Yet there is an answer; a light in the darkness, used by the masters of investment to generate excess returns even ” no, scratch that, – especially in falling markets like this one.

Shorting A Stock.
The phrase sends a blood-curdling chill down many a buy-and-hold investors spine, frightening them into a shock-induced state of confusion. Yet for masters of this easier-then-it-sounds technique, its an extremely profitable oasis within the uncompromising desert that is this bear.

Confused? Well there’s no need ot be.  Let’s take it step by step. First of all, the vast majority of investors only buy stocks. When you buy a stock, there are two ways to make money. Stock price appreciation (buy low, sell high), and dividends. Which is all well and good when the market is going up, but for markets such as the one were currently embroiled in, we need a whole different animal.

To short a stock is essentially to sell it, and then buy it at a later date. Counter-intuitive, no? In the shorting process, you borrow the stock from your broker, sell it on the open market, and when the price has fallen sufficiently, you buy it back again, and return it to your broker.

An example… back in early October, Kellogg (Symbol: K) was trading for around $56.00 per share. Over the next two months, it dropped from just over $55.00, to $42.00 per share. Shorting 100 shares of Kellogg would have, in this instance, had a profit of $1,400. The procedure would be the following. When you short the stock at $56.00, you borrow 100 shares from your broker, and sell them on the open market, giving you $5,600. Later on, you decide to buy back those shares, and return them to your broker, while Kellogg is at $42.00. This costs you $4,200. Now you have covered your short position, for a profit of $1,400. Not to bad for two months, and a relatively small $5,600 investment.

For those abstract thinkers, it may be easier to conceptualize shorting as simply buying a negative number of shares. When you own 500 shares of a company, and the companies stock price increases by $1.00, you make $500. When you own -500 shares of a company, and the companies stock price increases by $1.00, you lose $500. However, when you own -500 shares, and that company then plummets by 5$, now you stand to gain $2,500. As they say, the bull goes up the stairs, but the bear goes out the window. Markets fall faster then they rise, so the time to make money is now!

Even still, shorting stocks has risks. If you choose the one stock of 100 that is about to start trending upwards, you could lose some money on that. Different sectors of the economy may also be effected by events that cause exceptions to the everything goes down in bear markets rule. The recent auto bailout could feasibly cause industrials to go up for a while, so shorting industrials could choose to be a bad choice. The biggest risk is that the bear market turns into a bull market while your not paying attention " that could rack up losses on many positions at once.

One standard practice among investment professionals is the 5% rule. This rule is used when deciding how many shares of a company to buy/short, and is an invaluable tool when shorting stocks. Lets say you want to short a $15 stock, but your not sure how many shares to short. First take the amount of money in your portfolio, say, $10000. Then, take 5% of that. $500. That is the amount you can risk on this transaction.

Next determine the most logical stop loss. Lets say you decide if the stock goes above $17.50, youll sell your shares using a stop loss. If you can lose 2.50 per share, and your willing to risk $500, then you would short 200 shares of the stock, maximum. Many risk adverse investors choose only 2 or 3%, but 5% serves as a good maximum for even most risk-tolerant investors.

When it comes to stock picking, some people would call this a challenging market. And traditionally, we have been taught that buying low and selling high is the idea scenario, so looked at from that sense, perhaps it is a challenging market. Or is it? With everything covered already in this short document, you have already learned that a so called “challenging market” can be a bonanza for those who have learned how to short a stock or etf. Author: Jordan Weir

Any reliable and professional financial planner or stock broker must know this so he can help you determine your risk tolerance. Then, that professional needs to help you by recommending which investments don’t exceed that risk level.

It’s a commonly believed misconception that people’s emotions are the only factor in determining investment risk tolerance. That’s not the case at all. Actually, a lot is involved with determining what your risk tolerance level is, and emotions are only a piece of the overall picture.

Understanding your risk tolerance level, with regards to online stock market investing, requires that you consider multiple factors. One is that you have to know how much money you have available to invest, and you also have to be completely cognizant of your financial end game.

As an illustration, If you think you’ll retire in 10 years and you haven’t accumulated any money in your savings account,’ you’ll need a substantial risk tolerance and do some aggressive investing to reach your financial goals by the time you want to retire.

On the other hand, if you start investing quite early for your retirement, your beginner stock market investing risk tolerance will be low. Starting early will allow you to grow your money slowly. When you combine this with what you know about your emotional reaction to financial issues, you will have the investment formula that’s right for you.

This can be difficult to figure out for yourself, so it’s best to use a dependable financial planner or stock broker that can help you find an acceptable risk tolerance, and assist you with selecting appropriate investment opportunities.

Understanding your personal risk tolerance will help you find your own investment approach and allow you and the investment professional you select to invest with confidence. Even though there are myriad investment types, there are really only three specific investment styles – and those three styles tie in with your risk tolerance. Those three styles are called aggressive, moderate and conservative. But I will cover those in another article!

You should keep your emergency fund and immediate needs savings liquid, but all other savings that aren’t needed in the near future should you earning you more money through investing.

When you are ready to invest, you need to first choose an investment. There are so many different ways to invest, but the most common are stocks, bonds, mutual funds, and real estate.

Next, you will need to find out where to buy your investments. This is different depending on what you buy. You can buy bonds at your local bank, but if you want to buy stocks, you need a brokerage firm.

If your a beginner investor or if you are looking for a low cost way to invest, an online brokerage firm could be right for you. You don’t have to set up any appointments with a broker or make any continuous phone calls. Everything is done right online. It’s so easy, there’s no excuse for not getting started and signed up right away.

The online brokerage firm I use is Sharebuilder. I have been using them for about 2 years now and I have been pleased. It only costs $4 for each order. They have excellent service and even offer mutual funds if you aren’t too stock choosing savvy.

When you are ready to sign up for Sharebuilder and start investing, just visit the link at the end of this article to sign up. It’s easy to create an account and get started.

Once you get to the sign up page, you’ll have a few forms to fill out. Then, either mail or fax copies of verification and ID. This is an important step to ensure your security.

Sharebuilder is a very secure account. You have to log into your account with a password and you need more verification before you can place a trade. Also, they have the padlock in the browser when you’re on the site. Make sure you see this next to the address bar to ensure your safety.

Once you’re signed up and ready, you can get started! Buy stocks for just $4 on every third Tuesday of the month, or pay $9.95 a trade. Set up an automatic investment plan if you want. This is a great offer that you shouldn’t pass up!

So what should we do? Everyone has an opinion of course, but nobody knows for sure.

Many investors are angry, frustrated and disillusioned with stocks. Anecdotal evidence suggests that some people have decided to swear off stocks forever. Others may be wondering how much more pain they can endure before they also bail out. Those reactions to the bear market are no surprise.

But if you’ve already sold all of your stocks, please reconsider. And if you’re thinking of jumping ship, stay onboard. No one knows what the stock market will do tomorrow or over the next few weeks and months. But with the market at such low levels, the opportunities are far greater than the risks.

Kiplinger’s forecasts that U.S. stocks will return 5% to 8% in the coming year (see Outlook 2009). In my view, there’s a decent chance that stocks will be considerably higher a year from now. Here are six reasons you should hang on to (or boost) your stock holdings.

1. Stocks are battered and cheap.Between its peak on October 9, 2007, and its low on November 20, 2008, Standard & Poor’s 500-stock index plunged 52%. That makes this bear market the worst since the Great Depression (through December 12, the S&P was 44% below its high).

In my view, we’ve been punished enough for our excesses of speculation and imprudent borrowing. That’s another way of saying the market has already discounted the current recession — and then some.

On the surface, the market doesn’t look all that cheap. The S&P 500 trades at 19 times the past four quarters’ earnings. But those earnings numbers are depressed by write-offs at financial companies.

The Leuthold Group, a Minneapolis investment-research firm, calculates price-earnings ratios using “normalized” earnings (Leuthold defines normalized as average annual earnings over five years). At the market’s November 20 low, says Leuthold, the S&P 500′s P/E of 10.4 on normalized five-year earnings was in the bottom 10% of P/Es over the past 52 years. That is cheap, and the market hasn’t gotten that much more expensive since.

2. Stocks are overdue.Let’s not forget that the current bear market is the second megacollapse of this decade. From December 31, 1999, through December 11, 2008, the S&P 500 produced an annualized return of -4.0% (if you invested $10,000 in an S&P 500 index fund at the start of 2000, the fund would be worth roughly $6,960 today).

The index’s worst ten-year period since 1926 was an annualized loss of 0.9%. According to Leuthold, the median ten-year annualized return is 11.1%; that means half the returns were above that figure and half were below. After nine years of pitiful performance, stocks are due for a period of solid gains.

3. The low-risk alternatives are pathetic. Yes, we all know the old Will Rogers line that you should be more concerned about return of investment than return on investment. But will you really be satisfied with a ten-year Treasury note that pays a mere 2.5% (or a T-bill that yields virtually nothing)? It won’t take much for stocks outpace the risk-free alternatives.

4. It’s not the 1930s. Yes, the economy stinks. Joblessness is up, a growing number of companies are filing for bankruptcy, and consumer spending and sentiment are in the tank. But the economy is nowhere near a depression, which by one popular definition is a decline in real growth of at least 10%.

And we won’t have a depression because central banks everywhere are working feverishly to flood their economies with money and because governments are spending like drunken sailors. (The Federal Reserve’s decision December 16 to cut short-term interest rates to just above 0% underscores the Fed’s committment to revive the economy). Add the benefits of lower gasoline prices, which are like a gigantic tax cut, and mortgage rates that could approach 4% in the U.S. These are ingredients not just for preventing a depression but also for spurring an economic surprise to the upside.

5. The market shows signs that the worst is over.Between November 20 and December 15, both the S&P 500 and the Dow Jones industrial average climbed 11 of 16 trading sessions. Perhaps more significantly, the stock market has risen on days when the news has been awful — for example, on December 5, when the government reported that the number of jobs lost in November was the highest since December 1974, and on December 12, the day after authorities accused Wall Street legend Bernard Madoff of orchestrating a fraudulent investment scheme that could cost his clients as much as $50 billion.

6. If not now, when? Say you’ve sold a bunch of stocks and plan to reenter the market when things look better. Or perhaps you have inherited some money and are waiting for the “right time” to put it to work. The chances that you’ll nail the right time — or come anywhere near it — are slim.

Why? Bear markets almost always end in an atmosphere of deep gloom, and stocks start going up well before the economy bottoms. For instance, the month with the previous record for most jobs lost was December 1974. The horrific 1973-74 bear market bottomed in October ’74. But most people are constitutionally incapable of pulling the “buy” trigger when the news is unfailingly bleak.

If you wait for the news to get better, however, you’ll almost certainly miss the initial leg of the next bull market. And the early moves are typically fast and furious. T. Rowe Price, the fund company, looked at returns of the S&P 500 following each decline of at least 20%. In those six instances (not counting the current bear market), the S&P has been up an average of 31% in the subsequent year. The lesson: Not owning stocks can also cost you dearly.   Source: Kiplinger

Whether a company you own stock in is doing very well or struggling, a common occurrence over the lifetime of owning a stock is dealing with a stock split.

So how does the stock split affect the value of your investment?
To put it simply, the stock split doesn’t change the value of your investment at all or even your percentage of ownership in the company.
 

What does change is the number of shares you hold will now be doubled since the stock price will be halved. For example, if you assume a pre-split price of $40 per share and you hold 100 shares, after the split you will hold 200 shares at $20 per share. In both cases, the value of your account remians the same – $4,000.

Another issue is determining how the stock split affects the cost basis of your shares.
For income tax purposes, the cost basis of each additional share you receive as a result of the split and each share you currently own will be equal to one-half the cost basis of the shares just prior to the split. An example to help demonstrate this is: if you hold 100 shares of company ABC with a pre-split cost basis of $30 per share, after the split you will now hold 200 shares with a cost basis of only $15 per share. Once again, same total value just a different cost per share of ABC’s stock.