Elite Echelon The Playbook The Basics Demetrius Durante
Intro: What is the Stock Market? We must first understand what the Stock Market is in order to become successful at investing. The market in which shares of publicly held companies are issued and traded either through exchanges or over-the-counter markets. Also known as the equity market, the stock market is one of the most vital components of a free-market economy, as it provides companies with access to capital in exchange for giving investors a slice of ownership in the company. The stock market makes it possible to grow small initial sums of money into large ones, and to become wealthy without taking the risk of starting a business or making the sacrifices that often accompany a high-paying career. So there are different reasons for getting into the Stock Market. Some common reasons are as follows; Investing your money for retirement Investing in a company you believe in Quick profits for trading stocks Generating side income Financial efficiency Financial independence Whatever your reason for getting into the Stock Market just be prepared to do home work and research companies for hours on end. If you don t enjoy researching companies you can always find a service that will do it for you, like EliteEchelon.com 2
So there are usually 3 types of investors in the Stock Market. Day Traders Trading shares of stocks intra-daily for quick profits. Swing Traders Trading shares of stocks every couple of weeks to months. Long Term Investors Investing in a stock for the long run. The entire development of a company. These people hold onto stocks for years until they become large profitable gains. Section 1: Practice makes perfect No type of investing is superior to another. There is no best style of trading. Different people have different styles. All of them have their advantages and disadvantages. You will find your own style when you start trading in the Stock Market, but for now let s practice. So before investing any real money into anything. Let s talk about paper trading. Paper trading is a great way to start off learning about how to trade without having to risk any of your own. So let s start off with company XYZ. Right now for example, the company XYZ is trading on the market for $5.00. That means 1 share of XYZ cost $5.00. So let s say you want to invest $2,000 dollars into XYZ. Maybe you really believe in the company, maybe they will revolutionize their industry s market, maybe you did a financial analysis and the company has a good asset to liability ratio. So now we invest $2,000 into XYZ. So $2,000 divided by the stock price $5 equals 400 shares that you now own of XYZ. Now let s say the company starts doing really well and they are coming out with great news so this pushes the stock price higher over the next couple of months. XYZ is now at $9.00 a share! So let s calculate what our initial investment has grown to. So how many shares do we have of XYZ? 400 shares of the company. Now 400 shares multiply $9.00 equals $3,600. You have made $1,600 more now because of your initial investment of $2,000. 3
So let s say instead of the $2,000 initial investment we made with XYZ, that we actually invested $5,000 when we first invested. $5,000 equals 1,000 shares. XYZ at $9.00 with 1,000 shares equals $9,000 dollars. So you made $4,000 dollars from your initial investment. Let us keep in mind that the same holds true for the opposite. If XYZ was to plummet instead of rise then you would start to lose money that you invested. Paper trading is writing down your investments you would have made with real money so you can track your stock and see how you would have done, had you invested. I personally paper traded for 6 months before I even put any tangible money into the Stock Market. Section 2: Rules Now I want to go over what it takes to become successful in the stock market. There are a couple of rules that will help determine your success. 1. Never get an emotional attachment to a stock. 2. Always keep your ego in check. 3. Always keep loss limits no matter what. 4. Never let an investment go to your head. Let s go over in more detail what I mean by these. Number 1; never get an emotional attachment to a stock. I ve seen this happen way too often. People get so caught up in a company even when the plane is crashing they refuse to jump out. Number 2; always keep your ego in check. Never think your better than anyone or anything. This helps keep a clear unbiased mind when trading. Number 3; always keep loss limits no matter what. Simply put, keep a rule in place where if a stock falls more than a certain percentage (15%) from your initial investment point, sell your shares of the stock. This will help with the first 2 rules. Last but not least, Number 4. Never let an investment go to your head. It could be a good investment or a bad investment. Remember rule Number 2? Do not let 1 investment take you out of the game. There will be plenty more of opportunities. 4
Section 3: Setting up a trading/investment account Here are 2 trading accounts with the low trade commissions; 1. TradeKing Cost per Stock trade $4.95 TradeKing s platform is entirely online and its prices are some of the lowest for online brokers. Further, on the website, you have ample tools at your disposal for managing your portfolio, researching stocks and increasing your investment knowledge. TradeKing's comprehensive website and intuitive platform along with its impressively low trading fees are the reasons why I prefer them for online stock trading. When it comes to online discount brokers, TradeKing stands out among the competition. Its all-online platform is intuitive and simple, which makes it a great choice if you are a new trader or an experienced trader who wants an uncomplicated way to trade. 2. Scottrade Cost per Stock trade $7.00 Scottrade is a well-rounded resource for beginning Stock Market investors. You can control the flow of your money from the moment it enters your account and shuffle it into stocks, IRAs or other specialty accounts. They have a plethora of online educational avenues including webinars, articles and online classes to help you learn the basics of stock trading. You can also attend live classes at any of the hundreds of branches nationwide. The only thing we would have liked to see is a practice trading tool to help you learn the trading process before any of your own money is at risk. 5
Section 4: Going Long So to make money on a stock is easy right? You buy the stock when the price is low and sell it when the price goes up. Question is, how does anybody know that a stock will go up? Easy answer, they don t. You can do research and due diligence to invest in a stock that has a higher chance to succeed, but nothing in the stock market is ever guaranteed. So there are numerous technical terms to determine price movements, but for now let s just stick to the basics. Fundamental analysis is common sense. You look at a company s financial reports to see how much money they earn, and how much money they lose each year. If they are earning more than they lose, the company is heading in the right direction. This can get tricky as some startup companies who might turn out to be vastly successful will start off in debt. Some key things to look at when doing research about a company are; Total Revenue (year after year) Net Profit (year after year) Total Current Assets (year after year) Total Current Liabilities (year after year) Stockholders Equity (year after year) 6
Last, but not least you want to check the company s current cash flow. The cash flow needs to be increasing or at least not into the negative. A cash flow is the life blood of a company, if there is no cash flow, your company will have a heart attack. Section 5: Sizing up So after you have had paper trading experience, now it is time to open your stock trade account. Now how much you want to open your account with depends on the type of stocks you plan on investing in. There are 4 different classifications for stock sizes. Big/large cap - These companies have a market cap between $10 billion to $200 billion. Many well-known companies fall into this category, including companies like Microsoft, Wal-Mart and General Electric, and IBM. Typically, large-cap stocks are considered to be relatively stable and secure although there is not much reward. Both mega and large cap stocks are often referred to as blue chips. Mid cap - Ranging from $2 billion to $10 billion, this group of companies is considered to be more volatile than the large- and mega-cap companies. Growth stocks represent a significant portion of the mid caps. Some of the companies might not be industry leaders, but they are well on their way to becoming one. Small cap - Typically new or relatively young companies, small caps have a market cap between $300 million to $2 billion. Although their track records won't be as lengthy as those of the mid to mega caps, small caps do have the possibility of greater capital appreciation - but at the cost of greater risk. Micro cap - Mainly consisting of penny stocks, this category presents market capitalizations between $50 million to $300 million fall into this category. The upward potential of these companies is similar to the downside potential, so they do not offer the safest investment, and a great deal of research should be done before entering into such a position. For large cap stocks you will want to start off with more capital in excess of a couple thousand to a few thousand. Mid cap and small cap stocks I would recommend starting with $2,000 to about $5,000 when first starting off. Last, but not least we have our Micro cap stocks also known as penny stocks. For penny stocks starting capital should be at least $500 to $1,500 to make any reasonable profits. As a general rule of thumb, if you are worried when investing, you are in too big. Never invest money you cannot afford to lose. 7
Section 6: Protect yourself One of the most difficult things about trading and investing in stocks is setting loss limits. A loss limit is a point at which you will sell all the shares of your investment when your stock drops to a certain point or percentage. Referring back to Section 2, never get an emotional attachment to a stock. When your stock starts to drop in value, you must always discipline yourself to get off the ship before it sinks. No matter how much you like or believe in a stock, when its going down loss limits will save your life. I always set my loss limits at 15% of the price point when I entered the stock. For others it is best to calculate out your own risk to reward ratio. There are other ways to get hurt in the Stock Market. I have a couple more rules I always follow, hopefully these will help you as well. Never follow free stock reports. Free stock reports are garbage 99.99% of the time. Why would a company or service give out a free stock report? What would they have to gain? These are usually run by scam artists who are involved in pump and dump schemes. They pump up a stock with shares they already own. Once you buy the stock they are promoting as the next hottest pick they will sell all of their shares and leave the stock worthless. Never listen to friends, family, co-workers. By the time you hear about a stock from a friend, family member or a college at work, chances are they heard it from someone else who heard it from someone else. In short, the news is old and stale. There is no momentum and the ship has already set sail. You will jump into a stock blindly just because your friend got you enthusiastically excited about it and most of the time the stock will go nowhere. Always do your own due diligence and see the news for yourself from a credible source. 8
Never Average down. While this may seem like a brilliant idea at the time, it usually ends badly. Averaging down is buying more shares of a stock when the prices dips down to hopefully make a larger profit when the stock goes up. Remember Loss Limits? Exactly. Would you rather bet on a horse that is slowing down or speeding up? Always average up. Never trade Pink Sheets. Pink Sheets is not an exchange, but a quotation service, it is unregulated and can therefore result in scams or other potentially harmful investments. Minimal to no transparency or fundamental information is available for many of the stocks, while some are subject to various schemes. The Pink Sheets also disallows margins and short selling, which can be either a positive or negative depending on the investor's viewpoint. Summary Practice until you are confident and comfortable with researching and analyzing stock market information. You cannot rush into trading and investments or you will just run into a wall. Take your time and things will become prosperous. Follow rules; do not become stubborn or emotional. The hardest thing to do is take emotion out of it when you are investing. At the end of the day these are just numbers. Find your groove, you will win, you will fall, remember to get back up and keep trying. Success is never giving up. You will find what trading style best fits your lifestyle. Always think with your head and not with your heart. Logic is the name of the game. There are many talented people who haven't fulfilled their dreams because they over thought it, or they were too cautious, and were unwilling to make the leap of faith. - James Cameron 9
Glossary Assets items of ownership convertible into cash; total resources of a person or business, as cash, notes and accounts receivable, securities, inventories, goodwill, fixtures, machinery, or real estate. Liability moneys owed; debts or pecuniary obligations. Revenue an amount of money regularly coming in. Net Profit the actual profit made on a business transaction, sale, etc., or during a specific period of business activity, after deducting all costs from gross receipts. Stockholders Equity the net assets of a corporation as owned by stockholders in capital stock, capital surplus, and undistributed earnings. Cash flow A revenue or expense stream that changes a cash account over a given period. Volatile liable to change rapidly and unpredictably. 10