Find the best investment rates on savings and CD Rates » Stockbroker

Investing Without Brakes Is Hazardous To Your Portfolio

admin — Tue, 04 May 2010 20:12:59 +0000

The business of investing in stocks is an inventory buying & selling business. Naturally, the companies that sell stock to the public want you to buy and hold it forever in order to maintain its value. But if you are buying without any selling, you are literally driving without any brakes. That is a horrifyingly unsafe position for your principal. The most effective defensive brake system for your money is a stop-loss order on your stocks.

A stop-loss order is an order you give your broker to sell your shares if a stock falls below a certain price. You can select a stop-loss price for your stock based upon chart patterns or a percentage drop from your purchase price. And some brokers automatically move them as a stock moves up in price to lock-in profits for you.

The first time I learned this lesson (not the last unfortunately), I was just 18 years old. One of my early stock purchases, recommended by a stockbroker from a famous brokerage firm, was stock in a famous airline just before it trailed off into bankruptcy. Had I read this article before the airlines financial calamity, I would have rescued most of my $5,000 and prevented my own financial calamity.

But you cry, The greatest investor Warren Buffett is a buy & hold investor! No, Im afraid he is not. Mr. Buffett mainly buys whole companies or controlling interest in a company. He buys control so that if there are problems with the company, he can hire/fire/make changes. If there are critical problems with the company whose stock you own, the only control you have to protect your principal is to sell.

When a public company goes bankrupt, 70% of the time the shareholders receive no money at all. How many stocks do you want in your portfolio worth $0? I know exactly how many that I want, and I know that stop-loss orders prevent it from happening.

There are a few loss-recovery methods, but youll never sell enough covered calls to recover from a stock trading under $5, or be able to buy puts on a stock that has been de-listed from an exchange. But the nearly certain protection is to place a stop-loss order on the stocks you own. You can choose any percentage loss amount (5%-25%) based on your experience, but you must have a stop-loss order in place to protect your capital.

There a zillions of old stock market sayings. Here is one of them for those of you who are still skeptical, If the smart-money has sold and moved on, what type of money still own the stock?

Different Gambling Arenas For People At Different Income Levels

admin — Mon, 08 Feb 2010 15:20:08 +0000

Everybody is trying to get more money, keep more of the money they have, and, at the very least, pile a little up for retirement. But lower income, middle income, and upper income groups have a different approach to multiply their money. Casino patrons visit in order to quickly turn a tiny amount of money into a large amount of money. People from every economic level visit casinos, for most people it is short-lived entertainment. When it comes to getting more serious about an ongoing way to make a little money into a lot of money, most people do their gambling in three other arenas.

You want the big money right now, so why wait? Buy a lottery ticket today and find out the result tonight. This is the first gambling arena that people frequent to try to end their money troubles. People earning under $100,000 are 2.5 times more likely to frequently buy lottery tickets as people that earn more than $100,000. No big surprise here, middle to low income earners find lottery tickets a cheap and easy way to hit big money on the way home from work. This is not a form of gambling that I would recommend as your chances of winning have been equated to being struck by lightning 25 times.

Only half of the American population has ever tried their hand at the next gambling arena: the stock market or mutual funds. You might have a retirement account with a couple mutual funds, or you could be trading in and out of stocks every few days. But this is where middle income earners go to gamble and try to get rich. The average stock portfolio is a whopping $34,300. Any stockbroker will tell you that if you are lucky and have 50 years, you may be able to own a portfolio worth a million dollars. When there is a sharp increase in the stock market, the amateurs rush in and try to make it a profession; but get financially hurt in the end. In the late 1990s it was day-trading. I personally know successful short-term traders, but 97% of them quit after losing most/all of their trading account in a short amount of time. This is not a gambling arena that Id recommend to build your wealth: whether short-term or long-term stock investing. (The high income earners have an extra flavor of this type of investment called a hedge fund, but these funds offer a few spectacular gains but more frequent financial implosions.)

People in the high income bracket have two gambling arenas that they employ to get richer: real estate and private placement memorandums. The beauty of investment real estate is that it can lower your taxes by taking a deduction for depreciation. This feature is not available to lottery tickets, slot machines, or mutual funds. In this gambling arena, there is land development, residential rentals, apartments, and commercial property of various types. The high income earners buy properties with a high monthly income, reduce their taxes with its depreciation, and hope for a large rise in the property value over time. But as I said before, when there is a price run-up, the amateurs rush in and ultimately get financially hurt. In 2002-2005, the rage caught on in preconstruction condominiums (the cheapest way to get into real estate). The term flipping condos became prevalent and masses of beginning investors have lost a lot of money because they werent educated about real estate investing. But professionals in the industry continue to earn money because they buy based upon monthly income, and speculative gains are just the extra icing for the investment. The second casino that high income earners use is PPMs (private placement memorandums). These are investments that are illegal for people earning under $200,000, or have a net worth under $1 million. (The government only wants sophisticated investors who can afford to lose their money entering these unregulated investments.) These investments are normally created by small business owners that need more money to expand, so they are offering part of the ownership of their company with a higher than average rate of return. Conservative real estate offer the best odds of success for any of the gambling arenas; and then when you have built up enough money, you can begin with some conservative PPMs.

Where do you want to focus your getting richer effort? There is no risk free path to follow, but maybe this will help you decide: What is the probability that you will successfully pick the winning lottery numbers today? The joke youll hear is that losing money on lottery tickets is a tax on the mathematically challenged. What is the probability that youll buy the stock of a runaway company before the professionals run the price up? What is the probability that you can find a valuable real estate transaction? It is my opinion that educating yourself about real estate offers the best chance for sharply increasing your financial fortune.

[There is one more popular gambling arena available to people with internet/computer/technical skills, and that is joining a start-up company that is eventually taken public. The odds of success are only 7 times better than the lottery, about 1 in 6 million.]

Covered Calls, A Godsend in a Flat or Falling Stock

admin — Sun, 31 Jan 2010 16:03:22 +0000

Covered Calls, A Godsend in a Flat or Falling Stock Market

It is amazing to me that not many retail investors understand the concept of generating cash flow from their stock positions. When I tell people that I utilize covered calls to generate extra income, hedge my stock positions, and set strict sell disciplines they look at me like I am crazy. I was introduced to the concept from a stockbroker, Scott Masse, who runs Masse Wealth Management, in Smithfield, RI. Scott is also the owner of a few bars and one night over a few diet cocktails, ie. barcadi and diet cola, he explained the concept to me. The idea of writing covered calls is the only option strategy that you can employ at most of the major brokerage firms for your IRA investments. The reason is that writing covered calls is a very conservative strategy relative to other option strategies.

The strategy is very similiar to selling an option on a piece of real estate. For example, I’ll give you $10,000 now, if you allow me to buy your property 6 months from now at a set price. If I choose not to exercise my option, you keep the money and we go our seperate ways.

With a stock, if I buy 1,000 shares of ABC OIL at $10 and the stock goes to $11 in the following month. I can sell someone the “right” or option to buy the stock from me six months from now at $12.50. For that right or option, the option buyer has to give me some consideration, similiar to the above real estate example, let’s assume it is .50 per share or $500.

The $500 is immediately deposited into my brokerage account, but an option position also shows up on my statement. I can not sell the stock prior to 6 months unless I buy back the option in the open market. The option price can fluctuate from day to day, therefore, I typically hold my stocks until expiration.

Six months from now, two things can happen. One, the stock goes above $12.50 and the person “calls” me out of the position, which I am more than happy to do since I bought it at ten. Second, the stock has declined below $12.50 and the option holder is holding on to a worthless option. The option holder would not “call” the stock from me at $12.5 when he or she might be able to buy it in the open market at $11.50.

I then start the process all over again and write the calls again.

Let’s examine what I accomplished with this strategy: 1. I hedged my position by 5% or $500 2. I set a strict sell price that I was willing to let the shares gor for, $12.50 3. I generated income that I could enjoy or reinvest.

I can not tell you how happy this strategy has made me since the crash of 2000-2001. The strategy has helped me keep my head above water in this depressing market.

A good friend of mine is a computer programmer. He also shares a passion for covered call writing and has written a program that is in beta testing. I am his BETA Dummy. So far, the program has saved me countless hours of research and has narrowed my focus to a short list of 5-10 natural resource stocks to add to my portfolio quarterly. In future articles, I’ll discuss some of my picks and income generated from the covered call strategy, plus provide a link to the option software.

As a reminder, make sure you “know what you own” and consult with a tax professional or adviser before investing your hard earned money!

Find the best investment rates on savings and CD Rates » Stockbroker

Investing Without Brakes Is Hazardous To Your Portfolio

Related posts

Different Gambling Arenas For People At Different Income Levels

Related posts

Covered Calls, A Godsend in a Flat or Falling Stock

Related posts