We’ve all heard of the stock market and probably have a general idea of what it is and how it works either from high school economics classes, television financial reports, and the countless film depictions of what happens on the floor of the New York Stock Exchange. But how does it really work and what is meant by “playing the stock market?”

The Stock Market in a Nutshell

Companies sell shares of stock as a means of raising capital. For example, let’s say that the XYZ corporation, makers of the finest whatsidoos and thingamabobs in the country, wants to open a new factory. Doing so will require a hundred million dollars. The company can get a loan from a bank, but it would wind up in debt. So, instead of borrowing, it decides to offer additional shares of stock. As investors purchase the stock they are giving the company the capital it needs to do business. In return the stockholders actually own a part of the company and have some say in its activities. If XYZ does well in the thingamabob market, its stock will raise in value as more people will want to have a piece of XYZ for themselves. If it doesn’t do so well (maybe it gets undersold by the Ichi Nee company, a Japanese conglomerate that has found a way to make smaller, cheaper thingamabobs), less investors will buy the stock, current stockholders may try to sell, and the value of the stock drops. The price of individual stocks will rise and fall several times a day. The price for a certain stock you may see on the evening news for any particular company represents where the stock was valued at the end of the business day. It will also tell you whether that price rose or fell from the previous day. It can be enough to make an investor tear his hair out. Didn’t you ever wonder why nearly all economists are bald?

“Playing” the Stock Market

You may have heard people refer to “playing” the stock market as if it were all a big game of Monopoly. This is an adequate term because that’s exactly what some people do, but the game is more like Roulette – sometimes of the Russian variety. People who “play” the market typically invest for short periods of time in the hopes to get a quick return. They will buy some stock, wait fro the price to go up, then sell right away and invest in another stock and await the next profit. They may do this several times a day in some cases as prices fluctuate. This can be a very risky way to behave because a lot of money can be lost, but a lot can be earned as well. It’s almost like a trip to Vegas without Wayne Newton.

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I read a comment by a forum member on another site earlier today that suggested that every investor should back test their system for at least twenty years. I disagree and will now tell you why. Back testing and paper trading seem to be the most over emphasized techniques offered by market theorists, educational elite, market novices and/or market fakes. While learning the pure basics, I can see why a novice investor may want to paper trade; to see the results of the developing system but I will warn that these results are completely false. The results will not contain the emotional decisions that go along with risking your own cash. Anyone and I mean anyone can paper trade successfully. It’s simple, place a trade and hope it goes up and if it doesn’t, you have no worries because you can’t lose. The emotional imbalance that occurs when you really start to lose money is not present. Don’t fool yourself by believing the results of your paper trading or virtual simulation portfolio. These things may give you some confidence in your system but they don’t prove a damn thing in the real world. The real world, specifically the stock market, is run by emotional human beings. People make decisions that are irrational and base their trading decisions on fear and greed. Paper trading lacks fear and greed because there is no gain and no loss; therefore there is no consequence to deal with.

Don’t worry about back testing for 20 years because historical back testing is never very accurate. The most accurate testing is real time. If you can back test real trades (actual trades that you have made in the past), then this would be just as good as real time testing (or forward testing). Back testing can get you somewhat of an idea of how your system will perform but there is no emotional attachments to this type of testing so it is not realistically accurate. We all know emotions are tied to our decisions in the markets so we can only get accurate results through real testing. Learn to ignore the talking heads and the people on TV and that internet chat room that claim they are up over 1000% trading a fake account. What really makes me laugh is the person that sets up a virtual trading scenario and then allows each participant to trade $500,000 or more in their account. If you are going to trade a fake account, at least keep it real so you try to learn something, maybe money management.

I setup one virtual trading competition a few years back and I only allowed each participant to start with $10,000, a reasonable amount, an amount that most people start trading with. The competition was fun but it was not real for me or the others. I didn’t care what risks I took and I never had a problem pulling the trigger which does happen in real life. I did try to keep my trades in line with my real life account but it varied slightly. I witnessed other traders making 20 trades per day or 20-50 trades per week. This is not real because the commissions alone, even with a discount broker will wipe you out. I did allow margin because I use margin in my account but I saw other investors abusing the fake power of margin in their virtual account, again, playing the game for fun instead of learning something valuable. As a fellow investor, keep testing your system in real time and you will know what works and what doesn’t based on real trades, not simulations. Professors and the like teach theories while investors actually do the trading! Back testing may convince some people but I am only convinced with what works now, in real time. Besides, why would I waste my time playing for fake money when I can learn and do for real? Back testing may be good for some people but I have been testing my systems in real time since the day I started investing seriously. Currently, I am testing the $60-$100 theory using options in my newest account. I will not have concrete data on this system for another year or two, most likely two years down the road. I could back test the system but how will that help me realistically going forward? It won’t, it may show me some probabilities and the possible expectancy of the system but it won’t guarantee anything until I place a position for real.

If you want to test a system, open an account with real money, even a minimal amount and give it a try. Make sure you use enough money to allow emotions to be attached to your decisions. Without the emotional attachment, you are cheating yourself and your potential system.

Chris Perruna - http://www.marketstockwatch.com

Chris is the founder and president of MarketStockWatch.com, an internet community that teaches you how to invest your money with solid rules. We don’t stop at just showing you our daily and weekly screens, we teach you how to make you own screens through education. Through our philosophy, you will be able to create your own methods and styles to become successful.

Success in small cap & micro cap stock trading like with any other business in life comes from being able to see the big picture and from paying attention to the small details.

Let’s say for example that you are a business owner and you have a jewelry store on a given street just like the guy in the other corner does, but still the other guy is making 5 times more profits than you are only because he’s doing something different. He knows something that you still don’t and that’s what makes him more profitable.

The funny thing about this kind of situation is that you could be just a small distance away from being as successful as he is.

We know that day trading small cap stocks with momentum is not the only way to make money in the stock market. But it can be the fastest way when you do it right.

We also understand that a lot of people shy away from short term momentum trading and think that only a few traders can profit from it. It’s true. Only those short term traders with proven knowledge have the ability to profit consistently when stocks go up or down.

You don’t necessarily have to trade small cap stocks with positive or negative momentum all the time. But you can learn how to take advantage of them when you encounter with the best opportunities and at the same time limit your risk.

Visit us today at Profit From Penny Stocks http://www.ProfitFromPennyStocks.com and learn more on how to pick small cap & micro cap stocks stocks that you can short or ride all the way up on momentum every week.

ProfitFromPennyStocks.com helps beginner traders and investors take advantage of small cap and micro cap stocks in a simple way.

Are hedge funds a suitable investment for you? Hedge funds are an appropriate investment for qualified purchasers with a net worth above one million dollars and an annual income exceeding two hundred and fifty thousand dollars. Purchasers are often required to sign an acknowledgement confirming their qualifications to invest in hedge funds. However, just because one is qualified to invest in a hedge fund doesn’t necessarily mean they should do so. There is a major problem with this type of investment. Oftentimes, the risk associated with the fund is misrepresented, leading to investors being misguided into skewing their qualifications.

The term “hedge fund” is a generic term used to describe many unique investments. Put simply, the phrase is derived from the purpose – hedging the risk of investing. Hedge funds provide lower long-term returns in exchange for less volatility. The form of investment is not new, but their popularity certainly is. The newfound popularity of hedge funds has left many investors wondering what they are all about.

To shed a little light on a decidedly illusive investment tool, a quick run down is necessary. A hedge fund is typically a privately organized pooled investment fund, predominately invested in publicly traded securities. They are normally created as limited partnerships, consisting of one general partner and up to one hundred limited partners. The general partner usually receives a management fee and 10-20% of the profits from the fund. The success or failure of a hedge fund is often dependant on the competency of the fund manager, since they are more aggressively managed and traded than traditional mutual funds.

It should be noted that hedge funds have a higher failure rate than traditional funds. Numerous hedge funds fail by the second or third year of operation. Also, hedge funds are less transparent than traditional funds because some hedge fund managers do not reveal the securities they hold, or the extent to which they are leveraged. Hedge funds may have a higher turnover rate and be less tax efficient than traditional funds.

Along with the aforementioned downfalls associated with hedge funds, several more negatives should be noted. The management and performance incentive fees charged by the hedge fund manager, together with the trading costs and administrative fees can quickly add up, making B share mutual funds seem like a bargain. As stated earlier, only “qualified” purchasers are eligible to invest in hedge funds, leaving many would-be investors out in the cold. And liquidity, if available, is limited to quarterly release, and even then, investors are left at the mercy of the hedge fund manager.

The bottom line is, when dealing with hedge funds, get educated about your investment before jumping in. Discuss the option, both pros and cons, with your dealer, and know what you are getting into.

For more information on hedge funds and hedge fund attorneys, please click here.

Today’s society gives special recognition to alcoholics, sexaholics, binge-aholics, shopaholics, chocaholics and other "-aholics". What about stockaholics? Stockaholics are people who are overly obsessive about their stock market investments.

As approximately 50% of U.S. households directly or indirectly invest in the stock market, it is likely that there already exists a goodly number of undiagnosed stockaholics.

Are you a stockaholic?

To find out if you are a stockaholic answer Yes or No to the 10 short questions below …

1. do you check your stocks every day?

2. are you depressed on weekends, because the market is not open?

3. do you hate to go away on vacation because you will be out of touch with the market?

4. do you subscribe to more than 3 financial publications?

5. do you dream about stocks?

6. do you daydream about making a killing in the stock market?

7. do you think your stock broker is your best friend?

8. have you tried different stock market strategies, only to find out they didn’t work?

9. do you wish you could consistently beat the market?

10. do you wish you could make more money in the stock market?

If you answered yes to all or most of the questions you are a stockaholic … or a very good investor. If stocks are interfering with your ability to enjoy life … or if you are not making enough money in the stock market … get help.

Alan Korber is a stockaholic and a very good investor. He is also the creator and publisher of the successful Korber Strategy, a simple easy-to-understand stock market investment strategy that can pinpoint stocks likely to go up 50%-100% in the next 12 months. His website is http://akorber.com

The demand for world oil is increasing while world reserves are decreasing. This is a known fact. The current price of oil can certainly confirm this statement. Consensus also agrees that we will never see $25.00 oil again. The logical conclusion to our above statement is oil stocks should be a good long term investment. However, the location of the oil companies’ reserves can affect their bottom line and valuation.

Some of the largest reserves in the world are found in Venezuela, Saudi Arabia, Russia and Canada. Political unrest in Venezuela, unstable and unpredictable government in Russia and Osama Bin Laden targeting Saudi Arabia leave Canada, namely the Alberta Oil Sands, as the largest, most reliable oil reserves in the world.

Companies like Exxon Mobil Corp., Royal Dutch/Shell Group and Canadian Natural Resources Ltd. are planning to spend billions during the next 10 years to develop Alberta’s unusual oil deposits as demand for crude rises and output from existing reserves decline. Oil sands output in Alberta may double to 2 million barrels a day by 2013, according to a presentation by Enbridge Inc. earlier this month. Oil sands are deposits of bitumen - heavy oil that must be treated to convert it into crude oil for use in refineries to produce gasoline and diesel fuels. The U.S. Energy Department revised its global oil resource estimates to include the oil sands 174 billion barrels of proven reserves that can be recovered using current technology.

With demand for oil and other commodities from China and India increasing due to their growing economies, strong trading relationships are procuring with Canada - a country with numerous resources, political stability and neutral military views.

Companies with reserves in the Alberta oil sands look like a great investment for the next decade There are many companies with reserves in the Oil Sands here are some with strong exposure.

Suncor Energy Inc. SU.tse , Western Oil Sands Inc. WTO.tse and the Canadian Oil Sands Trust COS/UN.tse

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Jack and Jill went up the hill to fetch a bucket of …money. Money? They are continuing to fill their bucket with stocks without any consideration to the value of these equities. They are not worried at all as they are buying “safe” mutual funds.

Everyone knows mutual funds are safe. Jack and Jill know they don’t know how to pick good stocks so they leave that to the fund manager. He is an expert.

When you look at the long term record of 99% of the mutual funds you will see that expertise has been sadly lacking. I hate to remind you of the 2000 to 2003 period, but I must. In fact I must tell you it is going to happen again. Now you want to know when….and so do I.

And that is the problem with almost every fund manager. As long as the market is going up they can’t do much damage to your account, but when it rolls over and heads down they have no idea how to invest when a bear market is in progress. Not a single one of them will acknowledge that cash is a position.

Cash is a position? They are in shock. Of course they are. If brokerage customers put their money in a money market account while the market is falling it means they do not make any commission at all and if they recommend this to their customers the brokerage manager will fire them because he won’t make any money either. “Keep your customers fully invested or I’ll show you the door” is the manager’s comment.

You must learn when to sell. Any fool can buy, but it is the wise man who knows when to sell. To see the condition of the overall market one of the best indicators is the SP500 Index. Your broker compares everything he does with the SP500 because it is a broad base of 500 stocks that are widely traded.

The finest indicator is the SP500 Index. Draw a 40-week chart of the closing prices. If you don’t know how ask your broker. He will tell you. Write it down and save it. It is very simple. Have him set up a 40-week Simple Moving Average to appear on that chart. Look at 5 years worth of prices. Immediately you will see that if you are in the market while the 40-week MA is going up you are making money and if you are out of all your positions while the index average is going down you will not lose money. It doesn’t get any easier that that.

Jack and Jill can fill their pail as the market is going up and need not spill their accumulation while they walk confidently down the hill holding their bucket full of cash not equities.

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

Sometimes the best way of lowering exposure to risk is not to invest at all! However, when we make the decision to jump into the muddy waters of the stock market, its always a good idea to have a life jacket ready, just in case.

We all have stories of that "must have" "can’t lose" stock that looking back, we didn’t really need to buy, and it definitely lost. So, how to best protect yourself when the markets disagree with your due diligence? Trailing stop loss.

Its important to understand the psychology of investing. When we make money, there is instant euphoria. When we start to lose money, there is a sudden "deer caught in the headlights" type of emotion, which makes us unable to do the right thing. We fear that the moment we sell, will be the moment that it starts to rebound. Not only do we fear that we will be that guy who sold at the low of the day, but that we will miss out on untold fortunes because we got out too early.

While this happens, more often than not, a small loss turns into a much bigger loss. Remember, a 40% loss started off as a 5% loss.

So what is the best stop loss strategy? Well, we happen to have 2. One simple, one a little more complicated, but possibly more effective and capital saving.

The first strategy is called a "trailing stop loss". Its simple and effective. We’re going to add a small twist to it. A traditional trailing stop loss simply means that you set a percentage that you are willing to lose. For example, if you purchase 1000 shares of ABC at $5/share, you could set a stop loss at 10%. This means that if the stock dips below 10% of your purchase price ($5 - 10% = $4.50), you’re out of the market and no longer risking capital. If the share price moves higher, you would set your stop loss at 10% below the closing price. If ABC moves to $5.50, you would set your stop loss at $4.95. If the stock drops below that price, you’re out.

By setting your stop loss at the time of your purchase, you are taking the emotion out of investing. Specifically, you are taking out the "deer caught in the headlights" emotion. This will save you grief and will save you money. If your stock moves like you think it will, you can lock in your gains automatically.

Our twist to this strategy though, is to first establish the dollar amount that initial stop loss is worth, and let that dictate what your stop loss will be.

Given the same example as above, your initial stop loss would be $4.50. You would only be risking $0.50 per share or $500. This represents the most you are willing to lose, regardless of which way the investment goes.

If the share price moves to $7.00, instead of setting your stop loss at $6.30, (thus risking $0.70 or $700 of your money), you would set your stop loss at $6.50, which risks the same $500 you were initially willing to lose when you first started.

This little twist helps you keep more of your profitable investments. Why put more profits at risk?

The second stop loss strategy is, although a little more complicated, will protect more of your money.

While we would love to take credit for this strategy, we found it when reading Chart Trading by Darryl Guppy. This strategy starts by looking at your overall capital, not the amount of the specific investment. For example, if you had $20 000 in your investment account, you could trade 51 times if each time you invested you put 2% of your total capital at risk.

While 2% doesn’t sound like a lot, lets have a look at an example. Given your investment account has $20 000 in it and you only want to put 2% of it at risk, you would be willing to risk $400 per trade. This ensures that you will have 51 chances to get it right before you run out of money.

Where you set your stop loss is basically the point where you are risking $400. Given our initial example, your stop loss would be at $4.60. If the price moves from $5 to below $4.60, you have lost $400. What if you purchased 2000 shares at the same $5? Your stop loss would be then set to $4.80. Anything below that, and you have risked more than $400. If you think that you want a deeper stop loss, then you would purchase fewer shares. The idea is simple: you never risk more than the same amount per trade.

As the price increases, you then change the amount of your stop loss accordingly. If the stock hits $7, you would set your stop loss at $6.60.

Given our initial stop loss strategy, assuming you lost $500 each trade, you could lose approximately 40 times before you ran out of money. However, what if you purchased 2000 shares at $5 each? Your 10% stop loss would put $1000 at risk. This will lower the number of chances you have at getting it right.

Its up to you how much money you are preparing to risk. Many investors think of the ways they are going to spend their profits before they are made. Its much better to think about the amount you are prepared to lose. This way, when your hard work pays off, you’ll appreciate it more. On the other hand, if the market disagrees with you, you can still keep the majority of your money!

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There are formulas for just about everything, but it has been shown that the simpler the formula or method of doing a particular task the better it works. It has evolved down to KISS – Keep It Simple Stupid.

This also applies to trading in the stock market. There are literally hundreds of formulas, both technical and fundamental that are easily available to investors. Each trader has his own method he uses. Every professional trader on the floor of the stock exchange has his own variation on some major proven formula. The more skilled he becomes with it the more he feels it is the best one.

Sometimes it takes years for a trader to settle on one method or group of methods that he uses to signal buys and sells. It took me many years to find that technical group that worked for me when I was an exchange member.

For some it evolves into long term trading and for others it can be buying and selling in a matter of minutes. The time period is not important. The method is. Even as a floor trader on the commodity exchange I had only two criteria I watched before entering into any position.

All professional traders and investors are aware of the single most important fact and that is how much I am willing to lose before I exit this new position. Every KISS formula has an exit strategy. Every professional knows in advance how much he will allow himself to lose if he is wrong. The professional does not set a limit on the winning side of a trade only on the losing side.

Ask any full time professional and he will tell you if he is right 50% of the time he considers that to be phenomenal. When I was on the floor I was only right about 40% of the time, even about 20% and wrong about 40%. BUT I made $3.00 for every dollar I lost. Small losses and big winners are the key to success. This is the key to any profitable formula – keeping the losses small.

When I see advertisements in the financial papers for methods claiming to be right 80%, 90% of the time I cringe. It just can’t be. There is no trader I ever met who was that good and I have known some exceptional traders.

The major text on technical analysis is “Technical Analysis of Stock Trends” by Edwards and Magee now in the 17th printing of the Fifth Edition that lists multitudes of methods. They all work, but many are complicated. A magazine called Futures Truth analyses 200 commodity trading systems in each issue. Fundamental Theory is equally complex.

There are software programs that allow the investors to enter as many as 30 parameters. The more complex it is the less chance it has to work. And the biggest obstacle to any program is the trader himself. He cannot hesitate when a buy or sell signal is given.

Keep your formula simple and execute the signals. You can be a winner.

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

When an individual investor wants to roll up his sleeves and do some research in the pursuit of the next big winner in the stock market, the place many start is in the small cap sector.

As with the other capitulation sizes (capitalization is a stock’s market value), no one can completely agree on a precise definition, but corporations under $2 billion are often considered small caps. It should be pointed out that there are two asset classes below small caps. Micro caps are companies between $50- 300 million and Nano caps are below $50 million. To further confuse the issue, there are also "penny stocks" that really have nothing to do with capitalization size, but are stocks that trade very cheaply.

Life begins for many small caps as an Initial Public Offering (IPO) or as a "spin off" from a larger company. Like Toddlers, these companies are often still in their developmental stage. At this point they exhibit characteristics that give them the potential for both massive growth and extreme downside volatility.

Their huge growth potential is obviously the piece that attracts most investors. Who wouldn’t have wanted to get in on a Microsoft in its early days of trading? The question of course is who knew about Microsoft back then?

Often, it is individuals not institutions that first get in on the ground floor. Analysts working for major brokerage firms usually don’t have the time to develop coverage on small companies and institutional investors generally have limitations of how much they can own of a single company. Although a $100 million may seem a lot to an individual, it’s a drop in the bucket for the big players and equals 20% of a $500 million company. The 20% far exceeds what the SEC stipulates a mutual fund can own and often exceeds the investment policy statement of an institutional investor.

The disadvantage here to the investor is there is relatively little published research that the individual can rely on in the decision making process. But the good news is that the individual investor has the opportunity to buy the stock before the institutions get in and run the price up.

Many investors believe in the "efficiency" of the market. This means that with all the information out on a particular stock, the market can "efficiently price" any stock. In the case of small caps (where information is often lacking), an argument can be made that there is some potential to profit from inefficiencies in the market. Again, this cuts two ways. Many investors can remember that it wasn’t too long ago that many small cap techs sold for vastly inflated prices only to watch a steep price slide as the market started to correct these inefficiencies.

Income investors should probably look elsewhere. Small caps generally conserve whatever cash they earn for growth potential. Any yield is usually incidental to their objective.

For mutual fund investors, small caps can be an interesting proposition. Certainly, mutual funds can help offset some volatility through diversification. However, for investors that want to follow a small cap’s ascension to the large cap sector, mutual funds may disappoint. Often, to avoid what’s called "style drift" a mutual fund manager sells a successful position simply because it has outgrown its capitalization value. While this may be helpful for asset allocation purposes, it’s not appealing for investors wanting to watch a company "grow up".

Glenn (“Chip”) Dahlke, a senior contributor to the Living Trust Network, has 28 years in the investment business. He is a Registered Representative of Linsco/Private Ledger and a principal with Dahlke Financial Group. He is licensed to transact securities with persons who are residents of the following states: CA. CT, FL, GA, IL. MA, MD. ME, MI. NC, NH, NJ, NY.OR, PA, RI, VA, VT, WY.

If you have any questions or comments, Chip would love to hear from you. You may contact him at dahlkefinancial@sbcglobal.net. You may also reach him by going to the Living Trust Network web page located at http://www.livingtrustnetwork.com.

Copyright 2005. LivingTrustNetwork, LLC. All rights reserved. This material may not be published, broadcast, rewritten, or redistributed without the written consent of the Living Trust Network, LLC.