I wanted to share the approach that I take regarding stock investing, especially for the part time investor or trader. Many people want to know what stock to buy- what is hot, what is going up? Successful investors are more concerned with managing risk and following a decent trend, than chasing the hot momentum stock. In fact, I don't buy stocks any more- I trade ETF's (exchange traded funds). Why- is is simpler. Individual stocks have too many variables to pay attention to, if you are invested in any given stock, you need to know when an earnings announcement is due- it could affect the price significantly. So many things can change in a company that can have a hit on the stock. There are so many ETF's (check out profunds.com for a listing of some of the ones I trade), you can trade the indexes, metals, energies, etc. I'll get into that shortly.
Many people invest in an index fund, and are happy getting the basic market performance- this is easy to with ETF's. I'll use the S&P 500 as one example. The common ETF for that index is SPY. It is bought and sold just like a stock, and has none of the fund management fees that an index mutual fund has. It will also buy and sell when you place the order, not at the end of the day as a fund does. If you are looking for a more aggressive return, look into the leveraged ETF's- in the case of the S&P 500, look at BGU. It is a triple leveraged ETF- if the index moves 1%, BGU moves approximately 3%. It goes down as well as up, so be aware of the damage that leverage can do, if you do not manage risk.
To discuss risk a little, you have to understand and manage risk in any trade. Is risk what you spend on a stock? No. If you buy 100 shares of Apple (AAPL) at $320/share, you have spent $32,000 on that stock. Are you risking $32,000? Only if you are willing to stay in it until the price goes to zero. When you buy any stock or ETF, you have to know in advance when you will get out. At what price level will you decide that owning Apple is a bad ides, and sell it? If the answer to that question is "I don't know", then you should not be owning it at all, because you have no idea how much of that $32,000 you are really risking. On the other hand, if you bought AAPL at $320, and decide that if it drops to $300/share that you will get out of the trade, then you are risking $20/share, or $2000 of your money ($20/share, times your 100 shares). That is understanding risk per trade.
To wrap up for now, the other reason that I trade only ETF's is because I also trade commodity futures. I follow approx 10 markets, and don't have time each evening to also run an analysis on 20 or so stock charts. I can do that on 3-4 ETF's, and trade those.
More on risk to come......
Go Bears!
