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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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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