There is a popular saying among rich people and that it isn’t about the money they make but it’s more about the money they keep. This is actually profound advice if you consider that so many people invest in the stock market hoping for fast money without any savings to their name. Having money in the bank will definitely help in influencing you NOT to sell in rough times.

When people are investing, they should think about investing for the future with long-term stock picks. This is for a few reasons. Hopefully, you’re able to spot some growth stock picks that will be worth more in the future and it takes time for a company to build. Given the time you need to wait, they should be selling at a value price.

Other reasons to invest in the long term include just not triggering so many commission fees with buying and selling transactions like a lot of traders do. This eats away at your initial investment and like stated above, being rich is about the money you get to keep. While day trading might seem glamorous and there’s no doubt that you can make a lot of money fast, you can also lose it as quickly as the money came in.

One of the rules of investing from the famed investor Warren Buffett is to never lose your money. And given his track record of being a billionaire stock picker, who can argue with him? It takes discipline not to invest in losers and that is why Buffett is known to hold billions of dollars in cash. Going in and out of trades and being forced to make decisions when you don’t have money is not a good way to invest. If you want to be rich investing, you need to your money to pounce on opportunities when they do come along.

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… or Shorting Stocks For Dummies (Because they don’t have a book out for it yet)

If you’re a beginner investing in the stock market and trading stocks, there’s probably many terms and phrases that you’re not familiar with.  One of the many terms that you’ve heard by now is “shorting stocks“. The idea behind it is that an investor expects a company’s stock to go down in value and he/she will invest in it accordingly.

Typically when you buy shares of a company, you buy at a low price and then sell it at a higher price than what you paid. In shorting a stock you “borrow the share from a broker and sell them at a certain price and at a later time, you buy those those shares at a lower price to return to the broker. Of course, there is more to it that just this simple explanation of the process.

1. Risk – There is more risk involved in shorting a stock then there is in buying a stock to go up (long) in value. If you borrow a stock while it’s trading at $20 and it runs up to $100, then you’re out $80 a share. Unlike when you “go long”, you can only lose $20 a share as it falls to $0.

2. Locating A Stock – In the past year there has been a law passed that prevents someone from borrowing stock if you can not locate any available shares. In recent years, a trader would borrow shares that no one had and wait for the price to drop to buy the covering shares, but how can he buy them if no one had any? In this case it was referred to “naked shorts”.

3. Outstanding Short Position – The number of shares of a company held short, it is measured in absolute numbers, and/or a percentage of the float of the stock. Usually if the position is more than 10%-20% of a company’s total shares, it means that the bad news has already been factored into the stock’s price. If you find a company with a large short position, you need to avoid it all together.

4. – Margin Account – To be allowed to short stocks you will need to open what is referred to as a margin account. A margin account is where the funds will come from for you to borrow the stock. Take into consideration that you will be charged from your broker a “broker loan rate” (fee) based on the price of the stock. Also you will not get any interest on the margin account or have it rolled over into a money market account on the funds not being used.

5. Liquidity – Just like I said about an outstanding short position, if a company has too many share outstanding (liquidity) you need to avoid the stock. A stock that is not highly liquid should not be shorted. In this case you may find yourself stuck in the stock where you may not be able quickly liquidate your position.

In a future post, I’ll discuss more stock shorting tips for you.

Here is part two of 10 Things To Know About Shorting Stocks.

Reader Question:
To our readers who invest in the stock market, what’s your advice for beginners who want to to learn how to short stocks?

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Chasing a stock is a common mistake you need to be aware of, or your portfolio will take a beaten. This is when a stock had some good news come out and you missed the information when it was first released. In other words, the stock price made some good gains and you didn’t take advantage of the situation. I’ve seen stocks jump in value by over 30% and watch other traders try to guess at if the price would come back down temporarily so they could jump in. As the price goes up, they try to stay near the low end of the trading range, hoping for the pull-back. When the pull-back does come, it comes in the from of profit-taking from other trader and investors that got in on the initial news.

This can also take place over a period of a couple of days where the stock price jumps as much as 100% or better, only to have it come back down to levels of the original price before the move up.

Just because the stock price has moved up in a relative short period, doesn’t mean you should jump in for a quick gain. The traders that do that are very experienced in investing and this practice should be left for them to do. Any stock that you are planning to get into should be one that you’ve researched. You should be very familiar with it’s balance sheets, as well as other financial information in regards to the company. If not, take some time to check out a stock market site for information. You can never do enough research.

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The best way to do that of course is to start as soon as you can. Many people who are within ten to fifteen years away from retirement are trying to catch up to make sure that they have the money needed for their retirement years. Why is that? It’s because twenty years ago pension were becoming a thing of the past and the 401K plans were starting to make a name for themselves as the way to prepare for retirement. Unfortunately many people didn’t think that taking a portion of their money to put in a fund and not being able to touch until they were 59-1/2 years old made any sense. A bunch of twenty-something year old adults had what they thought were better ideas.

Looking back, they now realize that it was a big mistake not to take charge of their future and are now trying to put the maximum amount allowable by law in their 401K plans to prepare for what’s to come. Many even started to invest on their own, with money that they put in a discretionary account to increase their income by doing what is referred to as day-trading.

I was one of the many that didn’t think about retirement until I was in my thirties.

When I finally started to put money in a 401K plan, the stock market wasn’t doing so good. The dot-com era was just imploding and many investors were taking a big hit to their portfolio. Of course the stock market recovered, but the damage was done. Many of the day-traders never even bothered to come back after the devastating blow that was dealt to them.

Almost ten years later we face the same damage to the stock market that happened before (and most likely will happen again at some point in time). I’m sure that your retirement account has taken a beaten and you’re wondering if you should continue to invest in the stock market. I feel that these corrections to the stock market will happen every so many years and you need to be prepared to see the warning signs of the impending doom that will come. The only way that you can be prepared for the future is to start working on it now, in the present.

This site is designed to help and guide you in making your future more secure and if you play your cards right you may even be able to start retirement a couple of years earlier. We’ll openly share what worked, and didn’t work for us and we’ll review and recommend various programs and books that might be helpful to you.

If you have any questions on what we talk about here, please post in the comment section of any article and we’ll do our best to help you.

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