Mutual fund investors who hold their funds in a retirement account are not affected by this aspect, since income is tax-deferred in most cases. However, if you hold mutual funds in a taxable account, which includes a substantial portion of retirees, you will be doubly surprised this year. First, you will be hit with a tax bill whether or not you sold your fund during the year. To add insult to injury, you may be responsible for a large capital gains bill despite your fund being an overall loser for the year. Second — and few people know about this one yet — the expiration of three year tax loss carryforwards, means that your bill be larger this year than it’s been in the last five. Why? The losses sustained during the bear market of 2000-2002 enabled funds to offset gains in subsequent years. That expires this year. Lipper estimates that the average capital gains distribution is going to increase 50 percent this year (see Boston Globe).

How Did We Get Here?

Whether you are an individual or an organization, the IRS wants its cut of any income from capital gains and dividends. Mutual funds are not excluded. So, when your mutual fund manager sells positions for what you hope is a gain, that gain is taxable, regardless of whether there are offsetting losses. The same is true when a stockholding pays a dividend. For organizations that pass through these gains to the shareholders, the gains are taxable at the individual’s tax rate instead of the corporate tax rate. It is prudent to pass through these gains, since a large percentage of shareholdings are in non-taxable accounts, and few individuals that are in taxable accounts are in a higher bracket than the corporate rate.

You can’t fault the funds for choosing to pass through the gains. However, you can fault them for high turnover in their portfolios. In 25 years, funds have gone from an average turnover of 8 years (meaning that fifteen percent of their holdings are bought and sold in a year) to today’s average turnover of 100 percent. This means that in every year, all stocks are bought and sold. Some of the most egregious offenders turn over their portfolio five times in a year. The mutual fund industry has transitioned from buy-and-hold stewards of corporate America to being short-term, rent-a-stock traders in that time. Although evidence is unclear about why this has happened, the pessimist in me believes that it is because of soft dollar arrangements resulting in an incentive to trade frequently.

Why Should I Care?

High management and expense fees have already made it difficult to outperform their benchmarks consistently. Now, if you take into account that you will have to pay a larger bill to the tax man, that just means your performance suffers even more. If you lose one percent per year to taxes, that amounts to serious money over time. Over a 30 year saving period, this difference amounts to more than 25 percent of your ending net worth. Considering that this could make the difference between you running out of money before you die, it is not to be ignored.

What You Can Do About It

Index funds do not have high turnover. The only turnover they have is periodic rebalancing when their benchmark indexes change. This makes them more tax efficient.

An even better option is to engage First Sustainable to create a so-called Folio. This combines the technology available to a mutual fund to enable you to create your own diversified, asset-allocated mutual fund. You can buy fractional shares of individual stocks. This way, your only tax bill comes when you also do periodic rebalancing to suit your financial situation. To me, this is way more acceptable than swallowing a bill that was based on some conflicted manager’s financial situation.

Mark Brandon is the managing partner of First Sustainable (http://www.firstsustainable.com), a registered investment advisory catering to socially responsible investors. His regular colums can be found at Sustainable Log (http://sustainablelog.blogspot.com).

The fudging of expertise is appalling in our business. Believe me, I know. I am 35 years old now, and have been in the financial services business 13 years now. When I was 22, fresh out of the University of Texas with a History degree, my first job was with Fidelity Investments as a mutual fund adviser. I passed the Series 6 exam in a matter of days. After a few weeks of training, most of which was listening to one of the more tenured reps (by "tenured", I mean someone with six months experience), I was on the phone taking calls from all over the country, advising people on how to take care of their financial future. If you had called an 800 number on a prospectus or an advertisement, you would have been speaking with someone like me. Dozens of reps like me fielded calls, and not one of them had more than three years experience. I, myself, only lasted a year and a half in that job. Call center work has a way of burning you out.

In the 1990’s, Fidelity was undergoing rapid growth, and they could not keep the place staffed. They had planned on staffing to a level where no more than five customers were holding at any given time. Shortly after I arrived, we were constantly on "red alert", which meant that 30 people or more were holding all the time. So, they relaxed their hiring requirements. They had previously insisted on a college degree for their newly hired reps. Soon, I was sitting next to pimply-faced 18-year-olds who had been in a high school classroom only a few months prior. Looking back on it, who was I to feel so superior? It’s not like I learned how to plan someone’s financial future in my "Western Culture, 1865-present" seminar at UT.

Think about that, though. Customers were entrusting their retirement plans to kids. If you go to Fidelity, Schwab, E*Trade, TD Waterhouse, Ameritrade, T Rowe Price, Ameriprise, or any of the other purveyor of mutual funds, and click on their links to "talk to an adviser", it is usually accompanied by a smiling, healthy, slightly graying middle-aged man with great teeth and his own corner office. In fact, you are more likely talking to a very young, underqualified, underpaid call center worker who barely has a cubicle and is definitely NOT smiling.

Of course, it is true that it does not take grand expertise to do what they do. Back in my day, we were given a script to inquire of a customer’s marital situation, age, risk tolerance, spending goals, and that is it. With that information, there was (wait for it) a Fidelity fund that met their needs. This is how it works at most firms. You need what they are selling. Financial planning requires more than that.

All investment products should be discussed in the larger context of a person’s life — not just financial life, either. If you take no other advice from me, take this one tidbit. If a "financial adviser" is selling you a product from which he is getting paid a commission, he will not have your best interests at heart. Period.

Mark Brandon is the managing partner of First Sustainable (http://www.firstsustainable.com), a registered investment advisory catering to socially responsible investors. First Sustainable does not accept payment from sponsors of financial products.

As the world economy continues to grow, more people than ever are turning to the stock market in an effort to find ways to make their money work for them. Unfortunately, not everyone is able to master the market effectively. To help you to make sure that you get the most out of your investments, the information below will provide tips for when, how, and if you should invest.

Be Sure that You’re Ready

It makes no sense to invest in stocks, bonds, or mutual funds if you have thousands of dollars in credit card debt at interest rates in excess of 10%. You don’t have to be completely debt-free, but you should be making serious inroads into your debt each month, and you should be paying very low interest rates on that debt. Also, be sure you are secure in your basic living expenses. You generally want enough savings to survive for three months in case of a job loss, disability, or other problems.

Where Do I Find the Money to Invest?

The first question for many people is "where do I get the money to invest?" There are plenty of stock mutual funds that allow you to invest with relatively little money. Use your next bonus at work, or your income tax refund, or put in some overtime for extra cash. If you can’t come up with the money to start these portfolios, many funds will allow you to skip the initial lump sum investment if you sign up for automatic monthly withdrawals from your chequeing account.

How Do I Choose an Investment?

How do you choose a long term investment? The first step is to know what your goals are. Are you saving for a house? A college education? Retirement? The type of investment you choose will depend on the amount of time available before you need the money. Stocks are considered long-term investments, so it is best to plan on holding stocks or stock mutual funds for five years or longer. If you need the money sooner than this, you may reduce your return by cashing in when the stock’s value is down.

How Do I Determine My Risk Tolerance?

Next, you need to know your risk tolerance. If you don’t trust the bank to hold your savings, then you’re probably not going to feel comfortable investing in volatile technology stocks. If you’re likely to keep up with the latest curve of rising corporations, you might be interested in trying a moderate risk in your investments. High risks can yield high rewards, but should usually not be your primary investment for obvious reasons.

How Do I Choose an Investment?

How do you decide where to put your money? Most experts recommend spreading your money over several different types of investments to reduce risk, because typically one type of investment does well when another doesn’t. For example, usually when returns on stocks and stock mutual funds are high, returns on bonds are low, or vice versa. By having money in both types of funds, you’re more likely to get a decent combined return if one category takes a downturn. Your asset allocation should be tailored to your risk tolerance and how long you’ll need to withdraw the money from your investments.

For beginning investors, stock mutual funds are more popular than stocks in individual companies. A well-chosen stock mutual fund is less risky than an individual stock because mutual funds invest in many companies, thus spreading out the risk. If one company does poorly, the fund as a whole may still have a good return.

You may freely reprint this article provided the following author’s biography (including the live URL link) remains intact:

About The Author

John Mussi is the founder of Direct Online Loans who help homeowners find the best available loans via the http://www.directonlineloans.co.uk website.

Mutual funds gained popularity for the reasons down below. I maintain that both of them are now made obsolete by technology.

Economies of Scale Mean Lower Costs For Shareowners. On paper, the explanations sound great, but let us look at the evidence. What expenses are involved in running a fund?

1. Trading Commissions. This should be the primary benefit, but the evidence shows that mutual funds are not getting better prices than any ordinary investor can get. In fact, in many cases where soft dollar arrangements are concerned, they are getting far worse. Before commissions were de-regulated in the 1970’s, this factor was reasonable. Getting cheaper commissions meant having a technology and trading infrastructure that was too prohibitive for the small investor. Today, this technology is available to everybody. Discount brokers use ECN’s to execute their customers’ trades, just like the mutual funds do.

2. Shareowner Communication such as statements, proxies, confirmations, etc. There are expenses for printing and mailing these confirmations to be certain. However, proxies are only necessary because of the mutual fund structure. Statements and confirmations are required by regulations. Your broker sends these for free as part of the commission you paid.

3. Management Salaries. Certainly, these cost money, but the evidence shows that shareowners are paying way more for these than they should. A multi-billion dollar fund manager is likely to have a salary in the high six figures if not in the seven figures. Who sets these salaries? The fund board. Although they are supposed to have a fiduciary duty to protect investors, their salaries are probably determined by two factors: their achievement versus the benchmark and their ability to attract assets. As we have seen, the latter factor has been more bane to existing shareowners than benefit. So, why is he worth millions, especially when most of them fail to reach their benchmarks?

4. Administrative Expenses such as office space, office technology, travel, lodging, meals for staff, etc. Often, these expenses get paid by third party vendors in exchange for trading flow, and investors end up paying far more for these items than they should. Furthermore, there is no rational reason for the fund manager to be parsimonious with his shareowner’s money. These expenses should come out of the management fee, but instead they are passed on to investors. So, ask your fund operators if they are flying coach instead of first class.

5. Stock Research. This would be a worthwhile expense if the research enabled the fund to outperform, but as we have seen, it has too seldom been a difference maker. In the last few years, the public has seen how little value professionals place on this research. In fairness, it’s difficult for any buy-side investor to know if what is coming out of analysts’ work is worthwhile or fluff.

The second reason for a fund’s existence, as touted by the industry, isnstant diversification. I am absolutely on board with diversification being necessary and worthwhile. But, is getting diversification within the structure of a mutual fund worth the two percent or so that most investors are paying in management fees and expenses? The answer here is less clear, so one must look at the alternatives. Index funds provide the ultimate diversification at a much lower cost. Exchange Traded Funds (ETF’s) provide diversification, although many of these charge a management fee as high as 1.5 percent as well. Most of them charge well below one percent, and the biggest ETF’s are in line with the least costly index funds. On this point, the question hinges on whether active management is worth getting dinged several times what one would be charged otherwise with passive management. As we’ve seen, very few active managers are able to outperform their benchmarks over the long term.

To see if the mutual fund industry is drinking its own Kool Aid, one need not look any further than the long term trend in expenses and management fees. In the last twenty five years, assets under management have skyrocketed from the low billions to approximately $4 trillion today (down from about $7 trillion at the peak of the market). Using their rationale, fund expenses should have decreased dramatically. Instead, they have gradually increased, before you take into account off-balance-sheet expenses such as soft dollar arrangements.

I am an advocate of Folio Investing. This style means that an individual investor, after consulting an adviser, buys into a diversified, asset-allocated portfolio that is appropriate for the individual’s stage in life, risk tolerance, and spending goals. Technology enables us to buy fractional shares of individual stocks, making it possible to create your own little mutual fund without the exorbitant fees and self-dealing.

Mark Brandon is the managing partner of First Sustainable (http://www.firstsustainable.com), a registered investment advisory catering to socially responsible investors. First Sustainable does not accept payment from sponsors of financial products.

There are a vast number of investment opportunities available to potential investors, but not all of them are right for all purposes. The most common types of investments are stocks and bonds. Stocks are shares of individual companies, while bonds are government-issued investment funds. Both can be great for starting in the investing market, but you should know a little about the difference between the two before making your investment.

Stocks

Stocks can help balance out a bond-heavy portfolio by providing diversification

Stock dividends also receive more favorable tax treatment than bond payouts.

If you make the decision that stocks may be the place for you to put your investment dollars, you must now determine the primary purpose of your stock investment.

The two primary stock investment goals are income and growth. You can have a combination of the two in one stock investment, but the features are almost never equal. In other words, although growth and income may co-exist in a particular stock investment, the investment choice you make should take into account the primary strength of the stock.

Growth Stock vs. Income Stock

Growth stock is stock in a company that doesn’t pay cash dividends, but instead reinvests its profits into the company. The idea behind this strategy is that the company will continue to grow and become more profitable, driving the stock price up.

Income stock is stock in well-established companies that do not need to reinvest their profits into their companies and therefore use their profits to pay dividends to stockholders. Income stock is often more expensive because the income stream and security of the investment is greater.

Mutual Funds

Many investors invest in the stock market through mutual funds. Mutual funds are professionally managed and are easier to diversify your investments in, which makes them less risky than investing in individual stocks. You still have to research what type of stock will best suit your goals, but the average investor finds it less stressful to invest in the stock market through this method.

Bonds

Bonds, though some consider them “safer” than stocks, still come with risks. Some bond funds offer enticing payouts but may take big chances to do so, including venturing into lower-quality and longer-duration credits; if your funds’ bonds lose value, you could see your principal shrink even though you’re pocketing a healthy yield. Checking a fund’s quarterly losses can be an easy way to see whether you could stomach a given fund’s short-term losses. There’s nothing wrong with making room for some higher-yielding bond funds around the margins of your portfolio, but consider these income-heavy funds to be side items because of their greater potential for volatility.

And while paying for high-quality financial advice can be money well spent, think carefully before paying a sales charge for a bond fund. If you’re paying a 3.75% load to buy a bond fund (and that’s a pretty low load), you’re surrendering most of your first year’s income payments from the get-go.

Individual Bonds vs. Bond Funds

Many investors prefer to invest in individual bonds rather than bond funds. While that’s a reasonable tack if you’re buying Treasury securities or perhaps even extremely high-quality corporate bonds, it makes sense to opt for a professionally managed bond fund for every other type of fixed-income security. Not only will a mutual fund offer you much more diversification (and therefore lower risk) than you could obtain by buying individual bonds, but smaller investors who are buying and selling individual bonds are also at a big disadvantage when it comes to trading costs.

You may freely reprint this article provided the following author’s biography (including the live URL link) remains intact:

About The Author

John Mussi is the founder of Direct Online Loans who help homeowners find the best available loans via the http://www.directonlineloans.co.uk website.

As I have said many times in this series, active management would be palatable and worth the outsized fees charged by mutual fund companies if they consistently delivered superior performance compared to a pre-defined benchmark, but they do not. Less than forty percent of actively managed funds beat their benchmarks in any one year. Over several years, that percentage becomes infinitesimal. The point of this article is to outline the vehicles that enable you to get these results. While I admit that I am biased, I will attempt to be balanced in the discussion by explaining the drawbacks.

Separately Managed Accounts (SMA’s)

At First Sustainable, this is the vehicle we recommend for investors with $50,000 or more to invest. An SMA is an account that is set up by your investment advisor, which allows you to hold your own portfolio of well diversified instruments. The advisory makes its money by either charging a fee as a percentage of assets under management, a flat fee per year, or an hourly fee for the advisor’s time. Trading commissions are either nominal or free. Your adviser should take into account your needs and then arrive at a portfolio that is, for lack of a better term, the “YOU” Index.

Benefits. I love this vehicle, and here is why:

1) Your portfolio is completely tailored to your needs. You do not need to study every prospectus that comes to your door to see if a fund’s strategy has changed without your knowledge. Periodic rebalancing is all that is required when your financial situation changes.

2) You and your adviser can be patient. Because the adviser is getting paid from assets under management, there is no incentive to churn your account, which as I’ve demonstrated, destroys portfolios.

3) At least with First Sustainable, you can buy fractional shares of individual equities, enabling your portfolio to be spread among dozens, if not hundreds, of instruments. This factor accounts for why this vehicle is only now catching on. Until technology enabled this feature, an SMA only made sense for the very wealthy.

4) The above factor means that you can still invest periodically without messing up your asset allocation. Before, indexing in an SMA was only good for investing a lump sum. Now, you can set up a disciplined savings program.

5) Because your turnover should be lessened, your annual tax bill should be decreased.

Drawbacks. Your adviser will likely not have a published track record. Even if one was available, it would not necessarily be an adequate measure of your adviser’s competence. This account should be tailored to your specific needs, and thus, not comparable to anybody else’s portfolio, thereby making a comparison useless. At First Sustainable, we overcome this aspect by making available indexes that we subscribe to. These indexes do have track records and professional oversight.

What to Watch Out For. Do not let your adviser place you in this account if he is going to, in turn, recommend vehicles that also have high expenses. For instance, paying the SMA fee for the privilege of getting placed in other actively managed funds is not a good deal, as you are paying twice. Advisory firms get paid twice this way, and it should be outlawed. Yet, this is a common practice among our less dutiful competitors. The ONLY time this would be an acceptable practice is if your portfolio is small enough that the adviser recommends VERY LOW COST index funds or ETF’s. Even then, you should insist on a reduced SMA fee.

Index Funds

As investors have awakened to all the drawbacks of active management, these funds have exploded in popularity. They are essentially mutual funds that attempt to mirror the performance of an index. The most common indexes are the S&P 500, Russell 3000, Dow Jones Industrials, and a Total Market Index comprising all of these indexes. However, there are dozens of indexes for which funds are created. It is important that you and your adviser are capable of assessing the suitability of this index for your situation.

Benefits.

1) These funds have the lowest expense ratios around. The largest funds have expense ratios in the .05 percent range (that is .0005). A typical actively managed fund charges 3500 percent more.

2) They offer instant diversification. They require less research up front and less ongoing research.

3) They are ideal for investors who are just starting out with a small, disciplined savings plan. Because indexes do not have high turnover, they are usually more tax efficient than actively managed funds.

Drawbacks. Not all index funds are created equally. First, some funds still claim to be low cost, but still charge well more than the stingiest funds. Many S&P 500 funds still get away with charging .5 percent, or ten times what the largest funds charge. Second, most indexes are created on a market capitalization basis. This means that their weighting is based on the company’s total market value. This could lead to an overweighting of the high PE stocks that are most likely to retreat in a correction.

Exchange Traded Funds (ETF)

An ETF is a closed-end fund that is comprised of an index and trades like a stock on an exchange. Like their open-ended counterparts, there are dozens of alternative indexes than the most popular Spiders (S&P 500), Diamonds (Dow Jones Industrials), and QQQ (Nasdaq 100).

Benefits. Because they trade on an exchange, they are continuously priced. Most open ended funds are priced once a day. This allows an investor to take advantage of short term moves. Some (including me) would say this is a drawback.

Drawbacks. Closed end funds still carry an expense ratio. Theoretically, this should be less since the management company does not have to deal with inflows and outflows. The largest ETF’s are less expensive for the most part. The less famous ETF’s still carry a high expense ratio, which is not as well disclosed.

Mark Brandon is the managing partner of First Sustainable (http://www.firstsustainable.com), a registered investment advisory catering to socially responsible investors. First Sustainable does not accept payment from sponsors of financial products.

Tonight, we want to review shorting. I don’t know why but so many people become uneasy when they hear this term. I guess that occurs when there is not a clear understanding.

Shorting is used to capitalize on a drop in a stocks price rather then a rise in price. Buy a stock…goes up you make money. Short (sell) a stock…goes down you make money.

But how do I sell a stock that I do not own you may ask. You borrow the stock from your broker and sell it to someone else.

Your broker has it in inventory or they borrow it from another brokerage firm. They actually loan you the stock to sell to someone else. This is all done automatically and instantly when you place an order to short a stock.

Once you have shorted the stock (by borrowing it) you must eventually return the borrowed item…the stock, back to your broker.

You do this by placing a buy order on the stock you are holding short. The stock you buy is then returned. Again this happens instantly.

Example: You decide that stock ABC at $50 is about to go down so you want to short the stock. You click your online account "Short" button to place the order, let’s say 100 shares of ABC at 50.

The price of ABC goes down for you. Let’s say that ABC declines to $45. At 45 you decide that it may not decline much further, so you click your "BUY" button at your brokerage account to buy 100 shares at $45.

You shorted (sold/borrowed) the stock at 50 and bought it back at 45. You made $5 per share in profit or $500.

You sold the borrowed stock for $5000 ($50 X 100 shares) and bought it back for $4500 ($45 X 100 shares).

All the mechanics of borrowing the stock, debiting your account (when you buy), returning the stock, crediting your account (when you sell) is handled seamlessly by your broker.

Of course you can lose money if the stock goes up when you place a short order (like a stock going down when you place a buy order). That’s why it is imperative to be properly prepared when entering the stock market.

The point is, do not limit yourself to making money in only ONE direction. When the market is crashing you need to be shorting stocks, not buying or holding on to your buys. And when the market is taking off, you need to be buying.

Don’t limit your income potential by only purchasing stocks.

For a FREE report on HOW TO TRADE FAST, enter your email address at:

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Reducing risk to your money and protecting your trading capital must come before making money in the stock market; it must always be put first in your mind when trading. You must learn and become comfortable with this being your first priority when trading. I know that sounds a little strange, but it’s 100% true and a very important mindset to get into. After all, you can’t play the game if you don’t have the dollars. You should always be willing to give up a trade in order to reduce risk and save capital.

You absolutely must seek to reduce risk and protect yourself at every turn in the stock market, even before making a profit. Don’t get me wrong; you are here to make a profit, but never at the expense of taking silly risks.

Always consider the risk to reward ratio of any trade you plan to take up. What is the risk? What is the reward? Keep that ratio in your favor and you’ll be well on your way to making a good start in the trade and protecting your trading capital. I would rather miss 10 trades, than make 10 bad ones. Any trader would. Bad trades, mistakes, and large risks are like leaks in a dam. Forget about everything until you correct the leaks, and then worry about increasing the water level.

Trading and speculation in stocks (more commonly called ‘Daytrading’) has been around as long as the stock market has been in existence. Whether it’s the days of the Buttonwood tree on Wall Street, or the Bucket Shops of the 1920’s, or the electronic trading that takes place every day across the Internet, there are and there always will be "traders".

It’s certainly not difficult to imagine that the first time a person bought a stock and saw it go up, they had the urge to sell and take a quick profit. Daytrading is nothing new - it’s simply human nature to want to take a quick profit and then repeat the process.

Some people would like you to believe daytrading is something new, and that, therefore, it must somehow be "bad". However, when you really stop and think about it, daytrading is really no more risky than any type of investing or financial speculation. Any investment or trade can go bad, just like any trade or investment can go well. Just talk to anyone that has owned large amounts of real estate for any extended period of time. There have been times in the economy when interest rates sky rocketed and suddenly exposure to a large mortgage has been quite risky. No matter what the situation, speculation with any financial instrument brings some amount of risk, especially if done incorrectly or unwisely. Daytrading is no different.

Certainly, daytrading, like anything else, can be risky if you don’t know what you are doing. I’ve known of people making one silly mistake and getting wiped out over night. Since daytrading does come with a certain amount of risks, it’s only wise to get your financial "house" in order before you begin. As such, a few basic guidelines are in order.

To begin, we should understand that there are two basic categories of people that tend to seek out daytrading, and that these two categories are drastically different in their approaches to the markets.

The first (and more historically typical) category is made up of people who are basically pretty financially well off. These include individuals who have solid financial worth from other means. They also tend to have homes, which are paid for (or largely paid for) as well as being relatively high net worth individuals, particularly in the liquid assets category. For individuals in this category, daytrading most likely is only a small part of an overall (and diversified) investment strategies or portfolio, and typically it’s only used to further an already solid net worth without exposing a high percentage of the individuals assets to undo risks. Basically, these are individuals that can "afford" to do a little day trading and typically don’t go over board in "only" stock speculation.

The second (and not only more recent, but more dangerous) category tends to be people who are attempting to build their net worth strictly from daytrading. These are individuals who view daytrading not so much as simply one small aspect of an overall financial investment landscape, but more as the major way to generate and build their entire financial worth. This tends to also be the category of people who take larger risks and sometimes generate a bit of negative press regarding daytrading. This negative press would be along the lines of people that daytrade using funds from a credit card and/or home equity mortgage of some form or another. When things don’t go well in the markets, typically the losses tend to have a more dramatic impact on the individual’s net worth and life style.

It’s pretty clear that these are two radically different approaches to daytrading. If you are in the first category, then as long as you do not expose more than around 10% to 20% of your overall liquid net worth to stock speculation, you probably won’t get into too much trouble. However, if you fall into the second category - where you are trying to create wealth through daytrading and/or you are using daytrading as your only means of addressing stocks - then some guidelines are in order. Of course, at the end of the day, no one can force you to follow these guidelines. However, if nothing else, you should strongly consider the following information as it relates to your individual case.

First and foremost, you should never trade using money you cannot honestly afford to lose should some catastrophic event wipe you out in the markets. These funds should be largely similar to funds you would ear mark for Vegas or other forms of higher risk speculation. In the event you lost these funds in total, they should not have any dramatic impact on your life whatsoever. Generally speaking, these funds should represent no more than 10% to 20% of your overall liquid net worth. Beyond this, you should strongly take into account areas of your financial picture such as home ownership, outstanding short and long term debts, as well as future responsibilities such as college for your kids, etc. You should also take into consideration your age as it relates to your future retirement. Daytrading at age 20 or 30 is one thing; daytrading your retirement funds at age 65 or 70 is a whole different situation and very unwise unless you limit the amount of funds at risk.

Again, before you undertake anything but causal daytrading, you should seriously consider such things as paying down all of your short term debt. This would include paying off all credit card balances and any loans that may be near maturity. You should also consider allocating funds for and/or paying off longer term debts such as car notes and/or home mortgages. Additionally, if you have a family to provide for, you should not only consult with your wife, husband, etc. before attempting any sort of daytrading, but you should take into account what impact large and unexpected losses could have on your current as well as future living situation.

Generally speaking, unless you have tremendous earning power, you should have very little debt and a stable housing situation before using much capital in the markets for day trading.

Good luck in the markets!

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. Questions and comments can be sent to Ray at marketing@TraderAide.com

Ray Johns is the founder and Senior Market Editor of Daytraders.com, Proudly serving day traders & short-term investors since 1996, at http://www.daytraders.com

Daytraders.com is the publishers of the award winning Morning Stock Market Report and the home of the Interne’ts finest real time trading desk. Ray has been on the forefront of trading and investing in the markets and has appeared as a guest on a number of radio and television shows including CNBC’s Market Talk. If you would like a free trail of the newsletter and the live trading desk log on to Daytraders.com. Comments and questions can be sent to articles@daytraders.com.

We know day traders who found success by concentrating their attention only on the final 60 minutes or so of each market session. Essentially, they pick out their target stocks early in the day and casually monitor them from 9:30 a.m. until around 3 p.m. ET. Then they really go to work in that final hour and pocket the same profits that other day traders did in 6-1/2 hours–sometimes more.

They like the final hour because the market tends to make strong moves heading into the close, and they profitably follow the trend. They prefer the final hour to the opening hour which also produces many strong moves but is so busy and so potentially volatile that the risks are too high for their level of tolerance. Anyone who has been caught in a “gap and trap” between 9:30 and 10 understands.

There are serious swings during the final hour, but they tend not be as violent as they are at the open. Most important, there are plenty of opportunities to trade.

Why? It can be as simple as workers going to lunch on the West Coast. Remember that 3 p.m. on Wall Street is noon in Los Angeles, San Francisco and Seattle. With a three-hour time delay, people who are just hitting lunch time often run to their telephones and computers to make trades. If you watch the "tape" at that time slot, you will see an increase in activity.

The last half hour of the trading day is the time when the market pros do their best work. Funds that want to buy generally do it during that time slot, and last-minute buy/sell imbalances are straightened out. A significant number of program trades also kick in.

During a down session, there is often a temporary rally when short sellers buy stock to cover their profitable positions. The rally can last until the final bell if the short sellers quickly “flip” to long positions to take advantage of the upward momentum. On up days there tends to be a stretch of weakness when long players sell stock and take profits. In most cases it’s a momentary decline and the indexes head back up.

As the market ran toward DOW 10,000 in 2003, we experienced many sessions when the indexes appeared ready to collapse into a long-overdue correction. But in the final hour the unseen hand of the government’s “plunge protection team” apparently appeared to buy boatloads of futures, leading to a surprisingly positive close.

And there are folks like us adding to the momentum. Quite a few traders make their day trades based on only the last 20 minutes. If the market is running into the close, for example, it is a very good bet that the leaders will gap a bit the next morning. Late-day traders buy or go short in the final 20 minutes and sell or cover into that gap with a nice little profit shortly after the opening bell.

During the session, there are signs that point to the direction of the final hour. Market breadth is important. If advancing stocks are far ahead of decliners and many issues are hitting new highs, there’s a good chance that any rally will continue into the close. Also important is the put-call ratio. For example, if traders are loading up on call options that increase in value when the underlying stock rises, you can be confident that many individual stocks and the indexes will run in the last 60 minutes.

Keep in mind that final-hour trading is effective during typical market sessions that are dominated by economic reports and the collective action of institutions and individual investors. An outside event like a terrorist threat or natural disaster will roil the markets and make the closing action quite unpredictable.

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If the market starts to fall out of bed and I think it very well might be doing that in the near term, we are going to have to start going short. Although not half as many people play short as go long, that’s a sin and if you’re one of them, "stop it!" There is nothing morally wrong with shorting, it’s not anti-American, heck, it’s not even anti-stocks. It’s just a tool.

But just like going long, we are going to have to read the road maps. Just like when we are playing to the long side and we use upper resistances as “roadblocks” we must get past to start a position, on the way down we have to watch the support levels. That means technical analysis to some extent and this is a touchy area. Some people will swear on a stack of bibles that the market follows technical guidelines to a “tee”. Others will tell you it’s an advanced form of Voodoo. I am in the middle. Buy and sell programs are often based on presentable technical levels, and therefore important. But as I’ve always felt, the best chart in the world will lose you a ton of money that day if say, the country was attacked. In other words, they are a tool, not the “final word”.

When we are looking to go long for a trade, I generally use a 6 month chart. Why? Because in my perspective, they give a nice pattern recognition, and mini breakouts are often present that you would see on say a one year chart. But this is the concept I call “layering”. In basic terms, you could make the argument that you could find a mini breakout on a one day chart, a one week chart, one month, three months, 6 months, 1 year, 2 years, all the way to 20 years.

To get an idea of just what the heck we mean, let’s say a stock was $40 and the bear market hit. It paused at $30 for a month, paused at $25, twenty, and so on down to $10. On the way back up, a 6 month chart would probably show me a “breakout” when it crossed the $20 level. It would show me another maybe at $25. but, I might have to expand my horizon to a year to see the $30 level and who knows, maybe 2 years to see the $40 level. In other words there are “breakouts inside an overall wider chart picture”.

This has to be taken into account as the market falls also. A stock might be falling, and on the 6 month chart we see that if it fails say 50 bucks it’s probably has no support until it hits 42. So, we take the short, it falls to 42 and bounces a bit. Then it’s fades back to 42. Now, we might have to expand our chart to a one year, to see that the next level of support is at 35, that would then be the most probable area it could fall to.

Some people say, “why use the 6 month and not just go to one year or more? Again, I think you lose sight of the 4 and 5 dollar support and resistance levels a 6 month chart give versus a one year chart. It’s just more “defined”. So, as we start our search for short ideas, remember I will be suggesting them on stocks about to lose some form of support on a 6 month chart. Compared to a one year chart the move might seem insignificant, but we’ve found it to be pretty accurate for us. The shorter term charts seem too confined and the longer term charts seem too “congested” for our tastes.

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