Knowledge

Lessons On Buying Stocks

How To Select The Right Stocks At The Right Time
The seven lessons in this course explain the characteristics of successful stocks and the forces that push them up. The first seven lessons explain specific traits to look for when buying stocks.

Earnings: The Indispensable Element Of Great Stocks

Research shows that earnings growth is the single most important indicator of a stock’s potential to make a big price move. In this lesson, you’ll learn how to find the companies with the best earnings growth and avoid some pitfalls that trick many investors.

How many times have you kicked yourself for passing up a great stock like financial technologies or pantaloon retail? There were tell-tale signs that these winners were about to make major moves before they became household names.

A study of the greatest stock market winners dating back since a decade of research looked at all the biggest stock winners – stocks that doubled, tripled, and went up even more. This was a comprehensive study that analyzed every fundamental and technical variable. What emerged were seven common characteristics among the big winners with earnings growth being the most significant factor. (The other winning factors from the study are discussed in subsequent course lessons.)

Three out of four companies had average earnings increases of 70% or more in the quarter right before they started to make huge price moves.

75% of these top stocks showed at least some positive annual growth rate over the five years before their major price move.

Earnings, also called net profits or net income, are what a company makes after paying all its obligations, including taxes. Companies often conclude their quarters at the end of March, June, September and December, though some companies end their quarters in different months.

Earning Per Share (EPS) is calculated by dividing the total earnings by the number of shares outstanding.
Example: XYZ Corp., with 45 million shares, reports net earnings of Rs. 90 million will have an EPS of Rs. 2.
The EPS is most relevant for investors.

Many stocks that make major advances have another trait. Their earnings accelerate over the previous three or four quarters. Acceleration represents an increase in the earnings growth rate quarter over quarter.

Improving bottom-line growth nearly always precedes a burst in stock price. What’s important to realize about this is that it’s not just rising earnings that make a good stock. The key is to focus on companies whose earnings may be drawing professional investors’ attention — the phase when a stock prepares to spring higher.
(For a detailed description of the importance of volume and institutional sponsorship, see “Sponsorship: Catching The Stocks The Pros Are Buying.”)

> Quarterly earnings-per-share growth of at least 25% over the same quarter the year before.

> Preferably, accelerating earnings in the three most recent quarters.

>Annual earnings-per-share gains of at least 25% over the past three years.

Remember 25% is the least you should look for. Ideally higher the better 100%, 200% or even more. Strong companies with good management teams, innovative products and leadership in their industries boast the best earnings and reflect the best investing potential.

Unless you have time to sift through endless earnings reports, odds are you’ll miss out on those companies announcing superior earnings. And how do you know the difference between a one-hit wonder and a potential stock market winner when you are looking at raw earnings numbers on thousands of companies?

Winwayresearch.com compares the earnings performance of all the traded stocks on the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE) using its Rating Formula. The Rating Formula measures each stock on a scale of 1 to 99 (99 being best) for a quick assessment. An 80 Rating means that stock is outperforming 80% of all other stocks based on earnings growth. Seen another way, a stock with a Rating of 80 is in the top 20% of all stocks in terms of recent quarterly and annual earnings growth.

Our research shows that the stocks that make powerful gains usually have Rating of 85 or higher.

Stocks don’t live on strong earnings alone. We use a Corporate Ratings System which helps us round out for you the stock selection process. This set of tools also compares other meaningful factors, such as sales growth, return on equity, profit margins, industry vitality and a stock’s price performance.

The top 100 stocks that come up in the this rating system are then analyzed and the ‘ top 5 stock picks ‘ are presented to you in the market analysis section.

Investors can easily be misled by popular myths about earnings.

Myth: You should buy stocks with low price-to-earnings (P-E) ratios.

The P-E ratio is a comparison of the stock’s price to its annual earnings per share. For example, a stock quoted at Rs.50 a share with annual earnings of Rs.5 per share has a P-E ratio of 10. In other words, the stock is selling at 10 times its annual earnings.

Conventional wisdom says stocks with higher P-E ratios are overpriced and should be avoided. But the truth is that the best stocks often have high — some would say ridiculous — P-E ratios when they start their big climbs. And they continue having high P-Es throughout their advances.

Studies prove the percentage gain in earnings per share over the year-earlier period had a greater impact on a stock’s price.

Would you have purchased these “high” P/E stocks?

Stock: P/E Ratio before advance
Unitech: 108 (Up 920% in 20 months starting April 2006)
Educomp: 93 (Up 1050% in 23 months starting January 2006)
Financial Technologies: 235 (Up 500% in 24 months starting June 2005)
Pantaloon Retail: 56 (Up 310% in 12 months starting August 1994)

If you weren’t willing to pay the higher P-Es, you eliminated some of the best stocks of all time.

And believe me the list is long. Have a look at the biggest winners in history, more often than not they would seem ‘overpriced’ before their biggest price moves

> Insist on the best earnings performance, not just a promise of earnings. This way, you will pick stocks with the best probability of making substantial gains.

> Look for companies reporting earnings growth of at least 25% in the most recent quarter.

> Find companies with earnings that have accelerated in the three or four most recent quarters.

> Identify stocks with annual earnings growth of at least 25% over each of the previous three years.

> Don’t overemphasize the price/earnings ratio as a way to compare a company’s stock relative to its earnings.

Taking Profits

How do you tell if a stock is at the end of a major price advance? In this lesson, you’ll learn about ways to recognize when a stock starts sputtering and lock in your profits. Chart-reading skills are a key part of this education.

When To Take A Profit

Let’s say you bought a stock and you’re watching it go up. At what point do you call it a day and take your profits?

The sell signals discussed here and in other lessons can occur well before a stock has peaked. So it’s important to learn to recognize critical sell signals. If you regularly review the characteristics of stocks that took a turn for the worse, over time you’ll be able to quickly spot valid signals as soon as they occur.

There are several simple selling strategies that have proven beneficial in helping you consistently lock in profits.

Here’s a simple one. Generally, stocks tend to move up roughly 25% to 30% after rising out of a base. Then they may go through a period of consolidation, when a stock seems to go nowhere for a number of weeks.

A strategy that safeguards your profits is to sell after you’ve captured a 25% gain. This is the conservative approach to profit-taking that works like “building blocks.” Once you sell and take a 30% gain, compounding it with other 25% profits taken during the year should net you very substantial gains overall. This gets back to one of the basic tenets of investing: The key to being really successful is to capitalize on your strongest stocks.
The 25% profits will also outweigh any mistakes you make in stocks that start to take a nosedive if you also cut losses at 8% (see Lesson 1, “When To Sell Stocks To Cut Losses.”) These two strategies alone could help you become quite successful in the market.

There’s an exception to this rule, however. If a stock races up 20% in one to three weeks out of a proper base, it probably means it has plenty of fuel left and you should hang on to it. It may be your best stock. And always review the market conditions. In a strong market, you will see this situation often.

The shorter the trip to the 25% level, the stronger the stock.

Often, the most important sell indicator is the stock’s price and volume action as shown on a chart. Many times, stocks break down their upward trends before any negative signs emerge from fundamentals, such as earnings, sales, profit margins or return on equity. The following indicators can flag weakness in a stock and can be observed with the aid of Charts.

Volume Clues

If a stock’s price falls persistently on heavy volume, it usually signals a shift in professional investor sentiment in which sellers predominate, making any price advances more difficult. Another red flag is a stock making new price highs on lower or poor volume.

Price Clues

The number of consecutive down days in price vs. up days will likely change and increase once a stock begins falling from its top. For example, a stock will close lower five days, followed by two days closing higher, compared to an earlier pattern of five days up and then two down.

Churning

After a substantial advance, the stock’s trading volume increases but its price doesn’t move up much for several days. This is called churning, or heavy volume without further price progress.

Sometimes sales numbers mask problems at companies. Companies may rely on just a handful of customers, and losing any of them may mean big trouble. Other companies are overly reliant on overseas markets, putting them at risk of bad economies or political strife abroad. Also, fluctuations in foreign-exchange rates can seriously dilute sales figures. Some companies, such as pharmaceuticals, get the bulk of their sales from a few flagship products. If sales in these items falter, it could mean more trouble than if the overall sales drop. With retailers, additions of new stores increase the sales figures, even if sales at existing stores slow down. That’s why retailers report total sales as well as same-store sales, to provide an apples-to-apples comparison. Another pitfall happens when companies include sales that haven’t actually taken place. Orders that won’t be shipped or paid until weeks or months later sometimes are added to the sales total to inflate results. Also many a times the sales increase because of the price inflation and not actual demand, typical in commodity companies. Therefore price increase should be sustainable and not just a one time temporary phenomena.

Moving Average Lines

Pay close attention if the stock’s price closes below the 50-day moving average. The 50-day moving average is generally regarded as a stock’s possible price “support” level. It may not mean much when a stock dips below this level, but when it closes several weeks below the 50-day line, unable to rally, it suggests investors are abandoning the stock. Also worrisome is a 200-day line that turns down.

The stock breaks out of a basing chart pattern, but weekly volume is less than the week before, or volume is less than 50% above the stock’s average over the past 50-days (The average volume is illustrated by the line moving across the volume bars.) This indicates lukewarm interest at a pivotal point for the stock, and it could later become a failed breakout.

Climax Tops

The stock, after a strong run-up for several months, reaches a “climax top” in which the price suddenly goes up even faster — 25% to 50% or more on heavy volume in a couple of weeks. The price spread for the week will be greater than on any prior week since the beginning of the stock’s major move. Sometimes this run will culminate with the stock’s largest single-day advance since it began moving up. As the name implies, this is a situation when a buying spree in a stock becomes too obvious and everyone is excited by the price action. When it’s obvious and exciting, it’s too late — sell into the euphoria.

Some climax runs will end with an “exhaustion gap,” which happens when a stock that has been advancing rapidly and is greatly extended from its base opens at a price above the prior day’s highest level. This usually indicates the final stage of its move — one final burst of buying before a stock eases back. However, when this happens close to the breakout, it is called a breakaway gain, and it can actually be a sign of strength.

Late-Stage Bases

As a stock advances, it builds several bases. The third or fourth base, however, is more prone to a decline. This is common among leading stocks. During the first base, the stock demonstrates inherent strength, but few investors notice it. When the second base forms, more investors notice it. By the time the third or fourth base forms, however, almost everybody notices it, including most of analysts, brokers as well as dealers. That, oddly enough, is historically the time when the stock is most likely to sputter.

The Sales+Profit Margins+ROE (SMR) Rating — part of the Corporate Ratings System (CRS) — saves you the arduous task of going over the financial reports of every company and helps you find the best companies in terms of financial performance. The rating looks at a company’s sales growth over the last three quarters, its before- and after-tax margins and its return on equity. These four fundamental factors are widely used by analysts.

The SMR Rating ranges from A to E, with “A” being the best and representing the top 20% of all companies. The “B” stocks are in the next 20% and so on. The “E” stocks represent the bottom 20% and the lesser-quality companies. The rating also assigns a greater value to stocks in which any or all of these fundamental factors are accelerating. Look for stocks with ratings of “A” or “B.”

Our research shows that the stocks that make powerful gains usually have an EPS Rating of 85 or higher.

One of the most important selling rules applies not to individual stocks, but to the market as a whole. You may be right about your stocks, but if you’re wrong in your assessment of the general market, your stocks will suffer. During a market decline, even good stocks have a hard time swimming against the market’s current. Typically, three out of four stocks go down in a declining market.

The market always begins a downturn with a series of distribution days in which selling predominates. Over the course of a few weeks, at least one of the major market indexes (the Sensex or the Nifty) closes lower or stalls several times on higher trading volume than the prior day. This is another example of churning, and every major market downturn has begun with one such episode.

Also during weakening markets, the leading stocks (those that have led the market’s uptrend) typically start to falter.

When the market enters a confirmed downturn after four or five days of clear distribution in a market index, you’re better off selling some of your stocks and raising some cash. Get off margin (that’s when you borrow from your broker to buy stocks) at once. Sell your worst performing stocks first. Of course, you’ll need to keep watching the major market averages to identify the market’s next turn. You may see the market rally for a few days, only to falter. Learn to recognize a valid market upturn so you aren’t misled. Always regard the 8% Sell Rule (selling any stock that falls 8% below your purchase price) as your safety net, particularly in market declines. Track signs of weakness in both your stocks as well as the general market.

But we have already done the hard work for you. Market Direction is presented in the Market Analysis section.To avoid serious damage take the pain to read the ‘Market Direction’ daily.

> Strong sales growth is one key indicator of a company’s success. Quarterly sales growth should be up at least 25% in the most recent quarter. Otherwise, they should be accelerating.

> Profit margins tell you how much of a company’s sales end up as earnings after expenses. Generally, the higher profit margins, the better.

> Return on equity measures how well a growth company can produce earnings with shareholders’ capital. Look for ROEs of at least 17%.

Sponsorship

FIIs, Mutual funds and other professional investors represent the vast majority of trading activity in the market. As such, they wield tremendous influence on stocks, capable of sending their favorite stocks up significantly. Here, you’ll learn how to spot the stocks benefiting from “institutional sponsorship.”

There’s a term on Wall Street everyone soon learns to appreciate: institutional investors. These are the mutual funds, pension funds, banks and other financial institutions that do the bulk of stock trading on any given day. It is estimated institutions account for massive chunk of all trading activity. So when institutions target a stock for purchase, it’s more likely to go up in price thanks to the increased demand they create. This professional stock buying is called institutional sponsorship.

Institutions make a living buying and selling stocks. They employ analysts, researchers and other specialists to gather comprehensive information about companies. They meet with executives, evaluate industry conditions and study the outlook for every company they plan to invest in.

Now, wouldn’t it be great if you knew exactly which stocks the institutions are buying and when? Actually, you can.Although mutual funds and other institutions don’t disclose their buys and sells frequently, you can track their moves by watching for clues in trading activity.

One of the most useful ways to spot current institutional trading is to study volume percent change figures, in other words, how much trading rose — or declined — in a day compared to normal. (By normal, we mean the average daily trading volume over the past 50 trading days.) Because this information is continually updated, it is the quickest way to detect institutional trading in a stock. When volume spikes up 50% or more at the same time the stock goes up in price, that’s generally a clear sign that major investors are moving into the stock with both feet. This usually precedes a significant rise in the stock price. But if a stock’s price drops on heavy volume, it’s a sign large investors may be moving out of a stock. If a stock’s trading volume advances but the price goes nowhere, it could mean the stock is reaching a peak. Information about volume changes can be studied on daily charts.

You can also log on to www.mutualfundsindia.com to see the portfolios and performances of all the mutual funds.

A stock with strong buying by top-performing institutions has a greater probability of making you money. But you shouldn’t pick a stock on volume, accumulation or sponsorship numbers alone. First, be sure the company’s earnings, sales and other fundamentals are strong. Other factors, such as the stock’s Relative Price Strength, the industry group’s performance and the health of the overall market must be considered, too..

> Institutional investors represent the bulk of trading activity in the market. As such, their buying and selling power can move a stock’s price up or down dramatically.> You can learn to spot which stocks institutions are buying and selling by watching for surges in trading volume.

> Look for stocks with an increasing total number of institutional owners in recent quarters. Look for those stocks that are owned by more funds each quarter.

Industry Groups

The Strongest Industries Often Produce The Best Stocks

Research shows that up to half of a stock’s move is traced to the strength of its industry. That’s why it’s important to track the performance of industry groups. In this lesson, you’ll learn how to do that, plus identify the stocks in the most attractive industry groups.

The majority of leading stocks are in leading industries. Being in the right industry group is almost as important as investing in the right company. We lists down for you a list of top performing industry group in the ‘market analysis’ section.

Each new market cycle is led by certain industries. In the late 1990s, for example, telecommunications and Internet-related industries were the leaders. Economic conditions and trends, in large part, determine which industries and sectors rise to lead the market. Through much of 1993, generic-drug makers led the market by offering less expensive medications to a cost-weary pharmaceutical market. In the more recent market cycle of 2004 construction and realty related industries led the market. Companies in the top-performing industries usually enjoy strong demand for their products and services that can drive up their stock’s price.

Here are a few examples of historically successful industries and the factors that propelled them to the top. As you can see, economic conditions and trends can play a huge role in determining which industries lead the market.

Industry Fundamental Factors
Biotechnology Breakthroughs in gene research.
Wireless Growth of “anytime, anywhere” communication technology, such as
Internet Infrastructure Demand for high-speed connections.

Sometimes, a major development happens in one industry and related industries later reap follow-on benefits. For example, in the late 1960s in America the airline industry underwent a renaissance with the introduction of jet airplanes. The increase in air travel a few years later spilled over to the hotel industry, which was more than happy to expand to meet the rising number of travelers.But some industries and individual stocks don’t ride the leaders’ coattails. Don’t assume that just because it’s the rainy season umbrella manufacturers will suddenly surge. You must still look for quality companies capable of producing healthy earnings, sales, resulting from exceptional products and services.

You don’t have to scan every single stock to find out which industries are leading the market. Each day, StockAxis.com’s top industry groups, found in the Market Analysis section, lists the top 5 industry group out of over 250 different industry groups by analyzing the price performance of all stocks in each group over the latest six months. This is a realistic period in which to observe market trends.

Why over 250 industry groups? Because the Indian economy is fragmented, and industries tend to spawn related businesses that become industries in their own right. Take the computer sector, for instance. It’s not just PC makers. There’s also Computer-Graphics, Computer-Education, Computer-Hardware, Computer-Peripheral Equipment, Computer-Services, and Computer-Software, which itself is divided into large, medium and small enterprises. More specific industry classifications make it easier to pinpoint specific areas leading or falling behind.

Reading sector movements helps judge the overall market because different sectors perk up at different stages of the business cycle. For example, the defensive sector (This sector includes supermarket chains, utilities, etc., which are sometimes viewed as havens during market slumps. People don’t change their spending much in such industries even when times are tough.) rises during times of economic weakness or when investors think the economy is headed down. The high-technology sector has been strong during expansion phases.

Another excellent way to spot market leadership is look at stocks making new 52-week price highs located. Look for sectors showing the most stocks making new price highs. These are usually the leading market sectors.

> Much of a stock’s move is due to the strength of its industry. You want to own stocks in industries that are displaying strength and market leadership.> Different industries move to market leadership as economic conditions and consumer trends change. You can identify the new leaders by watching the top five industry sectors with stocks making the most new price highs.

Leaders

The stocks outperforming the market tend to continue performing well, while lagging stocks are likely to remain underperformers. Here, you’ll see why this is an important lesson for investors and how to identify the leading stocks.

The Best-Performing Stocks Continue Performing Well

How many times have you concluded a stock’s best days are behind it, only to watch it soar as you stand on the sidelines? This assumption has often come back to haunt investors. In reality, the stocks that are doing best tend to keep doing well, while those slumping likely will continue to do poorly. Why? The great companies manifest their strength through superior performance in terms of earnings, sales, profit margins and, yes, even the performance of their stock.

A study of the greatest stock market winners found that all-star stocks had, on average, outperformed 87% of the market before they began their most dramatic price advances. In other words, they were already in leadership positions. This concept is contrary to the popular bargain-hunting mentality, but is based on historical facts.

If you want to find next year’s winning stocks, look at the better-performing stocks today. Remember, the biggest winning stocks historically have been, on average, in the top 13% of stocks at the time they began their major advances. To help you identify today’s leaders, we have developed the Relative Price Strength Rating, or RS Rating. This rating compares the price performance of each stock over the last 12 months, with extra emphasis on the three most recent months. Stocks are rated on a scale of 1 to 99, with 99 representing the top 1% in terms of price movement. So an RS Rating of 85 means that stock is outperforming 85% of all stocks in terms of price performance. An RS Rating of 25 means the stock is being outperformed by 75% of the market and should be avoided.

A good starting point for stock selection is identifying the top two or three stocks with the highest RS Rating in an industry group that’s leading the overall market.

Any stock worth considering should have an RS Rating of 80 or higher. This way, you’re concentrating on the top 20% of price performers. In fact, the most successful stock selections generally have RS Ratings of 90 or higher just before breaking out of their first or second base structure.Any stock below an RS Rating of 70 is not in leadership territory. If you consider any stock with an RS Rating of less than 70, keep in mind that you’re automatically ruling out the top 30% of the market. It’s conceivable these stocks will still go up, but it’s more likely they’ll have only lackluster performance. Bottom fishers, those investors looking for a bargain among down-and-out stocks, are tempted to buy stocks with low RS Ratings. But history proves the most powerful stocks have shown prior strength and aren’t rebounding from last place.

Many fund managers rely on the Relative Price Strength Rating to help make investment decisions.

It’s best when the relative strength line moves up at a sharp angle, showing the stock is outperforming the market. A line moving down indicates the opposite: a weakening stock. The relative strength line offers other clues:

> It’s a positive sign when the line begins moving higher before the stock price itself does. A rising line indicates underlying strength in a stock; frequently, it’s just a matter of time until the price itself begins moving higher.

> If a stock’s line stays on an uptrend, that’s positive. It shows the stock is keeping ahead of the overall market, acting as a confirmation of the stock’s uptrend.

> If a stock’s relative strength line fails to follow along with a new high in price, that’s a warning signal. This shows the overall market is moving up faster than the stock. This may signal the stock is weakening, though the price may not reflect it immediately.

> RS lines that start drifting lower over a period of time, even if prices remain steady, indicate the stock is weakening. This also shows the stock is slipping in comparison with the rest of the market.s

Another common temptation among investors is to seek out stocks that resemble leading stocks in terms of having similar products or services, but are trading at lower prices than the leaders. Usually, though, you’re better off sticking with the leader of the industry, even if its share price is higher. Take the IT industry. Wipro after 2000 crash fell about 90% from the peak of Rs. 1700, the price of the stock was only about Rs.350 in early 2008 after 8 years of the crash. On the other hand infosys made a new high and rallied higher sending its stock up during the same span of time. This is not a rare example, for any industry. The moral: stick with the leading stocks in a leading industry group.

No investor should pick stocks based on a single factor. You must weigh the full picture, including a company’s earnings, industry group performance, institutional sponsorship and chart patterns. (Institutional sponsorship, chart patterns and other important elements will be explained in detail in subsequent lessons.)

> Relative Price Strength Rating measures a stock’s price move over the last 12 months compared to all other stocks.> Look for stocks with high Relative Strength. The better-performing stocks tend to go higher, while the lagging stocks tend to lag even more.

> The Relative Strength line helps confirm a stock’s upward price movement. You want to see the RS line moving in a strong uptrend.

New Highs

Many investors have passed up great stocks because they had reached new price highs. Yet, that’s when many of the best stocks begin their major climbs, not when they’ve bottomed out. That’s why buying bargain-priced stocks is often a frustrating experience.

Buy High, Sell Higher

How many times have you heard the phrase, “buy low, sell high”? This is the conventional wisdom in the investment world, but research shows you shouldn’t be concerned with that part about buying low. Let’s walk through this one step at a time. Research shows that the best-performing stocks make new highs before they make their major leaps in price. Moreover, stocks at new highs tend to continue moving higher, while stocks making new lows tend to continue to move even lower.

This is a concept many investors find difficult to accept. They assume it’s too late to buy a stock that’s reached an all-time high. But the great paradox of the stock market is “What seems too high and risky to most investors is likely to continue rising. And what seems low and cheap usually goes down.”

Just by applying the laws of supply and demand you can see why new highs are important. When stocks advance, they’re demonstrating growing demand as investors raise their expectations about the company. On the other hand, stocks making new lows are usually afflicted by just the opposite: sagging expectations. Yes, there’s plenty of stocks in the bargain basement, but they’re there because the merchandise, so to speak, isn’t hot.

Some stocks may have very strong fundamentals or great stories, yet they don’t go up because there’s little investor interest. So while you wait for a stock to be discovered — if it ever does — other stocks are moving into the spotlight.

Stocks reaching new highs tell you professional investors are moving in and pushing prices higher.

Would you shy away from stocks that more than doubled in the past year or less? Consider taking a look at what happened with the greatest stocks of every bull market. They looked overpriced or had already moved or looked risky to buy just before its biggest move up.

In a good market, opportunities such as these, which start with new price highs, will surface every two or three weeks. In fact, if you ignore this simple rule, you would miss out on just about every major winning stock.

However, there can be such a thing as an “overextended” stock: one that truly has gone up too much, too fast and is likely headed down. As a rule, don’t buy any stock that has risen more than 5% past its buy point. In a nutshell, the buy point is the price after a stock clears the highest point in its basing formation. Basing formations are periods of price consolidation when a stock moves more or less sideways for a number of weeks after earlier advances. The buy point and basing formations are explained in lesson on charts.

One reason new highs represent better opportunities is because of something market pros call overhead supply. Suppose a stock that once traded at Rs.50 falls to Rs25. If it starts making its way back up, investors who bought near Rs.50 start hoping the stock gets back to the old high so they can sell and break even. This presents selling pressure near the Rs.50 mark. But once it clears that Rs.50 hurdle, the stock is no longer burdened by disappointed investors looking to wipe out their losses.

Perhaps you’re one of those investors who think they’ll hit the jackpot buying a low-priced stock that goes on to make huge gains. Some investors equate cheap stocks with better value or low risk. If a stock costs cheaply priced, then you can’t lose a whole lot, right? Wrong. The truth is that trying to consistently make money with cheap stocks is difficult, at best. Stocks are cheap for a reason. Think of a stock’s price as a measure of its quality and, consequently, its potential. Stocks selling cheap have a much smaller chance of making major advances, because they’re usually companies lacking good performance records. Also, professional investors shun low-priced stocks because they tend to be lightly traded, making it harder to move in and out of such stocks.

So, you can see what research bears out: it’s best to look for new highs in quality stocks. It’s especially good when the stock is coming out of a base. But don’t wait too long: As soon as you spot a buy point — and if all other factors are in place, such as good earnings growth — it’s time to have confidence and conviction and make your move. Otherwise, you may miss your opportunity.

Like you’ve seen in earlier chapters, you don’t want to buy a stock on any single factor. Where a stock is in relation to its 52-week high and low price is just one part of your stock-selection checklist. Other important ingredients are the Earnings Per Share (EPS) Rating, the Relative Price Strength (RS) Rating, the Industry Group Relative Strength (Group RS), and so on. These concepts are explained in the lessons on earnings, leaders and industry groups.Also, be careful with stocks that make new highs on less and less trading volume. This could be a sign of a stock topping (reaching its peak), especially in cases when a stock has gone up at least 50% in a few weeks after an extended advance. When a stock goes up on low volume, it’s a gain produced by relatively small purchases. It’s much safer to go with a stock that makes a new price high on higher volume, which indicates broader support for the stock.

> Quality stocks making new price highs just as they emerge from sound bases on higher volume are often likely to continue climbing, while stocks making new lows are probably headed even lower. Therefore, focus on the new price highs list for the best potential opportunities.> The great paradox of the stock market is that what seems too high and risky to most investors is likely to continue rising. And what seems low and cheap usually goes down.

> You can think of a stock’s price as a measure of its quality and, consequently, its potential. Typically, stocks higher in price reflect higher quality.

New Products

New Products Or ManagementExplosive stock growth doesn’t happen in a vacuum. Usually, new products, new services or new management propels stocks to astounding heights. That’s why it’s important to keep up with developments that could launch the next great stock.

The Best Stocks Reflect Success Stories

Stocks don’t double, triple or move even higher in a vacuum. There’s usually a new story behind a stock’s major price advance. Where would Microsoft be today without its Windows operating system? If you look through the list of greatest stocks in U.S., there are plenty of breakthrough products that fueled stock advances:

> Syntex rocketed 450% in six months during 1963, when it began selling the first oral contraceptive pill.

> McDonald’s surged 1,100% from 1967 to 1971 as its low-cost, fast-food franchising business model swept the nation.

> From 1978 to 1980, Wang Labs’ shares grew 1,350% with the development of word-processing office equipment.
International Game Technology surged 1,600% in 1991-1993 thanks to the development of game technology based on microprocessors.

> Accustaff rose 1,486% from January 1995 to May 1996 as outsourcing grabbed hold of Corporate America, sending this temporary-staffing firm to big profits.

> America Online surged 593% from September 1994 to June 1996 as the company rose to become the leading Internet service provider to a nation eager to log on to the Web.

> Qualcomm rose 376% from February 1999 to December 1999 on the rising popularity of the company’s Code Division Multiple Access technology for wireless telephones.

A study evaluating the greatest stocks dating back to 1953 found 95% of these winners had breakthrough products, new management or new way of doing business that boosted these stocks to staggering heights.

It’s worth emphasizing that these and other success stories didn’t achieve greatness without proven products.

Often, gullible investors buy stocks because the company promises the cure for cancer or some other breakthrough technology. It’s wiser to wait for products to prove themselves in the marketplace before investing in something untested. If a product really hits it big, there will be strong demand for a long time.

For the best companies, success isn’t something that happens by accident. They never stop innovating and evaluating the future of the marketplace. As soon as one product is out the door, they’re working on the next generation and new ways to sustain their leadership. Microsoft, Google and Apple are one of the greatest examples.

Companies’ annual reports occasionally overhype achievements and developments, creating unrealistic expectations. Whatever annual reports promise should be carefully scrutinized.

Many Internet chat rooms and bulletin boards are notorious for stock hype, too. Anything you read in these sites needs to be taken with a big grain of salt. You never know who’s posting the information, what their motives are or if details are even true. Rumors and “tips” are plentiful, though few have any truth to them.

“Management is what used to be required to run a company. Today it’s leadership. A manager basically controls, establishes plans, makes a budget, allocates work and tracks results. A leader is much more focused on vision and beliefs. He or she inspires people and breaks roadblocks so that people can accomplish more.”

— Robert Eaton, ex co-chairman, DaimlerChrysler.

You’ve probably heard about super-executives who rescue companies from the brink of bankruptcy or take them to astonishing heights. Visionaries such as these can be responsible for a powerful stock move. Apple Computer was faltering in 1997, when co-founder Steve Jobs returned to lead the company back into profitability. Under his leadership, Apple shares more than quadrupled over the next couple of years.

What makes management outstanding? There’s more to successful management than inventing the next personal computer or coming up with the next big trend in fast food. Executives must also be adept at guiding companies through difficult times, adjusting to changing market conditions, taking advantage of new opportunities. Good managers are visionaries, able to redefine business models. Often, other companies emulate their successful strategies. These leaders demonstrate the ability to deliver on promises, meet growth projections and deadlines, building a reputation for credibility and integrity. Communication skills in today’s corporate world are vital if managers are to reach workers at each layer of their organizations.

> A stock that makes big gains often result from new products or services. But be wary of unproven products, especially if the company management doesn’t have a solid track record.> Superior management is essential to a company’s success. That’s why sometimes a change at the top pushes a stock’s price higher.

Lessons On Selling Stocks

How To Sell Stocks To Maximize Your Profits
Buying a stock is only half of the equation. Knowing when to sell is just as important. The first part of this course discusses why it’s critical to cut your losses early.
The second and third lessons teach you how to spot the best time to sell and take your profits, including ways to use stock charts to detect a weakening stock.
sell and take your profits, including ways to use stock charts to detect a weakening stock.
These lessons are based on decades of research that continues to this day into the primary factors that move stocks. These principles aren’t based on someone’s opinion or theories from business schools. They’re all based on what actually works in the market.

Lesson 1. Cutting Losses

Selling Stocks To Cut Losses

Success in the stock market is as much about limiting losses as it is about riding winning stocks. A rule-based selling strategy can help you avoid heavy losses and preserve your portfolio. This lesson explains how to sell when a stock selection doesn’t pan out.

Know When To Fold ‘Em

Nobody’s right all the time in the market, not even veteran market professionals. But as the famous investor Bernard Baruch once said, “Even being right three or four times out of 10 should yield a person a fortune if they have the sense to cut losses quickly.”

Being a successful investor is just as much about limiting losses as it is about riding a winning stock. Downturns are a part of life in the market, and you must act decisively to shield yourself from excessive losses. If your stock selection doesn’t work out and you’re faced with a loss, don’t let your pride stop you from admitting you’ve made a mistake and acting quickly. Cut your losses early and move on. You must make rational decisions, instead of trying to rationalize your way out of a costly mistake.

It’s not just your own personal opinions that can be wrong. Analysts or market commentators can be just as erroneous, and basing your decisions on their opinions can often lead to disastrous results. Investors often buy loser stocks, justifying their decision with remarks like, “All these Wall Street analysts are saying great things about this company,” or “This technology is the greatest thing since sliced bread. The market doesn’t realize it yet, but it’s bound to become a household item.” Famous last words.

The first rule is sell any stock that falls 8% below your purchase price. Why 8%? Because research shows stocks showing all the right fundamental and technical factors in place and bought at precisely the proper buy point (which is explained fully in “Lesson on Charts”) rarely will retreat 8%. If they do, there’s something wrong with them.

You may think a stock is due to rebound. But the market could send the stock to lower depths regardless of your views or what analysts and commentators say on TV. No excuses, no alibis. You may want to sell even before an 8% loss if you see other signs of weakness in a stock.

This rule emphasizes the importance of buying at the right time. If you don’t and you buy a stock that is overextended (that’s reaching the end of its climb), chances are it will hit the 8% sell level as it goes through a normal pullback. Make no exceptions to the rule. The best stocks will always give you other opportunities to buy. Here’s another way to look at it: Once a stock falls 8% below your cost, does it still look attractive? Is it still among the best stocks? Probably not. There’s no guarantee that it will go back up, and you need to protect yourself.

The bigger the fall, the harder it is to recover. Say you bought a stock at Rs.100 a share. It falls 20%, to $80. To get back to Rs.100, the stock has to make a 25% gain. Another example: The stock plummets 50%, to Rs.50 a share. It would take a 100% jump to get it back to Rs.100 — and how often do you buy a stock that doubles? And if it does, how many weeks, months or even years does it take to get there? Wouldn’t you rather cut your loss early, and free up money to purchase another stock with better chances of doubling?

Of course, it could happen that you sell a stock that falls 8%, and then watch it go up afterward. But you have to think of the 8% sell rule as your insurance policy against catastrophic losses. The rule will in effect limit any losses on your portfolio to no worse than 8%.

Nevertheless, if you’ve bought a fundamentally sound stock at the right point, (explained in the stock buying lessons) it will rarely plunge 8% immediately. Buying exactly right will solve half your selling questions.

Stock Shares Cost/Share Sell Price Profit/Loss %Profit/Loss
A 100 Rs.50 Rs.46 -Rs.400 -8%
B 100 Rs.50 Rs.46 -Rs.400 -8%
C 100 Rs.50 Rs.60 Rs.1,000 +20%
D 100 Rs.50 Rs.46 -Rs.400 -8%
E 100 Rs.50 Rs.46 -Rs.400 -8%
F 100 Rs.50 Rs.75 -Rs.2,500 +50%

As you can see, even if you had made these seven trades over a period of time — and taken losses on five of them — you would still come out ahead by Rs.1,500. That’s because the two stocks that worked out resulted in a combined profit of Rs.3,500. And the five losses — all capped at 8% — added up to Rs.2,000.

You see the point? It would take several 8% losses to wipe out the profit from just one or two good stocks.

The 8% Stop Loss Rules Applies Only To Losses From The Purchase Price.

The 8% sell rule, however, applies only to drops below your purchase price and does not apply to situations where you’ve already made gains on a stock.

About 40% of stocks pull back close to their buy point for one or two days. This is not the time to panic and sell, especially if the stock was purchased as it came out of a sound basing area at the right buy point. (For more on this, check lessons on charts ) As long as the price doesn’t drop 8% below the point at which you bought, you should, in most cases, hang on through the first pullback.Watch how the stock performs relative to the general market and its industry group peers. Often, a stock pulls back close to the buy point for one or two days because the general market has temporarily pulled back. This is normal. On the other hand, if the market has been rallying over several days and your stock hasn’t come to life, then this might be a warning sign, even if the stock hasn’t dropped 8% below your purchase price.

Some investors like to use stop-loss orders, which are instructions to brokers to sell a stock at a predetermined price. This might be useful for those who can’t watch their stocks closely or for those of us who may be less decisive.

Also, tax considerations and brokers’ commissions should rarely enter into your sell decisions. You shouldn’t always hold a stock for more than a year just because you’d pay a lower tax rate on the profit. And with lower commissions today, they should not be the most important factor. Your main goal should be to obtain and nail down gains.

You may be looking at your portfolio and seeing there’s some stocks already 8% below your purchase price — or worse. Should you sell them? Probably yes because as the stock goes lower it becomes even more difficult to sell. It is easier to sell a stock which is down 8% to a stock which is down 30%. You feel that the stock can not go lower but feeling has no significance in the stock market. There is no guarantee it will rebound, and the chances are it could go even lower. The greater the loss, the greater the chance of it developing into a really serious loss.

> The first sell rule is to get rid of any stock that falls 8% below your purchase price.

> It’s critical to follow this loss-cutting rule regardless of how highly you value a stock. Personal opinions get in the way of smart selling decisions.

> The larger the loss, the higher the recovery you need to get back to the break-even level. (A 50% loss requires a 100% gain to break even.)

> Strong stocks sometimes initially retreat close to their buy point (as determined by the stock’s chart pattern). This doesn’t necessarily mean you have to sell, unless the stock goes 8% below the purchase price.

> Avoid making sell decisions based on tax concerns or commission rates.

Lesson 2. Taking Profits

How do you tell if a stock is at the end of a major price advance? In this lesson, you’ll learn about ways to recognize when a stock starts sputtering and lock in your profits. Chart-reading skills are a key part of this education.

When To Take A Profit

Let’s say you bought a stock and you’re watching it go up. At what point do you call it a day and take your profits?

The sell signals discussed here and in other lessons can occur well before a stock has peaked. So it’s important to learn to recognize critical sell signals. If you regularly review the characteristics of stocks that took a turn for the worse, over time you’ll be able to quickly spot valid signals as soon as they occur.

There are several simple selling strategies that have proven beneficial in helping you consistently lock in profits.
Here’s a simple one. Generally, stocks tend to move up roughly 25% to 30% after rising out of a base. Then they may go through a period of consolidation, when a stock seems to go nowhere for a number of weeks.

A strategy that safeguards your profits is to sell after you’ve captured a 25% gain. This is the conservative approach to profit-taking that works like “building blocks.” Once you sell and take a 30% gain, compounding it with other 25% profits taken during the year should net you very substantial gains overall. This gets back to one of the basic tenets of investing: The key to being really successful is to capitalize on your strongest stocks.

The 25% profits will also outweigh any mistakes you make in stocks that start to take a nosedive if you also cut losses at 8% (see Lesson 1, “When To Sell Stocks To Cut Losses.”) These two strategies alone could help you become quite successful in the market.

There’s an exception to this rule, however. If a stock races up 20% in one to three weeks out of a proper base, it probably means it has plenty of fuel left and you should hang on to it. It may be your best stock. And always review the market conditions. In a strong market, you will see this situation often.

The shorter the trip to the 25% level, the stronger the stock.

Often, the most important sell indicator is the stock’s price and volume action as shown on a chart. Many times, stocks break down their upward trends before any negative signs emerge from fundamentals, such as earnings, sales, profit margins or return on equity. The following indicators can flag weakness in a stock and can be observed with the aid of Charts.

Volume Clues

If a stock’s price falls persistently on heavy volume, it usually signals a shift in professional investor sentiment in which sellers predominate, making any price advances more difficult. Another red flag is a stock making new price highs on lower or poor volume.

Price Clues

The number of consecutive down days in price vs. up days will likely change and increase once a stock begins falling from its top. For example, a stock will close lower five days, followed by two days closing higher, compared to an earlier pattern of five days up and then two down.

Churning

After a substantial advance, the stock’s trading volume increases but its price doesn’t move up much for several days. This is called churning, or heavy volume without further price progress.

Sometimes sales numbers mask problems at companies. Companies may rely on just a handful of customers, and losing any of them may mean big trouble. Other companies are overly reliant on overseas markets, putting them at risk of bad economies or political strife abroad. Also, fluctuations in foreign-exchange rates can seriously dilute sales figures. Some companies, such as pharmaceuticals, get the bulk of their sales from a few flagship products. If sales in these items falter, it could mean more trouble than if the overall sales drop. With retailers, additions of new stores increase the sales figures, even if sales at existing stores slow down. That’s why retailers report total sales as well as same-store sales, to provide an apples-to-apples comparison. Another pitfall happens when companies include sales that haven’t actually taken place. Orders that won’t be shipped or paid until weeks or months later sometimes are added to the sales total to inflate results. Also many a times the sales increase because of the price inflation and not actual demand, typical in commodity companies. Therefore price increase should be sustainable and not just a one time temporary phenomena.

Moving Average Lines

Pay close attention if the stock’s price closes below the 50-day moving average. The 50-day moving average is generally regarded as a stock’s possible price “support” level. It may not mean much when a stock dips below this level, but when it closes several weeks below the 50-day line, unable to rally, it suggests investors are abandoning the stock. Also worrisome is a 200-day line that turns down.

The stock breaks out of a basing chart pattern, but weekly volume is less than the week before, or volume is less than 50% above the stock’s average over the past 50-days (The average volume is illustrated by the line moving across the volume bars.) This indicates lukewarm interest at a pivotal point for the stock, and it could later become a failed breakout.

Climax Tops

The stock, after a strong run-up for several months, reaches a “climax top” in which the price suddenly goes up even faster — 25% to 50% or more on heavy volume in a couple of weeks. The price spread for the week will be greater than on any prior week since the beginning of the stock’s major move. Sometimes this run will culminate with the stock’s largest single-day advance since it began moving up. As the name implies, this is a situation when a buying spree in a stock becomes too obvious and everyone is excited by the price action. When it’s obvious and exciting, it’s too late — sell into the euphoria.

Some climax runs will end with an “exhaustion gap,” which happens when a stock that has been advancing rapidly and is greatly extended from its base opens at a price above the prior day’s highest level. This usually indicates the final stage of its move — one final burst of buying before a stock eases back. However, when this happens close to the breakout, it is called a breakaway gain, and it can actually be a sign of strength.

Late-Stage Bases

As a stock advances, it builds several bases. The third or fourth base, however, is more prone to a decline. This is common among leading stocks. During the first base, the stock demonstrates inherent strength, but few investors notice it. When the second base forms, more investors notice it. By the time the third or fourth base forms, however, almost everybody notices it, including most of analysts, brokers as well as dealers. That, oddly enough, is historically the time when the stock is most likely to sputter.

One of the most important selling rules applies not to individual stocks, but to the market as a whole. You may be right about your stocks, but if you’re wrong in your assessment of the general market, your stocks will suffer. During a market decline, even good stocks have a hard time swimming against the market’s current. Typically, three out of four stocks go down in a declining market.

The market always begins a downturn with a series of distribution days in which selling predominates. Over the course of a few weeks, at least one of the major market indexes (the Sensex or the Nifty) closes lower or stalls several times on higher trading volume than the prior day. This is another example of churning, and every major market downturn has begun with one such episode.

Also during weakening markets, the leading stocks (those that have led the market’s uptrend) typically start to falter.

When the market enters a confirmed downturn after four or five days of clear distribution in a market index, you’re better off selling some of your stocks and raising some cash. Get off margin (that’s when you borrow from your broker to buy stocks) at once. Sell your worst performing stocks first. Of course, you’ll need to keep watching the major market averages to identify the market’s next turn. You may see the market rally for a few days, only to falter. Learn to recognize a valid market upturn so you aren’t misled. Always regard the 8% Sell Rule (selling any stock that falls 8% below your purchase price) as your safety net, particularly in market declines. Track signs of weakness in both your stocks as well as the general market.

But we have already done the hard work for you. Market Direction is presented in the Market Analysis section.To avoid serious damage take the pain to read the ‘Market Direction’ daily.

Lesson 3. Selling Indicators

Just like stocks flash signals before making huge gains, they can also show certain characteristics that indicate potential trouble. In this lesson, you’ll learn to identify the warning signs of a weakening stock.

Sell Signals Aren’t Always Obvious

If sales growth starts to slow, does it really mean trouble for a company?

If the leading stock in an industry group sputters, does it spell a similar fate for other stocks in the group?
And must you always sell if earnings are disappointing?

For investors, these questions are just as challenging as finding the right stocks to buy. Sometimes, stocks can fool you. They peak on seemingly the best days, when financial magazines rave about them, and shareholders are bubbling with excitement.

But some of the same tools that indicate the potential for a stock to go up, can also tell you if a stock is headed down. This lesson will help you isolate the most useful fundamental indicators. But keep in mind that a stock’s price and volume action is also valuable in spotting sell signs. Many times, a stock’s chart will reveal something wrong with a stock much earlier than fundamental factors.”

If you want clues to a stock’s decline, you can basically take all the financial indicators that drive a stock up — such as earnings growth, sales growth and profit margins — and turn them upside down. These are your red flags:

A sharp slowdown in earnings growth in back-to-back quarters. For example, if a company’s earnings growth has been in the 100% range for several quarters, it’s bad news when that slows down to 20% or 30%. The street has little patience and will quickly turn its attention to other, faster-growing companies. You should also pay attention to companies whose earnings or sales growth break a habitual pattern. For example, if a company had earnings growth over several quarters between 25% and 35% then reports three quarters of steady deceleration, this could be a red flag. Such subtle slowdowns in earnings or sales can sometimes lead to the company eventually missing earnings forecasts.

Significant drops in other main fundamentals — sales growth, profit margins and return on equity — should serve as warning signs, especially if the stock starts having trouble making gains. Check the Sales+Profit Margins+ROE Rating for any significant drops in this gauge.

When the majority of best-performing stocks in an industry fall sharply on heavy volume and are unable to recover, typically other stocks in the same industry could become vulnerable.

For example if ICICI Bank or State Bank of India is falling sharply on heavy volume, the fall of the other banking stocks could be on the cards.

One of the best ways to tell if a stock might go higher is by how it’s performing already. When a stock no longer outperforms its peers, it’s telling you the road will probably get bumpy. You can tell exactly how a stock is performing with the Relative Price Strength. Your stock should better than its pears.

The buying activity by mutual funds and other institutional investors is a huge influence on stock prices. Just as it’s wise to buy stocks funds are buying, you might in certain cases consider selling stocks the funds are selling. Professional selling can be witnessed on the charts when stocks fall on heavy volume. One can also see the institutional holding in the shareholding pattern published every quarter on the websites of BSE and NSE.

Stock splits are when a company increases its shares outstanding and the share price is adjusted accordingly. For example, XYZ Corp. sets a 2-for-1 split of 100 million shares trading at Rs.50 each. After a split, there are twice as many shares, or 200 million, trading at Rs.25. Companies do this to lower the share price in hopes of drawing more investors into the stock.
But too many splits can have the opposite effect. Adding shares can tilt the supply-demand equation because there’s a bigger supply of shares to go around. The stock price could fall. Carefully watch any stock that has split more than once in the past 12 months. Consider selling if a stock runs up 25% to 50% for one or two weeks on a stock split. However, a few hyper-growth stocks have kept climbing despite more than one split a year.

> Consider selling a stock if it shows fundamental signs of weakness, such as a steady deceleration in earnings or sales.

> Watch for weakness in the stock’s industry group. When the leading stocks in an industry decline, the other stocks in the group may typically go down, too.

> If there are signs that mutual funds are consistently selling the stock, you should consider selling.

> Too many stock splits close together in time can push a stock lower.

Investment Philosophy

> We never advise to buy or sell stocks on tips or rumors, no exceptions.

> We identify an uptrend or downtrend by using a complex proprietary method.

> Only buy when the market is in an uptrend. 3 out of every 4 stocks follow the market either up or down.

> Buy leading stocks in the leading industry groups. Half of any stock’s move, either up or down is due to the strength or weakness of its industry group and its overall sector.

> Buy stocks with the best EPS growth in the past 3 years giving added weight-age to the most recent quarter results.

> Identify chart patterns: cup with a handle, flat base.

> Buy leading stocks at proper buy points in a market rally.

> Buy stocks as they break out into new highs on high volumes, at least 50% higher than the 50 day average volume.

> Sell stocks as they break down into new lows on high volumes, at least 50% higher than the 50 day average volume.

> Stocks tend to make their biggest gains within the first 8 years after an IPO.

> In US about 80% of leading stocks went public within the past 8 years.

> Cut losses at 8%, no exceptions.

>Remember it takes 100% gain to recover a 50% loss.

> The 8% rule only applies to your entry price.

> Cutting your losses is like paying insurance premium.

> In a bear market, average decline of a leading stock is 72%.

> Only 1 out of 8 will come back to lead the next bull market.

> Look for price and volume actions.

> Don’t let emotions take over; we believe that’s one of the biggest dangers in investing.

> Never average down, instead averaging up is a better strategy.

> Use 50 & 200 day moving averages as vital points.

> Buy & hold investing can be very dangerous.

> Look for distribution days (high volume down days) on major indices of the country and also other emerging countries like Hong Kong, Brazil, Korea, Taiwan, most importantly the USA.

> 4-5 distribution days in the past 4 weeks, indicates that market is in down trend and its time to be in cash.

> On an average bull market lasts for 3 to 4 years and bear markets for 6 months to 18 months although longer bull & bear markets have been witnessed in the past.

> Growing institutional holding is a positive sign for a stock whereas declining institutional ownership is negative.

> History definitely repeats itself in the stock market.

> Don’t back your judgment until the action of the market itself confirms your opinion. “Markets are never wrong – opinions often are.”

Rules For Stock Market Success

How To Select The Right Stocks At The Right Time
The seven lessons in this course explain the characteristics of successful stocks and the forces that push them up. The first seven lessons explain specific traits to look for when buying stocks.

If all our rules are carefully followed (not just the ones you like), your investment results should materially improve:

Rule 1.
Consider buying stocks with each of the last three years’ earnings up 25%+, return on equity of 17%+ and recent earnings and sales accelerating.

Rule 2.
Recent quarterly earnings and sales should be up 25% or more.

Rule 3.
Never buy or sell stocks on Tips or Rumours, no exception.

Rule 4.
Cut every loss when it’s 8% below your cost. Make no exceptions so you can always avoid huge, damaging losses. Never average down in price. In a bear market, average decline of a leading stock is 72%.

Rule 5.
Follow selling rules on when to sell and take profit on the way up.

Rule 6.
Buy when market indexes are in an uptrend. Three out of every four stocks follow the market, either up or down. Reduce investments and raise cash when general market indexes show five or more days of volume distribution.

Rule 7.
Buy leading stocks in the leading industry groups. 50% of any stocks move either up or down is because of the strength or weakness of its Industry Group & its overall sector.

Rule 8.
Pick companies with management ownership of stock.

Rule 9.
Buy stocks breaking out in heavy volume from chart patterns like cup with a handle, flat base, double bottom, etc.

Rule 10.
Select stocks with increasing institutional sponsorship in recent quarters.

Rule 11.
Current quarterly after-tax profit margins should be improving, near their peak and among the best in the stock’s industry.

Rule 12.
Don’t buy because of dividends or PE ratios.

Rule 13.
Pick companies with a superior new product or service.

Rule 14.
Invest mainly in entrepreneurial companies. Pay close attention to those with an IPO in the past 8 years.

Rule 15.
Check into companies buying back 5% to 10% of their stock and those with new management.

Rule 16.
Don’t try to bottom guess or buy on the way down. Never argue with the market. Forget your pride and ego. Dont back your judgements until the action of the market itself confirms your opinion.
“Markets are never wrong – opinions often are”. Dont let emotions take over, thats one of the biggest dangers of Investing.

Rule 17.
Find out if the market currently favours large cap or small cap stocks.

Rule 18.
Do a post-analysis of all your buys and sells. Post on charts where you bought and sold each stock. Evaluate and develop rules to correct your major past mistakes.

Common Mistakes Most Investors Make

Success In The Market Is Achieved By Avoiding The Classic Mistakes Made Most Often By The Least Successful Investors.
Knute Rockne, the famous winning Notre Dame football coach used to say, “Build up your weakness until they become your strong points”.

The reason people either lose money or achieve mediocre results in the stock market is that they simply make too many mistakes.

These are the mistakes you must avoid.

1. Stubbornly holding onto losses when they are very small & reasonable.

2. Buying On The Way Down In Price, Thus Ensuring Miserable Results.

3. Averaging Down In Price Rather Than Up When Buying.

4. Buying Large Amounts Of Low Priced Stocks Rather Than Smaller Amounts Of Higher Priced Stocks.

5. Wanting To Make A Quick & Easy Buck.

6. Buying On Tips, Rumours, Split Announcements & Other News Events, Stories Advisory Service Recommendations, Or Opinions You Hear From Supposed Market Experts On TV.

7. Selecting Second Rate Stocks Because Of Dividends Or Low Price-Earnings (P/E) Ratios.

8. Never Getting Out Of The Starting Gate Properly Due To Poor Selection Criteria & Not Knowing Exactly What To Look For In A Successful Company.

9. Buying Old Names You Are Familiar With.

10. Not Using Charts & Being Afraid Of Buying Stocks That Are Going Into New High Ground In Price.

11. Cashing In Small Profits Early While Holding The Losers.

12. Worrying Too Much About Taxes, Commission & Brokerage.

13. Speculating Too Heavily In Futures Because They Are Thought To Be a Way To Get Rich Quick.

Stock Trend

Timing the Right Buy Point

Every good trader knows that you cannot fight the overall trend of the market and win consistently. Great traders know that the easiest way to make profits from the market is to go with the current trend and not fight it. Makes sense, right?

Investors would love to know exactly when to get in a trade and when to get out. Trend System identifies the direction (UP TREND / DOWN TREND) of a stock price movement. The Trend is designed to help you quickly find when to buy, sell or hold a particular stock.

Stock Trend

Riding Your Winners

One of the most enduring sayings on Dalal Street is “Let your winners Run” but many investors still appear to sell the stocks after a small gain only to watch them head higher. We’ll help you stand out from the crowd and show you how to identify winners and when to make your move.

Trend System identifies the direction of a stock’s price movement. One should hold the positions till the Long Term Trend turns DOWN from UP.

Stock Trend

Cutting Losers Early

One of the most important rules for investment in stock market is “Damage Control” … by keeping Stop Loss on your trades. This means selling a stock when it’s down by few percent from your purchase price. Sounds simple, but no one wants to sell for a loss.

Now the question arrives, how one can know the technical point to keep the stop loss? You can get out of the stock when the Long term Trend turns DOWN from UP.

So leave your emotions behind. Cutting losses with discipline will help you stay out of trouble.
The same is true for every successful investor. They calmly take a small loss and look for the next potential winner.

Stock Trend

Short Selling

Short Selling is the most difficult part of trading and only a professional should attempt and only the very best succeed. Timing the right short sell point is one of the most tricky part of trading. With the trend system one can short a stock when the long term trend turns DOWN from UP.

Caution: One must be alert to reverse the short sell position as soon as the trend turns UP from DOWN.

(i) Cash Reserve Ratio (CRR)

It refers to the minimum amount of funds that a commercial bank has to maintain with the Reserve Bank of India, in the form of deposits. For example, suppose the total assets of a bank are worth Rs 200 crores and the minimum cash reserve ratio is 10%. Then the amount that the commercial bank has to maintain with RBI is Rs 20 crores. If this ratio rises to 20%, then the reserve with RBI increases to Rs 40 crores. Thus, less money will be left with the commercial bank for lending. This will eventually lead to considerable decrease in the money supply. On the contrary, a fall in CRR will lead to an increase in the money supply.

(ii) Statutory Liquidity Ratio (SLR)

SLR is concerned with maintaining the minimum reserve of assets with RBI, whereas the cash reserve ratio is concerned with maintaining cash balance (reserve) with RBI. So, SLR is defined as the minimum percentage of assets to be maintained in the form of either fixed or liquid assets with RBI. The flow of credit is reduced by increasing this liquidity ratio and vice-versa. In the previous example, this can be understood as rise in SLR will restrict the banks to pump money in the economy, thereby contributing towards decrease in money supply. The reverse case happens if there is a fall in SLR, as it increases the money supply in the economy.

1.) Repo Rate :

Whenever the banks have any shortage of funds they can borrow it form RBI. Repo rate is the rate at which commercial banks borrows rupees from RBI. A reduction in the repo rate will help banks to get money at cheaper rate. When the repo rate increases borrowing form RBI becomes more expensive.

2.) Reverse Repo Rate :

Reverse Repo rate is the rate at which RBI borrows money from commercial banks. Banks are always happy to lend money to RBI since their money is in the safe hands with a good interest. An increase in reverse repo rate can cause the banks to transfer more funds to RBI due to this attractive interest rates. One factor which
encourages an organization to enter into reverse repo is that it earns some extra income on its otherwise idle cash.

1)Marginal Standing Facility (MSF) :

MSF rate is the rate at which banks borrow funds overnight from the Reserve Bank of India (RBI) against approved government securities.

2) Bank Rate :

The interest rate at which at central bank lends money to commercial banks. Often these loans are very short in duration. Managing the bank rate is a preferred method by which central banks can regulate the level of economic activity. Lower bank rates can help to expand the economy, when unemployment is high, by lowering
the cost of funds for borrowers. Conversely, higher bank rates help to reign in the economy, when inflation is higher than desired.

Commodity Price Quotation Lot Size PRICE PER TICK PL PER RS EXPIRY D DELIVERY TRADING ORDER QTY DELIVERY UNIT MAX ORDER SIZE CIRCUIT FILTER MEMBERS LIMIT Approx Margin
ALUMINI1KGS 10000.0501000LAST DAYBOTH OPTION1MT TONE10 MT DELIVEY 150 MT 4,6,92500005,380
ALUMINIUM1KGS 50000.0505000LAST DAYBOTH OPTION5 MT TONE10 MT DELIVEY 150 MT 4,6,925000027,063
BRCRUDEOIL1BBL 100LAST DAYBOTH OPTION 100.000 30,355
CARDAMOM1KGS 1000.1001015 THCOMPALSORY100 KG100 KG 50.000 16003,923
COPPER1KGS 10000.0501000LAST DAYBOTH OPTION1 MT9 MT 70.000 4.6.97000017,300
COPPERM1KGS 2500.050250LAST DAYBOTH OPTION250 KG9 MT 280.000 4.6.9700004,349
COTTON1BALES 2510.000250LAST DAYCOMPALSORY25 BALES100 BALES 48.000 7000020,475
CPO10KGS 10000.100100LAST DAYBOTH OPTION10 MT10 MT DELIVEY 20.000 5000028,820
CRUDEOIL1BBL 1001.00010019/20BOTH OPTION100 BARREL50000 BARRELS 100.000 4,6,9480000024,799
CRUDEOILM1BBL 101.0001019/20BOTH OPTION10 BARREL50000 BARRELS 10000.000 4.6.948000003,268
GOLD10GRMS 1001.0001005 TH DAYCOMPULSORY1 KG1 KG 10.000 3,6,950 MT153,220
GOLDGLOBAL10GRMS 205 TH DAYCOMPULSORY20 50.000 3,6,931,348
GOLDM10GRMS 101.000105 TH DAYCOMPULSORY100 GRM100 GRM 100.000 3,6,914,820
GOLDPETAL1GRMS 11.00015 TH DAYCOMPULSORY8 GRM8 GRM 10000.000 3,6,9148
GOLDPTLDEL1GRMS 15 TH DAYCOMPULSORY 148
KAPAS20KGS 200LAST DAYCOMPALSORY 7,800
LEAD1KGS 50000.0505000LAST DAYBOTH OPTION5 MT TONE10 MT DELIVEY 20.000 4,6,935000 MT30,675
LEADMINI1KGS 10000.0501000LAST DAYBOTH OPTION1 MT10 MT DELIVERY 100.000 4,6,935000 MT6,643
MENTHAOIL1KGS 3600.10036LAST DAYCOMPALSORY360 KG360 KG 50.000 500016,380
NATURALGAS1mmBtu 12500.100125025/26BOTH OPTION1250 MMBTU10000 MMBTU 16.000 4,6,960000000 MMBTU11,325
NICKEL1KGS 2500.100250LAST DAYBOTH OPTION250 KG3 MT 96.000 4,6,910000 MT13,289
NICKELM1KGS 1000.100100LAST DAYBOTH OPTION100 KG3 MT 240.000 4,6,910000 MT4,688
SILVER1KGS 301.000305 TH DAYCOMPALSORY30 KG30 KG 20.000 4,6,9,31000 MT67,595
SILVER10001KGS 11.0001LAST DAYCOMPALSORY1 KG1 KG 600.000 4,6,9,31000 MT2,000
SILVERM1KGS 51.0005LAST DAYBOTH OPTION5 KG30 KG 120.000 4,6,9,31000 MT10,061
SILVERMIC1KGS 11.0001LAST DAYBOTH OPTION1 KG30 KG 600.000 4,6,9,31000 MT1,978
ZINC1KGS 50000.0505000LAST DAYBOTH OPTION5 MT TONE10 MT TONE 20.000 4,6,970000 MT36,587
ZINCMINI1KGS 10000.0501000LAST DAYBOTH OPTION1 MT10 MT 100.000 4,6,970000 MT7,473

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