A system can be defined as a precise series of coordinated and related events that is sufficiently reliable to establish a plan of procedure in response to those particular events or a combination of those events.

Stock market systems can be developed by identifying a number of known and typical patterns of stock reactions that often occur as prices or circumstances change in the stock or the stock market, sometimes in combination with other factors. When those reactions occur, they can be interpreted as signals that can forecast stock movements or price changes to a sufficiently high probability of accuracy that they can justify a trading commitment to buy or sell, or even to continue to hold.

A stock market system can be simple or it can be complex and systems are widely varied in their purpose and the guidance they offer. A system can be used to signal many situations of value to the user. The key is in knowing which signals to look for and when to take action.

The stock market system, just a tool to help in decision making

Systems to guide actions can be applied in many different situations, there are hundreds of systems in existence, probably thousands, and obviously there is no foolproof system that guarantees success. There are so many variables and influences affecting the changing patterns of stock market activity that a stock market system should only be regarded as a tool to help assist in interpretation and analysis.

Nevertheless, a stock market system can be useful when its signals indicate a forthcoming change that allows an entry or exit in a particular stock position. If that can be early in a price advance or decline, there is a better chance to capture a greater gain or possibly limit a loss. That is where a system can be of value, when it provides a “heads up” alert.

As a trader I follow no system although I do observe specific basic guidelines, so I suppose those may be called a system, the guidelines are:

The Five essential rules for trading stocks:

1. Trade with the trend, not against the trend.
2. When they occur, take losses early before they grow too large.
3. When a stock is on a profitable path do not exit too soon, let the profits run.
4. Use Stops and Stop Loss procedures.
5. Do not buy stocks that are falling in price in order to average down.

Preliminary note: For a full list of the 32 articles, shown under their categories that are relevant to the beginning trader, please check this link: LIST –  some of which are also noted at the end of this article.
—————————————————————————————————————

This article is called “Stock Market 101” because the “101” tag has become associated with beginnings, and basic information, an introduction to the given subject matter, in this case, Stock Market Basics.

Basic stock market 101 information is important because it provides the necessary foundation on which future knowledge and eventual expertise is acquired. At the stock market 101 level, new information and unfamiliar data should be easier to understand.

An example of the early steps to take in learning a particular trading strategy is given below with appropriate links that will introduce, recommend, provide an example, and enumerate the basic rules for guidance. For this, see the sub head below: “For Example“.

Stock market activities can be categorized by their associated levels of risk, some of those are:.

Capital Preservation looks primarily for a safe haven for money while providing a better financial return than is available from banks.

Growth Investing looking for financial gains over time through the increased value and earnings of companies.

Income Investing is in companies that distribute part of their profits to shareholders in the form of dividends and such companies should also have some positive prospects of growth.

Aggressive Growth investing entails high risk for higher returns.

Short term stock trading involves taking higher risks for potentially much higher gains as it seeks to capture profits from price changes in stocks or options over a relatively short period of time.

The purpose of this website is to provide an introduction to what is involved in the trading process with reference to various approaches, knowing that just one approach does not suit everyone. Experience can be a very good teacher if lessons can be learned from it and there is a lot of information available that has been gained from experience, both successes and failures.

The more a beginner learns about trading and the market and what I like to call the “lore” of the market, the better. But it will take several steps, from the initial introduction to a topic, seeing examples of a topic until making the trade, perhaps first on paper and later in reality, and then making an assessment of how well the trade was executed, what was right and what was wrong if anything.

The stock market encompasses a wide range of opportunities to trade or invest in many different types of trading products in addition to company stocks, there are exchange traded funds (ETF’s) index funds, mutual funds, stock options, futures, forex, and others.

For example
Straight forward trading of company stocks usually takes up all the attention of a beginner, but don’t ignore the other trading opportunities, for instance, check out Buy the Stock or Buy the Option? — but to understand that,  first read  Trading Options for the Beginner, and at the end of that post follow the link to  Four Rules for Trading Options.

To continue, let us offer some suggestions regarding trading in stocks using an online stockbroker.

Without questioning the precise reason why someone wishes to become active in the stock market, and there are many valid reasons to do so, let us assume it is with the desire and expectation of make a profit.

In the beginning it is mainly a learning process. The essential steps after opening an account and learning the basics is to find a source of continuing stock trading advice that will assist in choosing stocks to buy and sell, using specific strategies that follow established signals provided by the trading patterns of the related stock.

• Establish investment goals and formulate a plan to show how those goals can be achieved.
• Open an online brokerage account, get instruction on how to place buy and sell orders and how to set protective stops. Choose a broker that offers a paper trading account, also called a virtual trading account that allows making trades without using real money, the broker can provide instructions on how it operates and can also describe any other educational resources that may be offered free of charge.
• Start a reading program to learn as much as possible from reliable authors who have successfully bought and sold stocks. I always recommend the William J. O’Neil books, the Investor’s Business Daily newspaper and the Wall Street Journal and other financial magazines. For more suggestions on books to read see my article: Read to Learn.
• At the same time as the reading sessions, or shortly thereafter, find and enroll in a short and inexpensive course of instruction that will introduce all the basic information in a structured format. Some are available free the better courses should not cost more than about $200, avoid the expensive courses until later when a greater stock market knowledge base has been acquired.
• Subscribe to a reliable all inclusive stock data, educational, stock picking strategy service such as VectorVest, it costs about $50 a month, a trial subscription is OK too, and from my personal experience it is by far the best buy you will make other than the purchase of a big winning stock, and VectorVest will help you do that too, it comes with software instructions and suggestions, analysis, strategies, forecasts, and can do just about anything you are likely to want to pick stocks to trade. Here is a link to their site: http://www.vectorvest.com/ where you can find out the details.
• There are many other similar well known data sources that have a good reputation although I do not have as much familiarity with either, in my brief use of them I found them to be a little more complex and difficult to use than VectorVest so had no reason to continue with them, but the are good so for the record there is Worden (http://www.worden.com/) and ONI (http://www.club.ino.com/)
• From reading, and studying and with the aid of other resources, find a system that appeals and where there are guidelines that help identify suitable stock choices, entry and exit signals.
• Develop a trading plan to cover all possibilities including when to enter and exit trades.
• Start to trade, but follow the guidelines of risk management and profit capture, you can find suggestions about that here.
• Continue to read and study about the market, perhaps join a good stock forum – if only to follow the discussions and opinions on a wide range of stock related topics. It is not necessary to participate.

For the person wishing to add to their sources of learning about the many facets of the stock market and especially for them to learn of the views of others who have the same interests as their own, the stock market forums serve a very useful purpose where a diversity of topics are discussed and questions asked and answered.

To gain access to most stock market forums it is necessary to register by providing a username, password, and an e-mail address and also agree to abide by the rules established by the forum, it’s a simple process and takes little time.

For instance, I’ve just registered for and checked out a forum whose address I found on the internet called HotStockMarket.com and I can already see many topics of interest that I know I want to follow up. Almost all stock market forums work the same way and have similar requirements to join and no doubt the variety and quality of comments and opinions will differ from site to site but in general, most investors and traders, especially the newcomers to the stock market, are faced with the same types of questions and are curious about experiences of others who may be using the same trading strategies and styles. Check here for more about Stock Market Strategies.

It is not necessary to contribute questions, answers, or comments, it is perfectly acceptable to be just an observer, I notice that some who are, often refer to themselves as “lurkers” – as a newcomer to the forum, that is what I am for the time being. But there really are many topics of interest, as an example, I immediately saw a link for a discussion on “online brokers” a topic I have been checking out and writing about myself of late (refer to my post: Stockbrokers for Online Trading ). Not that I want to change from my current broker but just to see whether some other online brokers are offering different tools or services.

As it worked out I found four pages of comments on just one online broker, among which, someone was asking for facts to back up an earlier critical opinion given on the forum about a certain stockbroker. The following post to that request gave a reply stating they had “lost quite a bit of money due to incompetence/negligence/just plain indifference” due to that particular broker. That’s a direct quote, I won’t name the broker and it may have been an isolated client not typical of all but when trading in the stock market a basic rule is to question everything and do due diligence to minimize exposure to risks and setbacks in all situations.

So, in conclusion, I suggest that anyone wishing to learn about stock market basics might find it worthwhile to visit a stock market forum or two. There could well be a few items of knowledge to add to their knowledge base, and in the stock market knowledge is an asset in itself.

Successful traders follow stock market strategies that prepare them to take advantage of, or protect themselves against, changing circumstances in their stocks or the stock market in general. They follow strategies that signal when to initiate a stock purchase, when to take a loss and when to capture a profit. That is what contributes to their success.

Listed below are some well-known trading strategies that mainly depend on the recognition of patterns of stock action that occur because of the normal supply and demand for given stocks. There are many other strategies that prepare for the eventualities of other situations that frequently occur. For greater understanding, a brief description of Covered Calls and Stick Splits and Pattern Breakouts are described here.

• Covered Calls
• Stock Splits
• Pattern Breakouts
• Buying the Gap Opening
• Earnings Announcements

Covered Calls

The covered call strategy is a relatively safe and easy method that can be used when at least 100 shares of stock are owned and if the trading of options on that stock is available. This method is called Writing a Covered Call or Covered Call Writing.

A stock option is a contract that gives the owner of the option the right but not the obligation to purchase, or sell, (depending which category of option it is) the stock to which it is related at a specific price within a specific time period.

The option does not have to be exercised but can be re-traded during its assigned time period.

In the case of implementing a covered call strategy, the writer sells a call option against the shares (in blocks of 100 shares) that are already owned, or that are purchased simultaneously with the sale of the option. The call option will allow the purchaser of the option to buy the related stock at a specified higher price than the stock is trading when the option is acquired. The sale of the option provides immediate cash to the seller.

So what is the result of the outcome of this transaction? The owner of the option will either exercise the rights of the option and purchase the stock at the specified price or will not exercise the option and the stock will remain owned by the existing owner, the writer of the covered call.

In both cases the writer of the call has gained, firstly through receiving the sell price of the option and secondly from either the increased price for the stock that is received if the option holder exercises the right to purchase, or, if the option is not exercised then the stock is still owned and a cover call routine can again be instigated. The latter case can take place repeatedly.

Stock Splits

Sometimes, for various reasons, a company decides to issue additional shares of stock to its existing shareholders. This is known a s a stock split. When this happens, since there is no change in valuation of the company, the total new shares will have the same value as the single old share. Thus in a case of a 2-1 split, where two shares are issued for one existing share, each of the two new shares will inherit half the value of the original share. The date for the stock split to occur, so-called pay day, is announced ahead of time and a calendar of stock splits is maintained for easy reference for investors.

There are several strategies used to trade stock splits, we will make reference to one popular and easy to understand stock market strategy here now, sometimes called the Pay Day Split that historically has shown to have a high chance of being profitable.

Activating this strategy is subject to the stock rising in price as the stock split date nears, in which case, the stock is purchased two or three days before the actual stock split date and is sold a few days after the stock split date, typically providing a profit.

Pattern breakouts

The trading patterns of some stocks, when depicted graphically on a stock chart, can be seen to fluctuate up and down over a period of time within a given price range, appearing as if they are confined by unseen forces that hold their prices between the highs and lows of that price range. The confining area that can be seen on a chart is sometimes a triangle, sometimes a pair of approximately parallel lines, sometimes just a line known as resistance, or sometimes a line of support. Whatever the case, when a sustained break out occurs from that confining pattern, meaning the price rises above or below the area of confinement, that situation is a signal to take a position in that stock that will now be expected to continue its run in the direction of the breakout.

These are carefully watched for since they are often very reliable signals to buy or sell a stock.

Applied strategies guide many of the actions of stock traders

Successful traders are prepared and ready to adjust to changing conditions. They follow strategies that enable them to take effective action when events occur that can impact the price and value of individual stocks or the overall stock market. They are able to recognize and interpret events that signal various possibilities to which they can respond to if warranted.

Investing and trading in the stock market can be very rewarding but at the same time has a significant element of risk. Without proper knowledge and understanding of the many processes that affect the price movement of stocks it is almost impossible to succeed and survive financially unscathed. To invest profitably it is necessary to learn time-tested rules and guidelines that reduce risk and protect investment capital.

There are many stock market courses available that provide the essential elements of stock trading and investing, some of which are free and others that come at a cost ranging from a few hundred dollars to several thousands of dollars. For the latter, one must exercise the normal precaution of “buyer beware” before putting up cash for such courses and first do some due diligence to gain assurance that they are bonafide with an acceptable reputation and history with satisfied formal students. Perhaps advertised testimonials can be checked before proceeding further.

Some stockbrokers offer free training courses for their clients and some stockbrokers provide a virtual stock market simulator facility which allows the client to gain experience by implementing the newly learned trade routines and practices to make trades without using real money, often called paper trading. These are tracked and recorded by the institution with activity reports just as if they are real trades.

There are also stock market games that offer a realistic trading experience, often with virtual investing contests. These are good ways to learn the procedures of buying and selling stocks without putting real money at risk.

For the beginner, wishing to invest, and before commencing a training course, I suggest first taking time to read a few books that provide an introduction to the many aspects of the stock market. A few appropriate books are suggested here at Read to Learn. In addition to books, the financial newspapers such as the Wall Street Journal and Investor’s Business Daily provide interesting information on what is happening each day in the marketplace.

After gaining an initial grounding and familiarity from reading, you will probably be better prepared to join a stock market course and follow a more structured learning process. Such courses should provide instruction at several levels of sophistication beyond the entry level with the objective of the student eventually becoming capable of identifying how to select profitable stocks, how to time their purchase and their sale and how to manage the risks that are always present, especially through unexpected events that take place, many of which are global in nature.

For those who can master the principles and practices of investing and trading and who learn the effective strategies that have been shown in the past to produce positive results, the goals of financial security become realistically more achievable. By following sound rules and guidelines that can be taught in a stock market course, the chances of success are greatly enhanced. It takes knowledge and skill together with experience to be able to become a successful investor.

Many of the greatest and most successful investors and traders have started with small investments in the beginning. They have had to learn those very same basic guidelines and investment techniques, most of which been in existence and known about for a very long time. It would be wise to emulate their approach.

The stock market is an unforgiving place when it comes to mistakes and always results in a loss of money. Poor execution and a lack of understanding of how to manage risk, among other things, is a frequent cause of loss for newcomers to the stock market. Learn how to invest because without sufficient basic knowledge of the stock market and through ignorance of general guidelines, the best that can be expected is a mediocre result. In the words of the master stock investor, Warren Buffett, “Risk comes from not knowing what you are doing.”

It is commendable to want to own stocks and does not require a professional education or background. To acquire an understanding of stock market basics to a sufficient level to be able to begin to actively participate in the stock market, with real money at risk, some type of formal stock market training would be of value. Information and guidance is available, it is smart to seek it out before entering the fascinating world of the stock market.

The objective is to learn:

1. How to pick winning stocks for investment or trading,
2. When to buy them
3. When to sell them
4. How to manage risk to avoid big losses

While it is not necessary to become an expert in every facet of the stock market to achieve those objectives, it important to understand enough about a wide range of topics and how they might affect trading decisions and preservation of assets.

Through a course of stock market training, you should learn, among other things, about risk management and capital preservation, strategies and trading plans, the goals of different trading and investment approaches, fundamental and technical analysis, stock charts and their interpretation, market timing, watch lists, allocation of funds and financial planning, where to obtain data both current and historical, and so on.

Free training

There are free training and education programs and there is training that has to be paid for. With free information it is appropriate to be looking into several sources to learn everything possible about the subject and thereby slowly absorb enough background information to appreciate the most important aspects of investing and trading. A search of the internet yields many such free resources.

Stockbrokers and Virtual Trading accounts

Most stock brokers provide some education free of charge to their clients and one very useful learning device that many brokers offer is a Virtual Trading Account funded with pretend money of 5 or 10 thousand dollars, where you can put your new found knowledge to work without having to use real money to invest. That can be an eye opener!

Training for a fee

There are the stock market training courses that require payment ranging in price from a few hundred dollars to several thousands of dollars with the more expensive courses perhaps more suited to those who have already acquired some basic stock market training but then need more training to operate at a higher level.

There are some that also, as you learn, provide live examples to actually trade with pretend or real money. A concern for many is whether the educators have a successful trading background or whether their own expertise is academic rather than practical from having engaged in the effort to achieve financial gains from operating in the stock market.

Some major sites for your daily information, be sure to check these out and decide which you prefer and there are many others, these are just a few.

http://finance.yahoo.com/

http://www.marketwatch.com/

http://tearsheet.marketwatch.com/hp/tigger.asp

http://www.forbes.com/finance/investingideas/

http://stockcharts.com/

If you are an independent investor contemplating an entry into the stock market arena, whether you decide to enroll in a formal stock market training course or not, it essential to keep learning about what to do and what not to do. As you begin to become familiar with and gain an understanding of the various investment topics it will lead you to your own path of discovery and learning that suits your personal preferences. And I suggest reading  books  mentioned at Read to Learn.

If you are a newcomer to the investing and trading scene, wishing to learn the stock market basics, it is essential to read the books, magazines, and newspapers articles that report the important events of the times and provide explanations that can help you understand the way the market works. Information drives the market.

While I don’t like the put-down “For Dummies” titles, the well known “For Dummies” series of books do provide the information the beginner is looking for, they are easy to read and informative, covering only the essential basics but you have to start somewhere to build an inventory of knowledge and they are reasonably well written.

Of the several available titles, the most appropriate relating to stock market basics are the three titles: Investing for Dummies, Stock Investing for Dummies, and Investing Online for Dummies.

A fourth one could be Bond Investing for Dummies, but the point is to gain as much knowledge as possible and any of these books provide the reader with a foundation on which to add more sophisticated knowledge at a later date. They retail new for between $20 and $25, and through Amazon are discounted as usual. They are also available in an audio version.

Take the next step in a reading program if you wish to become active in the stock market

I have mentioned elsewhere that the most important books to read, in my opinion, are those written by William J. O’Neil, such as The Successful Investor, How to Make Money in Stocks, and 24 Essential Lessons for Investment Success.

These have all been written in the last few years and are sufficiently up to date for anyone wishing to engage in a self directed approach to stock market investing and trading. The O’Neil books provide complete explanations and strategies to follow, are well illustrated and introduce the fundamental guidelines that can lead to a successful stock market participation.

CANSLIM and Investor’s Business Daily

The books also outline a winning system called CANSLIM, originated by William O’Neil, that is well worth learning about. More than an author, O’Neil is a successful trader, investor, and entrepreneur and is also the founder of Investor’s Business Daily – another must read source for reference and knowledge-building for the beginner in the stock market.

In addition to the Stock Market for Dummies books, tens of thousands of others have been published on topics relating to investing, so just check out any decent book store where there should be at least a few to meet the requirement of learning the stock market basics.

And a couple more:

I recommend especially Jim Cramer’s books, Real Money and Mad Money. Jim Cramer has his detractors, lots of them, he’s controversial and arouses mixed emotions but he has proved himself as a highly success trader and is full of good stories, he has been there and done it all and knows how to tell about it. The Stock Market for Dummies books have to be read to get the basic information about the stock market and how it works, so don’t neglect reading them, but the Cramer books are much more entertaining and easier to understand and appreciate once you have been active in the market and gained some personal experience.

Gather and learn as much information about the stock market as you possibly can. There are a lot of books that are anecdotal and may not contribute much to your education and enlightenment but they can be entertaining if you have time to read them. There are many books of interest on great events and personalities of the past and of the present, Bernard Baruch and Warren Buffet come to mind for those. The local public library will probably have a few good books available including possibly some of those mentioned above, it’s worth a visit to where you can just browse in comfort while you audition the books. The large booksellers such as Barnes and Noble also provide a comfortable atmosphere to do the same.

To learn even the basics about the stock market requires a substantial intellectual effort to read widely and observe what happens in the stock market on a daily basis. The stock market is complex, demanding and unforgiving to those who do not adopt strategies to protect and limit themselves against risk as they seek to make their fortune.

Our objective here is to list some of the topics that need to be learned about in order to gain an understanding of what factors influence the price of stocks. We must also identify some of the tools and techniques used to attempt to forecast price changes in such stocks, both up and down.

As a concept, the stock market encompasses a wide range of subject matter dealing with many aspects of economic activity world-wide but for our purposes we are primarily interested in the mechanics and techniques of investing and trading.

Investing and trading, same objectives but different approaches

Both investing and trading in the stock market have the same general objective, to grow wealth and increase individual or corporate net worth. But the methods to achieve that goal are not the same, the most often cited differences being that the investors tend to focus on the growth and earnings potential and increasing value of companies over a relatively long period of time, often referred to as a “buy and hold” strategy, whereas the trader adopts a much shorter time horizon in which the possibility exists of capturing many short term episodes of price changes that are created by fluctuating supply and demand that can occur for many different reasons, some not directly caused by any long-term changes in the prospects of a company.

Some of what you need to learn about:

• · Sources of information about investing and trading
• · Stock Charts and the interpretation of chart patterns
• · How to pick stocks that will likely be winners
• · The 5 basic rules of trading, there are many more than 5 but these are good for a start
• · Technical and Fundamental Analysis
• · Knowing when to buy and when to sell a stock
• · Using and setting stops
• · Virtual Trading
• · Strategies to follow
• · Strategies to avoid

Explanations of most of the above are covered in the following Sources of Information references:

Sources of Information

Books, newspapers, and magazines that deal primarily with the stock market are readily available to purchase or to borrow at public libraries. Newspapers and magazines include The Wall Street Journal, Investor’s Business Daily, Barron’s, Kipplinger’s, Money, Forbes, etc.

In most parts of North America, television shows, such as CNBC, provide extensive and continuous coverage of what is happening in the market as it happens in real time. Although many seasoned investors criticize such programs, the interested watcher can learn a lot and become familiar with a wide range of investment and trading topics and terminology and the lore and history of the market.

My recommendation is to watch especially the programs after the close of trading each day where a panel of experienced traders discusses current action in just about everything in the stock market. In watching programs such as Fast Money, Mad Money, and the Kudlow report, the newcomer to the stock market is exposed to a wide range of terminology and exchanges of views that some of it should become. Important financial personalities are frequently interviewed and consulted on those programs.

The most important lessons can be learned here:

If you are willing to put some time into reading, my own opinion is that there is no better source of information and advice than that of any of the Investment Success books by William J. O’Neil, these three for instance: The Successful Investor, How to Make Money in Stocks, 24 Lessons for Investment Success. Read these books, then re-read them, and if necessary read them again. They are in large format quality paperback editions, well illustrated with charts and diagrams, and written in language that everyone can understand. Written in the last few years, they are up to date enough in their content and coverage to be relevant to today’s market.

William J. O’Neil is not just an author but is a successful investor and trader and is the originator of a great winning system called CANSLIM, fully explained in How to Make Money in Stocks. In addition to the books, O’Neil is the founder and publisher of Investor’s Business Daily a financial newspaper published five days a week together with an online edition. And there is much more.

Jim Cramer and Mad Money

It is not a bad idea to try to emulate those who are known to be successful. Another person worth paying attention to, noted for his bombastic style and his occasional contradictory statements, is Jim Cramer who has a TV show called Mad Money. Cramer is a controversial commentator, sometimes criticized and scoffed at, but a lot can be learned from him if proper attention is paid. And it should be acknowledged that he is an ultra successful investor himself, having acquired a trading fortune of many tens of millions of dollars early in his financial career started when still a law student at Harvard. I recommend his books and suggest Jim Cramer’s Mad Money published 2006 by Simon & Schuster.

Virtual Trading Accounts

Also, stock brokers usually have good information and courses for those wishing to learn stock market basics and most offer a paper trading or virtual trading capability, an account funded by five or ten thousand imaginary dollars with which you can practice trading following exactly the same rules as for trading in reality.