Wednesday, April 26, 2006

Making Money From Stocks - Useful Tips

Investments & Trading
Making Money from Stocks – Useful Tips By J. Foley

Making money from stocks doesn't involve a magic trick. It happens through maintaining consistent goals and sticking to them. We know of many 'successful trader' legends who purportedly made amazing amounts of money from stocks in a fairly short period of time. Remember, legends are legends and reality is reality. There is no magic formula for getting rich on stocks. You have to work hard, as in any other honest trade.

It is imperative to have a can-do attitude. The time to start creating wealth is right now, not next week or next year or after that vacation. Do not keep postponing. Good solid investments that you stick with for the long term are your best bet for creating lasting wealth. This takes discipline. Here are some common and ready tips.

Develop a system of disciplined stock trading and strictly follow it.
Avoid playing too much in the short term, and take a mid- to long-term approach.
Keep with a trend-following trading style.
Go for fully planned trades. Be ready for all scenarios in advance with a pragmatic and cool approach equally to bad times and good times.
Try to cut losses early, but do not panic over this.
Avoid fear and greed, the two greatest enemies of the honest stock trader.

All these rules are violated everyday by common traders who know no better, and who pay very little attention, if any, to money management.

The most important component of a trading system is money management. Even more than a good entry-exit strategy, one needs good money management – that is, the ability to solve rationally the most important question of a trading system: how much to invest and how many positions to trade at the same time.

An active investor has to know the in-s and out-s of buying and selling stock. In order to obtain the gains and rewards from trading, one must be ready to learn the basics of different trading methods. Otherwise it will be better to follow a mutual fund manager who does.

In that case also, it is usually said that the first step is to understand mutual fund expenses and the next step is to avoid them! Mutual funds are meant for people looking for minimizing the costs inherent in buying and selling stocks and minimizing risk and volatility in investments, and for maximizing purchasing power by pooling their resources with others.

But surprisingly, not all mutual funds have low expense ratios: many of them charge exorbitant fees. The common sense investor needs to be aware of the fees and expenses involved in any mutual fund investment.

Understanding the different ways to buy and sell stock in the market is the first step to make money from stock investments.

Dollar cost averaging is a good investment strategy for the reason that you are not overexposing your investment to the risks involved in timing the trading while you consistently invest on a regular, periodic basis.

Consistent investment is the route to take for becoming a winner, which is possible through dollar cost averaging. This actually takes advantage of market volatility so that you buy more stock when the price is low and less stock when the price is high.

Another important tip is you should generally avoid companies with high P/E (price-earnings) ratios.

A company's P/E ratio is a very common means for comparing and understanding the value of a company's stock. It is calculated by dividing the previous day's closing price by the adjusted EPS (earnings per share). But high P/E may be deceptive and it is wise to avoid being guided by this ratio.

Investors in stock who have turned wealthy know all this, because they have all developed their own disciplined approaches. A wealthy future with money from stocks is closer than you think if you keep with these tips.

Investments & Trading by J. Foley

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