The stock market can be broken down into sectors based on the types of stocks for sale, such as blue chip stocks, industrial stocks, technology stocks, or financial stocks. The financial sector is a popular area for investment, but as with all stock market investments, and indeed all of life, it is important to know what your are buying before you buy it. What that means for you is that you need to research the companies that you are interested in. All companies in the United States are required to send financial information to the Securities and Exchange Commission (SEC), which posts this information on its web site. By looking through the financial filings of companies, you find out a lot about them. Some things to look at are: how much the company owes, how much it makes per year, and how much it has paid out to investors in the past in the form of dividends. You can find out more about what to look for in these financial filings by going to your local library and checking out any book on the stock market.

There’s more to the stock market than just this, however. One thing that is hammered into the heads of all business school graduates is this: diversify, diversify, diversify. Think about it: if all of your money is tied up in one company, and that company goes belly-up, you have no hope. But if you have spread out your investments over many different companies in differnet sectors then you may only take only a small loss. Something else to watch out for is becoming too attached to your stocks. You should never put your emotions into your trades. Doing so will most likely cause you to not think clearly when trouble starts and the stock price falls. It’s better to take a small loss now than to wait until that “favorite” company is selling for pennies per share. There is much more to playing the stock market than just this, of course, but if you follow these few simple tricks, you’ll be well on your way to success.

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It’s no different than a child who is growing up and learning about life. When you are new to something, it’s expected that you will make mistakes. The important thing about it is that you learn from those mistakes and move forward. One quote that I keep in mind every time I trade stocks is “Knowledge Is Power”. Knowledge is one thing that no one can take away from you. Once you know it, it’s a tool to be used again and again,  throughout your life.

What you do after you’ve made a mistake is just as important as learning from that mistake.

Let me tell you about my very first trade. I was trying to place an order with TD Ameritrade for 1000 share of a beverage company that had a earnings report coming out the following day. After I clicked on the confirm button, I waited for the transaction to go though. About a minute later the screen change and informed me that my order “timed out”. I didn’t know what had happened. My mentor and I decided that I should place the order again. I went through the steps again and wait for the confirmation, but again the order “timed out”. I went to my portfolio page and according to the page,  my balance was zero. Needless to say I went ahead and for the third time, placed the order, only to have it time out one more time.

My first mistake was that I didn’t call the customer service number to check out what the status was after the first attempt. The second mistake was not to call customer service when it happened again.

One would think that after three attempts to place the order, I would have wised up and called. Yes, you would think that but I proceeded to do it again for the fourth time. When it timed out on that attempt, I finally called to find out what had happened.

The customer service representative informed me that each time that I placed the order it was filled. So now I was the proud owner of 4000 shares of a company that was to be a speculative play. I had 50% of my portfolio money tied up in a stock that if it had a bad earnings report, I could be hit hard since the report wasn’t due to come out until after the close of the day.

The next day I watched the streamer all day long, waiting to see the action throughout the day.

At 3:50pm, ten minutes before the close of the trading day I was up $1 per share. If you do the math, I was up $4000 dollars. I had a bad feeling though and considered dumping the shares and call it a good day, but I didn’t do that.Another mistake. I didn’t listen to my gut instinct. Instead I listened to the advice of my mentor and made the decision to ride it out.

Do I really need to tell you what happened to me in the next 17 hours while I waited for the stock market to open up?

The report came out at 4:05pm and the company missed the street’s (Wall Street analysts) estimates by $0.04. Not only that,  they also stated that their guidance for the next quarter was grim. I watched as the stock price dropped down to my cost basis and continued to go south from there. By the time I was able to sell out of my position, I had lost $12,000.

That was the most expensive lesson I have learned up to this day. I realized that not only did I make one mistake, I made five in in a twenty-six hour period involving the same stock. The reason that I say the “lesson I have learned” is because I’ve never made any of those mistakes again. It’s been years since that trade, but it’s the one I will always remember.

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Earnings reports are quarterly releases that a company will put out to their shareholders to inform them of their progress over a period of time. The period of time is three months (henceforth, quarterly) where the company did business and either made or lost money during that time.
Along with them reporting their past three month performance, they also give guidance to where they believe the company is going.

Wall street analysts who follow the company will put together their estimates as to what they think the company will announce in regards to their earnings. They look at the company’s past report to see if their estimations were correct and also take into consideration what the economy is currently doing. They look at if the company has had a new product come out during that time and how well that product is moving. They will also look at the company’s competitors to see if they are taking business away from them.

After all the information is put together, they release their estimate on what the earning per sharewill be for the company. If the company’s report is in-line with the estimate, it’s looked upon as a good thing providing that the guidance for their next quarter is a favorable one. The company can also, what Wall street refers to as “miss” their earnings report, which means that they made less than what the analyst predicted. When that happens Wall street will look unfavorable towards that and you will see the price of the stock drop and in some cases drop a large amount. If the company “beats” the estimate and gives a great guidance report as well, you will see the price per share jump by a big percentage gain.

This is where you can make some big money within your portfolio.

In the fall of 2007 a company by the name of Research In Motion (NASDAQ:RIMM) was about to release their earnings report. If you’re not familiar with the company, they are the manufacturer of the BlackBerry cell phones. I was following the company for a few months already and knew the the report would be a great one. The company didn’t miss their last four earnings report and their phones were selling like crazy during the summer months.

I went ahead and bought 200 shares of the RIMM stock a couple of days earlier when the priced dropped for just a day and waited for the report. When the report was released, it not only gave a great earnings, but also stated that it would exceed their previous predictions for the next quarter. In that day alone the stock went up $12 per share and continued for to climb for the next two days.

The reason I shared this story with you isn’t to show off, but to let you in on the different ways to make money in the stock market. Like I stated in the beginning of this post, there can be some costly mistakes as well and I’ve lost thousands of dollars in some of my other earnings report plays. The only way that I feel comfortable with trading on the results of earnings reports is during a bull market. My advice is always to do your research and due diligence on every company that you want to invest in.

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There are many words and terms used that you may be unfamiliar with. Here are the meanings of some

This post will cover many of the words and terms that are used when trading stocks. These are only a few but I’ll cover more in upcoming posts.

Cost Basis:
Cost basis is referring to what you pay for the stock. If you were to buy 100 shares at $30 per share then your cost basis would be $30. Now if you go ahead and by another 100 shares as the price drops to $25 per share, your new cost basis would be $27.50 per share (100 X $30)+(100 X $27.50)=$5750.00/200 = $27.50

Incrementally:
When you start to build a position in a particular company, you don’t go ahead and buy all your shares at once. Stock prices rise and fall and the time and if you purchase all your share at on price then the value falls you either have to sell at a loss or hold until the price comes back up in value. Buying incrementally will also help you lower your cost basis.

Diversification:
As you build your portfolio you need to keep in mind that you can’t just buy stocks in one sector. If you were to buy stocks in three companies and all of them were in the energy sector, you would lose a lot of your capital (cash) on a day that the sector took a big loss because the price of oil dropped. The idea is to not put all your eggs (investments) in one basket. What you need to do is have your investments spread out over different sectors. You also need to be aware what sectors effect other sectors (more of that in another post).

Fundamentals:
When researching any stock you need to look at what is referred to as fundamentals. It’s basically the financial information that can be found in a company’s earnings report or annual statements. An earnings report is information that the company puts out quarterly to inform their shareholders of the condition of the company as well as any future guidance.

Long/Short:
At times you will hear a stock analyst state they “long a stock” or “short a stock”. When they refer to “long”, they mean that they are invested in that particular stock for it to go up in value. If they state that they “short” a stock, they expect the company’s stock will go down in value because of one of numerous reason and they’re investing in it to go down in value.

Dividends:
Some companies will give their shareholders a cash payment. This is usually done on a quarterly basis and is given to shareholders that are listed on record at the time of payment.

Yield:
The yield is calculated by figuring the annual dividend divided by the stock price. The yield is referred to in percentage terms such as 5%.

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