Internet Stock Trading and Market Research for the Small Investor presents a fresh perspective on online trading that eliminates the prerequisite of technical charting, and simplifies the formulation of buying and selling positions down to a fundamental interpretation of corporate news that drives the market. The first part of the book introduces novice traders to basic market dynamics and terminologies, and exposes them to online trade regulations and web resources where market information can be accessed to formulate short-term daily trading positions. The investment strategies recommended in this book target the growing trend of online investors, including short-term and first-time traders who don't employ technical analysis as a trading compass. In the second part, Internet Stock Trading and Market Research for the Small Investor offers individual market researchers an alternative software tool to financial database subscriptions called SMART, which provides free access to discrete-time market data necessary for technical analysis. This combination of the trading and research aspects of the stock market leaves you with an encompassing introduction to the market dynamics, and to the sensible investment strategies that maximize profit from short-term positions in an environment of financial volatility.

INTERNET STOCK TRADING AND MARKET RESEARCH FOR THE SMALL INVESTOR

By Paul M. Moubarak Amy E. Steele

iUniverse, Inc.

Copyright © 2012 Paul M. Moubarak and Amy E. Steele
All right reserved.
ISBN: 978-1-4759-1360-6

Contents

PREFACE..............................................................xiiiACKNOWLEDGMENTS......................................................xvINTRODUCTION.........................................................xviiPART A: STOCK TRADING................................................1Chapter 1 MARKET STRUCTURE AND TERMINOLOGIES.........................3Chapter 2 ONLINE TRADING AND REGULATIONS.............................31Chapter 3 WEB RESOURCES FOR STOCK TRADING............................53Chapter 4 INTERPRETING MARKET NEWS—PART I......................72Chapter 5 INTERPRETING MARKET NEWS—PART II.....................90Chapter 6 CORPORATE NEWS TO AVOID....................................103Chapter 7 RECURRENT INTRADAY PRICE CHART TRENDS......................115PART B: MARKET RESEARCH..............................................29Chapter 8 OVERVIEW OF TECHNICAL CHART ANALYSIS.......................131Chapter 9 SMART SOFTWARE.............................................155EPILOGUE.............................................................165RECOMMENDED READINGS.................................................169GLOSSARY.............................................................171INDEX................................................................179

Chapter One

MARKET STRUCTURE AND TERMINOLOGIES

1-1. STOCK EXCHANGE

A stock exchange represents the floor on which most trading and brokerage activities take place, and constitutes the entity that regulates and controls the exchange and pricing of equities between buyers and sellers. In the United States, there are three major trading floors located in the financial district of New York City.

These floors are known as the New York Stock Exchange (NYSE), the National Association of Securities Dealers Automated Quotations (NASDAQ), and the American Stock Exchange (AMEX), the latter representing an integral body of NYSE. Together, these three stock exchange entities encompass a total listing of 5,189 public American and international companies (as of 2011).

All three exchange floors share a reasonable amount of similarities and have to adhere to the regulations imposed by the federal regulatory commission (known as Securities and Exchange Commission or SEC) of the United States. However, their modes of operation differ in many aspects, most notably with respect to listing/delisting requirements and maintenance fees. For instance, companies listed on NYSE are required to maintain a minimum market capitalization of $50 million, while the minimum market capitalization for listing requirements on NASDAQ is $1.1 million.

Maintenance fees also largely differ between stock exchanges, where NYSE imposes more expensive and stringent listing fees in comparison to NASDAQ. As such, companies listed on NYSE normally represent an agglomeration of the largest most prestigious and least volatile public corporations in America, which possess high market capitalization and can afford listing fees. NASDAQ exchange body on the other hand agglomerates smaller corporations, including those with share pricing under $1, and those companies with low trading volumes and higher price volatility.

In the event where a company trading on the floors of any of the regulated stock exchanges fails to comply with the listing requirements—such as in the event of bankruptcy or failure to maintain a share price above $1 for an extended duration of time—it normally becomes delisted to one of the Over-The-Counter markets better known as OTC or Pink Sheets.

These markets are not subjected to the same regulations that govern the organized stock exchanges, and encompass delisted corporations and firms with a very small market capitalization and a small number of shareholders (as low as 300 shareholders in some cases). As a consequence, OTC and Pink Sheet stocks are very risky and extremely volatile.

From an investment perspective, it is important to understand that the stock exchange under which a company trades is of little relevance to investment decisions, in particular when the objective is short-term buying and selling activities. For individual investors, the most important aspect about stock exchanges and the difference between the organized bodies of NYSE, NASDAQ and AMEX is the share price, the short-term return prospects and the volatility rate of a specific stock.

Companies trading on NYSE are in general more stable with expensive share pricing (above $10) and low prospects for high short-term returns. In comparison, companies listed under NASDAQ and AMEX internet Stock Trading and Market Research for the Small investor are less expensive (under $10) and subsequently more volatile, but often possess the ability to generate large single-day gains and short-term returns under low trading volumes.

Moreover,foronlinetradingactivities,onlypubliccompanieswithstocks listed under NYSE, NASDAQ and AMEX can be traded electronically through an online brokerage firm. In principle, an individual investor placing orders online should be capable of buying and selling stocks of any listed public company. However, it is not uncommon that brokerage firms impose buying restrictions on some cheap stocks, especially those with high volatility rates and low average daily trading volumes. OTC and Pink Sheet stocks on the other hand cannot be traded through online brokers and are not accessible to such investors.

1-2. STOCK INDICES AND AVERAGES

Stock indices and averages represent a statistical metric that measures the performance of the market as a whole, or the performance of specific sectors of the market on daily basis and over the course of a period of time. These indices reflect the general mood and direction of the market, and are used as indicators of the growth or decline of local and global economies.

From a statistical perspective, stock indices normally encompass a listing of stocks that share common market characteristics. Some indices agglomerate stocks attributed to the same industry or commodity, such as an agglomeration of technology or mining companies. Others encompass corporations that share similar trading characteristics, such as similar capitalizations or similar daily trading volumes.

The methodologies used to calculate the value of the average also differ from one index to the other. For instance, the Dow Jones industrial Average (DJIA) (Figure 1.1) which encompasses thirty large public corporations in the United States, calculates the value of the index based on the price change of the stock during the trading session, without any consideration for the stock volume or market capitalization. Other indices, such as the S&P 500 and the NYSE and NASDAQ Composite (Figure 1.1) are more encompassing, and use capitalization-weighted compensators to account for the difference in companies' market size and trading activities.

Typically, market analysts, economists, and journalists rely on stock indices to interpret the behavior of the market and indicate the health of the local and global economy. In the United States for example, there are many such indices, with the most popular being the Dow Jones, the NASDAQ Composite and the NYSE Composite.

These three indices encompass a large body of American public companies and serve as an indicator for the overall health of the local economy. An illustration of the relevance...