Most of us have heard of stock indexes, but have only a fuzzy idea of them at best. This article aims to clarify some of the basics of stock indexes — what they are and how they work.

What Is A Stock Index?

A stock index is simply an average price for a large group of stocks, either those on a particular stock exchange or stocks across an entire investing sector. Indexes are formed from stocks with something in common: they are on the same exchange, from the same industry, or have the same company size or location. Stock indexes give us an overall snapshot of the economic health of a particular industry or exchange.

Many stock indexes exist; in the United States the most well known are: the Dow Jones Industrial Average, the New York Stock Exchange Composite index, and the Standard & Poor 500 Composite Stock Price Index.

How Does It Work?

There are several ways to calculate an index. An index based solely on stock prices is called a "price weighted index." This type of index ignores the importance of any particular stock or the company size.

A "market value weighted" index, on the other hand, takes into account the size of the companies involved. That way, price shifts of small companies have less influence than those of larger companies.

Another type of index is the "market share weighted" index. This type of index is based on the number of shares, rather than their total value.

Index As Investment Tool

Another huge function of indexes is that they can function as investment instruments in and of themselves. Mutual funds based on an index duplicate the holdings of the underlying index. Thus, if index A rises by 1%, the Index A Mutual Fund rises by 1%. This has the tremendous advantage of lower costs. Plus these index funds have been shown to generally outperform managed funds.

The Big Indexes

One of the best-known indexes in the world is the Dow Jones Industrial Average. It is a "price-weighted average" index composed of the stocks of 30 of the most influential companies in America. Some feel that 30 companies are not enough to form an accurate assessment for so influential a measurement, but it is reported around the globe daily nevertheless.

The Standard & Poor 500 Index is based on 500 United States corporations, carefully chosen to represent a broader picture of economic activity.

Beyond the United States, the most influential index is the FTSE 100 Index, based on 100 of the largest companies on the London Stock Exchange. It is 1 of the most important indexes in Europe. 2 other important indexes are France’s CAC 40 and Japan’s Nikkei 225.

Visit Stock Trade to learn more. Ron King is a full-time researcher, writer, and web developer with a Website Here.

Copyright 2005 Ron King. This article may be reprinted if the resource box is left intact.

During every secular bear market there are cyclical bull markets. Don’t let this confuse you. It is very simple. Read on.

First let’s understand what a secular bear market is. As far back as you want to go in the history of the U.S. stock market there have been cycles of up and down. No one will deny that. See how easy this is. These long term cycles average out to about 16 years. Sixteen years (about) of the stocks going up followed by 16 years of stocks going down.

Did you happen to notice the long pull up from 1982 to 2000? Just about everything went up and every investor thought he was a genius. Even your broker and financial planner looked smart. Then ca me 2000. Ugh!

Why did the NASDAQ drop 78% and the Dow plummet 40%? In hinds ight everyone has an answer. My question is if brokers and analysts are so brilliant why didn’t they tell you to sell at the top instead of continuing to advise buying all the way down? The professionals sold and went short while the little guy sat there with his portfolio in his hand agonizing all the way down.

It is an unfortunate truth that brokers and financial planners are taught their trade by Wall Street brokerage house. Please remember they are not there to help you get rich. They are there to get rich off you.

Back to the cycles. Is there any indicator that can alert an investor to a major trend and especially a major trend change? The market seems so volatile with its daily ups and downs that it is almost impossible to buy an equity that will make money for you. Many investors are told the half story that they should buy and hold and not worry about the current price. That is obviously a half truth because when we look at history we see that half the time the market is going down and that is NOT when you want be holding equities.

There is a very simple method of determining major market direct. Forget the daily buys and sells. Forget the weekly buys and sells. Forget the monthly buys and sells. Step further back and look at the entire year. You want to see what has happened and what is happening for the past 200 trading days.

Go to almost any stock web site and enter the symbol one of the major indexes – the Dow Jones Industrial Average, the Standard & Poor’s 500 or the NASDAQ 100. On that web site you will be able to enter a 200-day moving average. When that line has turned up or is ascending the stock market is going up. If that 200-day line has turned down that is the top of the market and almost all equities should be sold.

Then WAIT. Do not buy anything. Keep you money in a money market account or a CD at the bank. When the line turns positive BUY.

If you will do that now you will know where your money should be.

Al Thomas’ book, "If It Doesn’t Go Up, Don’t Buy It!" has helped thousands of people make money and keep their profits with his simple 2-step method. Read the first chapter at http://www.mutualfundmagic.com and discover why he’s the man that Wall Street does not want you to know.

Copyright 2005

The reasonable way to find undervalued investment is to find the fair value of the common stock. This requires us to predict into the future. The stock that seems cheap on the trailing basis will not rise if future earning is in jeopardy. An example of this is General Motor Corporation (GM) which had been trading at a trailing Price Earning (P/E) Ratio at single digits for years. Nobody rush to buy GM because investors realize that the future of GM is still shaky. Cost is high while revenue per vehicle is $ 3500 less than its Japanese competitors, Toyota Motor ™.

To find undervalued investment, we therefore need to have a good predictive tools. This is mainly a quest of learning by doing. The more you do, the better your prediction power would be. Experience can teach you a lot of things about the proper way of predicting future earnings. Aside from that, you can follow the guidelines below to improve your earning prediction.

Be Conservative. Lean on the cautious side. After all, not all predictions are accurate. We would like to be in the position where our investment would not lose money even when the performance of the company misses our expectation.

Be Realistic. Let’s assume the company has a gross profit margin of between 40-45% for the last three years. If you are predicting a gross profit margin of 75% next year, do you think it is realistic? Nope. Unless the company is changing its line of business entirely, I don’t think such drastic change is possible within a year. For example, if Walmart Stores Inc. (WMT) is expected to be in the retail business, it is unwise to predict a significantly higher gross profit margin even when it branches out to higher margin industry such as credit card or insurance. Its profit margin might be up but it will not be shooting up from 30% to 60% in one year.

Be Reasonable. Use a reasonable judgment to justify your prediction. For example, you need to justify the cause of your forecasted gross margin of 40%. Perhaps, the company is moving its production to places where the cost is significantly lower. Perhaps, the company will see increased pricing pressure due to new competitions in the marketplace. Whatever it is, every elements in the pro-forma income statement should have some justifications behind it.

Be simple. There are a lot of uncertainties in pro-forma income statement. By simplifying the elements of income statements, it will be easier to decide whether a stock is a good investment or not. For example, if a company is paying different taxes rate at different states, it is better for us to simplify it and use the combined average tax for our calculation purpose.

Get your free investing idea by visiting our commentary section at http://www.noviceinvesting.com

Have you ever been struck from behind while you were in your car? It usually happens at a stoplight or stopsign. Everything is nice and peaceful and BANG you get a terrible whack. Totally unexpected. Some damage to the car and maybe to you.

It might be a day or so later as headaches start, dizzy spells and vomiting. Yuk! Best thing is to be off to your chiropractor to have bones reset.

This is somewhat like the stock market and your portfolio. You are going along comfortably relaxed and suddenly the market hits you from behind. Totally unexpected. There is damage to your portfolio and maybe to your peace of mind. Could be headaches and vomiting depending on how serious is the crash.

It’s off to your broker or financial planner to get things fixed. After you get there you are shocked to find out he has no idea how to get your money back. Yuk! He is supposed to be an expert and this should not have happened in the first place. You are about find out that brokers and financial planners have been taught their trade by the big Wall Street brokerage houses. Their goal is not to make you rich but to get rich off you. Can this be true? You betcha. You will learn that advice from a broker is a eulogy for your money.

It is not that your broker or financial planner is dishonest. It is that he doesn’t know that he doesn’t know. The methodology of Wall Street is to get your money and keep it. Buy and never sell. Brokers are not taught that cash is a position. Think back. How much more money would you have today if you had been in cash from 2000 to 2003? There are times when Buy And Hold is a good idea, but there are also times when you should be in a money market.

Your chiropractor will make an adjustment to your neck and back and you will get off the table feeling better. Your broker will suggest adjusting your portfolio by selling certain equities and buying others. The chiropractor may ask that you have additional adjustments. Unfortunately, unless you have a very large account brokers forget their clients until you are faced with another headache and call him to make further “adjustment”. It doesn’t help unless he is aware of the general direction of the market – up or down. Down he doesn’t understand and has not been schooled how to protect your money.

The standard Wall Street medications of Buy and Hold, Diversification, Do Research, Dollar Cost Average and You Can’t Afford to be Out of the Market are a few of the poison pills prescribed to investors every day. There are more standard WS tablets and they will all make your portfolio smaller over a period of time.

If you have either of these types of whiplash you will need to find someone who knows the cure.

Al Thomas’ book, "If It Doesn’t Go Up, Don’t Buy It!" has helped thousands of people make money and keep their profits with his simple 2-step method. Read the first chapter at http://www.mutualfundmagic.com and discover why he’s the man that Wall Street does not want you to know.

Copyright 2005

There are two ways company can give out its profit to shareholders. One is to give out dividends. The other is to buy back its own stocks. Which one is more appropriate? This article will explore the topic further.

The American tax law give a slight edge to stock buybacks. It is taxed once before the company decide to use its profit for stock buyback. (Every profit in a corporation is normally taxed). Dividend payment meanwhile is taxed twice. Once when the corporation reports a profit. Twice, when the shareholders receive it as an income. Most recently, investors receiving dividend income are taxed at rate of 15%.

So, does stock buy back is always advantageous to dividend payment? No, not really. It really depends on what price the company buys its own stock. If a company buys back its stock when the stock price is relatively overvalued, then it is better to distribute it as dividends. Shareholders can then appropriately invest it in undervalued investments.

So, at what point will dividend make much more sense? This all goes back to the fair value of the common stock itself. In a 4.5% interest rate environment, stock trading at a fair value is yielding 7.5% ( a Price Earning Ratio of 13.3 ). This assumes a 0% growth in earning. Therefore, it is desirable for companies to buy back its stock at a P/E of 13.3 or less.

But, wait. Since, dividend is taxed at a 15% rate, company that buys back its own stock at fair value will still saves shareholders 15%. Therefore, buyback still reward shareholder even when the common stock is 15 % overvalued. Based on this, company should continue buying back its stock only when the stock is trading at a P/E of (115% x 13.3) = 15.3. For a 0 % growth, it makes no sense for management to insist on buying back its stock that is trading at a P/E higher than 15.3.

One recent example is Intel Corporation (INTC) which initiates a $ 25 Billion intelligent stock buyback on Thursday Nov 10th 2005. At current price of $ 26.16 and $ 2.24 positive net cash on the balance sheet, Intel is buying back its stock at a forward P/E of 16.72. While this is a high P/E to buyback stock for a company that is not growing, Intel is not a 0% growth stock. Analysts generally expect Intel to grow its earning by 15.5% for the next five years.

Investing Idea is Free. Please visit our commentary section at http://www.noviceinvesting.com

The stock market is a fascinating exchange that always provides hope and promises traders the possibility of becoming rich overnight. The hope and promise comes in the form that one day they may hit a jackpot or home run as we have seen daily - stocks flashing past our eyes with wonderful up day or down day. One day, the common trader thinks that he will be able to catch this shooting stock just before it takes off.

For many novice traders they think that there must be a system out there that can provide reliable indications to jump on these stocks right before it takes off. So the common trader heads out to the market place seeking stock or investment gurus for the holy grail of trading. This Holy Grail will provide all the answers and solutions to finding the right timing and the right stock before it plummets or takes off like a shooting star.

Unfortunately, for the common trader, there is no such thing as a holy grail in trading. If there is, then the market would collapse as eventually nobody would lose money in the stock market. When there is no one to lose, then how can anyone gain?

However, there are plenty of successful trading systems in the market place that can be used for long term financial gains. Most of the time, traders are too impatient thinking that a winning system is one that cannot lose. A winning system is one that will win in the medium to long run but will still occasionally lose.

Some trading school of thought will say that it is best to take small losses and aim for the home run. These occasional home runs will more than cover the small losses that you would so often take. This is may be a good system provided that you are resilient and strong in self discipline to stick to the system. If you do not have a good discipline, you may take a series of small losses and decides to quit- just before your system is about to pick out a home run. So who is it to blame for your losses? The system or yourself?

Other school of thoughts will say that it is always good to take small short term profit and once in a while take a medium sized loss. The advantage of this is that you will always see good profit consistently. The disadvantage of this system is that for every losing trade that you may have it will probably take 2-3 trades of profit to cover 1 losing trade. Again, in the long run, if the winning probability is high, then this strategy will work out much better in the long run as you would be able to compound your returns for accelerated profit.

Trading strategies and systems are plentiful out there. Of course, there is no harm to have several portfolios that employ different investment strategies as long as you have the time to monitor your investments. But do not waste any of your time to search for the holy grail of trading as it does not exist.

At the first sign of loss, too often, traders will decide to change to a new system and abandon a system that may have worked. These traders will keep on changing everything they lose and eventually will be out of the game because they will never be able to keep to a strategy. Unfortunately, most novice traders will feel that a “Perfect System” exists and it will be a system that provides zero risk and zero loss. And so they continue their search for the perfect system each time they lose with an existing strategy.

The holy grail of trading is always nearby – in fact it exists within you. The holy grail of trading is self discipline. It is not the system that will determine success or failure but it largely depends on the discipline of the investor.

The key to your trading success is the need for you to identify a winning system and have the discipline stick to it. A winning system is not one that does not lose but is one that will grow your portfolio and net worth in the long run.

Copyright 2005 William Tan

CASHFLOW AVENUE is established to provide Low-Risk Options Trading Recommendations to the common traders in their pursuit of financial freedom and a better lifestyle. http://www.cashflowavenue.com

Before you jump into following Jim Cramer’s Mad Money stock picks, it would be very insightful to track his picks so that you can have a detailed and unbiased record of how well they perform, both short-term and long-term. This is also important in order to assess the best strategies to use when considering either a trade or an investment from one of his suggestions.

What one must really understand when looking to invest in Jim Cramer’s picks is that although most of his picks are meant as longer term opportunities, however, in the short-term, many of these picks can easily get overbought - especially when all his followers decide impulsively to buy at the same time. This is absolutely the WORST time to consider buying the stock! Although Cramer may be right longer term, the only reason it moved that day is because of his many followers jumping aboard hoping to make a quick buck, and unless new buyers come in very soon for some other reason, the stock will likely trade right back down to where it started.

Consider what Jim Cramer himself is telling you. He will not buy or sell a stock within 5 days of mentioning it on the show. Now, inherent in that statement what he’s also telling you is that for a long-term portfolio he doesn’t need to act any faster than that. In fact, he can gain valuable insight into the stock based on how it performs after it is mentioned on the show. For example, if a stock jumps after he mentions it, and every time it does try to dip back new buyers come in and bring the stock back up, that is an indication that his thesis - possibly long-term - but now more importantly in the shorter term - may very well be "right on the money", and possibly a good time to initiate a position.

If, however, the stock merely jumps and falls right back with little or no new buying interest coming into the stock, that is also just as telling that perhaps this stock is just not ready yet, and now anyone who jumped aboard into the spike will bring the stock lower as they all liquidate their positions at increasingly losing prices. These will likely be the same people who the go on to send Cramer hate-mail. When all of this pressure capitulates into a panic in the stock, THAT is the time to consider your long term stock purchase/investment!

Through analysis of his picks at sites such as http://www.booyahboyaudit.com and http://www.madmoneyrecap.com, combined with the right shorter-term tools and analytics (try the free alert and charting tools at http://www.yourika.com/tymAlertsMadMoney.html and http://www.yourika.com/MadMoneyCharts.html), you’ll discover that it’s best to wait for the dust to settle after a stock gets pumped up and watch for a few days to see how trading unfolds. In fact, it may even set up an excellent shorting opportunity for more advanced traders to consider.

Cramer does have many good ideas and he definitely knows about stocks, and for that I too enjoy watching him and listening for new ideas that may interest me. But add a little common sense to the equation and you are on your way to a real winning plan.

Alexander Paul Morris, the designer and creator of tymoraPRO, serves as President of Yourika Corp. He is a trader, programmer, and mentor widely renowned for his ability to analyze market behavior and to program systems and alerts that assist in capturing trading opportunities based on patterns of fear and greed that continually repeat themselves in the marketplace. A 14-day free trial of the platform is available to those visiting http://www.yourika.com.

Stock vs Mutual funds

Are you looking for something that you want to commit to? Something that provides a real business engagement, than you should invest in stock.

Mutual funds are great. They help you spread your risk. They provide rest overnight. You can buy-and-hold them for years or trade them actively. They also give you a wide variety of flavors like a country or regional focus, a sector orientation, a commodity approach and even (high yield) bonds or hedge choices. However, they are always one step away from the real action.

This starts with the price and value of both. Stocks do not only have a price, they are also (under and over) valued. The value of a stock can be calculated and this value gives the rational investor some indication of the risk he or she takes, when buying the security. The value of a fund is hardly to be determined or at least less visible for the private investor.

More important is that stocks represent real companies. The moment you buy a stock, you have a STAKE in a company. If you want to know what the search engine business is going to do in the future, you should first have bought Google or Yahoo or even Microsoft. One share is enough to let you FEEL what is going on in the market and the what choices that company takes (for the stock) to grow.

The engagement starts the moment you buy the stock. Next steps follow from there; your interest in the company will increase, you will read more about the activities the firm undertakes and what the strategy is. In the mean time the price of the stock in your portfolio changes. Then there comes the moment – once the stock is underperforming against the market – on which you should decide; do I keep it or do I sell in search for a better one?

There are Technical (Analysis) tools that could help you take those decisions. They help you to diminish you personal (emotional) commitment to that one-and-only company and help you search for better alternatives. After which you could end up with a new or different stock in your portfolio. And with that a new opportunity to gain interest in the company behind the stock.

© 2005 Hans Bool / Astor White

Visit Astor White for the link between investment and consulting

Disciplined money management makes the difference between success and failure in investing. When considering an investment, too many people ask, "How much can I make?" That’s the wrong question. The right question is "How much can I lose?"

Let’s take the stock market for example (although proper money management applies to all investments). If you buy a stock at, say, $20 a share you typically do so with the hope and expectation that the stock will go up to $30, $40, $50, or more. But what if that doesn’t happen? What if the stock goes down to $15 or $10.

Since a decline in the stock price wasn’t expected, you may start rationalizing. "Well, if I liked it at $20, I must love it at $15." Or, "I’m a long-term buy and hold investor, so I’ll just wait until it goes up." Or, "I can’t sell now because I would have to take a loss. I’ll just wait until I break even and then sell." The problem with that kind of thinking is that the stock may never be profitable. It may never allow you to break even. And you end up selling for a big loss or tying up capital in a losing investment.

No matter how much research you do and no matter how refined your analytical abilities may be, the truth of the matter is that some stock positions are going to be losers. So your best bet is to practice sound money management by taking the decision making process out of the question, "How much can I lose?"

The 3% Solution

Here’s how you can answer the question of how much you can lose before you buy a stock. Determine the number of shares you will purchase based on the amount of money you have to invest, the difference between the price at which you purchased the stock and the price you want to exit the position in case it goes against you, and the percentage of your money you want to risk.

For example, let’s say you have a $25,000 account. Let’s also say that you want to buy a $20 stock and that you want to get out if it trades to $18 (10% lower). Make up your mind that you will not risk more than 3% (or less) of your account on any one position.

Here’s your formula…

Number of shares = (3% times the account value) / (entry price - exit price)

So if you have a $25,000 account and if you buy a stock with an entry price of $20, and if you want to get out of the position if it trades to $18, then the difference between the entry price and exit price is $2. Therefore, you can buy 375 shares (3% of $25,000 divided by 2).

That’s it. You now have a powerful money management system that will allow you to know how much you can lose before you invest. It will keep you in the game by keeping you from losing a significant percentage of your capital on any one position. And as long as you can stay in the game, the better chance you have to realize big profits.

(C) Larry Holmes

Larry Holmes invites you to visit http://www.smart-money-report.com/ Your common sense guide for financial and investment success.

Price Earning Growth (PEG) Ratio is the ratio of a company’s P/E with its growth rate. A lot of analysts have concurred that a stock is fairly valued when its PEG ratio equal one. This means that if a stock has a P/E of 10 with a growth rate of 10%, then the stock is trading at fair value.

How many of you have seen this kind of statement? I have seen it plenty of times and I think it is silly. This is a relatively simple reasoning. Let’s think of it for a second. If a stock will grow its earning for 8%, then to reach fair value, the stock has to trade at a P/E of 8. How about a stock with growth rate of 5%? Its fair value is a P/E Of 5. How about a company with 0% growth? Oh, right. According to this theory, the company should have a P/E of 0, or worthless. Does this make sense? Heck, no. But there are a lot of articles regarding this PEG theory. Here are several sources of commonly misunderstood PEG ratio:

http://www.moneychimp.com/glossary/peg_ratio.htm
http://www.fool.com/School/TheFoolRatio.htm
http://www.investopedia.com/articles/analyst/043002.asp

For a 0% growth company, the fair P/E ratio for the company is not 0. Rather, it is a few percentage above risk-free interest rate or a ten year treasury bond. If a ten year bond is yielding 4.6%, then the fair value of a common stock is at 7.6% yield. Inverting this yield, we get a P/E ratio of 13.2.

Anything else is wrong with using PEG ratio to determine the fair value of a common stock? PEG assumes infinite growth rate in earning per share. No company can grow at the same rate forever. If we assume company A will grow at 10% rate for the next five years and then growth slows to 2% indefinitely, what is the fair value of the common stock using PEG ratio? The answer is it can’t do that. PEG ratio is way too simple to single-handedly assign a fair value for a common stock. It is misleading and simply wrong to use PEG ratio for our fair value calculation.

Common sense dictates that a stock with higher growth rate should be valued at a higher P/E ratio. There is nothing wrong with that. But using a simple PEG ratio of one as a fair value of a common stock is simply wrong. I don’t have an accurate way to calculate this but an estimation can be read on other articles entitled Calculating Fair Value with Growth and Fair Value with Negative Growth.

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