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.

“I never attempt to make money on the stock market. I buy on the assumption that they could close the market the next day and not reopen it for five years.”  – Warren Buffett

If you think of day trading as a series of one night stands, long term investing is that one that sticks. Whether it’s a bad rash you can’t get rid of or the love of your life, these are long term relationships where you meet the dysfunctional family and all the friends and baggage you didn’t expect.

Long Term Investing

Most investment professionals would consider five years long term. When it comes to investing using individual stocks, it can be a bit more expensive and potentially more risky than using an ETF or mutual fund. Mutual funds or ETF’s can help facilitate diversification and protect your portfolio when the market gets choppy.

Diversification

There are just as many believers in diversification as there are opponents of the philosophy. Opponents will say that an investor should buy a stock that they believe in regardless of industry or sector. It’s a plausible idea, but how would you feel if you believed in three of the top financial companies two years ago. These were very popular stocks, with great track records and dividends, but then…

The idea behind diversification is that where one sector or industry is under-performing, other industries will usually perform at a better rate. A good starting point for a portfolio is 10 individual stocks or ETFs. An investor must still do their due diligence to pick the right sectors and/or stocks. There are two ways of doing this: top-down or bottom-up.

Top-Down Investing

When you hear about a money manager or a mutual fund the analyzes stocks using a “top-down” process, this means that they first decide what sector or region they feel will out-perform the market. Once they decide the sector, then they research the individual stocks inside the sector in order to choose the right one for them

Bottom-Up Investing

This is the exact opposite (obviously) of Top-Down. In this scenario, you choose individual stocks based on your own extensive research regardless of sector.

Buying Stock via ETFs

If you’ve decided on a top-down approach but you can’t decide which healthcare stock you want, you can look into ETFs to fill the void. With ETFs, you are purchasing every stock in that sector/index. With a healthcare ETF for this example, you are filling the sector and getting diversification in the process.

Top Down Example

Here’s an example of a portfolio that might represent a top down strategy, each of the stocks is from a different sector. Let me be clear in saying that no research went into this sample portfolio, it’s simply an example to demonstrate stock from various sectors.

1. Apple Inc. (AAPL) – Technology – Computers
2. Wells Fargo & Co. (WFC) – Financial
3. Johnson & Johnson (JNJ) – Healthcare
4. Chevron Corp. (CVX) – Basic Materials
5. Coca Cola (KO) – Consumer Goods
6. Dow Chemical (DOW) – Chemicals/Major Diversified
7. Walmart (WMT) – Services – Discount/Variety Stores
8. General Electric (GE) – Conglomerates
9. Boeing (BA) – Aerospace/Defense
10. Utilities Select Sector SPDR (XLU) – Utilities Sector ETF

Again, this is just an example of ten holdings pulled together to show a diversified portfolio. These are holdings that you need to look at with the idea of holding them for extended periods of time.

Monitoring Your Stocks

Keeping an eye on your holdings is very important. There may be a holding that increases significantly in value for a specific reason and overweights your portfolio in a certain sector. Taking profits in situations like that may be in order. By that same token, if a stock drops suddenly, but you believe it is still a strong company, you may want to double down and buy more shares on that dip.

One other final thought, most of these companies do give dividends. You can either re-invest those dividends back into that particular stock and buy more shares or take the cash and use it to take advantage of other opportunities.

Day traders and long term investors can both make money in the stock market.  The different approaches of buying and selling stocks vs buying and holding them require different strategies and come with different levels of risk.

Day Trading

Day trading has been a part of investing for a few decades now. Before 1975, all commissions on trades were set at the same rate. The SEC at that time made fixed rates illegal. Discount brokers rose out of that decision and changed the landscape of investing. The practice of day trading didn’t really come into it’s own until the great bull run of the 1990’s though.

In the mid-90’s, an individual could almost close their eyes and point at a stock in the Wall Street Journal and make money on that trade. People started quitting their jobs and mortgaging their houses to take advantage. Unfortunately all good things must come to an end, and so did the run on the market when the Tech Bubble burst. The chaos and carnage this created in day trading circles is legendary.

So what is day trading? It is the act of buying a stock and then selling it in the same day, or a short time later. It is a very intense, hands-on practice. Day traders watch the markets and monitor their trades the entire time the market is open, looking for short, quick movements in a stock to get in and out.

While day trading is risky, it can also be extremely lucrative. It’s also an accountant’s nightmare. Later this week we’ll dig a little deeper into trading stocks and take a look at some day trading strategies.

Long Term Investing

When you think about the word investing, things like “buy & hold” or “Warren Buffett” probably come to mind. Mr. Buffett, arguably the best investor of all time, has made a living out of buying a stock that he feels is cheap, and holding it until it goes up. A long term investor does not buy Disney stock because he thinks it’s going to pop because they are releasing another Pixar movie. He buys it because he believes the company is going to be here twenty years from now, still making Pixar movies. He can hold that stock, for however long, enjoy the dividends and then sell it down the line when necessary.

Tomorrow we’ll talk about building a stock portfolio and how you can use a top-down or bottom-up approach to diversify your investments.

Day Trading vs Long Term Investing

One way to look at the difference between day trading and investing for a longer term is that a trader will either sink or swim by trading through a market storm. An investor will ride through the storm and see what happens on the other side (usually).

Investing in stocks is difficult and not for the easily squeamish. There are dangers at every turn, but also rewards. There is only one guarantee, no matter which style of investing you choose; you will NOT get bored.

Technical analysis of stocks is defined by Investopedia as the “method of evaluating securities by analyzing statistics generated by market activity, such as past prices and volume. Technical analysts do not attempt to measure a security’s intrinsic value, but instead use charts and other tools to identify patterns that can suggest future activity”.

Technical Analysis

In the world of technical analysis, the men and women who become analysts play part historian, part weather man. They look at the past performance of an individual to try and predict what “might” happen in the future. There’s a reason why the disclaimer, “past performance is no guarantee of future results” though. This job is not easy and the professionals are wrong just as often as they are right. Analysts will end up being “early” or “late” in their predictions, but the one that nails it on a regular basis ends up on CNBC.

The foundation of technical analysis came from the writings of Charles Dow early in the 20th century. Three main points of the Dow Theory are:

It’s all inclusive

The price of a stock at any time is indicative of all the information available that can affect the stock. This is the launching point for technical analysis.

Stocks are trendy

Like skinny jeans, stock prices tend to follow a trend. While there can be some random movements, like baby boomers storming the closest Abercrombie & Fitch, generally stock prices will follow a trend for a period of time. The difficulty is in figuring out when the trend is over. Who wants to be the last guy walking around with a Michael Bolton haircut?

Even if we know history, we are doomed to repeat it

Based on investor behavior, stock movement tends to do the same thing when certain factors occur. One example would be the run on banks we saw in early 2008. Like the late 1920’s, people thought their money would disappear (not the case if you are within FDIC limits) and rushed to withdraw it all. Who would have thought we’d see a repeat of that?

Stock Charts

Next, let’s look at three different styles of stock charts that are used in technical analysis and an example of each.

Overlays

These charts are placed over the standard stock pricing chart. One use for this is to follow moving averages of a stock. When looking at a moving average of a stock price, it is based on a certain time frame and is the average price of that time frame. This can filter out short term spikes and pick up longer term trends.

In the chart above for Wells Fargo (WFC), the orange line is the 50 day moving average laid over the daily stock movement.

Price-Based Indicators

One price-based indicator used for technical analysis is the Relative Strength Index (RSI). This is a momentum oscillator that measures sharp movements in a stock price. This is an indicator that suggests if a stock is either oversold or overbought.

This is an RSI chart for WFC for the same timeframe as above. J. Welles Wilder, the man that developed this chart in 1978, believed that if the chart went above 70, the stock was overbought, and if it fell below 30, oversold.

Volume-Based Indicators

Money Flow Index (MFI) takes a look at the dollar volume in terms of shares traded.

MFI is used much in the same way as the RSI. The values to keep an eye on in this example are 80 and 20.

Technical traders never rely on just one of these charts, the idea is to use multiple indicators to come up with enough evidence to make a move one way or the other.  Hopefully this was a useful overview into the concepts behind technical analysis, is you have any questions just leave them in the comments below.