Posts Tagged ‘stock market’
Thursday, May 28th, 2009
Learn The Stock Market Lesson - Bears, Bulls, Hogs, And Sheep
Legend has it that Wall Street was named after a wall that was designed to keep farm animals from wandering around Manhattan. Today, four animals are still frequently mentioned on Wall Street: bears and bulls, hogs and sheep. Stock traders often say, “Bulls make money, bears make money, but hogs get slaughtered.”
Here is how you can remember each of the 4 animals and what they symbolize:
Bulls- When a bull attacks, he has a tendency to lower his horns and strike upwards. Therefore, the term “bull market,” means a rising stock market. A bull is a buyer – a person who bets on a rally and profits from a rise in prices. The trader would also be known as a bullish trader.
Bears- A bear fights with its paw, striking downwards. Therefore, the term “bear market,” means a falling stock market. A bear is a seller – a person who bets on a decline and profits from a fall in prices. The trader would also be known as a bearish trader.
Hogs/Pigs- Hogs are greedy and get slaughtered when he loses site of his original strategy and becomes too greedy. They are tempted to buy shares which they cannot afford due to their greed of being able to make quick cash. They are often unable to control their emotions, panic, and make bad decisions, which is why they get slaughtered in the long run. Some hogs overstay their positions—waiting for profits to get bigger even after the trend has reversed itself.
Sheep- Sheep usually has no trading strategy. In Dr. Alexander Elder’s wonderful book, “Trading for a Living,” he describes sheep as being “passive and fearful followers of trends, tips, and gurus…You recognize them by their pitiful bleating when the market becomes volatile.”
What happens during the open market?
Bulls are buying, bears are selling, hogs and sheep get trampled while the undecided traders wait on the sidelines, watching and waiting for the “right” time to come in. A trade occurs when there is a consensus between a buyer and a seller—either a bull agrees to a seller’s terms and pays, or a bear agrees to a buy’s terms and sells a little cheaper. The presence of undecided traders puts pressure on both bulls and bears because the buyer knows that if he waits too long, another trader can step in, snagging away his bargain. A seller knows that if he holds out on a high price for a long period of time, another trader may step in, trying to sell at a lower price. This pressure leads buyers and sellers to come to consent of a price, causing a transaction to be processed.
Keep in mind that without a distinct and disciplined trading strategy and using techniques such as technical analysis and fundamental analysis, you may become either a hog or a sheep and you will eventually be washed out by the market. (I will be discussing some trading techniques such as technical and fundamental in a later post).
Source Used: Trading for a Living: Psychology, Trading Tactics, Money Management Written by Dr. Alexander Elder
(This is a GREAT beginner’s book. I recommend everyone to at least read this book, if not own a copy of it. It is pretty cheap on Amazon.com if you want your own copy or you can look in your local library.)
Tags: alexander elder, bear market, bears, bull market, bulls, fundamental analysis, hogs, price, sheep, stock market, Technical Analysis, trading for a living, wall street
Posted in Learn The Stock Market | Comments Off
Monday, May 11th, 2009
Learn The Stock Market Lesson – Reverse Splits: Meaning and Purpose
In my previous entry, I began an introduction on stock splits and reasons why companies might decide to perform this. To be better informed for this lesson on reverse splits, it is recommended for you to read my last post about normal stock splits.
A reverse split, as the name applies, has the opposite effect of a normal split. Instead of increasing the number of shares outstanding and decreasing the share price, a reverse split decreases the number of shares outstanding while increasing the price of the stock. This type of split is not looked upon favorably by many investors, partially because the shares of current investors will decrease, causing them to feel like they have less ownership in the company.
If this type of split is not favorable, why would a company issue this? Sometimes, a reverse split is necessary for a company. For example, if company ABC has 10 million shares of stock outstanding but because, perhaps, of a rough year, their stock price has dropped to $0.50 per share. Although smaller investors often seek less expensive shares because they are more affordable, shares that are priced this low are considered highly risky. These shares are also known as penny stocks, which trades at a relatively low price and market capitalization. Because of its high risk, many institutional investors such as mutual funds and insurance companies will most likely avoid these penny stocks.
Many times a company may also do a reverse split to avoid being delisted, which is the removal of a security from the exchange on which it trades due to its failure of meeting listing requirements that includes maintaining a minimum share price.
In this case, company ABC might decide to perform a reverse split:
1) Before- 1000 million shares outstanding X $0.50 per share = 500 million (market value)
2) After- 100 million shares outstanding X $5.00 per share = 500 million (market value)
As you can see, again the market capitalization does not change but the shares outstanding is decreased and the price of each share is increased. In addition, fewer number of shares outstanding tends to be more attractive because the price can rise more quickly on positive news since it will take a smaller number of shares traded to make significant changes to the price.
Last month, in March, Citigroup filed for a reverse stock split to keep its stock price from dropping below $1 per share.
However, be careful about buying a company’s stocks after a reverse split. Unlike a normal split, reverse splits are considered negative events because stock prices often drops immediately after a reverse split.
Tags: citigroup, high risk, market capitalization, mutual funds, penny stocks, reverse split, shares outsanding, speculative, stock market, stock split
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Saturday, May 9th, 2009
Learn The Stock Market Lesson – Stock Splits: Meaning and Purpose
A stock split is an action that companies might decide to do especially if their stock has been very successful. A stock split would increase the number of shares outstanding by dividing them into multiple shares to be traded publicly. However, this does not change the total market capitalization (the total market value).
[Total market capitalization is calculated by: # of shares outstanding X price per share].
For example, suppose company XYZ has a total of 20 million shares of stock outstanding at the price of $50 per share. If XYZ’s board of directors decided to do a two-for-one split and the shareholders approved it, they can increase the number of shares outstanding from 20 million to 40 million, which would then cause its price to decrease from $50 to $25 per share. In both cases, the market capitalization does not change as shown below:
1) Before- 20 million shares outstanding X $50 per share = 1000 million (market value)
2) After- 40 million shares outstanding X $25 per share = 1000 million (market value)
[Here Company XYZ has decided on a 2-for-1 split, meaning that each stockholder receives an additonal share for each share that he/she already holds.]
So, what’s the difference between the two scenarios? After the stock split, current shareholders have twice as many shares, and new investors can buy shares at a lower price. Stocks can be split in any number of ways: two-for-one (as shown in the example above), three-for-two, three-for-one, etc.
What are possible reasons why a company would decide this? One primarily reason is to stimulate trading and to enable smaller investors to buy shares since the shares would now cost at a lower price than initially. Since most investors buy shares in round lots (e.g. a block of 100 shares) because commissions are higher for odd lot transactions (e.g. block of anywhere from 1-99 shares), it can be difficult for smaller investors to buy shares of a company whose stock is priced at $200. However, if that company splits its shares five-to-one, the price would drop to $40 per share, making it easier for smaller investors to buy that company’s stock. Again, the market value of the company hasn’t changed, but the total number of outstanding shares has increased by a factor of five.
Many times, a stock’s price will rise somewhat after a split, perhaps because investors become more interested in the stock, causing a wave of buying. Also, generally, a stock split is perceived as a positive indicator for a stock and the company, because stocks that are doing poorly usually are priced low to begin with.
Next Lesson: Reverse split!
Tags: investing, odd lots, reverse split, round lots, shares outsanding, stock market, stock split, total market capitalization, trading
Posted in Learn The Stock Market | Comments Off
Thursday, May 7th, 2009
Learn The Stock Market Lesson – Common VS. Preferred Stocks! Which one should YOU buy?
Many companies issue 2 different types of stocks: common stocks and preferred stocks. Common is definitely not a derogatory term as one might think. Common just means that it is the standard one that the company issues. Likewise, the name “preferred” does not mean that these shares are better, but rather it offers investors privileges and rights different from those offered by common stock. The main differences between the two are the levels of risk and privileges involved.
Common stocks, also referred to as voting shares or ordinary shares, is considered to be more risky and speculative than preferred stock because they are the last priority for ownership structure, should a company go out of business. This means that they are paid after all the other creditors, preferred stockholders and bondholders if a company goes bankrupt. They are last to receive interest and dividends. An advantage is that due to what is called preemptive right, common stockholders have the first right to purchase any new shares of common stock the firm decides to issue before any non-holders. Another advantage is that common stock provides voting rights on matters of corporate policy. Shareholders’ voting rights are based on one vote for each share of stock held. However, they cannot vote on dividends.
Common stock shareholders can be paid dividends variable with the company’s growth. For example, the company’s board of directors will decide whether or not to pay out a dividend. When a company makes profit, after tax, retained earnings may be distributed to shareholders as dividends. If you are one to take this risk, you could receive a great increment of dividends.
Preferred stocks, also called hybrid investment, tend to be more expensive but do not fluctuate as often. It is a more stable investment because it guarantees a regular dividend that is not directly fixed to the market, like the common stock. That means that if the company grows, you would receive the same amount of dividends. You should buy preferred stocks if you want to have priority and have a greater claim on the company’s assets. Even though preferred stockholders are paid before stockholders, they are paid after bondholders. Preferred stockholders do not enjoy voting rights. They can only vote on certain issues such as if the company wants to merge, liquidate asses, or issue more bonds or preferred stocks.
There are 4 types of preferred stocks:
1) Cumulative preferred stock – Guarantees an investor that if one or more dividends are not paid, the missed dividends will be accumulated. All the dividends must be paid in full before any common stock dividends can be distributed.
2) Noncumulative preferred stock – Any dividends missed are lost to the stockholder.
3) Participating preferred stock – You receive extra dividends when a company does well.
4) Convertible preferred stock – Allows you to convert a certain number of preferred shares to common shares.
Tags: bondholders, common shares, common stock preferred, common stocks, convertible preferred stock, convertible stock, cumulative preferred stock, cumulative stock, dividends, investment, noncumulative preferred stock, noncumulative stock, participating preferred stock, participating stock, preemptive right, preferred shares, preferred stocks, stock market, the stock market
Posted in Learn The Stock Market | 1 Comment »
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Bullish Stock Patterns
Bullish Engulfing Pattern
Doji Pattern
Three White Soldier Pattern
Above Stomach Pattern
Hammer Pattern
Piercing Pattern
Harami Pattern
Morning Star Pattern
Bullish Kicker Pattern
Inverted Hammer Pattern
Moving Average Crossover Pattern
Price & Moving Average Crossover
Macd Crossover Pattern
Weekly Macd Crossover Pattern
Stochastic Crossover Pattern
High Volume Percentage Gain stocks
Relative Strength Index (Rsi) Moving Up
Bollinger Band Crossover (Lower)
Bollinger Band BCrossover Upper
Commodity Channel Index (Cci) Crossover
Three Outside Up Pattern
Bullish Side By Side Pattern
Rising Three Method Pattern
Three Line Strike Pattern
Last Engulfing Top Pattern
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Gap Up Stocks
Bearish Stock Patterns
Bearish Hanging Man Pattern
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Bearish Harami Pattern
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Shooting Star Pattern
Weekly Stochastic Crossover Pattern
On Balance Volume (Obv) Pattern
Average True Range (Atr) Pattern
Moving Average Crossdown Pattern
Price & Moving Average Crossdown Pattern
Macd Crossdown Pattern
Weekly Macd Crossdown Pattern
Weekly Stochastic Crossdown Pattern
Day Volume Percentage Down Pattern
Relative Strength Index (Rsi) Crossdown Pattern
On Balance Volume (Obv) Moving Down Pattern
Average True Range (Atr) Moving Down Pattern
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