How to read stock charts for dummies and beginners

Posted on May 16, 2012 by admin| Leave a comment

Once you have started investing in the stock market then the most common thing really that you will keep seeing everywhere is the stock charts and graphs that are put out by CNBC or even on Google finance or Yahoo Finance.

Let us see how the stock chart looks like and then I can explain what are the basic types of charts and also some other complex types of charts which are used extensively in the technical analysis though these are not used in the basic fundamental analysis of the stock. You can use these charts for seeing if there are major things going on in the stock.

Here are the basic types of charts that are there

Bar chart – Bar chart primarily charts graphs the price movement over a period of time mostly in the form that it will be plotted the price movement on a daily basis with the starting and the closing prices. It is also known as OHLC chart which means that is Open High Low Close chart.

The chart will list the open, close, low and high price on a straight-line and based on that we can see which days the stock closed higher or lower.

Line Chart – The line chart is created as and when the prices are put as points across a period of time and then joined by line. You can see the line going in a particular direction. This is simple and easy to track as this will tell very easily that what way the price is going. Now there are a lot of trends that can be read from these charts which will be dealt with later in detail by me . These are the MACD or the 20 day moving average and the 50 day moving average.

You can also plot the support and the resistance levels for the stocks.

Candlestick chart – This chart originated about 300 years ago and when the Japanese traders used this to plot the price of rice. It has two wicks above and below the main body and it indicates the open high low and close prices in a certain manner. You can read more candlestick patterns in my previous article.

I have listed the basic types of charts but the main point is how do you read those and draw some benefit from these charts.

Resistance levels – The trend in the price will suggest as to what is the price that the stock cannot across. You can check historically also and otherwise looking at the recent price movements say last six months and you will see a lot of selling happening at that point and the no buyers which will mean a resistance level there.

Support level – This level indicates that there are going to buyers at this price and also most likely the sellers will stop selling beyond this point. So as the name indicates it is the support that the stock has at that level of price.

Trends – The trend line is drawn using the two or more lows. If you draw a line supporting the two lows then you can see a trend and that is known as uptrend.

The opposite of that is the downtrend which is also drawn by using the resistance levels of the two highs in a period. That way you can predict is the price is now in a downtrend.

Averages – The 50 day moving average and the 200 day average are the common ones. The 50 day average is definitely more easily interpreted to tell you how the trend is going on the price front.

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Should you open a money market IRA account at Vanguard or Fidelity ?

Posted on May 16, 2012 by admin| Leave a comment

 Let me first tell about the IRA and then we can go over the reasons why you should or should not be opening a money market IRA account at the big two or even the big three. I used to be a big fan of money market funds but that was for a different reason. The main aim nowadays for me is to build the retirement corpus and that will mean that I will part my money in something that will yield me good amount of returns.

IRA is merely a holding instrument where you can put the money in to retrieve it later at retirement. Now that said, with the money in IRA account you can invest in stocks, mutual funds, ETF’s, bonds, money market and high interest CD’s.

Why invest in money market IRA

Now there is only  one reason I see why you should be keeping your money in the money market IRA account and that is if you want to just save your principle amount and really do not care about whether you earn some interest on that or not. The reason I say that is because on the money market fund you may get a yield which is far below even the online CD’s or the high yield savings account. Note tat on ETF and mutual funds you can earn definitely much better than paltry 2-3% over a longer period. I am talking about returns greater than 7-8%. And IRA is an instrument on which you just cannot withdraw the money before 591/2. That is definitely long term.

Let us look at the difference in the amount of money that you will earn

Assuming you are at age 25 and you start with and 400 dollars a month in your Roth IRA and invest that in a money market mutual fund and that yields 3% annually. So at the end of 60 year you would have earned $ 298,924.53.

In stark contrast you can very easily put money in a index fund and you will earn about $ 893,290.31.  I have assumed that this index fund will earn you 8%.

The difference in the money is massive approx $600000. Not sure why anyone would want to lose that apart from the only fact that they will feel safe that the initial basic amount is still there safe in the money market fund.

Even that is myth given the fact that money market funds are not FDIC insured.

So if you have to get the safety and liquidity then go for ING direct online high yield savings account. They are safe and secure and FDIC insured plus liquid.

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Stock market definitions for dummies and beginners

Posted on May 16, 2012 by admin| Leave a comment

If you are starting new or you are teaching your kids then here are some of the basic stuff that you need to know before you take a plunge into the stock market.

Some basic terminology that is needed

Stock – This is the basic unit which you hold as proof that you have small share in the company. The more number of stocks that you hold the higher your ownership in the company goes. The stock is what is traded on the stock exchanges.

Stock market – The market where you can purchase or sell stocks is known as the stock market. In today’s world it means all sorts buying and selling including index funds and stocks and ETF’s and any other trade-able instruments

Stock Exchange – It is the exact marketplace where you can buy or sell shares or stocks in a variety of companies. Each company who wants to sell their shares to the public must list here so that public that is holding the stocks can trade here. In this marketplace the buyers and the sellers come at a common place and place their bids.

Dow Jones Industrial average – this is the weighted average price of the most commonly traded top 30 stocks on the exchange, Typically these are the best blue chips available in the exchange.

Let us now examine a few terms that will help you understand the stock market better and the trading better

Book value – this is the actual value of the stock in the books of the company. Which means the assets minus the liabilities and the common stock value on the books. Note that this may not be the price the share is being traded. The share will be traded at a value higher than that if the market thinks that shares will be worth more later based on profit projections etc.

Blue chip – This is the company which are most respected on the stock exchange and is based on years and years or good financial performance and the management performance.

Bear market – This is the term that is used by traders when there is overall selling in the market and there are a few buyers in the market. It is typically a mass selling that will happen when the market is in the grip of bears.

Bull market – This is a market situation when there a mass buying of shares and there a few sellers. This will happen as there will be less supply of shares and the demand will be more. That is typically a very good thing as that means you will make money in the stock market.

Broker – A broker is someone who will help you buy and sell stocks. That means that you cannot biuy or sell the shares by yourself on the exchange. Typically you will have to go via a broker. The broker will charge a commission or a fee and he will then sell or buy stocks from you.

Market capitalization – This is something that you will keep hearing a lot in the news. This is arrived by multiplying the stock price with the number oif outstanding shares in the market i.e the exchange. It tells how big the market value of the company should someone were to buy this company.

Price to Earnings ratio or p/e ratio – Now this is something which is definitely asked by a lot of people and it is the most important ratio used by analyst to see what price will be there given that you know the average ratio and the earnings. It is arrived by dividing the price by the earnings of the company.

S&P 500 – This is the weighted index which is much broader than the Dow 30 mentioned above. It tracks the price of the shares of 500 largest US corporations.

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