Trading Large Cap Stocks -- Beginning

Like many stock market investors/traders, I too, lost my shirt in the nineties. High-tech stocks always seemed to offer such huge returns, and when you analyzed the charts they looked like can't miss opportunities. But as the decade wore on my stock portfolio value went on a steady nose dive. Until it virtually became non-existent.

At the time I was looking for stocks to hold for a few months, and then sell. Stocks that were likely to increase in a short time. I read all the books, learned fundamental and technical analysis, created and back tested stock trading systems. Subscribed to all the newsletters, the services, the gurus, and jumped around in my opinions so much, that even when I was right, I didn't allow my correctness time to pay off. Self-doubt, gut wrenching anxiety, not to mention unnecessary stress on an already dysfunctional marriage all added to my panicking. And the inevitable loss of my entire account.

Through it all I made right buys and short sells, but my convictions was never very strong, I couldn't stand the fluctuation of hi-tech stocks, and had no idea when to keep my position and when to dump it. Usually I would dump winners at the exact worst time, and keep losers for way too long. I tried system trading, but grew weary of systems that worked when back testing but not in real time. In short, I went broke, lost my marriage, my house, and my confidence.

I paper traded large cap stocks for 3 years, averaging over 50% return on investment for 3 years. While I scrimped and saved, and hid money until I had a whopping total of $3000, to open a stock account.

Around 2001, I began sniffing around the market again. Now, though I had no money to trade with. However I remembered a time right at the end of 1999. When I had traded GE, several times successfully, it was in a nice up trend, with enough timely dips that allowed buying opportunities, and timely spots to also sell. I began wondering if I could buy and sell large cap stocks, and make a profit. I began, again pouring over charts, it was easier now, with the Internet, you could do it for free. I studied household names, and not so household names but always stocks over 5 billion in capitalization. In 2002, I began paper trading, based on a few quick judgments I made about chart formations, and using a few basic indicators. I did this in real time

I had no money to trade, now going through an expensive divorce, that was to leave me virtually broke for 3 years. I, still was fascinated with the idea of using large cap stocks, and the fascination kept me paper trading. I found these advantages to large caps; one they had real value, not blue sky. So often, hi-tech and biotech's only had future earnings to offer. Large caps had real worth, real property, real earning, etc. Information on them was readily available. I learned during the nineties, I will never have the latest information on stocks. But with large caps you don't really need it. Large caps charts were also more predictable, more reliable, upturns and down turns were within parameters, that were almost always followed. High tech could drop like a rock from the sky on rumors, rumors that I wouldn't even know about until the end of the day.

But was there enough volatility to trade in large caps. I was always bored with buy and hold and hope for a 7% return over the next ten years type strategy, I wanted some action. But what I found was there is enough volatility, if you can figure out how to predict it. Consider my first real trade of this year, I bought All-State Insurance ticker symbol ALL. I bought it in March of 2005, at that time its 52 week low was 43, and its high was 52. If you had bought it at the exact low and sold it at the exact high you would have made, 20% annual return. Not bad for such a safe investment. Of course it is impossible to do that. But what is very possible is to hold it for about 39 days, and make around 3%, in that time. That is almost a 30% annual return while holding a very safe stock for a very short time. And that is what I did.

And then I bought All State. This year I again hope to make over 50% return on investment, only in real dollars. Which let me tell you is much more exciting, than paper trading. Oh, I have started a successful side business, whose profts I place into my account. But more on this later. You can read my trades as they occur on my blog http://livingonlargecaps.blogspot.com/. And watch as in real time I attempt to prove you can make huge profits on large cap stocks.

CT Larsen has been trading stocks since 1990. He now trades large caps stocks exclusively with wildly successful results. You can track actual trades in real time at http://livingonlargecaps.blogspot.com

Different Ways of Buying Stocks

Let's say you are interested in this one company. You read its annual report, like what you see and your calculation indicates that the stock is trading way below its fair value. You are excited. It is time to buy! Hang on for a second. There are several techniques of buying stocks out there. Some are better than the other. Let me explore several useful ones.

Buy all at limit price. Assume that we have done our research and we want to invest $ 2000 to buy stock XYZ at $ 12/share. We can do this by setting a limit order of $ 12/share to buy 166 shares of XYZ. The advantage for this method is that we will not pay more than $ 12 for our XYZ share. If you use market order, instead of limit order, XYZ might run up to $ 13/share and execute your order at $ 12.50. Fifty cents may not sound a lot, but in this case, you just saves $ 83 for using limit order. Any better methods? Check out this next one.

Buying half at $12. Buying half when it drops. Stock market is volatile. It goes up and down due to various reasons. In this case, we set a limit order to buy $ 1000 worth of XYZ at $ 12/share. When XYZ drops lower, and if you think that the reason that you initially bought it is still valid, then you can buy more XYZ at a lower price. If XYZ drops by $ 1, you already save $ 83 off the bag. What else is there?

Dollar Cost Averaging (DCA). With DCA, investors normally buy a specified dollar of stock at regular intervals. In this case, you can decide to invest $ 500 monthly in XYZ stock. If the XYZ stock falls, you can buy more shares next month. If XYZ stock rises, you would buy less. But it is ok. You already made money on XYZ stocks that you bought at a lower price.

Which method is the best? There is no clear cut answer on this. Personally, I will never use market order when buying a stock. Commission for buying a limit order is not as expensive as it used to be. My favorite methods is by buying half position initially and then add half more when the share price drops. If you have done your research and you feel that $ 12 per share is a good buy, then why won't you buy some more if it goes down to $ 10? Just make sure that the fundamental remains the same when the stock drops.

While knowing how to initiate your position is important, I am more inclined in focusing on how to calculate fair value of a stock. This is where the bulk of your investment return comes from.

Curious about fair value calculation? At http://www.noviceinvesting.com, these analysis are shown for free. No String Attached. No fee to be paid. You just need to put some time and effort into it. Honest.

Hari wrote regular commentary about stock investing. He is always on the lookout for stocks that match his buying criteria. You can share your ideas or questions in our discussion board. He would be more than willing to assist.

Small-Cap Stocks: The Beginning of the Journey

When an individual investor wants to roll up his sleeves and do some research in the pursuit of the next big winner in the stock market, the place many start is in the small cap sector.

As with the other capitulation sizes (capitalization is a stock's market value), no one can completely agree on a precise definition, but corporations under $2 billion are often considered small caps. It should be pointed out that there are two asset classes below small caps. Micro caps are companies between $50- 300 million and Nano caps are below $50 million. To further confuse the issue, there are also "penny stocks" that really have nothing to do with capitalization size, but are stocks that trade very cheaply.

Life begins for many small caps as an Initial Public Offering (IPO) or as a "spin off" from a larger company. Like Toddlers, these companies are often still in their developmental stage. At this point they exhibit characteristics that give them the potential for both massive growth and extreme downside volatility.

Their huge growth potential is obviously the piece that attracts most investors. Who wouldn't have wanted to get in on a Microsoft in its early days of trading? The question of course is who knew about Microsoft back then?

Often, it is individuals not institutions that first get in on the ground floor. Analysts working for major brokerage firms usually don't have the time to develop coverage on small companies and institutional investors generally have limitations of how much they can own of a single company. Although a $100 million may seem a lot to an individual, it's a drop in the bucket for the big players and equals 20% of a $500 million company. The 20% far exceeds what the SEC stipulates a mutual fund can own and often exceeds the investment policy statement of an institutional investor.

The disadvantage here to the investor is there is relatively little published research that the individual can rely on in the decision making process. But the good news is that the individual investor has the opportunity to buy the stock before the institutions get in and run the price up.

Many investors believe in the "efficiency" of the market. This means that with all the information out on a particular stock, the market can "efficiently price" any stock. In the case of small caps (where information is often lacking), an argument can be made that there is some potential to profit from inefficiencies in the market. Again, this cuts two ways. Many investors can remember that it wasn't too long ago that many small cap techs sold for vastly inflated prices only to watch a steep price slide as the market started to correct these inefficiencies.

Income investors should probably look elsewhere. Small caps generally conserve whatever cash they earn for growth potential. Any yield is usually incidental to their objective.

For mutual fund investors, small caps can be an interesting proposition. Certainly, mutual funds can help offset some volatility through diversification. However, for investors that want to follow a small cap's ascension to the large cap sector, mutual funds may disappoint. Often, to avoid what's called "style drift" a mutual fund manager sells a successful position simply because it has outgrown its capitalization value. While this may be helpful for asset allocation purposes, it's not appealing for investors wanting to watch a company "grow up".

Glenn (“Chip”) Dahlke, a senior contributor to the Living Trust Network, has 28 years in the investment business. He is a Registered Representative of Linsco/Private Ledger and a principal with Dahlke Financial Group. He is licensed to transact securities with persons who are residents of the following states: CA. CT, FL, GA, IL. MA, MD. ME, MI. NC, NH, NJ, NY.OR, PA, RI, VA, VT, WY.

If you have any questions or comments, Chip would love to hear from you. You may contact him at dahlkefinancial@sbcglobal.net. You may also reach him by going to the Living Trust Network web page located at http://www.livingtrustnetwork.com.

Mid-Cap Stocks: Asset Class with an Identity Crisis

Much like the middle child, mid-cap stocks have long struggled to find their identity. Carved out from the upper echelons of the small caps and the lower end of the large caps, the mid-cap sector has a rough definition of stock with a market capitalization of greater than $2 billion, but less than $10 billion. Taking components from both worlds, some analysts argue that mid-cap stocks can offer growth opportunities found in the small caps and the relative stability found in the large caps.

Within this rationale lies the argument for participation in mid-cap investing. Unlike the small caps that have not yet been seasoned by the market, nor like the large caps that have most of their growth behind them, there are those who claim that mid caps are in the "sweet spot" of the economy. You might say that they have survived the rigors of childhood and are now ready for their years of growth and maturity into adulthood.

Still other analysts point out that this area is ripe for merger and acquisition targets. With premiums often being paid on the acquired stock's value, an opportunity presents itself for the investor looking for a little "extra."

There are literally hundreds of mid-cap stocks and, while some languish in obscurity, a number have widely recognized names. Abercrombie & Fitch, Circuit City, AutoZone, Marriott International, and Newell Rubbermaid all fit this category. Because this range is often a stop over point for the large caps, it goes without saying that the real heavy weights of the investment world have also spend at least some time here.

A number of indexes track mid caps, with The Standard & Poors Mid Cap 400 and The Russell Midcap Index being two of the more popular. The S&P 400 Midcap is a weighted index like the S&P 500, except that it covers the mid-cap sector of the U.S. stock market. The Russell Midcap Index currently has a weighted average market cap of $7.5 billion and includes the smallest 800 stocks in the Russell 1000.

The Steele Mutual Fund Expert database contains about 1,200 funds within its mid-cap categories, although less than 220 have track records of 10 years or more and less than 50 have been around for at least 20 years. The vast majority of funds that adhere to the mid-cap style are actively managed funds. For investors who follow an index approach, they won't find as many choices compared to the large-cap index funds, but the number is growing.

Besides individual stocks and open-end mutual funds, exchange traded funds (ETFS) have also gotten into the act.

In recent years, mid-cap funds have started to receive substantial attention in the financial press. Using Steele Mutual Fund Expert as our source, they have come out from under the shadow of their bigger sibling, large cap funds, and turned in better returns. For the three years from1/1/ 2002 through 12/31/2004, the 162 funds in the mid-cap blend averaged 9.40% and beat the 853 funds in the large-cap blend, which averaged 2.91%. Importantly, the mid caps did this with only slightly greater standard deviation. The 228 funds in the small-cap blend averaged 11.65% and boasted the best track record for this period, but had greater volatility. While these results are not guaranteed in the future, they have helped the mid caps establish themselves as a formidable asset class.

So, for those looking for a palatable mix between large caps and small caps, the mid- cap sector deserves serious consideration.

If you have any questions or comments, Chip would love to hear from you. You may contact him at dahlkefinancial@sbcglobal.net. You may also contact him by going directly to the Living Trust Network web site located at http://www.livingtrustnetwork.com.

Oil Stocks As A Long Term Investment

The demand for world oil is increasing while world reserves are decreasing. This is a known fact. The current price of oil can certainly confirm this statement. Consensus also agrees that we will never see $25.00 oil again. The logical conclusion to our above statement is oil stocks should be a good long term investment. However, the location of the oil companies’ reserves can affect their bottom line and valuation.

Some of the largest reserves in the world are found in Venezuela, Saudi Arabia, Russia and Canada. Political unrest in Venezuela, unstable and unpredictable government in Russia and Osama Bin Laden targeting Saudi Arabia leave Canada, namely the Alberta Oil Sands, as the largest, most reliable oil reserves in the world.

Companies like Exxon Mobil Corp., Royal Dutch/Shell Group and Canadian Natural Resources Ltd. are planning to spend billions during the next 10 years to develop Alberta's unusual oil deposits as demand for crude rises and output from existing reserves decline. Oil sands output in Alberta may double to 2 million barrels a day by 2013, according to a presentation by Enbridge Inc. earlier this month. Oil sands are deposits of bitumen - heavy oil that must be treated to convert it into crude oil for use in refineries to produce gasoline and diesel fuels. The U.S. Energy Department revised its global oil resource estimates to include the oil sands 174 billion barrels of proven reserves that can be recovered using current technology.

With demand for oil and other commodities from China and India increasing due to their growing economies, strong trading relationships are procuring with Canada - a country with numerous resources, political stability and neutral military views.

Companies with reserves in the Alberta oil sands look like a great investment for the next decade There are many companies with reserves in the Oil Sands here are some with strong exposure.

Suncor Energy Inc. SU.tse , Western Oil Sands Inc. WTO.tse and the Canadian Oil Sands Trust COS/UN.tse

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