have it ,we lose our ability to trade or invest wisely and rationally and become herdishly emotional. That happens when we pass the point where we can lose money because of some unexpected change in stock market or a particular stock and still go on to continue making rational investing and trading decisions.

This same less mature switch from rationality to emotionality affects our positive financial decisions and results when we make trades/investments with sums of money which we can't emotionally afford to lose. This means that if buying $10,000 of Microsoft (MSFT) causes us to worry a lot more than normal when the price temporarily fluctuates down on no news, then we are trading too much money at once for our level of emotional maturity.

I will guarantee that if you do much trading or investing, you will make decisions which will ultimately lose you money some of the time. If you are able to overcome your emotional pain over these failures you will be well on the way to investing emotional maturity. And, if you take the time to analyze exactly what went wrong or where your decision process was faulty, you will get continually wiser and will make fewer mistakes. Because the stock market is quite complex, you will never learn all of its variables and so will make mistakes once in a while. Learn to take those mistakes in stride and go right back to the market and continue making good investments and trades.

How much money is enough for me to accumulate through my stock market trading and investing?

This question must be answered by every individual trader or investor who wants to use and enjoy the money that he or she has been or will be accumulating over time through successfully making profits in the stock market. Typically that involves a careful analysis of one's retirement needs and aspirations. Seriously asking oneself about how much money is enough to make is also vital for each individual trade and investment. Many people never take the time to do that, but it is very important to your mental and emotional trading discipline.

The psychological problem for the trader or investor who doesn't know how much to accumulate overall, is that he or she becomes the slave of the investing or trading process instead of the master of it. This might happen as follows. As the investor learns to precisely use one or more of the strategies in this book and continues to learn about the stock market's behavior, he or she will double his or her original investment at some point relatively soon after starting investing.

Lets say that the original investment was $10,000 (which is purely arbitrary) and that the investor now has $20,000 in his or her Online brokerage account 6 months later. Do you suppose that this investor will now stop investing, take this money, spend it, and never invest again? Almost certainly not! And why is that? Because this investor is delighted with the profit made and how short of time it took to make it. And so this investor continues to make careful investing decisions for the next 6 months and manages to double his or her trading account balance again to $40,000. Well of course this investor could stop now, enjoy the money, and never invest again. But, will this investor stop now? Almost certainly not! After all, why should one stop such a great way of making money, just when he or she is really rolling.

Will this investor feel differently when he or she has increased the brokerage account to $80,000, $160,000, $320,000, $640,000, and $1,280,000? Probably not. And why? Because it is really exciting to make money in the stock market, because investors like to continue making money while it is their opportunity, and because in the heady environment of serious money making it is very easy to forget that the real purpose of life is to do good in the world, to build good positive relationships with our family and friends, and to build our individual character, knowledge, and skills. Having money is nice but money can easily slip away or be taken away from a person. But the knowledge and skill to make more money is much more stable.

Perhaps you have already learned that money does not give you joy, peace, or understanding. I do admit that it can help you be comfortable while you are bored, disturbed, and clueless though. Not knowing how much is enough results in the making of money becoming your master instead of your servant. It is sort of addictive and very difficult to stop doing when there is not a clear, specific financial objective which has been committed to beforehand. I hope that you realize how important it is to determine specifically for yourself how much is enough.

If you haven't already done so, take time to consider how much is enough for you to do good in the world in the specific ways that you want to, for you to build good positive relationships with your family and friends, and for you to build your character, knowledge, and skills for the rest of the time you reasonably expect to remain living. Don't forget to consider the compounding effect of average inflation, and the income, capital gains, and estate tax issues. Also consider the cost and safety of having someone manage your money and tax preparation and who or what you want to leave any remaining money to when you die.

Knowledge is your #1 advantage and continuing education is essential to continuing financial success in the stock market.

I cannot emphasize enough that you currently have a major free advantage for your competition with other stock market participants. That advantage is knowledge. There has been and continues to be tremendous insights to successful trading and investing, published and taught for general consumption by the average small investor/trader. There are many very experienced, very intelligent, and often very immoral and hostile participants in the stock market. In the past they have excluded the average person from gaining from the stock market. But, in the past several decades, there has been more and more access granted to you and I. I believe that the main motive for that new access is to provide those historic participants a large new source of money to take away from us.

Your major protection from being victimized is to gain lots of useful knowledge about how the stock market really works, about when and where the best investments are to be found, about strategies which give you a predictive advantage, and about how to protect your investments and trades from those stock market participants who are trying very hard to take your money from you. This can be mostly gained for free or for little money, by using your public library's resources, by learning where on the Internet the best (most useful and most reliable) information can be found (see Chapter 5), by select newsletters, by attending some classes, and by purchase and study of good trading and investing books (see Appendix A).

Because the stock market and its major and minor influences are continually changing, it is absolutely necessary to continue your education about how it works and when and where the best opportunities are. It is all to easy to get herdishly lazy and neglect this vital element to all long-term financial success in the stock market. Part of your growing emotional discipline is to continue your broad and specific education about the stock market. Don't ever neglect it, or you will eventually suffer financial and emotional pain. Things which you currently understand and which are working very well to give you good profits will change over time so that you cease to understand all that you need to know and so that your current strategies don't work as well or as often as before.

What it means to make 100% on your investments every year.

In this book I will be talking about the percentage gains you can achieve through alignment of the planets and use of the strategies in this book. The most conservative and least productive of the strategies is called The Conservative Stock Split Strategy. And, its annual rate of return on your investment is approximately 100%. That of course seems very unrealistic to most people. In fact we can't even really get an accurate idea of what that would mean for us financially because of its unreality to us. When you read the strategies in this book and then when you paper trade using the strategies carefully, you will find that what I tell you about is actually fact. For now keep your scepticism, and look for hard evidence of what you are learning in this book. If I were you, I would do exactly the same.

Now, I will give you a fuller view of what making 100% a year means in terms of dollars. If you start investing in The Conservative Stock Split Strategy according to the strategy rules with $5,000 (purely arbitrary amount), in one year you will have an investment worth $10,000. In two years, if you leave all of that money actively in your investment, you will have $20,000. By continuing this strategy the third year, you will have $40,000 by the end of that year. By the end of the fourth year, you will have $80,000 and by the end of the fifth year you will have $160,000. By the end of the sixth year you will have $320,000 and by the end of the seventh year you will have $640,000. And, by the end of the eighth year you will have $1,280,000. I will stop here so as to not bore you with this example, but I think you can begin to get the vision of what is possible for the average investor who is starting with a modest amount of money.

When I was first learning about the financial potential of investing in the stock market in 1996, I read about making 100% a year first in disbelief and then with growing excitement. Now I know that that is not only achievable, but I also have learned through my own investing experience that making 100% a day is possible, repeatable, and even frequently achievable. Of course that rate of trading return requires large investments in knowledge, vigilance, emotional nerve, and the ability to make very quick decisions throughout the trading day. I do not currently get that rate of daily return because it requires too much of me considering my other life involvements in my family, my church, and teaching others how to prosper. I am getting the rates of return on my trades that I teach you how to get, and like most of you reading this book I started with just a little money in the beginning of my trading. I have a fair amount more now in my trading account because I have been prospered.

What makes stock prices go up, and what makes them go down is my next topic as I near the end of this first chapter. Many of you may already know the fundamental reason for stock price movement up and down, but for those of you who don't know here is a simple explanation. The fundamental reason for stock price movement is change in supply and demand. Even though there are a lot of shares of the 30,000+ different stocks which trade on United States stock exchanges, there is still a limited supply. And, supply is also limited by all of the stock market participants who own stocks and do not want to sell them for one reason or another. As some sort of good news occurs for a company or the stock price is believed to be too low, and more stock market investors and traders are attracted to buy the stock, the current owners are also more reluctant to sell their shares because they then have reason to believe that the price will continue going up for a while and they can then sell their shares later for more money than they can get for the shares now. To entice the current share holders to sell, the people who set the prices for stocks in the stock market, raise the price of the stock. That does entice some to sell their shares but if there is still a lot more shares which want to be bought, the price must be raised again and again to entice more stock owners to sell. In this scenario, the supply is held constant or even reduced because of the new reluctance to sell until later higher prices, and the demand is increased due to the good news attracting traders and investors, and then the rising price of the stock to attract shares for them to buy, attracting even more new traders and investors who want to buy.

When bad news or a stock price which is believed to be too high occurs, and more stock market investors and traders are motivated to sell their stock, the other stock market participants who do not own any shares of that stock become more reluctant to buy any shares because they then have reason to believe that the price will continue going down for a while and they can then buy shares later for less money than they would have to pay for the shares now. To entice the current non-share holders to buy, the people who set the prices for stocks in the stock market, lower the price of the stock. That does entice some to buy shares but if there is still a lot more shares which want to be sold, the price must be lowered again and again to entice more stock non-owners to buy. In this scenario, the supply is increased because of the new desire to sell on bad news or to take profit on too high stock prices, and the demand is decreased, also due to the bad news and the belief that the price needs to go a good deal lower for the price to be attractive, And then, the continued falling price of the stock additionally increases supply because it motivates even more traders and investors who own the stock to want to sell.

To sum this up, when more shares of stock in any publically traded company want to be bought than normal and/or the current owners of that stock are motivated to keep their shares more than normal, the stock price rises. Increase of demand and/or decrease of supply cause stock price increases. And when more shares of stock in any publically traded company want to be sold than normal and/or the current owners of that stock are motivated to sell their shares more than normal, the stock price drops. Increase of supply and/or decrease of demand cause stock price drops. The change in motivation is what you will learn to predict better from reading this book and/or attending my classes. Look in Chapter 31 for locations and information about my classes.

Why has the stock market been very bullish for the past several years?

Typically a bull market, when most stock prices have a fairly steady rise in price, lasts for a few years and then it is followed by a bear market, during which most stock prices decline, which lasts for 3 to 18 months. We have been having an unprecedented 11 year bull market with only 2 very brief recent 3 month quasi-bear markets (summer/fall of 1998-Asia Flu; and spring of 2000-Biotech and then technology/high P.E. slam, or the Tech-Wreak) to slightly slow it down.

From my observations, since 1996 (I was stock market clueless before then), I have found 10 influences in our economy which have fueled and supported the long bull market. These influences are not mentioned here in any particular order of importance. You will have to judge that for yourself. First of all there has been a steadily growing investment by the common person in mutual funds. This has shifted a lot of money to the stock market on a steady basis. This flow of money to the stock market is fairly stable, because once someone has invested in a mutual fund, they tend to keep their money in that fund or move it to another fund. All of this steady influx of new money into the stock market drives prices steadily up because it creates an increased demand on the relatively stable supply of stocks.

A second bullish influence is the increasing inflow of common person money to discount brokerage firms and to Online brokerage accounts. This has been stimulated by declining brokerage commissions and heavy herd oriented advertising to the common person who wants to make money in a seemingly easier way. This steady influx of money into the stock market has the same stock price increasing effect that mutual funds do. A third influence is the ascendence and acceptance of 401(k) retirement funds which are funded by automatic payroll deductions for a steadily increasing number of employees of most companies. Again the effect on the market is to cause stock prices to rise because of the increased demand.

The steady rise of two income families has increased the amount of discretionary money which can be and is funneled into Online trading accounts, 401(k) funds, and mutual funds. A confidence in investing in the stock market influence has been exerted by our current low inflation good economy, by mostly declining interest rates, by expanded world market opportunities for the sale of U.S. goods and services, and by low unemployment. Most of these bullish influences are probably because the Controllers (see Chapter 11) don't want the bullish conditions in the economy and the stock market to stop right now. And finally, the rapid and continuous advances in technology and biotechnology are really positively motivating most investors to jump on the band wagon to make lots of money as the stock prices of the innovation technology and biotechnology companies go up and up.

Market, Sector, Industry, Company are the common names used to describe the different groupings of some 30,000+ stocks which are publicly traded in our stock markets. The largest group is called the Market. Unfortunately this word is used several different ways and so has several different common definitions. I will mainly use this word to mean all of the stocks which are publically traded in the U.S. Another use of the word is the usage which is associated with daily changes of stock prices such as "the market is up 230 points today" or "the market has been steadily declining all day". Many people think that this is the same as a reference to all of the 30,000+ stocks, but it generally isn't. What this market reference generally means is the 30 Dow Jones Industrial Index stocks, which are supposed to represent all of the other stocks in terms of how investors/traders currently and generally feel about them.

Market also refers to such things as the physical location of different stock exchanges, or other than stock financial products such as bonds, futures, options, commodities, etc. And market refers to a single stock sometimes. Greater clarity would really be helpful to the common investor, but don't hold your breath waiting for it to happen. And, as I said, I will use the word market to refer to the collection of all 30,000+ stocks which can be publically traded in the U.S.

Sector is the next smaller grouping but it is also used somewhat sloppily, because there doesn't seem to be a universally accepted standard of how many or which particular stocks belong to a given sector. Multexinvestor.com divides the 10,000+ stocks its covers into 12 sectors (technology, services, healthcare, financial, transportation, energy, conglomerates, utilities, basic materials, consumer cyclical, consumer non-cyclical, and capital goods), but The S&P 500 stocks are divided into 10 sectors. I have even seen the term sector used to refer to smaller groups of stocks which are usually call industry groups. Supposedly all stocks should at least loosely but logically fit into a sector. Sectors of the market rise and fall in investing interest both on the short term due to opportunity money flow and in the long term due to cyclical/predictable changes in the business cycle of the economy.

Industry is the term used to describe the next smaller grouping of stocks. It seems to have a clearer universal meaning, but I could well be wrong about that. An example of an industry would be the software industry in the technology sector. There may well be the same problem that sector has of how many companies and which companies belong in a given industry and how many different industry groups to have.

The grouping of company (the smallest division) is pretty hard for people to create confusing usages for. It refers to a individual company which has stock that is publically traded.

Common and Preferred Stock are the two types of publicly traded company ownership for sale in the stock market. Both types of stock are ownership in publically traded companies. Preferred Stock has certain privileges which common stock does not have, pays fairly large dividends, and does not rise or fall in price very much over long periods of time. It is a good type of investment to own if you want a regular income each quarter, or once a year. Almost always when people talk about buying, selling, trading, and investing in stock in the stock market, they are talking about Common Stock. It is the common stock which rise and falls in price per share according to stock market investors' and traders' opinions and beliefs about the value of the companies. Common Stock is the type of stock I talk about in this book for you to use this book's strategies with to invest and trade for high rates of profit. Some of the Common Stock which is traded in the stock market pays a dividend every so often to share the company profits with the shareholder owners. The dividends are not very large for most of the few companies which pay them because Common Stock is mainly not meant to pay dividend. D.R.I.P. investing is a type of investing which uses these dividends to automatically buy more of the company stock instead paying the dividend to the shareholder. In this book I do not talk about D.R.I.P. investing nor do I talk about Preferred Stock.

The stock market is like an auction.

Those who run the stock market exchanges are like the auctioneers. They have ways of getting paid which take a part of your money without you realizing it. They actually manage to get a lot of your money. Those experts and amateurs who are selling stocks in the stock market are seeking to get the best price possible. The most favorable of those prices to the buyers is called the (best) ask. The experts and the amateurs who are buying stocks in the stock market are seeking to buy them at the lowest price possible. The most favorable of these prices to the sellers is called the (best) bid. If no one is selling or buying a stock at a given time those who run the stock market guarantee to buy a limited amount of shares of that stock at the bid which they set and they also guarantee to sell a certain limited amount of shares of that stock at the ask which they set. A trade happens when a or several buyers and a or several sellers agree on a price.

What we refer to as the stock market is not one place. There are three main national exchanges and several smaller regional exchanges of the stock market in the United States. They open for normal market trading at 9:30 a.m. Eastern Standard Time and close at 4:00 p.m. Eastern Standard Time. The oldest of the three national exchanges is the New York Stock Exchange (NYSE) and is in New York City. This is the one we see on television all of the time with lots of excited people all talking, shouting, waving, and signaling at once to make the trades which are made there. The American Stock Exchange (AMEX) also has a physical location, but is not very exciting to most traders and investors and so seems to handle only a small part of stock market trading. The NASDAQ is the newest of the three national exchanges but it does not have a single physical location. It is best described as a network of people with telephones, faxes, and computers who operate much more efficiently than older, physical location exchanges. I believe that the NASDAQ actually represents the modern economy and whole stock market much better than the other exchanges do. It is the exchange which lists most of the technology stocks, new companies, high growth companies, and smaller companies.

How to make money up, down, and sideways.

On of the most common mistakes which the amateur investor/trader makes is to rely on the false belief that money is made when the stock market goes up. In the first place the amateur often believes that the stock market is the same thing as the Dow Jones Industrial Average (DJIA), which is only an adjusted average price of 30 large/established companies stocks. Then when the DJIA goes up the amateur buys stock and when it goes down, he or she sells stock. Although many investors/traders do the same thing, causing many stock prices to rise or fall accordingly, it is basically a foolish, money losing practice.

Other amateurs believe that stocks should smoothly and continually increase in price. They of course don't. Following this false belief also leads to loss of money. A third group understands that the DJIA is not the same as the stock market as a whole and that stocks rise and fall in price often erratically, but still believes that money is only made as stocks rise in price over time. If these individuals do a good job of selecting the best companies (see Chapter 19) they will do fairly well in the long run by just holding the stock which they bought over a long period of time so that the short term up and down movements of the stock's price are overcome by the long term gradual increase in the stock's price. And, unless they are the very rare individual (of course most of us think we are the rare individual, when in fact we are not) who lucks upon a Microsoft type of company in the beginning of a 10 year rapid growth phase, their long term annual gain is only a modest 10%-15%. If they did not do a good job of stock selection (for long term increase in price), they are then unpleasantly surprised when the stock's price is erratic, flat, or suddenly drops. This behavior is also a sure thing money loser.

The good news is that all of these potential problems can be avoided. The challenge is to get reality educated, look for and learn to recognize your own false beliefs, and then form new and correct beliefs about how the market and stock prices really change over time. Remember, I had to do these things too as has every successful investor/trader. And, I and they continue to do this on a regular basis so that I can keep up with and even get ahead of the ever changing landscape of successful investing in the stock market.

Some of the reality of the stock market is that the individual stock prices, industry group stock prices, sector stock prices, index averages like the DJIA, S&P 500, and NASDAQ 100, and the market as a whole stock prices all go up some of the time, go down some of the time, and are flat or go sideways some of the time. And, there are a lot of different things which cause those three types of conditions in price. This book deals somewhat with most of the major things which cause those conditions of price. If you learn what is covered well and your strictly follow it, you should be able to predict most of the price changes correctly 90% of the time or 9 out of 10 times correctly. It is my recommendation that you at least learn how to make money consistently in the stock market when prices are going up, sideways, and flat. Hopefully you will also chose to actually use what you learn to make money in all of those conditions.

The best times and situations I have found to go long or take a long position (buy stock with the reasonable expectation that the price will rise soon or over the long term) are taught in Chapters (2, 4, 6, 8, 10, 12, 14, 16, 18, and 20). In those chapters it is also suggested how long to keep/hold your long position. The best Strategies I have found to use when prices are going sideways or flat are covered in Chapters 8 and 10. And the Strategies I have found to use to make lots of money when prices are falling (using short selling of stocks) are covered in Chapters 8, 14, 16, 18, and 20. Look in the table of contents for location of the chapters. In the chapters mentioned above, there will also be specific directions on how to find stocks which best fit the conditions of up, flat, or down in price.

Though you may be tempted to use many of the strategies all at once, it is best to learn one at a time by practicing it with pretend (paper trading) money or real money until you get really good at it. The reason to learn how to make consistent profits from all three different price situations is that really good trading/investing opportunities happen in all three price situations and they don't happen as frequently as most of us would like. When all three price conditions are taken advantage of carefully, then money accumulations is most rapid and satisfying. When only one price condition (typically rising prices) is focused on, there are frequent frustrations when conditions unexpectedly change in the market to cause profit stagnation or reversal. Take it from me, I found those situations most unpleasant when I experienced them in my learning experiences.

Well, this is all I want to include in this chapter. Remember to spend regular time learning the stock market vocabulary and definitions which you can sample in the Glossary of this book. You may find it boring at times, but if you persist, it will greatly increase your potential to profit from trading or investing.

The next chapter is a strategy chapter. It is about The Conservative Stock Split Strategy. That strategy is the most conservative one in this book, but when used correctly, it can yield 100%-200% profits each year.


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