Resources to Learn About Stock Market Investing

If you know nothing about the stock market, consider yourself lucky.

If you think the stock market is a scary place that you don’t understand, you’re actually in good shape.

I learned about the stock market in a time of prosperity, in pieces, and probably in the worst possible way and it’s burned me on numerous occasions. When everything is going up and there’s an irrational exuberance, you are afforded the opportunity to have good results come out of bad decisions and that can lead to the development of bad habits. So, if you know nothing about the stock market and are scared of it, that’s actually the best time to start learning about it.

So, if you’re scared and I have bad habits, why should you read anything I have to say about investing? I don’t actually talk much about investing outside of discussing ideas and theories (and recommending index funds from Vanguard) but today I’ll outline a few good resources I’ve found to help you learn more about investing in the stock market.

Morningstar Investing Classroom

Morningstar is great. The number one best place to start, if you know absolutely nothing, is with Morningstar’s Investing Classroom. They have four areas of beginner study – Stocks, Funds, Portfolio and Bonds. Each classroom has five levels of study with the exception of Bonds, it only has two, and each level has anywhere from five to eleven courses. I’ve taken several of the courses and they begin with the basics and move onto progressively more advanced topics.

As a bonus, you earn points for answering the quizzes following each course and can redeem those points for various rewards (you have to be a free registered member to earn these credits).

Motley Fool’s Investing Basics

If you’ve completed all of Morningstar’s Investing Classroom courses, Motley Fool’s Investing Basics is a great place to reinforce those ideas but with a witty and humorous twist. Depending on how quickly you went through the Morningstar site, you probably glossed over a few topics or forgotten others, so review can’t hurt. Plus they’re entertaining to read.

Decisions Decisions Decisions…

At this point, armed with the basics, you have to make a decision. Do you want to invest the your stock allocation in index/mutual funds or do you want to try to go your own way and invest in individual stocks? If the answer is index and mutual funds, you probably are armed with enough information go forth and conquer. Open an account with a Vanguard or a Fidelity and have it (those two always seem to dominate Top Fund lists). If you want to go after individual stocks… there is more learning ahead. (some would say there is more to learn but from here but between Morningstar and Fool, you have enough information to Google search from here)

Securities and Exchange Commission

The SEC has a great guide to financial statements, which you’re going to have to decipher and interpret if you hope to be able to pick some winners in the stock market. I would also get myself familiar with EDGAR, which is the SEC’s database of company filings (EDGAR Quick Guide, Comprehensive EDGAR Guide). EDGAR is far more versatile (and comprehensive) than navigating company websites for their filings. They also have a pretty extensive Publications section that has all sorts of valuable information.

Google Finance

If you want a very quick snapshot of a particular company, I think Google Finance has the most amount of information on a single page and provides the easiest interface to reach it. Simply type in the ticker or name of the company and you can get a wealth of information on one page. You can access their related companies, their latest financials, recent and future events, key stats & ratios, a brief summary as well as links on their company website, list of officers and directors, as well as links to other resource reports such as SEC filings, MSN Money’s listed major holders, etc. All that information is one page, that’s why I like it over other similar services like Yahoo Finance (Yahoo Finance’s advantage is that you can add a lot of technical indicators to their charting services).

Wall Street Journal Markets Data Center

So, armed with that information, you probably have enough to go out and do some serious damage to your portfolio (take that any way you’d like :)). Are you ready to be inundated with market data? If so, and my inundated I mean like drinking from a fire hose, then check out the Wall Street Journal Markets Data Center. Pages and pages and pages of financial information at your finger tips. (if it’s intimidating, but that’s okay… and that’s just the home page, you can drill down even more!) It’s absolutely stunning… now go forth and conquer!


What Is A Stock Market Correction (And Why It Matters)

A stock market correction is when a major index (or the market in general) falls 10% in a relatively short period of time. In our case, as a result of yesterday’s decline, the Dow has fallen about 10% from its highs in October and so many pundits are calling it a stock market correction. On Monday, after that big two hundred point plus drop, we were solidly into market correction. On Tuesday, we snapped out of it as Citi received some overseas investment from Abu Dhabi (oil helped too) and the market responded favorably by bouncing back. So, why does a market correction matter?

Honestly, I don’t think it does. It’s valuable to know that you’re 10% away from highs because you’re now no longer talking about the random walk and starting to discuss trends. A few percent either way can be considered part of the noise, 10% starts getting you thinking because 10% is more than can be considered standard deviation. However, outside of knowing you’re 10% away from highs, I think it’s not terribly important to know that a “correction” has occurred. The reason I say this is because you don’t know, at that exact moment you recognize a correction has occurred, whether you’re going to continue to trend downwards or bounce back.

On Tuesday, the market bounced back by tacking 1.69% back onto the Dow. Tuesday easily could’ve been a day in which we saw larger losses. Tuesday easily could’ve been a day in which we saw smaller gains or losses, we simply cannot see the future and thus cannot make any decisions that we’re 100% confident in. It’s kind of like the cup and handle technical indicator, as great as past performance may be, it’s not an indication of future performance.

What can you take away from a market correction? I think that if you have money on the sidelines that you’ve been holding off on putting into a market, seeing a market correction might be a good time to buy back in. The only thing you can be confident about is that you aren’t buying at the highs of the market. While you might be buying while the market slides down that slippery slope, at least you know you didn’t buy at the highs of the market.

Beyond that, I don’t think you can really take much away from knowing a market correction has occurred.


Technical Indicator: Double Tops

It’s been a while since I wrote about a technical indicator (the last time it was about Relative Strength Indicator back in May) but this one I was reading about, Double Tops, caught my eye because it looks very similar, at least superficially, to another indictor – Cup and Handle.

As a recap, the Cup and Handle is a breakout positive indicator that says that if the pattern look like a cup with a handle, then it’s poised to break out. Reading the other post and seeing the graphic will go a long way so check it out and I’ll still be here when you come back. 🙂

So, how does Double Tops work? First off, Double Tops is a negative indicator and will indicate when you can expect an extended uptrend to turn into a downtrend.

Double Top Stock Indicator Graph
Image from Investopedia

So, don’t a ton of stocks show this behavior but not trend downward? There are a few characteristics to this trend that you must pay careful attention to in order to identify this indicator. First, the two tops have to stop at levels of resistance. After the first top, you should see something of a 10-20% fall off before pushing back upward to hit the second top. Now, at this point you should see an increase in volume as it starts to decline from the second top. This is still not a double top until it breaks through the lowest point of the “trough” between the two tops. There are a few other caveats and I invite you to read this great article for more information as well as an example involving Ford.

This is a reversal trend so you can expect the same sort of rules from its sister indicator, Double Bottoms, which would indicate a falling stock will turn into a rising stock.


Technical Indicator: Relative Strength Index

This is part of my series of reading about investing topics like technical indicators. I don’t really know what I’m talking about and all of it is based on information I read online, please feel free to correct me, my interpretations, whatever – door’s wide open.

The Relative Strength Index (RSI) is basically a mathematical calculation meant to try to figure out whether a particular security is overbought or oversold. It does this by first taking the average of the price increases of a security on the days it’s up and dividing it by the average of the price decreases of a security on the days it’s down, then it does some simple math to come up with an RSI value using the following equation:

RSI = 100 – (100 / (1 + RS))
RS = average increase on days up / average decrease on days down

Now, how do you use this? When the RSI reaches around 70, it means that the security might be overvalued since it’s been going up a whole heck of a lot and may experience a drop of some kind, either a pull back or some profit taking. When the RSI reaches around 30, that’s an indicator that it perhaps has been oversold and is likely to rebound off its latest woes.

RSI indicators don’t work well on their own because big jumps or big dips will mess with the score, since it’ll throw the whole average off (as you would expect if you take an average). Experts recommend using this along with other indicators to get a clearer picture.

There you go, yet another crazy mumbo jumbo investing technical term demystified.


Technical Indicator: Cup & Handle

Don’t know much about history, don’t know much biology, don’t know much about these crazy technical indicators people talk about so I decided to look some of them up. Just as I did (albeit briefly) before with an investing strategy (there are more on the way I hope), I’ll do the same with some popular technical indicators. This time, I take a look at the always popular Cup & Handle technical indicator – which is a bullish indicator.

Cup and Handle Technical Indicator Image
Image from Investopedia

Why do its proponents claim it works? Well, what you have is a case of an investment that has turned a little sour and is on its way back up – but there’s a catch. The handle occurs when people who bought in at the start of the cup decide they want out, so the price will drift sideways or even lower and thus creating that little handle. Once that selling pressure is gone, the stock will take off. The only hitch in that idea is that you have no idea how long that handle is going to drift, it can be as short as a couple days or as long as a couple months.

So, the next step is understanding the various dimensions of the cup itself. If the cup itself is wider and has a long U, that’s a solid cup signal. If it’s more like a V or if it’s too deep (again, subjective), yuck stay away. Now, as for the volume of the security, the volume should be smaller as you get lower and lower into the cup and be lower than average at the bottom of the cup. As the price increases again, finishing the cup, the volume should increase.

This indicator is a little tough because it is so subjective, how deep is too deep, how much volume is too much, and because you have to see it after the fact. You have to identify the cup after it’s almost been formed (otherwise it could just be a decline) and then be able to jump in at the right moment. Unfortunately I don’t know of any historical data where folks have looked at cups and handles to see how things ended up but this is definitely one of those classic technical indicators most investors have heard before.

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