Basic Financial Investing

Trading Stocks – Basic Investment Guide

Trading stocks involves two basic decision areas: stock selection and timing. In other words, what stocks to trade and when to pull the trigger. For those of you who are not veteran traders, here’s a basic investment guide to simplify stock selection for you.

Trading stocks is risky enough without adding an extra element of risk to the mix. I’ll refer to this extra element as specific risk. Let me give you an example of specific risk, and why I try to avoid it.

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The stock market has been volatile and financial stocks are the center of attention. After being pounded for a few days, you expect them to rebound. JKLFinancial has been especially weak for no obvious reason. It’s early in the trading day when a news alert hits the market…good economic data. You jump on JKL. Sure enough the stock market soars on the good news, lead by financial stocks. JKL takes a dive. After taking your loss like a man, it comes to your attention that JKL’s accounting practices were in question, and the news went public.

Few things ruin the trader’s day more than lost opportunity. In this case it was a matter of good timing…bad stock selection. In trading stocks I’ve given up on finding the best stock to trade, and have in effect eliminated specific risk. I now trade stocks called ETF’s. Here’s a basic investment guide for those of you new to trading stocks who want to simplify your trading life.

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ETF’s (exchange traded funds) trade as stocks on the major exchanges. The popular stock ETF’s are index funds that tracka stock index. Trading these vs. individual stocks like JKL Financial has its advantages. This brief investmentguide highlights the ETF advantage.

You can avoid specific risk by trading the major-index stock ETF’s. For example, (SPY) tracks the S&P 500 Index. If the stock marketis up asmeasured by the S&P 500, (SPY) should follow suit.

Traders can focus ona sector or industry group of stocks by buy and sellinga single stock. For example, instead of picking JKL Financial, you could have traded (XLF) which tracksan indexof major financial stocks. In which case you’d have made money and not lost it.

You can trade and profit from price increases in hard assets or commodities like real estate, basicmaterials, oil, and gold by simply trading the appropriare stock ETF.

Stocktraders can golongorshort (bet up or down) with one simple buy transaction in their brokerage account. Ifyou want to bet that stocks will fall, you simply buy ashort ETF.

StockETF’s can be bought on margin, like other stocks can if you want some leverage.

If you want to double or triple your profit potential and risk, you can do this simply bytrading leveraged ETF’s. For example, (UYG) gives you double the action in financial stocks, and (FAS) gives you 3X the action.

Author: James Leitz

A retired financial planner, James Leitz has an MBA (finance) and 35 years of investing experience. For 20 years he advised individual investors, working directly with them helping them to reach their financial goals.

Jim is the author of a complete investor guide, Invest Informed, designed for average investors or would-be investors of all levels of financial background and experience. To learn more about investments and investing and his new financial guide go to http://www.investinformed.com

Article Source: http://EzineArticles.com/?expert=James_Leitz

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