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Trading Baskets II: The Crapolio, A Roll Of The Dice In The Stock Market

Aug 31

Posted by admin in Investing, Stocks Mutual Funds

In a previously written article, we expanded the use of the term ?Trading Baskets? to include stocks from different sectors or industries. Now I want to share with you an approach to day trading or swing trading that I had some success with back in the wild and woolly, pinnacle days of day trading that may still work today. Unfortunately, this basket of stocks was dubbed ?The Crapolilo?, a name it just could not shake. You?ll see why.

The crucial element that traders are looking for in any stock, which makes it a good day trade or swing trade, is movement or momentum. There are any numbers of things that can cause movement in a stock. Usually it is news of some sort, either positive or negative. It doesn?t really matter. You are only looking for movement, up or down. However, for this particular strategy we are looking for positive news. Keep in mind that it is not your job as a trader to totally understand why or what is causing the movement in a stock, beyond what it takes to make a quick profit.

If you spend enough time glued to a computer monitor with CNBC blaring in the background and are looking for a stock to make a quick buck on, sooner or later you will realize that there are some familiar names that just keep popping up over and over again. From these repeating names you may want to consider building your own Crapolio.

Start by tracking the stocks that keep coming up over and over again. In this scenario the stocks for which we are looking usually play out the same way every time one of the stocks has news of some sort. Traders will jump on the stock, causing a mad scramble to get in on the move, and the stock will run up in price for a nice gain. The challenge is to be as early as possible on the play, get into the money (profitable), and get out before the momentum turns and the stock retreats. Rest assured, they will retreat because that is one thing all of the stocks we are looking for have in common; they hardly ever hold their gains. If you?re late to get in and even later to get out, you won?t make a dime and will maybe even lose money. It is this phenomenon that the now famous Floyd?s 4-Gets are based upon: Get In, Get Profit, Get Out and Get Away!

So here?s what I did, but remember that this strategy may or may not be right for you. I set aside a percentage of my trading capital for a basket of stocks that became known as ?The Crapolio?. I picked a large number of the stocks I had been tracking, low cost stocks under $5-$10 for the most part, but not always. I charted every one of them as far back as I could, looking for the ones that were most likely to continue to repeat the scenario. I came up with what I thought was a recent low that was going to hold for some time; and I bought half the normal lot of shares I usually traded. (See link below to DTM: Decisive Trade Management and Trading Stops for lot sizes.) Then I waited.

The theory is that sooner or later these stocks will once again have some sort of news event that will move them to the upside. As soon as that news hit, I would be in an excellent position having already bought the stock at a recent low. I would then try to buy an additional half lot or a full lot once the new news event hit the street. Overall, I would be in the shares much earlier on average and be able to take advantage of the move and sell for a profit into the momentum. Being in the stock gave me the ability to lock in a nice profit without having to scramble to get in and scramble to sell before the momentum ran out.

Often, I would be in the stock and the news would hit over night, causing the stock to gap up significantly at the market opening in the morning.

However, this is not called ?The Crapolio? without a reason. High quality stocks do not usually behave this way to the same degree. Those that do are much more expensive, usually $35 or more, making it cost prohibitive for all but the wealthiest traders to use this plan.

As previously mentioned, most, if not all, of these stocks were under $10 and for a reason. These were not high quality stocks; in fact, the opposite was the case. Most were high-risk speculative tech stocks or bio-techs. Many were dot-coms; remember this was in the hay-days of the dot-com boom. As we all know now, there were a lot more dot-bombs than there were successes.

Obviously, this was my own version of Swing Trading.

IT IS IMPORTANT TO UNDERSTAND THESE WERE \”NOT\” BROKEN DAYTRADES. Each stock was chosen, charted and watched over a period of time before it was added to ?The Crapolio?.

I believe this strategy could still work today. However, it is to be considered extremely risky and should only be used with money you can afford to lose.

When trading this or any day trading strategy one should know and use DTM: Decisive Trade Management (see story at http://www.traderaide.com/index.html).

Happy trading!

No permission is needed to reproduce an unedited copy of this article as long the About The Author tag is left in tact and included. We do request that we be informed of where it is posted and reciprocal links will be considered. Email floyd@sbmag.org.

Floyd Snyder has been trading and investing in the stock market for three decades. He was on the forefront of the day trading craze that swept the nation back in the late 1990\’s both as a trader and as the moderator of one of the Internet\’s largest real time trading rooms. He is the owner of http://www.TraderAide.com, Strictly Business Magazine at http://www.sbmag.org

Writen By : Floyd Snyder

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Traders, Defend Against The Dreaded Death Spiral.

Aug 25

Posted by admin in Investing, Stocks Mutual Funds

It has often been said that there is only two ways to get hurt really bad on a stock trade, getting caught in a \”death spiral\” by not using DTM: Decisive Trade Management in the way of stop loses and having a stock halted on you. Halts you have zero control over. Death spirals are of your own making if you do not practice the use of stop loses.

Very simply stated Decisive Trade Management is keeping a stock form moving to far against you when the trade goes bad. It is not impossible to have 5 or 6 out of 10 trades lose money and still be profitable for the net of the total 10 trades. What you must do is keep your loses small and manageable and try to maximize you winners. This is done with the proper use of Trading Stops and a strict discipline in using them.

Capital Preservation

It is my firm belief that capital preservation is one of, if not the single most important thing a trader has to concentrate on. It is also my belief that it is always better to error on the side of safety or caution, in general this all comes under DTM: Decisive Trade Management.

Stop loses and the discipline to use them are part of DTM

When you enter a trade, you should have both a possible profit figure or gain that you hope to obtain and a downside loss that \”you\” are comfortable with if the play turns against you. Only \”you\” can make that decision as to what these limits are. You are the only one that can determine you risk tolerance and ability to absorb loses on an individual trade. Factors on which these limits are determined include the amount of money you have in your account, your experience and knowledge of the particular stock, news or events affecting the trade and over all market conditions and possibly others. As an example, a trader trading a $250,000 account is more then likely better able to take a $2.00/shr hit on a stock then the trader trading a $25,000 account. Some traders will consider just how well they may have done on a previous trade or number of trades and let the stock run a bit more against them if they have already made a few good trades or if they need to make up for a bad trade or two. This is very risky. I personally don\’t like to see risks taken in direct relation to previous trades. I would much rather see a plan that is in effect straight across the board. This goes along with my thinking that ever trader should have a trading plan and then you work your plan. (See Trading Plan: Everyone Should Have One) But human nature what it is, I\’m sure the balancing trades against one another is probably being done all the time.

As a personal guide, in a market with very tight trading ranges, I\’d think twice before letting a sock turn down by 50 cents or so. That is a very tight stop loss for the most part; again this can be flexible depending on your knowledge of the stock and its trading habits coupled with your own tolerance for loss. On an $85 stock, 50 cents is not all that much, but on a $9-10 stock it\’s a much larger percentage. Markets trading in tight ranges and lacking volatility make it much more difficult to recover loses if the follow through is just not there. If the average profit in a trade is 25-75 cents, then letting one get down on you a buck or more is going to wipe out most if not all of the previous gains on two or three plays. It can take that many trades to get back to even.

On the other hand some stocks can move $2 or $3 in a heart beat and reverse just as quickly for $2 or $3 move into the money for a total of $4-$6 or more. A $.50 stop on these will have you stopped of the trade and out of the money more often then not. I suggest that unless you are familiar with these stocks that have a history of wild swings that you avoid them until you get familiar with them.

The Trading Stop Itself

It is the opinion of many experienced traders and one that I share, that the stop order should not actually be placed. Instead you determine what price it should be and be ready to place the order if and when the trade turns against you and nears your stop price. This is referred to as \”mental stops\”. You can even go as far as having the order form all filled out and ready to execute as the price approaches your stop price. A lot of the newer trading platforms will allow you to actually place the order in their system but it is not sent to the market for execution until the price is reached.

When you actually place the order, you lose control of you trade. Many systems do not allow you to have two orders on the same position at the same time. If you want to sell the stock you first have to cancel the stop and get confirmation back before you can place another order.

On a stock that is moving rapidly against you some traders prefer to use a market order for the quick exit. I do not like the use of market orders any under circumstances. There are too many pitfalls involved with the use of market orders. Instead I suggest you use a limit price that is significantly lower then the bid that assures you get a fill.

However you chose to exercise the use of stop loss orders is up to you but it has to be done. DTM with the use of stop orders is the only way to defend against the dreaded death spiral.

See more Trading Tips at http://www.TraderAide.com

There are many excellent books on learning to day trade. My favorites are found at http://www.TraderAide.com/books

About the Author: Floyd Snyder has been trading and investing in the stock market for three decades. He was on the forefront of the day trading craze that swept the nation back in late1990?s both as a trader and as the moderator of one of the Internet?s largest real time trading rooms. He is the owner of http://www.TraderAide.com and Strictly Business Magazine at http://www.sbmag.org

Writen By : Floyd Snyder

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A Triple Dipper: How To Make 3 Profits On 1 Stock Trade

Aug 17

Posted by admin in Investing, Stocks Mutual Funds

This is a rather simple strategy with which I am sure a lot of seasoned traders are very familiar, possibly under some other name with which I am not familiar. I wanted to write about it because I don?t see anyone talking about it anymore. Since the big hey-days of day trading and, of course, the burst of the Internet bubble of 2000, there seems to be a lack of patience that this strategy needs to work.

A lot of people seem to be moving back into the markets since the declines of 2000. If you were one of those that jumped back in during the early part of 2004 you reaped big profits. But now there seems to be a fair number of Wall Street Pundits that are beginning to raise the \”irrational exuberance\” flag once again. If you have been watching some of the unrealistic gains in recent high flyers, you may be looking for a bit more conservative way of being in the market.

In the early 70?s I met a young Dean Witter Reynolds broker and told him I had a few dollars I wanted to put into the stock market. The first thing he told me was that unless I had $100,000 I wanted to invest one time into a diversified portfolio with a buy and hold strategy?or?. $10,000 I wanted to invest in a more aggressive \”trading\” strategy, he was not interested in my account. Keep in mind, this was a long time before the day trading craze hit. I was impressed with his straightforward and honest approach. However, I did not have $100,000 back then, but I did have a bit more then $10,000. With that we were off to the races, and this is the trading plan he put to work for me.

First of all he stayed away form the high flyers altogether. He followed a number of solid, top quality companies that had a history of paying above average dividends but still with a little bit of volatility. Both the dividend and the volatility are required ingredients.

We bought six to ten positions with an average of 300-500 shares in each position. Every stock we bought paid higher then average dividend. We did well with companies like Phillip Morris [MO], American Electric and Power [AEP], Battle Mountain Gold Co. [now a pink sheeter], General Motors [GM] and few others. I only mention them so you that are nuts-o for research (exactly the sort of thing I would do) can go back and see the sort of movement we had in these stocks back in those days. There were others of course, but that will give you some fodder for research. GM and MO may still work these days, but I have not looked at AEP in years and, of course, Battle Mountain is history.

Okay, so now you know what sort of companies we are looking for; solid, higher then average dividend paying companies with a bit of volatility. Hey, I never said this was easy! But to make it even more challenging, we need one more component to make the triple dip into the money – Options. To be more specific, we need Covered Calls only!!! Let me repeat that, we are only selling covered calls, no other options. You will have to be cleared by your broker for options trading, and you will need a margin account.

Here?s how the play is made. You buy 300-500 shares of a stock that is going to be paying a dividend with in the next 15-45 days. You sell the 30-60 day covered call taking in the premium money and giving you that amount of money downside protection to offset any move against you.

The ideal trade will play out like this. You will buy the stock, it will pay the dividend while you own it, you sell the Covered Call collecting the options premium money, and hopefully the stock will be called away at the strike price. Obviously, you have to make sure you only sell the call with a strike price higher then your entry price.

Now let?s apply the math on a hypothetical trade. Let?s say you buy MO at $50 and it is paying $.25 dividend and the $51 call option is selling for $.25 with an expiration date 45 days out. Let?s further assume the stock pays the dividend, and moves above the strike price of $51 by the expiration date and it gets called away. You will earn $.25 for the dividend, $.25 for the premium money on the call and $1.00 on the stock position itself for a total gain of $1.50 on 300 shares. That?s $300 on a $7500 investment (using 2:1 margin account) for a 24% annualized yield on your money. More of the math: $300 divided by $7500 = 4% X 8 = 24%. Keep in mind you made the $300 in 45 days meaning theoretically you can do this 8 times a year. That?s how you get the 24% annualized yield. Not to shabby! (Because commissions vary, I have not put them into the equation, something you will have to do obviously.)

Seems pretty easy doesn?t it? Well it is, when it works. But like everything in the stock market (or in life itself for that matter) there is no sure thing.

Any number of things can happen. Here are just a couple of things you have to consider. First off, I would check to see what all the analysts are saying about any stock you are about to try this on. Make sure the company has a solid dividend history. I would also caution against making the play on a stock that is due to report earnings while you are in the options period. Also keep in mind that as a general rule a stock will dip in direct relationship to the divided paid.

Obviously this strategy is not always going to play out as our hypothetical trade did. However, I have had results similar to that as well as some much better, and \”yes\” some that did not work at all. What makes the play less risky than the stand alone buy and hold trade is that no matter what the stock does, you get the dividend and the options premium money giving you that much downside protection on a move against you.

I had a number of stocks that I would hold in my account and merely roll over the option money and collect the dividend on a regular bases, double-dippers, and was very happy not to have the stock called away.

I was very fortunate that I had met a broker who became one of my best friends and taught me this method of investing. I strongly suggest that you seek the advice of a professional broker; money manager; your attorney; your accountant; your present, past or future wife or husband; your doctor; your heirs, your auto mechanic or anyone else in the world that you can think of before you try this or any method of investing. (Okay, I think that covers about everyone.)

To learn more about Covered Call writing, check the resources at http://www.TraderAide.com. Good luck and happy trading!

No permission is needed to reproduce an unedited copy of this article as long the About The Author tag is left in tact and hot links included. We do request that we be informed of where it is posted so reciprocal links can be considered. Email floyd@sbmag.org.

Floyd Snyder has been trading and investing in the stock market for three decades. He was on the forefront of the day trading craze that swept the nation back in the late1990\’s both as a trader and as the moderator of one of the Internet\’s largest real time trading rooms. He is the owner of http://www.TraderAide.com, Strictly Business Magazine at http://www.sbmag.org, http://www.FrameHouseGallery.com and http://www.EducationResourcesNetwork.com

Writen By : Floyd Snyder

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Stock Market Update: October 23, 2006

Apr 9

Posted by admin in Stocks Mutual Funds

With the Dow breaking out over the key 12,000 mark the time has come to determine the health of the overall markets. In performing this analysis it is important to also evaluate other indices such as the NASDAQ and the S

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The Stock Market 101: Part 2

Apr 8

Posted by admin in Stocks Mutual Funds

What Makes Share Price Move: Demand and Supply Basics

The prices of the shares listed on the major exchanges are changing constantly during market open hours. They are moved by the orders from individual traders through to large banks and institutions. The basic concept that determines these price fluctuations is that of demand and supply. To put it simply, if more people want to buy stock XYZ than sell it price will rise, conversely if more people want to sell the same stock than want to buy it price will fall. This is a pretty basic interpretation and it fails to consider the factors that contribute to these buying and selling decisions.

Fundamental Traders Fundamental traders are people who make their decisions based on market, sector and stock specific news. For example, in an expanding economy, a bullish sector and with an excellent earnings report from a specific stock a fundamental investor will probably choose to open a long position or add to the position he/ she already has. This exceptionally likely if the current price trend is up; as the old adage goes: the trend is your friend. The fundamental analyst would see this positive news as a sure sign that price will move higher. After all this news is sure to increase the demand for the stock and decrease the supply.

The problem with fundamental analysis in its most basic form is that it doesn?t take trader psychology into consideration. What we mean by this is the impact that fear and greed will have on price cannot be measured. An example of this would be a highflying stock, such as one of the Internet stocks during the boom in the late 1990s. All fundamental reasoning for prices to reach as high as they did went out of the window. Share prices were over valuing companies who failed to make any profit. Price was in fact being driven higher by greed. Everyone wanted to invest in these stocks and make a fortune. As soon as the price stopped rising and began to fall the human emotion of fear kicked in sending share prices into a rapid decent.

Technical Traders Strictly technical traders completely ignore the fundamentals and stick to spotting price patterns. Technical traders argue that price patterns mimic the psychology of the market?s participants. By spotting patterns that have occurred multiple times throughout charting history a technical trader will aim to put the odds of being able to pick a profitable position in his/ her favour. Of course no technical patter is 100% guaranteed to repeat itself every time and technical traders often find their analysis undone by unexpected fundamental reports such as earnings or legislation releases.

Combining the Two Most successful traders will tell you that they have found a happy medium between trading both fundamentals and technicals. This means that they are aware of company earnings and the business environment but wait for key technical levels before making their trades. Professional traders always have a clear, definable method for their entry and their exit, stick to their trading rules religiously and ignore their emotions. It is this discipline and consistency that breads success.

Always keep in mind that everyone has slightly differing views on where a particular stock is headed, how quickly and how far it will go. If everyone had the same idea then the market wouldn?t exist at all. That is why it is so important for you to learn to trust your judgement.

A Company?s True Value

While reading through a list of quotes in your daily news paper or online you may be forgiven for thinking that the companies with the highest priced shares are worth more than those with a lower stock price. This is not the case. A company?s current market value is calculated in terms of market capitalization. This is calculated by multiplying the number of outstanding shares by the current price per share. A good example of this is as follows:

At the time of writing Google (GOOG) has a share price of $375.39. Therefore it will cost you $375.39 to buy one share in Google.
At the same time Microsoft (MSFT) has a share price of $24.21, much lower.
So which company has the greatest value? The answer, maybe surprisingly (when looking at the share price anyway!) is MSFT. Microsoft has a market capitalization of $243.6 Billion compared to Google?s $113.78 Billion. The reason for this is of course the number of shares in issue. To put this into perspective the average daily volume (number of shares changing hands every day) for Google is almost 7 million compared to more than 82 million for Microsoft.

Keeping in Touch With The Market

We don?t want to go into too much detail about how to choose the shares you wish to invest in but here are a few brief pointers:

Choose a company you have had many experiences with, possibly even on a daily basis. If you love their customer service and efficiency the chances are others will too.

Do your research. The Internet is an invaluable source of information. Most companies will often have an ?investor relations? page keeping you up to date will past, present and future performance and news.

Take your time. Don?t rush into anything, the market was there yesterday and it will be here tomorrow. Make sure you understand the ins and outs of what you are doing and feel confident in your trading or investment plan.

We have already written about the power of the Internet when researching your potential investments but it is also an excellent means of keeping track of the day-to-day price movements. You can log on to http://www.NASDAQ.com http://www.nyse.com or http://finance.yahoo.com/ where you are provided with slightly delayed market data and news releases. This is by no means sufficient for the active day trader but it is enough information to keep most people up to date.

Trading Vs Investing

The difference between trading and investing is quite a large one. An investor is someone who buys shares in a company with the intention of holding onto them for a period of years (all things being well). Therefore an investor is relatively uninterested in daily price fluctuations and will be paying much more attention to press releases, earnings reports and news items concerning the companies they have invested in. On the other hand a trader can open and close a position in a matter of seconds or hold on for several months. A very active trader (seconds, minutes, hours) is known as a day trader while the less active (days, weeks, months) are swing traders.

Investing and trading can both be highly profitable pursuits but you should consider several factors before deciding which path to follow. For example, if daily price fluctuations make you nervous you should probably stay away from day trading and move towards investment or longer term swing trading. Day trading is for those who can stay detached from their emotions and want to make trading a full-time job.

Choosing a Broker

There are two different types of broker that will enable you to buy and sell shares, full-service and discount.

Full-Service:
The first brokerages on the scene were mainly full service. These brokerages can actually manage your account for you and recommend certain investments. The fact of the matter is that these brokerages are very expensive and you lose control over your own investments.

Discount:
Don?t be put off by the name, discount doesn?t mean ?cheap and nasty?. Discount brokers exploded into the market place with the arrival of the Internet. Rather than offer you advice and mange your account, you are free to do this via an online trading platform. Your discount broker makes their money by charging you commission costs for any trades you execute. The rate of these costs depends on how often you place trades.

When you come to open your first brokerage account you must do your due diligence so you avoid any unnecessary costs or wasted time. By the time you come to open your first account you will probably have a good idea of how active you will be and therefore the commission costs you should look to pay. Internet forums are an excellent source of independent reviews and experiences that will help you find the best brokers in a highly competitive market.

The difference between trading and investing is quite a large one. An investor is someone who buys shares in a company with the intention of holding onto them for a period of years (all things being well). Therefore an investor is relatively uninterested in daily price fluctuations and will be paying much more attention to press releases, earnings reports and news items concerning the companies they have invested in. On the other hand a trader can open and close a position in a matter of seconds or hold on for several months. A very active trader (seconds, minutes, hours) is known as a day trader while the less active (days, weeks, months) are swing traders.

Investing and trading can both be highly profitable pursuits but you should consider several factors before deciding which path to follow. For example, if daily price fluctuations make you nervous you should probably stay away from day trading and move towards investment or longer term swing trading. Day trading is for those who can stay detached from their emotions and want to make trading a full-time job

Conclusion

This is what we have learned over the course of this tutorial:

Ignore the hearsay ? Don?t become involved in the ?heard mentality? of the general public. Take your time to learn about the inner workings of the stock market and develop your own trading plan.

Stock, share, equity ? All of these terms mean the same thing and ownership of them entitles you to voting rights and dividend payments.

Why do we have stocks? ? Stocks are issued to raise money for a business, this method is known as equity financing.

Preferred or common stock? ? Preferred and common stocks have different characteristics. Most of the investment decisions you come to make will involve common stock.

The Exchange ? There are two major types of exchange, listed and over the counter.

Supply and demand make the market move ? Supply and demand are governed by fundamentals, technical and trader psychology.

A company?s true value ? Market capitalization is the true value of a company and not share price.

Keeping in touch ? You can use the Internet to great effect when you wish to research and keep in touch with your investments.

Trading Vs. investing ? The type of market participant you become depends heavily on your spare time and your emotional attachment.

Choosing a broker ? Whether you want to invest or day/ swing trade will determine the broker you want to use. Remember due diligence is key.

David Thorpe is a senior contributor for www.passion-trading.com a free educational resource centre for traders and investors. The goal of the site is to stimulate the minds of its users, enabling them to achieve a greater understanding of the art of trading, thus helping them to become more profitable.

Writen By : David Thorpe

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The Stock Market 101: Part 1

Apr 8

Posted by admin in Stocks Mutual Funds

Introduction

Apart from the glitz and panache of Hollywood or the iconic World of the pop star the stock market is probably seen as the most glamorous way of making a living (and a very healthy living at that!). Over recent times advances in technology have made the Stock Market far more accessible to the general public. This has made the possibility of becoming rich from stocks far more realistic than obtaining a record deal or a landing a role in a Hollywood production.

Unfortunately involvement in the Stock Market is not a one-way street. It is commonly acknowledged that losing a fortune in Stocks is much easier than gaining one. You will constantly see figures touted for the percentage of people who lose money trading or investing. They range from 90% to as much as 99% depending on which ?market guru? is selling you their foolproof guide to making money.

The true pros, however, will tell you the key to being a successful Stock speculator is being able to make decisions for yourself based on your own set of rules. Just like a baby learns to crawl before learning to walk and run, you must begin by learning the stock market basics.

Ignoring the Hearsay

The chances are that all you hear concerning the Stock Market comes from either a work colleague or the ten-second report delivered on your evening news. This news report is as interesting as it is useful, not at all. On the other hand what you hear at work should be ignored for other reasons. If you are a complete stock novice, no offence intended, this hearsay might sound very interesting and possibly even tempting. The typical conversation will go something like this:

Colleague: ?Did you hear about Mike from payrolls??
You: ?No, what about him??
Colleague: ?He made a few grand from Stock ?WXYZ? last month.?
You: ?Wow, I could really do with that money right now.?
Colleague: ?Me too. He says he has a few more hot tips for us if we are interested.?

Well done to Mike, but the chances are the next conversation you have with this colleague will go something like this:

Colleague: ?Have you seen Mike from payrolls??
You: ?No, why??
Colleague: ?I lost my shirt on that ?hot tip? he gave me. I want to give him a piece of my mind.?

Although this conversation is complete fiction it is not at all unrealistic. It serves as a classic example as to why you should learn to make you own investment decisions, and pay no attention to what your friend at work or drinking buddies down at the pub think.

Shares, Stock and Equity

When the media, your broker or your mates talk about The Market you will hear them use the terms Stock, Share and Equity. Slightly confusing, you might think, but the reality is they all mean the same thing. Examples of how the terms are used can be seen below:

Stock ? ?I?m a big time player in the Stock Market.?
Share (s) ? ?Sara just bought 2 000 shares in company ?XYZ?.?
Equity ? ?Now over to our financial correspondent and a look at today?s Equity Market.?

All of these terms mean the same thing, partial ownership of a company, and all three are interchangeable in any of the above examples. The more Shares you acquire the greater your stake in the company becomes.

As a shareholder you will have a claim to a portion of the company?s earnings, paid in dividends, and any voting rights attached to the share. It is standard practice to have one vote per common share to be used when electing the Board of Directors. It is the Board?s responsibility to increase the value of the company (your share) for you so it is only right that you get a say in who gets appointed.

Just because you are a partial owner it does not mean that you will be in any way responsible for the running of the company, nor does it afford you a discount on any of their products or services!

It used to be the case that shareholders were presented with a certificate to prove their ownership. If you had wanted to sell your shares you would have had to take the actual certificates the exchange. However, with the birth and evolution of the computer and electronic trading this is no longer necessary. You can now buy and sell your shares with the click of a mouse or a phone call and you are no longer issued with a certificate. To ease the flow of transfer, certificates are now held in electronic form by your broker (in street name). This makes it possible to transfer ownership (buy and sell) in a fraction of a second. In fact day traders do just that, many times every day.

Why Issue Stock?

So why do companies issue stock in the first place? Lets face it; it means they share their ownership and their profits with the general public for the price of a share. The reason is to raise money. By selling off a slice of their business they can raise hundreds of millions of dollars without having to pay any of it back or pay any interest on it. This method of raising funds is knows as equity financing.

The alternative to equity financing is debt financing. This is where a company issues bonds or takes out a bank loan.

What Happens if the Company Goes Bust? If the company you have invested in goes bust then you are only liable for the amount you have invested in that company, i.e. the number of shares you own multiplied by the initial cost of each share. This does not mean that creditors will come after you for that amount it simply means your shares will be worth nothing. Only once the creditors have sold off the company?s assets to cover its debts the shareholders have a claim on any assets remaining. This is known as absolute priority.

Stocks Vs Bonds As we know bonds are a form of debt financing. To invest in bonds does have some advantages over buying shares. For example, you will receive a guaranteed interest payment throughout the life of the bond (some companies don?t pay dividends) and you are guaranteed the return of your initial investment known as the principal. We already know that this is not the case as a stock?s price can just as easily fall from the value at which you made your investment. However, with greater risk comes greater reward; traditionally stocks have outperformed bonds on rate of return.

Preferred Stock So far the shares/ stock we have referred to is known as common stock. As the name suggests this is the most widely traded type of share. However, there is another type of stock, preferred stock. This is a cross between common stocks and bonds. Preferred stockholders are repaid before common stockholders (but still after creditors) if a company goes bankrupt. They often pay a guaranteed dividend for life. Frequently the issuing company has the right to buy back their preferred stock at any time for a premium. One downside of being a preferred stock holder is they usually come with a lack of voting rights. Examples of companies currently issuing preferred stock are:

MBNA ? Ticker: KRB-B, KRB-C
TransCanadaPipelines ltd – Ticker: TRPPR
Merrill Lynch ? Ticker: MER-B, MER-C

Market Exchanges: Home of Shares

Exchanges are where shares are traded, i.e. where buyers and sellers meet to decide on a price for a share. That doesn?t mean you have to go down to the exchange yourself; your orders are sent via your broker to the exchange where orders are matched. The two major exchanges in the US differ slightly in the way they operate. They are the NYSE and the NASDAQ.

The NYSE The New York Stock Exchange is the oldest exchange in the US and the most highly regarded in the World. It is home to many of the US and the World?s largest and most famous companies such as McDonalds, Coca-Cola and Citigroup as well as the DJIA and S

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