1. Set longer-term goals and objectives.
2. Develop a trading plan.
3. Identify investment opportunities.
4. Execute (open) trades.
5. Monitor, adjust, and exit open positions.
After the decision to invest has been made, the next step is to develop a plan. How will you try to reach your goals? Can you trade actively during the trading day, or will your investments be made only once per week or per month? Are you investing for five days, five years or fifty years? How much risk are you willing to take? What financial instruments – stocks, futures, bonds, options, commodities – will take part of the trading plan?
Developing a relationship with a brokerage firm is a key part of the trading plan. A brokerage (or broker-dealer) like my firm, holds customer funds and places buy and sell orders as instructed by you, the client. The first step is to open an account and submit any trading approval request forms. For example, investing in options requires applying for options trading approval from your broker.
While many investors focus on brokerage commissions and fees, there are a number of other things to consider besides price. The primary thing to consider is service. For example, does the firm have people that can answer my questions and help me when needed? Make sure they can help you pursue your trading goals. As you read through the chapters of this book, you will likely find the investments and strategies that match your longer-term goals and trading plan.
Research
Believing in your trading plan and your investment choices will lower your stress levels during times of increasing market volatility. Research is often a key to maintaining that conviction and also to finding attractive investment opportunities. In addition, it often makes sense to research companies or investments that you already know and love.
For example, let's say you own a pizza restaurant and a salesperson from The Pizza Sauce Company stops by your shop with samples of his newest sauce. You like the taste, and the price is $0.10 per can below your current supplier. You agree to sample a few cases and discover your customers love it. Your pies have never tasted better. Mama mia!
Convinced that The Pizza Sauce Company will soon gain substantial market share from its pizza sauce competitors, you check with your broker for any research available on the company. You discover that the stock is trading under the symbol PZZA. Two analysts currently cover the stock, and both agree that the company has a clean balance sheet, and shares are attractive at current levels, according to the research. Both analysts have a twelve-month price target of $26 per share.
At $20 per share, you note on the daily stock chart that the stock hasn't moved much during the past six months, but you believe that is likely to change once it becomes clear that the company is gaining market share over competitors. Your trading plan states that you do not invest more than 5 percent of your $200,000 portfolio, or more than $10,000, on one position. Instead, you place on order on your broker's platform to buy 250 shares of PZZA, for an investment of $5,000, or 2.5 percent of your portfolio.
Fast-forward one year, and as you had anticipated, The Pizza Sauce Company is outperforming its competitors, and the share price has increased to $25. You still hold 250 shares, now worth a total of $6,250, for an unrealized gain of $1,250.
However, a few weeks later, Pepperoni & Mozzarella Inc. says its cheese sales are falling short of previous expectations, and its stock drops 20 percent. The steep decline triggers a ripple effect that is felt across nearly every pizza company, as investors interpret the news as sign that pie sales are falling across the board.
Shares of The Pizza Sauce Company fall back to $22. However, your research continues to indicate that PZZA has strong fundamentals and is still gaining market share. Rather than sell hastily based on the headlines related to Pepperoni & Mozzarella, you are more likely to maintain your conviction in PZZA and possibly even buy more shares on the pullback. And that's exactly what you decide to do.
You place an order electronically to buy another 250 shares of The Pizza Sauce Company for $22 per share. You now own, and you are long, 500 shares at an average cost of $21 per share, for a total investment of $10,500. Assuming you earned 2 percent on the other assets in your account during the past year, the portfolio is now worth $204,150, or $193,650 plus the $10,500 of PZZA.
• Going long is taking a new position as a buyer. If you are long a stock, you want the stock to increase in price so you can sell it at a profit.
• Going short is initiating an opening position as a seller. If you are short a stock, you want the stock price to fall so you can buy it back at a lower price. The mechanics of selling stock short are covered in detail in Chapter 3.
Your analysis was correct. Four months later, shares of The Pizza Sauce Company have recovered some losses and now trade for $25. You own 500 shares at a cost basis of $21, and the position is now worth $12,500 for an unrealized profit of $2,000. The total portfolio is now worth $207,700, or $195,200 and $12,500 of PZZA shares.
The stock position now accounts for 6 percent of your portfolio and exceeds the 5 percent threshold dictated by your trading plan. You sell 100 shares at $25 a share and reduce the position in The Pizza Sauce Company to 400 shares. The adjustment leaves you long 400 shares worth $25, or $10,000. You have booked $400 in realized taxable profits and have $1,600 of unrealized gains.
Indeed, as you will see in later chapters, sometimes the best investment opportunities happen when the news headlines seem the worst. At the end of the day, there is no substitute for timely, thoughtful research. Once you have a trading plan and have determined what instruments you will use to pursue your goals, find a broker who offers the type of research that will help you make informed decisions and keep you focused on the bigger picture when short-term events cause momentary setbacks. Research when combined with probability is a powerful combination.
Data
It wasn't that long ago when, outside the trading desks and the professional investment community, most investors relied on printed newspapers to see price changes to their stock positions. Periodicals like The Wall Street Journal and Investor's Business Daily provided tables of stocks listed alphabetically, and the prices represented the closing prices from the day before.
• Open: The first price of the trading day.
• Last: The most recent price.
• High: The highest price of the trading day.
• Low: The lowest price of the day.
• Close: The final price of the trading day. It will be the same as the last price at the end of the trading day.
Wow, a lot has changed since that time! Many websites readily offer free delayed intraday prices. Brokerage firms typically offer free real-time quotes to their customers as well. Offerings might include a symbol quote box where you can type in a ticker symbol or tables that include lists of multiple symbols along with relevant information, including last, high, and low prices.
Figure 1.1 is a snapshot of what I watch on the thinkorswim platform each day. It includes indexes like the Dow Jones Industrial Average, the S&P 500, and the NASDAQ Composite, as well as some widely held names like Apple (AAPL), Netflix (NFLX), and General Electric (GE). I also watch some of the action in the futures markets, especially the S&P 500 Futures (/ES), and the US 30 year Treasury Bond Futures (ZB), as well as the Euro/US dollar (EUR/USD) currency pair.
Figure 1.1 My Watch List
I can also see the price quote for any stock by using the Quick Quote tool. First, identify the ticker symbol of the company you're researching. It's simply an abbreviation to uniquely