Yesterday we looked at some investment club tips that were personal considerations to think about before joining an investment club.  Today my former co-worker looks at the importance of evaluating the investment club itself and a few things to look for.

Defined Investment Goals

Each member of the group needs to have the same goal in mind and the same methods of achieving that goal. If some members of the group are only interested in making a profit, instead of learning more about investing and the details involved, there will be a divided set of goals. All members of the club should have the same philosophy about investing.

Long Term Goals

Members of the club should be clear on what the long term goals of the club are all about. There should be an understanding established of what amount of the profits that are realized from investments are going to be held and which amount is going to be reinvested immediately back into the stock market. There should be an equal amount of growth and stability that is agreed upon.

Investment Club Meetings

It’s important that members of the group are able to attend all meetings. When there are decisions that need to be made about ongoing investments and future investments it’s important that all members are part of the decision process. If the group decision is held up because some members don’t attend regularly the endeavors of the investment group are jeopardized.

Investing Accountability Checkpoints

It will be very important that the investment club have checkpoints in place that account for all investments, profits, losses, and other money issues. These checkpoints should be readily available for all members of the club to read at point in time.  For example decisions on buying and selling stock. Before any stock is purchased or sold it will be required that all members of the investment club are part of the study of these stocks and part of the final decision.

Investment clubs startup all over the US each year and help thousands of potential investors learn the basics of the stock market. I’ve never joined an investment club but I have a family member and a former co-worker who are investment club members so I asked them to offer a few tips on starting or joining a club.

Before you decide to invest your money with other people, here are a few things you should consider.

Have Realistic Expectations

If you’re joining an investment club to make a killing in the stock market, you’ll most likely be very disappointed. The goal of an investment club is to learn more about the stock market and if you have dreams of becoming rich you’ll be starting the club for the wrong reasons. Joining an investment club means joining for a long period of time.

You’re Not a Professional Trader

Starting an investment club doesn’t mean that you have to be an expert on the stock market. In fact, an investment club is ideal for a group of amateurs who want to learn about how the stock market works and what it can do for them. An investment club should be a safe environment in which you can invest a little bit of money and not worry about losing a large amount of your hard earned dollars when something unexpected happens.

Minimum Investments

You shouldn’t need a lot of money to start or join an investment club. There will be a minimal fee for each month’s contribution, just make sure that it fits into your budget. If it’s a new investment club, you’ll have the chance to determine what the minimum monthly contribution should be each month when you have your first meeting.

Willingness to Debate & Compromise 

One thing that you should keep in mind is that your voice will be part of the larger group and you may not always have a say in which stocks you want to invest in. If you’re unable to sit back and let another decision take the place of something that you would rather see, then an investment club might not be for you. You’ll need to have the ability to let the majority rule whenever a decision is made.

You Might Lose Money

Be aware that you may never realize a profit from the stock market through your club. One of the important goals and features of an investment club is that you benefit from the learning experience of being with other people with the same interests in the stock market. No one likes to lose money but if you do make sure you learn from the loss.  Analyze what went wrong with the stock picking process and figure out what you’ll do differently next time.

The Tradeking promotion that runs through the end of the month reminded me of a conversation I had with a co-worker last Spring about online brokerage accounts. She’s from a different generation and doesn’t feel comfortable opening a stock trading account on the Internet.

Her son suggested she open her own account but she had the whole process built up in her mind to be too complex for her to ever understand. I told her I’d put together an overview of the account opening process to show her that’s it’s really not that complicated.

I went through in the Spring and took screen captures of opening a TradeKing account but then we had a baby so I’ve been a little distracted since then. Anyhow, here is a visual walkthrough of opening an account and the 10 main questions you have to answer to complete to an application for their online brokerage account.

1. What’s Your Basic Info?





2. What Will Be Your Secure Code?









3. Which Type of Account?









4. Who Are You?









5. Where Do You Work?









6. How Much Money Do You Have & What is Your Trading Experience?









7. Do You Have a TradeKing Promotional Code & What Are Your Affiliations?









8. What Are Your Investment Goals?









9. Do You Agree To Follow the Rules?











10. Give Your Electronic Signature









11. TradeKing Application Complete!

Of course, opening an account’s not so bad; it’s actually the easy part. Setting your investing strategy & buying and selling stocks is where the uncertainty comes in. To open a TradeKing account, click here.

The TradeKing promotion has been extended through the end of this month. For some reason, TradeKing likes to run thier promotions in the fall of each year.  Last October Tradeking ran a $50 bonus promotion and despite the turmoil of the stock market had a lot of people sign up to try out their online brokerage.

This year the market has a lot more positive momentum than it did last fall and some of the people that were sitting on the sidelines are getting back in.  TradeKing is offering a $50 bonus if you open a new account and try out their stock trading platform.  You can read more about pros and cons of the online brokerage in this TradeKing review.

I had forgotten that they extended the promotion by a month last year until I recently got an email from TradeKing announcing they were pushing the deadline out a month.  They didn’t push it any further last year so if that’s any indication then this month will likely be the last chance for the bonus in 2009.

There is no TradeKing promo code necessary simply signup here and you get your $50 bonus after you fund your account with at least $2,500 and make your first trade.

Free Stock Trades Promotion

Zecco will give you 20 free stock trades if you signup for an online trading account as a new customer in the next week and a half.

You don’t have to use the trades right away, they are good for 90 days. I’m not eligible for the free trade bonus because I’m already a Zecco customer, you can read this zecco review for more about their online brokerage account. 

It used to be that you only needed a balance of $2,500 to get 10 free trades a month with Zecco.  Trades are still cheap, $4.50, but they have raised the minimum balance necessary to qualify for free trades to $25,000.

Zecco Promo Rules

• The Zecco promo gives you 20 trades in addition to the 10 free stock trades that eligible customers already recieve a month.
• To qualify for the free trade bonus you have to sign up for a Zecco account by Sunday, September 13. 
• The free trades will show up in your account by September 16^th and you have 90 days to use them.

If you’re not already a customer and are thinking about signing up to get the free trades, make sure you use the Zecco promo code “bonus1”.

Click Here for the free trades Promo code – bonus1

Stock Analysis Series

We covered price to earnings growth, debt to asset ratio, and dividend yield in the last edition of the stock analysis series.  In this installment we’ll look at the measurements of price to book ratio, beta, and price to sales ratio when evalutating a company’s stock.

Price to Book Ratio (P/B)

Also know as the price-equity ratio, the P/B is used to compare the market value of a particular stock to its book value (value of each share of the company’s stock after the company’s liabilities have been subtracted from the company’s assets).

Price to Book Ratio = Current Share Price/Book Value Per Share

Value investors use this analysis to find hidden gems. Low P/B numbers can indicate that the stock is undervalued. It could also mean that the company has some serious problems. This ratio also puts a value on what would be left if the company immediately went under.

Beta

Beta is used to measure the volatility of an investment compared to the market. Usually the investment is compared to an index. The most popular index used is the S&P.

If the Beta is 1, it means the volatility of the investment is the same as the index. If the number is higher than 1, the security is more volatile than the index and if it’s lower than 1 then it’s less volatile than the index. If the number happens to be negative, it means the security typically does the opposite of market.

Beta can be used to build a portfolio of diversified investments. Financial planners use Beta to put together portfolios of stocks, both domestic and international, bonds, cash products and commodities such as oil and gold.

Price to Sales Ratio (P/S)

What do you do when you want to analyze a stock, but it is so new that there is limited earnings history. You use the P/S!!! The Price to Sales Ratio compares a stock’s performance to itself or similar companies.

Price to Sales Ratio = Stock Price/Sales Price Per Share

Like many of the other measurements, the lower the number, the better. Expenses or debt are not involved in this calculation, so this measurement only tells part of the story. Just like all the other analytical tools, this one should not be used alone to decide whether to buy or sell an investment.

Financial Accounting

Hopefully this series on stock analysis has been useful to you. If you find yourself struggling with some of the terms and concepts that have been covered (like earnings per share) and would like to be able to do fundamental analysis on a company’s stock, it might be worth while to take a class or read a book on financial accounting.

Stock Analysis Series

In the first stock analysis article, I covered two of the most popular analytical measurements investors use to gauge the health of a particular stock, earnings per share and price to earnings ratio. These are certainly not the only measurements you should use to evaluate a company’s stock; today I’ll take a look at three more tools for your investor toolbox.  These tools are not used in every scenario but it is good to know what they are and how they are used.

Price to Earnings Growth (PEG)

The PEG is an indicator that was made popular by Peter Lynch (Fidelity Magellan Fund). It is used extensively now and some investors favor it over the P/E due to the fact that it takes into account the growth of the stock.

PEG = Price to Earnings Ratio/Earnings Per Share

Like the PE, the lower the PEG, the more undervalued the stock and vice versa. There are issues with this analytic measurement though. The number is based on projections and can be widely inaccurate. One other issue is that it is not always clear when published if past EPS or projected EPS is used.

This measurement should really only be used on growth stocks. A stock that is well established and pays a considerable dividend will most likely have a low PEG, but still be more than suitable as an investment.

Debt to Asset Ratio

This one is pretty straight forward. It shows how much of a company is financed by debt.

Debt to Asset Ratio = Total Liabilities/Total Assets

The lower the ratio, the more the company is financed by its equity. This is a sign of stability. The higher the number, the more “leveraged” the company. We have all seen in the recent past the dangers of being highly leveraged both as a company and as an individual.

Dividend Yield

While you would use the PEG above to find growth stocks, the Dividend Yield is usually used for value stocks with lower growth potential. The growth in these stocks doesn’t necessarily come from the stock price. It is created by the dividend that is paid. Investors can choose to re-invest those dividends to purchase more shares of the stock or take the cash (either way, taxes are paid the year the dividend is distributed).

Dividend Yield = Dividends Per Share (last 12 months)/Current Price Per Share

If a stock is trading at $30.00 and issues a quarterly dividend of $.25 (totally $1.00 annually), the Dividend Yield would be 3.33% for that stock.  This measurement is extremely important for those who are looking to create some income from their investments without actually selling their stock.

Hopefully the next time you look at a stock’s fact sheet, some of those numbers and symbols will make a bit more sense to you. Next up in the stock analysis series I’ll go over price to book ratio (P/B), beta, and price to sales ratio (P/S). If there are any ratios or other fundamental analysis tools I haven’t covered that you’re curious about, leave a comment below and I’ll cover them.

Stock Analysis Series

In the world of financial investing, there are many different types of analysis that people look at in judging the health and value of a company and its stock. Over the course of the stock analysis series we’ll explain what these methods are and how you can use them to evaluate your investments. This article will cover Earnings Per Share (EPS) and Price to Earnings Ratio (P/E).

Earnings Per Share (EPS)

When comparing two stocks, it isn’t as simple as comparing the stock price or the total earnings of each. There are too many variables that make these comparisons unfair and unrealistic. One way to get a clearer view is the use of Earnings Per Share.

EPS = net earnings/outstanding shares.

If the number of shares have changed during the period calculated (share buyback, stock dividend, etc.), a weighted average is used for outstanding shares.

Some fact sheets will show three different versions of EPS:

• Trailing EPS – based on previous fiscal year; only true EPS
• Current EPS – current year’s information; actually projections
• Forward EPS – looking out to future numbers; projections

When looking at EPS for a company, please keep in mind that there may be one-time events that could affect the number for a given period. If you see a spike in one direction or another, take a deeper look at why. Ultimately, you want to find a company that has and EPS that has trended upward over a period of time.

Price to Earnings Ratio (P/E)

Like the EPS, the P/E of a stock is one of the most popular pieces of analysis used by investors. This is also one of the pieces of information that “CNBC trained” investors often base their whole trading philosophy on. If it were only that easy…

P/E = stock price/EPS

A high P/E can mean one of two things: the market has confidence in the stock and believes the price will go up, or that it is over-priced and ready for a drop. A low P/E could a down and out stock or a Warren Buffett gem.

Be careful when using P/E to compare two different stocks, specifically when they are from different sectors. You could be looking at one stock that has a P/E of 25 where the sector average is 30. The other stock could have a P/E of 14 where the average is 10 in its sector. Using just P/E to analyze these stocks, which one do you think is a better investment? Are you sure???

Evaluating Stocks

Earnings per share and price to earnings ratio are the two most popular pieces of analysis for DIY investors, but they are NOT the only ones. They only tell part of the story. By all means use them, just remember there are other factors out there that can have an impact on a stock’s price.

Next time I’ll cover using price to earnings growth, debt to asset ratio, and dividend yield for stock analysis.  If you’d like to have the rest of the stock analysis series sent to you click here to subscribe to free updates.

As you sit and watch the financial news, or read other financial articles, you will constantly hear about this large-cap company or that small-cap…etc. What do these terms mean? Which companies fall where? And most importantly, why does it matter?

The first thing we need to do when discussing this topic is define what market capitalization is. This term represents the size of a corporation in regards to value. The market cap of a company is equal to the share price of its stock multiplied by the shares outstanding. For example:

Company ABC stock price: $10.00
Company Shares Outstanding: x 10,000,000
Company Market Cap: $100,000,000

Market Capitalization

How a company is described in reference to market cap depends on the size. There are five categories that are regularly discussed. So much so, that there are indexes, mutual funds, ETFs and sectors built around these. These numbers are not set in stone and may even vary by country. The following would be a good benchmark to use for comparison:

Mega-Cap: Over $200 billion
Large-Cap: $10 billion – $200 billion
Mid-Cap: $2 billion – $10 billion
Small-Cap: $250 million – $2 billion
Micro-Cap: $50 million – $250 million

Mega-Cap Stocks

These are truly the biggest companies in the world. Names like Microsoft, ExxonMobil and Johnson & Johnson fall into this category. It used to be that these big companies were considered pretty safe investments…”too big to fail” if you will. We found that not to be the case in the last twelve months.

Large-Cap Stocks

This is probably the most popular segment in regards to investing. The S&P is built on these stocks. Names like Wal-mart, Coca Cola & Apple fall into this category. As discussed in a previous post, there is an argument for index investing and just taking advantage of the natural growth and movements of the market. The more sophisticated investor will disagree, but then not everybody falls into that category either.

Mid-Cap Stocks

This segment is probably the most over-looked by the average investor and it is possibly their biggest mistake. Mid-cap stocks benefit from being like their larger brothers, in that they have established track records both in financial statements and share price. They are less risky than smaller companies, and yet they have only truly seen the beginning of their growth. According to Morningstar, the Mid-Cap 400 Index has outperformed the S&P in both the 5 year & 10 year time frames.

Small-Caps/Micro-Cap Stocks

These segments are the area where many sophisticated investors and day traders play. The volatility is much higher here and the potential to wither win big or crash and burn is much higher. The hard part here is the limited information available for many of these stocks.

Each of these segments of the market has their reasons why you should or should not use them in your portfolio. Whether you do or not is entirely up to you. At least now when you hear those analysts rattle on about small-caps outperforming, you will know what they are talking about.

Day trading by individual investors became really popular when online brokerage accounts came onto the scene.  You probably remember the late 1990’s, when the market was running faster than Olympic sprinters, people were re-financing their homes and taking withdrawals from their 401ks to dive into the day trading pool. Unfortunately, many of these people lost a lot of their money when the technology bubble popped.

Day Trading Strategies

Day trading is not for the timid or emotional, but it can produce positive results. The key is to have a well-defined strategy; one that you must stick to. This strategy must be specific in when to buy and sell a stock. Every step must be clear and in place before you make your first move. This helps remove the emotion from the decision making process.

Day trading is not a hobby. It’s not a game and certainly not something you “play” with. Day trading is a business and must be treated as such. Without the proper planning and/or experience in place, you will fail before you even start. Your trading strategy should define two things:

• Buy/Sell Signals
• Risk Management

Buy/Sell Signals

All day trading strategies start with where you will buy into and sell out of a position. These signals must be as objective and as specific as possible. They must be quantifiable and measurable. Choosing a stock based on whether it is “trending up” is too subjective and general.

Once a “Buy” trade has been placed, this investor needs to know exactly when they will get out or “Sell that position. The exit signal could be a specific percentage profit or a maximum loss. These “Sell” signals must be followed. Discretion can be very dangerous when playing with your profits. Using that same philosophy, a pre-set price must be followed in which you would realize your loss.

Risk Management

In the world of day trading, the use of a “stop-loss” is extremely important. All traders must know before entering into a position, where they will be getting out if the market goes against them.

Traders must be as disciplined in the use of stop-losses as they are in protecting their gains. All emotion must be removed and replaced with your strategy. An effective strategy will have very clear steps on where and how they will be exiting a position.

Day trading is all about capital. Every penny must be protected to fight another day if the market turns against you. Yes, you can hold off to see if the market turns around, but the danger of more losses will become more prevalent with each minute you leave yourself exposed.

Day Trading vs Long Term Investing

When you compare day trading to long term investing, please remember that in some day trading strategies, all you need to succeed is a stock price movement as little as $.25. The idea is to take advantage of these little spikes and move on.

Long term investing looks at building a portfolio that can stand the test of time, where you don’t even blink at tiny moves in price of a stock.