Investing in Stocks, My First Month

I am tracking my investing here. I'm a beginner, easily lost. But I would like to learn how to buy and sell stocks with reasonable success.

Here are some of my ground rules I have laid out so I don't mess around too much:

1. Use play money. Don't threaten our retirement savings or other funds set aside for specific purposes.

So this has a caveat. I am putting some good chunks into this in short order of time. It does mean a lot to our family, that I am going to put 9K in the stock market that I'm playing with, by May. Since we have hardly any equity in our house, a little bit of savings towards our kids' college, 401K for both my husband and me, we own our cars outright, have no credit card debt and practically no student debt (one I have will be paid up by a grant soon from work), I feel we can risk our tax return, some savings, and some other accounts I had been socking money into -- consolidate into this stock market investing and learning endeavor. I would not say we are financially strong, but we have been making smart choices and been working hard to not spend money we don't have.

2. Buy and sell stocks rated as a buy by www.TheStreet.com, and be careful about unrated stocks.

Pretty self-explanatory, but this basically means that I am leveraging thoughts of analysts who spend a lot of time on industry information and who is best in industry, and quantified objective analysis. While they may miss opportunities for good stocks by rating it as a hold or a sell when it's actually ready to rally, the odds are, they are keeping me safe in the green zone. 

I don't know how to pick those winners... not yet, and maybe I never will. 

But I certainly will not be doing penny stocks or companies going down in debt, drowning from lower earnings YOY, giving out too much in dividends and shooting themselves in the foot by limiting their future growth opportunities, companies that are mismanaged, or companies that have had major legal issues or liabilities. These kinds of things are already considered into the analysis done by the smart folks with finance degrees. Why should I work hard and belabor this for every stock, just to see a slightly finer point from their analysis? If it was my job or I wasn't working full time already at another job, sure. I would go line by line and double check their analysis, and maybe have more insight. But I am only doing this on limited time.

3. Buy and sell stocks for free.

Right now since my stocks are only totaling so much and I'm trading 1-15 shares at a time, I'm at Robinhood. Free trades. If you want to check it out, use my link and it may give me a perk towards getting my account to instant trade level. Not money. http://share.robinhood.com/misheec 

Just full disclosure. Robinhood is not perfect, but if you're a beginner, it's the perfect tool to get started. The prices are not as up to date if you do market buy and market sell, but my limit buy and limit sell works great with it. Deposited money from bank to Robinhood will not show up as available to invest in stock for 3 business days and likewise for sold stock funds. However, the buying and selling of stocks is real time. Also, I have found that Robinhood doesn't have all the stocks. It has most of them, not much penny stocks, some like MNDO missing for mysterious reasons...

4. Buy at a preset price, not at market price. Sell at a preset price, not at market price.

Limit buy and limit sell, which are an options at most trading accounts, is something I'm using a lot. This is one of the key things that create barrier between my emotions and the buy. My analysis and strategy is actually followed if I just do limit buy and limit sell.

This does create a rigidity to what I'm doing, that doesn't account for real time news, changes going on, and market winds. But I don't care. I'm not here to buy everything I set out to buy. Just a few out of the limit buys. Same with selling.

5. Go for stocks with dividends. 

Until I learn to read growth stocks' statements, evaluate the management, current holdings, debt, and risk, I will focus more on the mature or almost mature companies at are paying dividends. Why? Simple...

How to earn money from stocks

There are two ways to get paid from any business, as a business owner.

1. Sell it.

2. Pull out the profit from it.

In stock terms, it means:

1. I sell the stock at profit from when I bought it.

2. Capitalize on the dividends from a stock.

My Strategy

So my form of day trading, pattern trading, and value trading combination is basically combining the ideas above.

Specifically, I am starting with stocks that are about to pay dividends. It's called dividend capture strategy, but I kind of stumbled on the idea on my own. Of course, the beginner finds out that others think alike...nothing is original. So, this is not new.

The market maker subtracts the dividend amount from the stock on the date dividend is already considered decided on who gets it... this date is called the ex-date.  Buy stock before dividend ex-date, sell on or after ex-date at prices that defy the market maker's action. That's the strategy.

There are multiple opportunities I see around it, just deducing here.

1. buy at lower price than after ex-date, sell (profit is the margin and the dividend)

2. buy at same price as after ex-date, sell (profit is dividend)

3. buy at higher price than after ex-date, but the price is still at a profit after dividend is considered, sell (profit is dividend minus the price move)

4. buy on or after the ex-date, at price lower than normal price correction (if it over-corrects) then sell when it "normalizes"
5. buy 2 or more days prior to the ex-date and sell day before ex-date when the interest peaks, so someone else gets the dividend but I might get even more than the dividend in market move

6. keep the stock until you get your sell price (holding until limit sell goes into play)

7. keep the stock for the dividends mainly (if the stock pays more than the market average of 2% yield per year, the likelihood of losing money on this investment is more palatable...)

8. keep the stock indefinitely for growth (This is not as likely for most of the high dividend companies, because they are not in major growth stage. So actually, this strategy is best for certain stocks that cross my path in a more unusual way... like new products that I like and all my friends like. Or I see an overall demographic trend, problem being addressed by something in a unique way. However, sometimes mature companies are doing innovative things, are experimenting a lot, buying startups left and right... and if I see those activities as something that will pay off in the future, that's when I would implement this one. But again, that's a lot hope.)

These assume market is going up generally, and/or it is going sideways but with enough volatility to support the trades. So, basically in a bull market, I would make money. 

To hedge this risk, I am going to make some moves to buy when the market moves down and reserve those funds solely for this.

That means 50% of my funds are on reserve to buy at certain market correction prices with a value proposition on mature stocks. I am taking the 52 week low, adding a little margin depending on how mature the company is and the growth opportunity it has. Then putting limit buy on those stocks at those market low prices.

The myopia of this strategy is that my parameters are only 52 weeks, and history does not dictate the future. So, it is not a great strategy if we face a big market correction, but my unsophisticated trading and thoughts for now are basically summed up by the above. 

I figure if there's a huge market correction, I will sell one of our cars and put it in the stock market because I will be probably able to buy a new car in a year or two off of the proceeds. He-he. 

Again, that's another assumption. Market ups and downs are cyclical. There is some evidence that the market ups and downs are artificial. If so, it doesn't matter for my investing as a small fry like me, but just a slightly disturbing thought... 

Anyway, my very unrealistic goal is 10% gain every month on my capital invested. So far, last month I made 10% when the market moved 4%. I made 5% on my stocks invested today when the market moved sideways 0.4%.

Best of all, 93% of my gain is already realized (sold and converted into cash) by the fact that the limit sells lock in my gain immediately. At any time, most of my funds are in cash, not in stocks--because of my reserves of limit buys, and my sells coming back.

Sometimes a stock runs off on a big rally after I sold at a little profit, and it looks like I "lost out" on a big rally. But that is exactly the kind of thinking I don't subscribe to. I am not greedy. My strategy is to limit my emotional involvement and hanging on that kind of hope. I am simply not qualified to know why stocks move the way they do -- except in hindsight, after several news outlets confirm what happened, lol.

My limit buys don't come to fruition often, especially when the market is rallying, because I'm conservative. Stock needs to move down 1% from pre-announcement of dividend for me to limit buy. But that also means most of the stocks I do have are in the green. In fact all of them but one was in the green today, and the one that's not in the green is a long-term hold that I got at a lower price, so the red didn't eat up my profit much.

I will continue to study and learn to analyze companies individually, and really get a feel for whether the company is moving in the right direction. For now, what I have outlined above is an analysis-free way to trade, which can be computerized, if I can write the code... or get a software that would do it for me. I don't know which one is best for me.

I will just keep at it manually until I learn of one or learn to code. Will keep you posted.

Over and out,

Misheel.

Oh...

Tax considerations

Since my tax bracket is so low, I am not going to care as much about tax consequences of my little bit of piddling trading. If I make enough income to be taxed, I'm kind of pro-tax anyway, even if I will take all the deductions I can. I am happy to support our government, and abide by the law.

So, I am not putting my efforts into an LLC and tracking expenses, and minimizing my income tax risk from this activity yet, until I feel I need to complexify my life that way. Obviously I'm not a tax professional and am not giving legal or financial advice. Please do not misconstrue simply what I am choosing to do, to imply responsibility to you.

I will probably change my mind as necessary, and as often as it makes sense to do so... and am just learning.