Articles on Investment Matters:

How Do You React When Your Stocks Are Down?

There is a lot of money to be made when trading the stock market, however, losses are a fact of life for every stock market investor. The difference between successful traders and the rest is simply in how they deal with those losses. Its that strategy that will either make you money, or simply add to your losses.

The buy and hold method of trading large and small caps has been preached to and from the choir loft. Yet it is one thing to hear and know that this is a solid investment tactic and another thing in which to follow through when your stock has dropped 20 points during the course of a single afternoon.

Anyone has suffered through the woes of a bear market knows that it is quite difficult to stick to your initial investment strategy when all around you people are jumping ship and liquidating assets. This is an investment strategy that requires discipline along with nerves of steel. Fears of depression often have investors heading for the hills and using logic that is at best faulty and at worst financially devastating.

If you have done your due diligence on your investment before you bought, then you should be able to weather the storm over the long term. As a matter of fact, the drop may provide the perfect opportunity to add to your position. Its important to remember that the buy and hold strategy works best with large cap stocks.

In these situations, perfectly stable companies may begin selling for fractions of their actual value for the interim-this by no means indicates that these companies will not fully recover and prove to be a perfectly solid investment. Below you will find three fundamental truths that should help weather your short-term market losses and stand fast when others are running for higher ground.

First: what you hold in your portfolio is more than a piece of paper; it is a part of a business. You own a share in that business and as a result have a stake in the prosperity of that particular business. You will find that along the way many people simply invest in stocks simply because they are going up and hope to sell before they go down below the price at which they were purchased. These types of investors are more like 'gamblers' than investors because they invest nothing solid into their holdings. What goes up must come down and these types of investors run a very real risk of loosing money on these types of ventures.

Owning a portion of a company is no different than owning anything else. From a car to a home, whether you own it outright, or own it with someone else, in both cases, you need to do your due diligence. The price of everything fluctuates, whether its the value of a home, or a collectible hockey card, its value will move according to how the market is valuing the item. Stocks are no different. If you have researched, asked questions, and followed the movements of the share price, each of these actions has one thing in common: the do not involve emotion. If you let emotion dictate or influence your investing decisions in any way, you need to stay away from the stock market - you are going to lose money.

When a stocks share price moves lower, its for one of two reasons. Either the company has issued a material news release, which changes the variables you used to base your decision to buy on, or, for some reason that is not apparent at the moment. This is where you need to assess your position with a clear mind. Is this a signal of the future direction of the company, or, a great opportunity to add more shares to your portfolio at a great discount. You wont be able to make that assessment if you let emotions cloud your thoughts.

Second: If you are trading large and small caps with the big picture or the long haul in mind then you should look at a bear market and falling prices as a blessing rather than a curse. The only times these should profoundly effect you as a long term investor is when you have an immediate need for access to your money. If you look at it from this point of view, then declining prices only really indicate a good time to purchase more stock at a discounted price (more stock for the same money).

Whether your are trading large and small caps for the short term or long term, the following tips should help to improve your returns:

Consider buying after a major correction. Markets go up and markets go down. Over time, they always go in an upward direction. Often corrections will provide excellent buying opportunities because of the "herd mentality". This often creates an oversold situation, which is perfect for buying! Just ensure that you are buying a strong company.

Remember there is money to be made going long, just as there is money to be made going short. Just know the trend before you decide which way to go.

Never buy a stock just because it has a low price. A low price and a great stock makes for a good selection. A low price on it's own does not. There is normally a reason why a stock is at the price it is at. If you want to gamble, go to Las Vegas.

The biggest mistake stock market investor make is to make the current situation fit the one they bought the stock in. I've seen countless swing traders buy a stock based on the movements of the 15 minute charts, only to say well, the daily chart looks good. If the share price of your company is down, you need to reassess what is happening now. Based on the current due diligence, is this just a temporary move down, or is this part of a larger change in the trend of the share price.

There is plenty of money to be made investing in the stock market, however you will make more money if you invest without emotion, and assess the current situation to identify if the party is over, or if you have been presented with an amazing opportunity. Buy and hold does not mean buy now and look at your positions in 10 years. It means investing in solid companies, and assessing along the way. Sometimes, things change, and you have to be willing to accept the change. The successful investor can easily identify if the share price is down for a bad reason, or is down to present them with a perfect opportunity to add more shares.

Christopher Smith
30 Jan 2007

Become a better stock market investor today and learn more about stock market basics , our free list of penny stocks and small caps at www.1source4stocks.com

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Are Bonds Really Risk-Free?

If you are a neophyte investor, perhaps you have never invested in bonds before. Before you invest, you need to understand some of the risks associated with investing in bonds. Most people assume that all fixed-income investment instruments are completely risk free, but this is not the case. Even if you are an experienced investor, you may not be aware of all the potential shortcomings of bonds. For the purposes of this discussion, we are going to carefully examine the pitfalls and risks associated with bonds.

The most important risk factor you need to take into account is the interest rate. Even if you are new to investing, you are probably aware that every 6-8 weeks, the Federal Reserve (also known as the Fed) meets to evaluate the current condition of the economy. At each meeting, the Fed renders a decision regarding interest rates. If inflation has been increasing, the Fed will need to raise interest rates. If inflation is moderate or contained, the Fed will likely maintain the current interest rate level. However, if the economy is slowing down and there is very little inflation or maybe even deflation, then the Fed might decrease interest rates to stimulate the economy by making it easier for businesses to borrow money.

The reason why the current and future level of interest rates are important for bonds is because as interest rates go up, bond prices go down, and vice versa. If you are able to hold a bond until maturity, then interest rate movements do not really matter, because you will redeem the principal upon maturity. But often, investors have to sell their bonds well before the maturity date. If interest rates have moved up since you bought the bond, and you sell it prior to maturity, then the bond will be worth less that what you paid for it.

It is also important to understand the claim status of the bond you are buying. Claim status refers to your ability to recover your investment in the event the bond issuer goes bankrupt. If you are buying a government bond, such as a Treasury Bill, claim status is irrelevant, because the odds of the Federal Government going bankrupt are slim and none.

If you are buying a corporate bond, however, there is always a chance that the issuer could go out of business. In the event of liquidation, bondholders are given priority over stockholders. However, there are often several classes of bondholders. Senior note holders can often claim against certain kinds of physical collateral in the event of bankruptcy, such as equipment (computers, machines, etc.). Regular bondholders claim after senior note holders. You should check your bond portfolio to determine what class your bonds are in. If you can not determine the class of your bonds, call your broker.

Next, you should always check the three most basic features of a bond; the coupon rate, the maturity date, and the call provisions. The coupon rate is the interest rate. Most bonds pay an interest rate semiannually or annually. The maturity date is the date that the bond will be redeemed by the issuer; simply put, the maturity date is when the company must pay back to you the principal you loaned to them. The call provisions refer to the rights of the issuer to buy back your bond prior to maturity. Some bonds are non-callable, while others are callable, meaning that the company can buy your bond back before maturity, usually at a premium.

Finally, you should also understand that if economic conditions become more favorable after you a buy a bond, and interest rates start to go down again, the issuer will likely issue a lot more bonds to take advantage of the low interest rates, and will use the proceeds to try to buy back any callable bonds it issued previously. So, when interest rates go down, there is an increasing likelihood that your bond will be redeemed prior to maturity, if in fact the bond is callable.

I hope this information will help you formulate a strategy for making wise decisions when investing in bonds. Even though bonds are normally classified as fixed-income securities, you now understand that there are risks associated with them. So, follow all of the procedures outlined in this article when evaluating the risk characteristics of bonds, and you will do fine.

Jim Pretin
3 Feb 2007

Jim Pretin is the owner of http://www.forms4free.com, a service that helps programmers make free HTML forms.