You’re investing in stocks — good for you! To make the most of your money and your choices, educate yourself on how to make stock investments confidently and intelligently, familiarize yourself with the Internet resources available to help you evaluate stocks, and find ways to protect the money you earn. Also, be sure to do your homework before you invest in any company’s stock.
Leveraged ETFs are known as a “cheat” by regular stock game players as these ETFs typically provide far faster returns. ETFs are Exchange Traded Funds that act like Mutual Funds but trade like stocks.
The 10 Most Important Points about Stock Investing
If you’re committed to investing in stocks, keep the following points in mind as you make your choices and reap your rewards. After all, stock investing is fun and frightening, sane and crazy-making, complicated and simple — and you may need reminders to stay focused.
You’re not buying a stock; you’re buying a company.
The primary reason you invest in a stock is because the company is making a profit and you want to participate in its long-term success.
If you buy a stock when the company isn’t making a profit, you’re not investing — you’re speculating.
A stock (or stocks in general) should never be 100 percent of your assets.
In some cases (such as a severe bear market), stocks aren’t a good investment at all. A bear market, however, may offer buying opportunities for profitable companies.
A stock’s price is dependent on the company, which in turn is dependent on its environment, which includes its customer base, its industry, the general economy, and the political climate.
Your common sense and logic can be just as important in choosing a good stock as the advice of any investment expert.
Always have well-reasoned answers to questions such as “Why are you investing in stocks?” and “Why are you investing in a particular stock?”
If you have no idea about the prospects of a company (and sometimes even if you think you do), use stop-loss orders or trailing stops.
Even if your philosophy is to buy and hold for the long term, continue to monitor your stocks and consider selling them if they’re not appreciating or if general economic conditions have changed.
Checking Important Company Fundamentals before Investing in a Stock
Before you buy stocks, you have to do a little research on the companies you’re thinking of investing in. Pay attention to the following key components when you look at a company’s main financial statements (the income statement and the balance sheet):
Earnings: This number should be at least 10 percent higher than the year before.
Sales: This number should be higher than the year before.
Debt: This number should be lower than or about the same as the year before. It should also be lower than the company’s assets.
Equity: This number should be higher than the year before.
Financial Measures to Consider before Investing in a Stock
You’re thinking of buying stock in a company, but before you invest your hard-earned money in hopes of a profitable return, check out some financial ratios that can help indicate whether the company is on sound financial footing. Here are key measures to consider:
Price-to-earnings ratio (P/E): For large cap stocks, the ratio should be under 20. For all stocks (including growth, small cap, and speculative issues), it shouldn’t exceed 40.
Price-to-sales ratio (PSR): The PSR should be as close to 1 as possible.
Return on equity (ROE): ROE should be going up by at least 10 percent per year.
Earnings growth: Earnings should be at least 10 percent higher than the year before. This rate should be maintained over several years.
Debt-to-asset ratio: Debt should be half of assets or less.
A Mandatory Reading List for Stock Investors
Before you buy stock in a company, you need to do a little light — or not-so-light — reading. Investing in stock without checking out the company beforehand is a recipe for disaster. So before you plunk down your money, be sure to read the following:
The company’s annual report
The 10K and 10Q reports that the company files with the SEC
Standard & Poor’s Stock Reports
Value Line Investment Survey
The Wall Street Journal and/or Investor’s Business Daily
Reputable stock investing websites
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Reassuring Points for Nervous Stock Investors
With the world looking so crazy and volatile sometimes, it’s important to note that prudent investing isn’t just about what you invest in but also how you invest. If you want to build long-term wealth through stock investing and still be able to sleep at night, then consider these points:
Invest in stocks of profitable companies that sell goods and services that a growing number of people want. Your stocks will zigzag upward.
As long as you invest in stocks and exchange-traded funds (ETFs) with human “needs” (rather than “wants”) in mind, your long-term investing success will be more assured.
If you keep your money diversified broadly across stocks, ETFs, mutual funds, and hard assets (such as real estate and precious metals) and keep adequate cash in the bank, you’ll be much safer in the long run.
Keeping informed every day about your portfolio, the financial markets, and the general economy will keep you from the fear and anxiety that come from the unknown and the surprises that are inevitable.
Being aware of investing tools and using them regularly (such as stop-loss orders and put options) give you more control against the downside and more peace of mind.
Keep a tight control on your debt and finances. In turn, this practice will ease the pressure to invest aggressively with a short-term focus and help you focus more on the longer term instead.
TO WIN: Be Aggressive
Winning virtual trading games, like HowTheMarketWorks.com, where the game has a short duration and there are no trading criteria (the game does not specify the type of stocks eligible to be traded), requires entirely different tactics than you would use with your own money. They require you to be VERY AGGRESSIVE!!! You will need to take risks and invest in stocks that you SHOULD avoid in your own portfolios because of the high risk factor.
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TO WIN: Follow The Market
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The most important step is to identify the direction of the market. This step is only necessary if you have only one account to trade. If you have two or more, then you can cover your bets by going LONG in one account and SHORT in the other. But if you only have one account, you must make sure you are on the right side of the market.
For a novice trader, the easiest way to determine the market’s direction is to look at one of the Market Indicators. They are all relatively difficult to understand for a novice but that is ok. You don’t need to understand them to use them. All you need is to find a site that will interpret the market direction. For example, if you look at the S&P 500 Bullish Percent Index chart and look to see if the chart is showing green (BULL MARKET).
If the market indicators confuse you, you can look at a chart of a market index. All of the most popular are listed at http://stockcharts.com/. The most popular index is the Dow Jones Industrial Average chart. Look at the direction of the chart (up or down) and determine if you are a BULL or a BEAR.
Once you decide the direction of the market, you will need to identify which stocks have the most potential to move in that direction the fastest – as you are under time pressure from the game. The rest of the article will help you identify these stocks.
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TO WIN: Use Leveraged ETFs as they Provide Fast Returns
Leveraged ETFs are known as a “cheat” by regular stock game players as these ETFs typically provide far faster returns. ETFs are Exchange Traded Funds that act like Mutual Funds but trade like stocks. Leveraged ETFs use financial derivatives (a sophisticated means of trading) and debt (like bonds) to amplify the returns of an a variety of indexes. Once again, it is not important to understand Leveraged ETFs, but they will provide far faster returns than regular stocks, bonds, ETFs or Mutual Funds. Since you have already chosen your best guess at the direction of the market, choosing a Bull ETF (market going up) or Bear ETF (market going down) will be easy. Leveraged ETFs come in several multiples of an index including 2X and 3X ETFs. A 2X will try to double the return on its specified index and a 3X will try to triple its index. Of course, you will want to use 3X ETFs. The highest rated 3X ETFs are:
3X Bull ETFs
Direxion Financial Bull 3X – Triple-Leveraged ETF (FAS)
Direxion Small Cap Bull 3X – Triple-Leveraged ETF (TNA)
Direxion Large Cap Bull 3X – Triple-Leveraged ETF (SPXL)
3X Bear ETFs
Direxion Financial Bear 3X – Triple-Leveraged ETF (FAZ)
Direxion Small Cap Bear 3X – Triple-Leveraged ETF (TZA)
Direxion Large Cap Bear 3X – Triple-Leveraged ETF (SPXS)
NOTE TO INSTRUCTORS
We would highly recommend that you specify criteria to your stock game so that Leveraged ETFs are not used. It is far more instructional to specify that the students only use “stocks” in their portfolios and that the stocks must have a value over $10 to avoid the problem with Penny Stock trading. Yes, a student can achieve far more return in the risky world of leveraged ETFs but it will teach them little about real world stock market trading.
Glossary
Market Indicators: Technical indicators that are used by traders to predict the direction of the major financial indexes. The most known are the Advance/Decline Index, Absolute Breadth Index, Arms Index and McClellan Oscillator.
Leveraged ETFs: An exchange-traded fund (ETF) that utilizes financial products and monies due to enlarge the returns of an underlying index. Leveraged ETFs are accessible for almost all indexes, like the Nasdaq-100 as well as the Dow Jones Industrial Average.
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Market Index: By aggregating the value of a related group of stocks or other investment vehicles together and expressing their total values against a base value from a specific date. Market indexes help to represent an entire stock market and thus give investors a way to monitor the market’s changes over time.
Remember that this is a stock game.