Checking Out the Income Statement

Checking Out the Income Statement

The income statement is where a company periodically reports its revenues,
costs, and net earnings or profit. It’s basically a snapshot of how much a
company is earning from its operations and any extraordinary earnings that
may have impacted its bottom line during a specific period of time. From the
income statement, you’ll be able to determine the impact of taxes, interest,
and depreciation on a company’s earnings and to forecast earnings potential.
Every income statement has three key sections: revenue, expenses, and
income. The revenue section includes all money taken into the company by
selling its products or services minus any costs directly related to the sale
of those products or services (called cost of goods sold). The expenses
section includes all operating expenses for the company not directly related
to sales, as well as expenses for depreciation (writing off the use of equipment
and buildings — tangible assets), amortization (writing off the use of patents,
copyrights, and other intellectual property or intangible assets such as
goodwill), taxes, and interest.


The income section includes various calculations of income. Usually you’ll
find one calculation that shows income after operating expenses and before
interest, taxes, depreciation, and amortization, called EBITDA. This will be
followed by net income, which is the bottom line showing how much a
company earned after all its costs and expenses were deducted. Public
companies must file financial reports with the OSC and the SEC on a quarterly
and annual basis. You can read any public company’s financial reports at Canada’s System for Electronic Document Analysis and Retrieval (SEDAR)
(www.sedar.com) and at the EDGAR Web site (www.sec.gov/edgar.
shtml) for American issuers.

A year’s worth of figures won’t show you much, so you need to look at the
trends throughout a number of years to be able to forecast growth potential
or assess how well a company is doing compared with its competitors. We
discuss a number of good sources for finding fundamental information in



Both quarterly and annual reports are important. Comparing a company’s
results on a quarter-to-quarter basis gives the trader an idea of how well the
company is meeting analysts’ expectations as well as the company’s projections.
Also, looking at, for example, results for the first quarter of 2008 versus the
first quarter of 2009 you can see whether a company’s earnings are increasing
or decreasing in a similar market environment. While for some types of
companies the first quarter is generally productive, other types of companies,
such as retail stores, are dependent mostly on fourth-quarter holiday results,
so you need to know what is expected in earnings for the various quarters.
Quarterly results allow you to monitor results from similar time periods.
Annual statements give you a summary for the year. You can also compare
current-year results to the results over a number of years to see at what rate
the company is growing.

Revenues

The first line of any income statement includes the company’s sales revenues.
This number reflects all the sales that have been generated by the company
before any costs are subtracted. Rather than go to all the trouble of showing
their math — gross sales — any sales discounts, adjustments for returns, or
other allowances = net sales. Most companies show only net sales on their
income statements. From these figures, you want to see obvious signs of
steady growth in revenues. A decrease in revenues from year to year is a
red flag that indicates problems — it’s probably not a good potential trading
choice unless you’re considering shorting the stock.

Market Behaviour : Business activity

Market Behaviour : Business activity

A number of key economic indicators can give you a good idea of what business
is doing and how that information may impact the stock markets. Key
business indicators to watch include:-


✓ The Ivey Purchasing Managers Index: This index, sponsored by the
Richard Ivey School of Business (University of Western Ontario) and the
Purchasing Management Association of Canada (PMAC), shows monthto-
month variation in economic activity.

The Ivey Purchasing Managers Index measures monthly changes in
purchases as indicated by a panel of purchasing managers from across
Canada. The 175 participants have been selected geographically and by
sector to match the Canadian economy as a whole. The index includes
both the public and private sectors. Index panel members indicate
whether activity is higher than, the same as, or lower than the previous
month across five categories: purchases, employment, inventories, supplier
deliveries, and prices. The index is released at 10 a.m. ET on the
third or fourth working day of each month at http://iveypmi.uwo.ca.



✓ The American Purchasing Managers Index (PMI): One of the first economic
indicators released each month is the American Manufacturing
Report on Business, which surveys purchasing managers and provides
reviews of new orders, production, deliveries, and inventories. This
report is released at 10 a.m. ET the first business day of each month
and reflects data compiled from the previous month. You can track this
report online at the Institute for Supply Management www.ism.ws.



✓ Durable Goods Orders: The American Commerce Department releases
another critical economic indicator of business activity in the area of
Durable Goods Orders. This indicator measures the dollar volume of
orders, shipments, and unfilled orders of durable goods, or types of merchandise
that have a life span of three years or more. This report serves
as a leading indicator of manufacturing activity and can move the stock
market, especially when its numbers vary from expectations. You can track
the Durable Goods Orders online at www.census.gov/indicator/www/
m3/index.html.




✓ The Building Permits Survey for Canada: This survey covers 2,400
municipalities representing 95 percent of the population. It provides an
early indication of building activity. In addition to data on the number
and value of building permits issued by Canadian municipalities, this
publication provides information on the average value of dwellings, the
number and value of mobile homes, and permits issued for building
renovation. The value of planned construction activities shown in this
release excludes engineering projects (such as waterworks, sewers, or culverts) and land. The Building Permits Survey is released by Statistics
Canada on the fourth business day of each month at 8:30 a.m. ET and
can be found at www.statcan.gc.ca.



✓ Housing Starts and Building Permits: The American report is another
that’s released by the Commerce Department. It can be a leading indicator
of the direction the economy will take. When the number of permits
rises, a positive economic indicator results. About 25 percent of investment
dollars are plowed into housing starts, and that makes up about 5
percent of the overall economy. The report is broken down by regions —
Northeast, Midwest, South, and West — so you can also get a strong
indication of the strength of the economy on a regional basis. You can
track this indicator online at www.census.gov/const/www/C40/
table2.html.



✓ Manufacturing Surveys: The Canadian Monthly Survey of Manufacturing
covers 21 industry groups that produce goods for both industrial
and consumer use. The manufacturing sector’s activity is monitored
monthly and annually, as it accounts for a large part of Canada’s gross
domestic product. It’s released by Statistics Canada around the 16th of
each month at 8:30 a.m. ET and can be found at www.statcan.gc.ca.
Each Federal Reserve Bank district in the United States compiles data
from regional manufacturing surveys that can help you find a score of
indicators including new orders, production, employment, inventories,
delivery times, prices, and export and import orders. Positive reports
indicate an expanding economy. Negative reports indicate a contracting
economy. The two most closely watched are the Philadelphia survey at
www.phil.frb.org/econ/bos/bosschedule.html and the Chicago
survey at www.chicagofed.org/economic_research_and_data/
cfmmi.cfm. If you’re trading in regional stocks, following the manufacturing
surveys from the Federal Reserve Banks in key regions that
you follow can help you determine the direction of the economy for the
areas most relevant to the stocks you’re trading.

Observing Market Behaviour : Jobless claims

Observing Market Behaviour : Jobless claims

The Labour Force Survey, another report from Statistics Canada (www.
statscan.gc.ca), is one of the most important leading indicators to watch.
This report is the first critical economic indicator released every month
and frequently sets the expectations for the rest of the month’s reports. For
example, signs of a weak labour market reported in the Labour Force Survey
usually are a strong indication of poor retail sales and other possible negative
reports later in the month.

The summary also breaks down data by
industry, such as construction and manufacturing. For example, a significant
drop in employment numbers for the construction sector is a strong sign that
the housing starts report also will be negative.

This report can send shockwaves through the financial markets, especially
if the numbers that are released vary greatly from expectations. Stock prices
often fall whenever the report doesn’t meet expectations or employment statistics
show signs of weakness. On the other hand, stock prices can rise dramatically
whenever the report indicates better than expected numbers. As
is true with any shock to the market, changes in prices are temporary unless
other indicators also exhibit the same trend or tendency.


The employment report can drive markets so strongly because its data are
only a few days old. Because it is so timely, this report is widely recognized as
the best indicator of unemployment and wage pressure. Rising unemployment
can be an early sign of recession, while increased pressure on wages can be an
early sign of inflation. The report also is a broad-based snapshot of the entire
labour market, covering 50,000 Canadian households and every major industry.
Statistics Canada releases the report at 8:30 a.m. ET on the first Friday of
each month with data for the previous month. The two key parts of the
report that traders need to watch are :-

✓ Unemployment and new jobs created
✓ Average weekly hours worked and average earnings
In the United States, the Bureau of Labor Statistics (BLS) (www.bls.gov)
produces the quaintly named Employment Situation Summary.


Another employment indicator traders like to watch is the Employment
Cost Index (ECI). It’s especially relevant during actual times of inflation or
when fear exists that an inflationary period may be imminent. The ECI is a
quarterly survey of employer payrolls that tracks movement in the cost of
labour, including wages, benefits, and bonuses. Wages and benefits make up
75 percent of the index. The BLS surveys more than 3,000 private-sector firms
and 500 local governments in the United States to develop the index. The ECI,
which reports data from the previous quarter, is released on the last business
day in January, April, July, and October.

Observing Market Behaviour : Money supply

Observing Market Behaviour : Money supply

The money supply is a key number to watch, because growth in money
supply can be a leading indicator of inflation in situations when the money
supply is greater than the supply of goods. When more money than goods is
around, prices are likely to rise. Commodities and money traders will want to
keep close watch over these three aggregates — money supply, inflation, and
goods and services.


The Bank of Canada and the Fed track two monetary aggregates: M1 and
M2. M1 includes money used for payments, such as currency in circulation
plus chequing accounts in banks, trust companies, credit unions, and caisses
populaires. The Canadian monetary aggregates can be tracked at www.


bankofcanada.ca (see Weekly Financial Statistics) and at www.statcan.
gc.ca (see Economic and Financial Data). Currency sitting in bank vaults
and bank deposits at the central banks are not part of M1, but instead are
part of the monetary base. M2 includes M1 money plus retail nontransaction
deposits, which is money sitting in retail savings accounts and money market
accounts. You can follow the American money stock measures for M1 and M2
at www.federalreserve.gov/releases/h6/Current. When you total
the money base, M1 and M2, you can track the total amount of money sitting
in someone’s account or circulating in the economy.


The Bank of Canada attempts to manage money growth through short-term
interest rates, or through the reserves provided to deposit-taking institutions.
When short-term rates change, they affect mortgage and lending
rates at banks and credit unions. When interest rates rise, consumers and
businesses pay off existing loans. The result is slow growth of M1+ and
other monetary aggregates. The BoC monitors several indicators to achieve
its inflation target. The growth of M1+ provides useful information on the
future economy and is a leading indicator of the rate of inflation. The Bank
of Canada’s monetary policy supports a level of spending on goods and services
consistent with keeping inflation within its target range. By monitoring
the supply of money and credit, the BoC ensures that total spending in the
economy is consistent with controlling inflation.


The Fed decided in July 2000 that it no longer would set target ranges for growth
rates of the monetary aggregates. In the late 1970s, money supply drove the
Fed’s decision-making process. As money supply grew to what was considered
out of hand, the Fed kept raising interest rates until they were so high that many
believe the Fed’s moves actually caused the recession in the early 1980s. After
that time, managing interest rates became a higher priority than managing
money aggregates. The Fed didn’t kill the idea of target ranges for the money
supply until it was certain that managing interest rates alone would help stem
inflation. Now that the Fed has proved interest-rate management works, it
decided it no longer needed to set a target for monetary aggregates.

Understanding Economic Indicators

Understanding Economic Indicators

The key to knowing where, as a trader, you are during the business cycle
is watching the economic indicators. Every day you open your newspaper,
you see at least one story about how the economy is doing based on various
economic indicators. Popular indicators track employment, money supply,
interest rates, housing starts, housing sales, production levels, purchasing
statistics, consumer confidence, shipping, and many other factors that indicate
how the economy is doing.


Economic indicators are useful to your trading. Some are definitely more
useful than others. We don’t have the space here to describe each of the indicators;
instead, we focus on the ones that can provide you with the most help
in making your trading decisions.

BoC and Fed watch: Understanding how interest rates affect markets

Watching the Governor of the Bank of Canada and the Federal Open Market
Committee (FOMC) of the Federal Reserve (which includes the seven members
of the Board of Governors, the president of the New York Federal
Reserve Bank, and presidents of 4 of the other 11 Federal Reserve Banks) and
tracking what it may or may not do to interest rates is almost a daily spectator
sport in the business press. Although members of the FOMC meet only
eight times per year, discussions about whether the Bank of Canada and the
Federal Reserve will raise or lower interest rates serves as fodder for stories
published on at least a weekly, if not daily, basis. Every time BoC Governor
Mark Carney or Fed Chairman Ben Bernanke speaks, people look for indications
of what the BoC or the Fed may be thinking. Speeches by other members
of the BoC staff or the Fed likewise are carefully dissected between
FOMC meetings. Most press coverage will shortcut all this by saying the BoC
or the Fed may raise or lower interest rates.


The Canadian and U.S. economies tend to move in lock step, so the perception
is for monetary policy in both countries to go in the same direction.
However, that has been less true since late 2000, when the Bank of Canada
established eight pre-set dates per year to announce its key interest rate
policy. This schedule is referred to as the BoC’s fixed announcement dates,
or fixed dates. In setting interest rates, Canada has recently tended to focus
more closely on the inflation rate than the United States, which tends to be
concerned with employment.

Because the Canadian economy is inextricably linked with the U.S., our
manufacturing costs and output are structured around a Canadian dollar
valued at a discount against the U.S. currency. The Canadian dollar is often perceived as a petro-currency by international investors: it fluctuates with oil and gas commodity prices. When the interest rate policy also starts to attract investors to Canada, the effect of a strong loonie is a struggle for our exporters.

Higher interest rates and high energy prices causing a high currency
exchange rate further increase the cost of our exports.
Therefore, Canadian interest rate policy is crafted with an eye to U.S. rate
policy. Canada must be aware of U.S. interest rates in order to stay competitive
with the potential of expanding exports to the United States. So that we
are not totally dependent on our southern neighbour, we undertake regular
trade missions to the growing markets across the Pacific.


The key reason for you to be concerned is that a change in interest rates can
have a major impact on the economy and thus on how you make trades. An
increase in rates is likely to slow down spending, which can lead to an overall
economic slowdown. For the most part, when the BoC or the Fed raises interest
rates, it’s because the board believes the economy is overheated, which
can fuel the risk of inflation. An increase in interest rates can reduce spending
and thus ease overheating. If, on the other hand, the BoC or the Fed fears an
economic downturn or is trying to fuel growth during a recession, the board
frequently decides to cut interest rates to spur spending and growth.


The Bank of Canada’s policies and strategies can be gleaned from its quarterly
Monetary Policy Report. The current economic state of the nation and
implications for inflation are covered at length. The information at www.
bankofcanada.ca dates back to 1995.
Speeches by the BoC Governor and Deputy Governor are also listed at this
informative Web site. The speeches often are made at the press conferences
that accompany the Monetary Policy Report or an opening statement to a
Standing Committee of the Senate or House of Commons.


For the American perspective, you can get a good hint about what the Fed
is thinking by reading the Beige Book, which is a report compiled by the 12
federal reserve banks. Summaries about current economic conditions in
each of the 12 districts are circulated to Federal Reserve Board members two
weeks prior to the FOMC meeting, at which monetary policy, including interest
rates, is set. The summaries are developed through interviews with key
business leaders, economists, market experts, and others familiar with each
individual district. You can read the Beige Book online at www.federal
reserve.gov/FOMC/BeigeBook/2008/. Find out about past FOMC statements
at www.federalreserve.gov/fomc. These links give you access not
only to current issues of the Beige Book and FOMC statements but also to
information from those two sources dating back as far as 1996. They can provide
an excellent overview of economic trends and possible shifts in Federal
Reserve monetary policy.

Market Behaviour : The Basics of the Business Cycle

Market Behaviour : The Basics of the Business Cycle

The old adage “What goes up must come down” is as true for the economy as it is for any physical object. When a business cycle reaches its peak, nothing is wrong in the economic world; businesses and investors are making plenty of money and everyone is happy.

Unfortunately, the economy can’t exist atits peak forever. In the same way that gravity eventually makes a rising objectfall, a revved-up economy eventually reaches its high and begins to tumble.

The peak is only one of the four distinct parts of every business cycle —
peak, recession, trough, and expansion/recovery (see Figure 5-1). Although
none of these parts is designated as the beginning of a business cycle.


hereare the portions of the business cycle that each represents:

✓ Peak: During a peak, the economy is humming along at full speed, with
the gross domestic product (GDP — more about that later in the chapter)
near its maximum output and employment levels near their all-time
highs. Income and prices are increasing, and the risk of inflation is great,
if it hasn’t already set in. Businesses and investors are prospering and
very happy.

✓ Recession/contraction: As the old adage goes, “All good things must
come to an end.” As the economy falls from its peak, employment levels
begin to decline, production and output eventually decline, and wages
and prices level off, but more than likely won’t actually fall unless the
recession is a long one.

✓ Trough: When a recession bottoms out, the economy levels out into
a period called the trough. If this period is prolonged it can become a
depression, which is a severe and prolonged recession. The most recent
depression in North America was in the late 1920s and early 1930s.
Output and employment stagnate, waiting for the next expansion.


✓ Expansion/recovery: After the economy starts growing again, employment
and output pick up. This period of expansion and recovery pulls
the economy off the floor of the trough and points it back toward its
next peak. During this period, employment, production, and output all
see increases, and the economic situation again looks promising.


How do we know which part of the business cycle the economy is in?
Officially, we don’t usually find out until months after that part of the cycle
has either started or ended.

The underlying process of the business cycle is of interest to analysts and
traders. Statistics Canada’s foray into this area has been well received by
analysts over the years. Although no other organization has undertaken the
work, it’s worth noting that Statistics Canada is not providing “official” reference
cycle dates in the sense that the results are beyond dispute or that
StatsCan has a legislated requirement to do so.

In identifying the economy’s ups and downs by determining the cyclical turning
points, StatsCan allows a better understanding for policymakers and traders
alike.


In America, the National Bureau of Economic Research (NBER) officially
declares the peaks and troughs. The NBER is responsible for formally
announcing the ends of peaks and troughs and signalling when a recession
(end of a peak) or expansion (end of a trough) starts. You can see a table
explaining the peaks and troughs since 1857 at www.nber.org/cycles/
cyclesmain.html. The NBER identified December 2007 as the peak of the
most recent economic expansion, but did not make that pronouncement until
December 2008. By the time the peak was declared, the market had been in a
downtrend for 15 months, including the sharp selloff in September 2008.


As you can see, the time lag between events and when the NBER makes its
announcements can be lengthy. But it can get worse. For example, the NBER
declared on November 26, 2001, that the peak of the current business cycle
was reached March 21, 2001. That was eight months later. But then, in January
2004 the NBER revised its position by announcing that the peak may have
actually occurred as early as November 2000. The end of the trough for this
cycle, November 2001, wasn’t announced until July 17, 2003. In other words,
the economy was in a period of expansion/recovery for 20 months before the
NBER made it official.


Unfortunately for all concerned, information that the NBER needs to make its
official announcements isn’t always immediately available. The process of collecting
economic data and revised preliminary estimates of economic activity
takes time. Estimates and data don’t become available immediately after a particular
part of any business cycle ends. As a result, before drawing any conclusions
the NBER must wait until it sees a clear picture of what’s happening with
the economy.

Although many economists identify recessions and expansions
based on at least two quarters (six months) of economic data, NBER uses its
own models. Still, a growth spurt that lasts one full quarter won’t indicate the
start of an expansion; nor will a decline that lasts a quarter indicate the start of
a recession. Bearing that in mind, a time lag of at least six months is typically
required before the NBER even considers declaring a recession or a recovery,
which effectively renders the official announcement useless for traders.


The peak of a business cycle occurs during the last month before some key
economic indicators begin to fall. These indicators include employment,
output, and new housing starts. We talk more about economic indicators and which of them are critical for traders to watch in the “Understanding Economic Indicators” section later in the chapter. However, because neither
a recession nor a recovery can be declared until enough data are accumulated,
finding a way around the time lag in official information is impossible.


Signals that the economy was weakening became clear to the markets as
early as October 2007, when the major indexes hit their peaks. Looking at
an earlier business cycle, you can see the whole process. Just as in October
2007, clear signs the economy was headed toward a recession were seen as
early as the spring of 2000, which is when the Nasdaq index hit its peak and
began its downward spiral. The effects of the recession took a bit longer to
hit the other major exchanges, but they started a downward trend by the
summer of 2000. Just like in 2008, job losses had started mounting by mid-
2000, and many economists already were sending alarms that the economy
was headed into a recession.


Even though the NBER announced the official beginning of that recession as
March 21, 2001, and the official end of the trough and beginning of the recovery
as November 2001, no significant recovery was seen in the markets until
October 2002. Job growth remained anemic as of early 2004. The first sign
of job growth was seen during the fourth quarter of 2003, after nearly three
years of job losses. That economic expansion finally picked up steam, and
ultimately lasted through 2007 .

Selecting a stock Trading Platform

Selecting a stock Trading Platform

You’ll find as many different approaches to trading as you’ll find traders.
Fortunately, almost as many alternatives for setting up your trade environment
also exist.

As technology develops and expands, online brokers are providing increasingly
powerful trading tools for their clients. These tools include market
research, charting capabilities, streaming prices, and news services. If your
broker doesn’t offer a specific service, you probably can find it offered on the
Internet.

When selecting a trading platform, look for the capabilities you need today
with an eye toward future expandability. You may want to consider the features
in the three lists that follow.


Trading tools to look for include the following:

✓ Stock trading
✓ Support of sophisticated option stock trading strategies
✓ Futures trading, especially single-stock and index futures
✓ Nasdaq Level II access
✓ Direct-access trading and ECN book data
✓ Watch lists
✓ Automatic e-mail or text message notification when a stock hits your
price point.


Analysis tools to shop for include these:

✓ Sector analysis
✓ Proprietary and third-party analysts’ reports
✓ News feeds (Dow Jones, Reuters, and so on)
✓ Real-time charting capabilities
✓ Time and volume sales reports


Account management tools you may need include the following:

✓ Real-time account balances
✓ Real-time updates of buying power and margin exposure
✓ Portfolio management tools
✓ Open-order status
✓ Ability to transfer funds electronically to/from your account Before putting your computer to work as a trading platform, you need to understand the two primary techniques for delivering trading tools and services.


The first uses your Internet browser to enter orders and deliver all
information. The other approach uses a stand-alone software program, called
an integrated trading platform, to interact with your discount broker and your
investment account.


The approach that suits you best depends somewhat on your trading style,
cost considerations, and your computer’s configuration. You may find that the
level of service your dealer offers depends on the size of your account or your
trading volume. You have to balance your cost with your actual information
needs.

Integrated trading platforms typically are direct-access systems. We discuss
both direct-access brokers and traditional online brokers in Chapter 3.
Although direct-access systems are offered in browser-based configurations,
active swing traders and day traders may require a completely integrated,
direct-access trading platform.

Online Trading : Understanding Order Types

Online Trading : Understanding Order Types

Buying a stock can be as easy as calling a broker and saying you want to buy
such and such a stock — but you can place an order in a number of other
ways that give you better protections. Most orders are placed as day orders,
but you can choose to place them as good ’til cancelled orders. The four
basic types of orders you can place are market orders, limit orders, stop
orders, and stop-limit orders.


Understanding the language and using it to protect your assets and the way
you trade are critical to your success as a trader. The next few sections
explain the nuances of placing orders so you don’t make a potentially costly
mistake by placing a market order when you intended to place a limit order.
Putting a stop-limit order in place may sound like the safest way to go; however,
doing so may not help you in a rapidly changing market.

Market order

When you place a market order, you’re essentially telling advisers to buy
or sell a stock at the current market price. A market order is the way your
adviser normally places an order unless you give him or her different instructions.
The advantage of a market order is that you’re almost always guaranteed
that your order is executed as long as willing buyers and sellers are in
the marketplace.

Generally speaking, buy orders are filled at the ask price
and sell orders are filled at the bid price. If, however, you’re working with a
dealer who has a smart-order routing system, which looks for the best bid/
ask prices, you sometimes can get a better price on the Nasdaq or NYSE
Alternext US exchanges. In most investment dealers, market orders are the
cheapest to place with the lowest commission level.


The disadvantage of a market order is that you’re stuck paying the price when
the order is executed — possibly not at the price you expected when you
placed the order. Investment dealers and real-time quote services quote you
prices, but because the markets move fast, with deals taking place in seconds,
you’ll probably find that the price you’re quoted rarely is the same as the execution price. Whenever you place a market order, especially if you’re seeking
a large number of shares, the probability is even greater that you’ll receive
different prices for parts of the order — 100 shares at $25 and 100 shares at
$25.05, for example.

Limit order

If you want to avoid buying or selling stock at a price higher or lower than
you intend, you must place a limit order instead of a market order. When placing
a limit order, you specify the price at which you’ll buy or sell. You can
place either a buy limit order or a sell limit order. Buy limit orders can be
executed only when a seller is willing to sell the stock you’re buying at the
limit price or lower. A sell limit order can be executed only when a buyer is
willing to pay your limit price or higher. In other words, you set the parameters
for the price you’ll accept. You can’t do that with a market order.

The risk you take when placing a limit order is that the order may never be
filled. For example, a hot stock piques your interest when it’s selling for $10,
so you decide to place a limit order to buy the stock at $10.50. By the time
you call your broker or input the order into your trading system, the price
already has moved above $10.50 and never drops back to that level; thus,
your order won’t be filled. On the good side, if the stock is so hot that its
price skyrockets to $75, you also won’t be stuck as the owner of the stock
after purchasing near the $75 high. That high will likely be a temporary top
that quickly drops back to reality, forcing you to sell the stock at a significant
loss at some point in the future.

Most firms charge more for executing a limit order than they do for a market
order. Be sure you understand the fee and commission structures if you
intend to use limit orders.

Stop order

You may also consider placing your order as a stop order, which means
that whenever the stock reaches a price that you specify, it automatically
becomes a market order. Investors who buy using a stop order usually do
so to limit potential losses or protect a profit. Buy stop orders are always
entered at a stop price that is above the current market price.

When placing a sell stop order, you do so to avoid further losses or to protect
a profit that exists in case the stock continues on a downward trend. The stop
price is always placed below the current market price. For example, when you
have a stock that you bought for $10 that now is selling for $25, you can decide
to protect most of that profit by placing a sell stop order that specifies that
stock be sold when the market price falls to $20, thus cementing a $10 gain.

You don’t have to watch the stock market every second; instead, when
the market price drops to $20, your stop order automatically switches to a
market order and is executed.

The big disadvantage of a stop order is that if for some reason the stock
market gets a shock during the news day that affects all stocks, it can temporarily
send prices lower, activating your stop price. If it turns out that the
downturn is actually merely a short-term fluctuation and not an indication
that the stock you hold is a bad choice or that you risk losing your profit,
your stock may sell before you ever have time to react.

The bottom can fall out of your stock’s pricing. After your stop price is
reached, a stop order automatically becomes a market order and the price
that you actually receive can differ greatly from your stop price, especially in a
rapidly fluctuating market. You can avoid this problem by placing a stop-limit
order, which we discuss in the next section.

Stop orders are not officially supported on Nasdaq. However, most dealers
offer a service to simulate a stop order. If you want to enter a stop order for
a Nasdaq stock, your adviser must watch the market and enter the market or
limit order you designate as a stop when the stock reaches your specified sale
price. Some investment dealers won’t accept a stop order on some securities
and almost never accept a stop order for OTC stocks.

If you intend to use stoporders, make sure that you

✓ Check with the dealers you’re planning to use to ensure they accept
stop orders.
✓ Find out what your dealers charge for stop orders.
✓ Review how your dealers’ stop orders work, so you don’t run into
surprises.

After all, you don’t want to execute a stop order and end up selling a stock
that you didn’t intend to sell or at a price you find unacceptable.

Other order types

Less commonly used order methods include contingent, all-or-none, and fillor-
kill orders. Contingent orders are placed on the contingency that another
one of your stock holdings is sold before the buy order is placed. An all-ornone
order specifies that all the shares be bought according to the terms
indicated or none of the stock should be purchased. A fill-or-kill order must be
filled immediately upon placement or killed.

Reviewing Stock Exchanges

Reviewing Stock Exchanges

Toronto Stock Exchange (TSX) and
other Canadian exchanges

Most securities in Canada trade on the Toronto Stock Exchange (TSX), which
was established in 1852. The TSX is owned by the TMX Group, which also
operates the TSX Venture Exchange for small new companies as well as the
Montreal Exchange for derivatives trading. Fixed-income bonds, natural gas,
crude oil, and electricity contracts also trade through the TMX Group. TSX is
the eighth largest in the world by market capitalization.
A handful of electronic exchanges have taken some blue-chip stock trading
business from the TSX because of improved technology and lower fees.
Rivals include Alpha and Chi-X Canada, which operate as alternate trading
systems (ATS). Pure trading is another ATS that is connected to the Canadian
National Stock Exchange (CNSX), where shares of emerging companies are
traded.

New York Stock Exchange (NYSE)

The US stock market dates back to May 17, 1792, when 24 brokers signed an
agreement under a buttonwood tree at what today is 58 Wall Street. The 24
brokers specifically agreed to sell shares of companies among themselves,
charging a commission or fee to buy and sell shares for others who wanted to
invest in a company. Yup, the first American stockbrokers were born that day.

the brokers adopted a formal constitution and named their new entity the
New York Stock & Exchange Board. Brokers actually worked outdoors until
1860, when operations finally were moved inside. The first stock ticker was
introduced in 1867, but it wasn’t until 1869 that the NYSE started requiring
the registration of securities for companies that wanted to have their stock
traded on the exchange. Registration began as a means of preventing the
over-issuance (selling too many shares) of a company’s stock.


From these meagre beginnings, the NYSE built itself into the largest stock
exchange in the world with many of the largest companies listed on the
exchange. Trading occurs on the floor of the exchange, with specialists
and floor traders running the show. Today these specialists and floor traders
work electronically, which first became possible when the exchange
introduced electronic capabilities for trading in 2004. For traders, the new
electronic trading capabilities are a more popular tool than working with
specialists and floor traders. Electronic trading capabilities were enhanced
when the NYSE merged with Archipelago Holdings in 2006. The exchange
expanded its global trading capabilities after a merger with Euronext in 2007,
which made trading in European stocks much easier. Some European companies,
such as German insurer Allianz, have delisted from the NYSE due to the
American regulatory burden of Sarbanes-Oxley legislation. The federal law of
2002 seeks to promote corporate accountability.

You may not realize just how much the concept of supply and demand influences
the trading price of a stock. Price swings of a stock frequently are
caused by shifts in the supply of shares available for sale and the demand created
by the number of buyers wanting to purchase available shares.

Why Trade? What is the Successful Trading Characteristics ?

Why Trade? What is the Successful Trading Characteristics ?


First : Why Trade?

Improving their potential profit from stock transactions is obviously the keyreason why most people decide to trade. People who want to grow their
portfolios rather than merely maintain them hope that the way they invest

does better than the market averages. Regardless of whether traders invest
through mutual funds or stocks, they hope the portfolio of securities they
select gives them superior returns — and they’re willing to work at it.
People who decide to trade make a conscious decision to take a more active
role in increasing their profit potential. Rather than just riding the market up
and down, they search for opportunities to find the best times and places to
be in the market based on economic conditions and market cycles.
Traders who successfully watched the technical signals before the stock crash
of 2000 either shorted stocks or moved into cash positions before stocks
tumbled and then carefully jumped back in as they saw opportunities for
profits. Some position traders simply stayed on the sidelines, waiting for the
right time to jump back in. Even though they were waiting, they also carefully
researched their opportunities, selected stocks for their watch lists, and then
let technical signals from the charts they kept tell them when to get in or out
of a position.

Secend : What is the Successful Trading Characteristics ?

To succeed at trading, you have to be hard on yourself and, more than likely,
work against your natural tendencies, fighting the urge to prove yourself
right and accepting the fact that you’re going to make mistakes. As a trader,
you must develop separate strategies for when you want to make a trade
to enter a position and for when you want to make a trade and exit that
position, all the while not allowing emotional considerations to affect the
decisions you make on the basis of the successful trading strategy you’ve
designed.


You want to manage your money, but in doing so you don’t have to prove
whether your particular buying or selling decision was right or wrong. Setting
up stop-loss points for every position you establish and adhering to them is
the right course of action, even though you may later have to admit that you
were wrong. Your portfolio will survive, and you can always reenter a position
whenever trends indicate the time is right again.

You need to make stock trends your master, ignoring any emotional ties
that you have to any stocks. Although you may indeed miss the lowest entry
price or the highest exit price, you nevertheless will be able to sleep at night,
knowing that your money is safe and your trading business is alive and well.
Traders find out how to ride a trend and when to get off the train before it
jumps the tracks and heads toward monetary disaster. Enjoy the ride, but
know which stop you’re getting off at so you don’t turn profits into losses.