Stock Trading  Novice               Getting  you started.

Canadian Insight

Insight into the basics of stock trading

 

You too can understand the stock market. There is nothing mystical. There is nothing extra difficult. Learn the basics and it will be easier for you to grasp the rest. Don’t get overwhelmed in what companies to invest in and when to buy. With time, patience and experience you will acquire the necessary skills. Eventually you should become successful and find stocks financially rewarding.

 

The first step is to get an understanding of stocks and how the stock market operates. A single share is the smallest unit of ownership in a company. If you own a share of a company’s stock, you become a part owner of that company.

 

There are two types of stocks, preferred stock and common stock.  Most of the stock held by individuals is common stock. Common stock represents the majority of stock held by the public. Common stock gives you voting rights, along with the right to share in dividends.

 

 Preferred stock has fewer rights than common stock, except in one important area – dividends. Companies that issue preferred stocks usually pay consistent dividends and preferred stock has first call on dividends over common stock.

 

Companies may issue more stocks or warrants that you may convert into shares at a future date. A company may hold as few as a handful to as many as hundreds of millions of shares. Usually the larger the company the more shares there are issued; don’t use this as a rule. I have seen an odd penny stock with hundreds of millions in shares but this doesn’t happen very frequently.

 

You as a common stock owner have the right to vote to elect members of the board of directors and other important matters before the company. If the company distributes profits to shareholders, you will likely receive a proportionate share.

 

As a stockowner you have a very limited liability. If the company loses a lawsuit and must pay a huge judgment, you as an individual are not liable. The creditors can’t come after your personal assets. You may lose stock value should the company end up paying a large sum. If the company goes bankrupt you are not responsible for their incurred debts. You may however lose your shares if you are unaware and hold your stock until the very end. In case of bankruptcy the creditors are first and the shareholders are last to receive what remains. 

 

A big benefit of common stocks is that they are highly liquid if you invest in the right company. Small companies may not trade frequently, but most of the larger companies trade daily creating an opportunity to buy or sell shares. You should exercise care to avoid unknown small companies and not take on high risks. Most high volume stocks can be sold almost immediately and receive payment within three to five days should you need that emergency cash.

 

Unlike termed investments, or bonds you can sell stocks quickly and convert to money when you need it. If you should decide to reinvest in a different company you can buy or sell shares almost any day the markets are open.

 

Some companies which are just starting may not qualify to have their shares listed on a stock exchange and may sell shares over the counter basis. These shares if bought are not very easy to dispose of and may be risky to hold. I would certainly stay away from purchasing them unless there are some guarantees by sound reputable financial backers.

 

Shares offered on the Toronto Venture Exchange (former CDNX) are in a variety of tiers in which companies qualify and can be listed under. The riskier the company the higher the tier number will be. If for example you buy shares into tier #1 company it is a more established company than a tier #2. There are many established tier #1 companies that could move to the TSX from the Venture Exchange but prefer to stay.

 

All listed companies on the Venture Exchange must comply with regulations such as submitting audited annual discloser statements, or run the risk of being suspended. Financially established companies may advance to the Toronto Stock Exchange (TSX). Those that fail to meet the regulations of tier #2 may get demoted to the NEX Exchange, or apply to be listed on CNX. Some companies may not qualify to meet any exchange requirements. If such a demotion occurs the last resort is to have their shares sold over the counter.

 

The Toronto Stock Exchange does not follow a tier system. It does have very strict guidelines that companies must follow. All companies listed on the TSX must submit quarterly and audited annual financial reports on time and on regular basis. If perchance they do not follow the stock exchange guidelines the company is suspended from trading. If this company does not comply within a specified time limit it can no longer trade and the company’s listing is removed from the stock exchange.

 

Other stock exchanges around the world operate in similar fashion. They all have some form of guidelines and regulations to protect investors. Your awareness and knowledge is your form of best protection.

 

Choosing an online broker

 

You may have done this important step already but if you haven't here's a word of caution and advice. Choosing the right online broker is far more important than one may assume. If you are into serious stock trading it may determine the success or failure of your future trading. Don't let this be your handicap. If your intentions are to place an occasional order, it may not be as important as to some that intend to make countless trades per week.

 

A serious trader will require an online broker with a suitable trading platform and dependable customer service. Good customer service should be quick, helpful, and responsive. Should you encounter a problem or have a question, you should get reliable, willing, and accurate help quickly.

 

All trading information should be available whether it's stock quotes, trading news, or most recent news releases. You may want the option of instant trade execution and real-time stock quotes. You should have the capability of tracking companies, which interest you.

 

With your online service you should have an option of executing a trade via a phone should the internet service go down. There will come a time where you may be compelled to make trades while travelling away from your home, or office. You should as well have access to stock quotes through your phone.

 

Some brokers require a deposit for you to open an account while others make no such requirements. If you wish to have bonds or mutual funds included in your portfolio there are some brokers that offer such services. Banking institutions offer accounts with checking services. If you intend to buy stocks on credit you will require setting up a margin account.

 

Commission rates may be very important to you and rates vary with each institution. Check and compare what you believe is acceptable to you. Most discount brokerages require that you make a minimum number of trades to qualify for discounts. What may look as a bargain may have added stipulations, which you may not qualify should your trades be few. 

   

Go to as many brokerage sites as you possibly have time for and test their demos. All banking and credit unions have their own online broker services. Here are some Canadian brokers that you may wish to look at: Forex, Credential Direct, RBC Action Direct, TD Securities, TradeFreedom, Questrade, Scottrade, Charles Schwab and E-Trade. These are only a few to mention. Only you can determine which suits you best.

 

After your big decision, be certain that your computer has proper virus and spyware protection. Make sure that all your software is updated frequently. If you don't have a firewall, I suggest that it is a good investment. A few simple steps in security may save countless hours of headaches. 

  

Recognizing an opportunity to buy


Even in a bull driven market there are times when the markets take a dive as a result of unexpected events. These may be unforeseen government policies, weather events of a huge magnitude, or acts of terrorism. Some investors may refer to such events as a "black swan." While to some such events may cause turmoil and bleak times, you should accept them as acts, which can be turned into positive opportunities providing you were not a possible victim yourself.

 

I am not suggesting that you should jump into the markets as soon as there is a "black swan" occurrence. If you hold investments that you suspect may suffer it may indeed be time to sell. Take your losses or your remaining profits and bow out. This is only a judgment you can make. Some stocks depending on the sector may react in a more positive fashion and you may see them rise.

 

Once again I cannot overemphasize the value of charts or having access to such tools. Software should not be difficult to find, or perhaps you may use some that are online. Charts will help you in a variety of ways, but learn how to use them. They cannot be any better than you the user.

 

I will never suggest that you enter a freefall market, or catch a "falling knife." With the aid of charts you will derive when to enter a market. There are many stocks that may have fallen simply because of panic selling. Take for example when Hurricane Katrina struck the Gulf States and destroyed complete cities, a multitude of homes, businesses, and oil refineries, there was a sudden shortage of food, clothing, emergency supplies, and fuel. Later when flooding abated and people were able to return, there was a boon in the lumber and housing sector. If you had invested in the right areas whether it was stocks, or commodities you may have done quite well.

 

There are times when investors will over react to perhaps a new law or regulation passed by a government. There is a fast sell off as the market overreacts, within days market confidence comes back. This may be your big opportunity to buy back into the markets. With experience you will gain the knowledge to be opportunistic in securing good stocks, which have dropped in value unnecessarily due to the markets overreaction.

 

You will know which stocks may be a bargain if you have kept visual or market observation. Keep track of all stocks that interest you and if such occasion should arise you will be prepared to make the right decision when and what you should be buying.

Weeding out the losers

 

You have found an interesting company and want to know more about it. Is it a sound company to invest in or is it a loser that you should stay away from?

 

Learn to read and evaluate company financial reports. You will never regret it. Download all the necessary files from Sedar (www.sedar.com). Include other company news releases in downloads and read them. If you feel that you are not knowledgeable then have someone that is experienced in finances take a very close look at the five-year financial history. If the company has struggled and has been ending up with negative income this may be an early warning sign that it is in financial difficulty.

 

Let’s use “xyz Oil Company” as an example. Its income has dropped off in the past few years but it is not a negative figure and the P/E ratio is a sound 15:1. This company has sold some property in the past. This disposed property may have been no longer needed or simply liquidated to supplement their cash flow. Further investigation should supply you with your answers.

 

A careful look at the company’s past financial reports and past news releases should show why this property was disposed off. The company may even have stated why they made the sale. It is also possible that this company is upgrading for better or more suitable property.

 

Upon careful examination we find out that this oil company’s production volume and sales have dropped off for the past five years. This company has disposed some of their property without making any new replacement property. Is this enough proof that the company can be in financial difficulty? A resounding, YES!

 

Why does the company show healthy 15:1 P/E ratio? Never assume that the company’s P/E ratio demonstrates the health of the company. I have seen companies declare bankruptcy and yet if you looked at the P/E ratio listed on the stock exchange it was a healthy positive ratio. The P/E ratio is a general guide as to whether the shares are over or under valued not the general health of the company. (The TSX Venture Exchange does not list P/E ratios.)

 

To me “xyz Oil Company” is a loser. I would advise to stay away from this company until such time that this company could show to their shareholders and the public that they have a sound-restructuring plan.

 

If you run across a company that interests you, write the name and symbol down in a notebook. Keep an eye on this company and do research work. Try to record daily or weekly share prices of companies that have attracted your interest. DO NOT RUSH! Keep a careful watch. This may be the “ten bagger” that you have looked for. You’d be surprise what you will find on your own if you take the time and effort. Remember the Hot Stock everyone is now buying should have been bought months or perhaps years ago.


Learn how to read charts


So you have spent endless hours and you think that this may be the company you will be a part owner in. You feel that you have made all the possible checks that are necessary. You like the company because it trades on the stock market with big volume. There are endless "bids" and "asks." The sector that this company falls under is very bullish. It seems as the right company to buy into as soon as possible.


Is there something I have missed? You should always look at the number of  shares that the company has outstanding. If this company has 300 million shares it may be a difficult stock to make move. A company with 50 million shares will likely react more quickly. Remember that if this company should experience a problem, prices will drop faster as well.


The question now arises, are you a short-term buyer? Do you intend to sell as soon as there is a decent rise in stock, say 5 or 10 percent? If you are in for the long this may not be so crucial but none the less still important.   

 
You should check the charts of the stock value for the period of the past three months, past six months, and past year. How far back should you look? I would definitely look back at least the past three to five years. You will rarely find daily charts beyond a year. Charts for extended periods will be in weekly or monthly basis.


The charts should show a rise. Was it abrupt during a certain period? If so what caused this? Perhaps there was a sharp drop in share value. What is it attributed to? Maybe the sector was in a bullish or in a bearish cycle. Maybe the company experienced some problems. Charts tell the complete history of a company. There are no hidden lies here.

Spend as much time as possible to learn how to read charts. You can determine whether this is a good company to invest in, a sleeper, or a dud. You can determine whether this is the right time to buy or sell.


If the charts show that the prices have been stagnant for some time and the prices begin to move upwards this may be the time to buy. If the prices start to level off or pull back, this may be the time to sell.


Here are some good sites you should look at:
Stock Charts and Trading Charts.   There are many more that I haven't mentioned. I recommend that you visit your library as well and ask for books on chart reading.


Learn how to read charts and you will never regret it. I cannot over emphasize the importance of charts. This is a very valuable tool that will help you make successful and profitable trades.

Pitfalls to avoid


You have secured your stock and all seems to be well. Someone asks you how your stocks are doing. You are not sure. Last time you checked the stock market the prices were holding well.


When was the last time you checked your stocks? Unless you have access to an experienced broker and you are using his professional services to keep a very close watch on the markets, be watchful. Whether you are in the short or long term, never take it for granted that all is well. 


Refrain from using this as an excuse, "It really doesn't matter what is happening in the markets now. I am in for the long." Even if you are a long-term investor keep an eye on your stock. Watch for news and developments in the sectors where your interests are.

At the very least check the markets weekly, or even daily if you have the time. It certainly doesn't take more than a few minutes. This may save you from a costly financial disaster.


Make it a habit to take an occasional look whether there has been a news release or an update. If you cannot keep up reading the daily newswire releases, companies submit these to
Sedar on a regular basis. Take a look at least once a week. If you have more time on your hands then check with insider news. Are the insiders buying or selling? This should give you a clue as to how the insiders feel about their company's future.

 

There are times when sectors show a weakness long in advance. Before your stocks reflect a significant drop in prices you may be able to liquidated with a tidy profit and enter the market when prices stabilize. You may even decide to enter into stocks that are in a different sector which are now showing promise.


It is very important to restrict your losses should there be a market drop. Make it a habit to sell if there is a sign of a significant drop or the markets are turning bearish. A 10% drop in prices is a good time to sell off and avoid further losses. It may be easier to take that small loss and quicker to recoup your losses when the markets bounce back.

 

Hot tip and I’m buying

 

“My friend’s friend who has a family member working in a well known financial institution told me to buy into a company destined for a stock split. I may be able to at the very least double my money within a few months. Trading volumes are building each day in anticipation of the big news release. The sooner you buy into this stock, the more money you’ll make!”

 

This is one of the most common mistakes a novice will make is to act on a hot tip without taking time to verify the strengths and weaknesses of a company. I strongly advise everyone to take a very careful look at what you are investing into. No fast off the cuff judgement calls. No rush decisions. Use your common sense. We are not sitting at a poker table.

 

Let’s look at this example. Your friend has recommended “Company ABC” which happens to be a blue chip stock. This company has been in existence for the last fifty years. My friend said that the company has a very strong balance sheet. He also said it had positive earnings in the last annual financial statement, and this company has been paying out annual dividends almost every year.

 

Charts show stability in company’s stock value in past ten years. P/E ratio is low, 7:1 which usually signifies a very undervalued stock. Would you buy it? The glossy financials the company is showing is it attributed to sales and production, or is this company selling off assets to show a healthy P/E ratio?

 

Know and be familiar with all your investing sectors. Is it agriculture, chemical, fishing, housing, lumber, manufacturing, mining, or petroleum industry? How well is this particular sector doing? Is there a strong demand, or is it a dying industry? Why would you invest in an asbestos mining company? Is there a strong demand for the product, or is the future looking very optimistic?

 

Spend time and do research work on this or any company you intend to invest in. Research the sector the company is in. How experienced is the CEO, CFO and board of directors of the company? How experienced are their working employees, office staff, or engineers? Has the company had a history of labour related problems? Has the company had prior financial difficulty, or was it in bankruptcy protection?

 

The company someone strongly advised you to buy may indeed be a strong buy. Do a thorough check. Check the company’s news releases and financials with Sedar , or Sedi . Is there any insider buying and selling? If insiders are dumping the company stock it may be a warning sign to stay clear; there may be upcoming difficulties. If insiders had been making many buys this may be a very positive sign. It is not difficult to find out by going to Sedi, or Canadian Insider .

 

Never take things for granted or at someone else’s word. Treat all companies as suspect of being in difficulty. A problem spotted before you purchase your stock in a company near financial disaster may save your hard earnings from disappearing.

     

By J. Klemchuk

 

 

Copyright  © 2016, 2015, 2014, 2013, 2012, 2011, 2010, 2009 Canadian Insight