PART THREE: TRADING INDIVIDUAL STOCKS

MONEY: Part One: Basics. Part Two: Investing. Part Three: Trading.)

DISCLAIMER: I am not a financial advisor so do not listen to anything I say about stocks as absolute truth. These are just my suggestions. You could lose a lot of money investing in the stock market. So school yourself and be wise. And don’t forget to understand all you can about taxes. Selling stocks may cost you a lot of money on April 15 if you haven’t save money out for taxes from your sales.

After you have a mutual fund set up and ideally have $10,000 in your mutual fund, you may want to explore trading stocks on your own. You can play with trading stocks on the side, but focus on your mutual fund first. ​

DEVELOPING FINANCIAL LITERACY FOR TRADING STOCKS

• ​​Listen to financial Podcasts:

  • Mad Money Podcast byJim Cramer or watch MadMoney on CNBC every weekday.  Cramer, in his energetic and humorous way will teach you and help you learn how to trade stocks.

  • Halftime Report podcast is a daily CNBC show with a host and four investors who debate and discuss the best moves for stock trading and investing. I love this one.

  • FastMoney podcast is a lot like Halftime with a different team. It is on CNBC after the market closes. They reflect on the stock moves and discuss what may happen the next day.

• Subscribe to his daily email (newsletters@thestreet.com) from www.thestreet.com. It is called Jim Cramer’s Daily Booyah. They will send you updates, articles, and news flashes.  In the evening email, there will be a link to that evening’s Mad Money episode. I always pay attention to the lightning round section in that email (and in the show/podcast) where he highlights stocks he is bullish (excited to possibly buy) or bearish (stocks he would stay away from for right now. Those bearish stocks may come into favor after they have dropped a while. You don’t want to catch a “falling knife” as they say.

• Here are several websites that will be helpful in educating yourself in trading stocks.

  • 40 Basic Stock Terms (Visualized) 

  • CNBC app - It has tons of articles and up to date market prices

  • Investopedia - Like Wikipedia, this site will help you understand the terms and concepts necessary to know when trading stocks.  You have to teach yourself. Watch videos and read as much as you can. This is real money you are investing. Sign up to receive daily email with investment tips, insights, and instruction. It is soooo worth it!!!!

  • MarketWatch.com (They also have an app, but I love the website better) - You can read more on each stock that you may be interested in trading.

  • Nasdaq.com - I use this site to keep track of my stock portfolio. I love the information it provides. (Yes, I have my stocks listed on several places.  I learn a lot from each of them.)

STOCK TRADING PRINCIPLES

​You must know the basics.

• You can lose money. You can also make money.

• You will need to submit yearly end-of-the-year reports to your tax preparer. It may cost a little bit more in dealing with stock trading, depending on how much you do.  

• TAXES. TAXES. TAXES.

  • If you sell a stock within the first month of buying it, you will pay taxes on that profit. But If I make $100 and have to pay $8.50 in taxes, I will gladly do that every day. I will buy a stock and hold it for a week at times and sell if I make enough money. (Read more about Capital Gains Taxes.) If you hold it for at least a year (366 days), then you won’t have taxes to pay (at current laws).

    • Here is an answer I gave to a student asking about this: “You must remain the owner of the stock for 366 days and then you can sell it.  That is the way to avoid taxes. Free money. If you sell it before you will invite capital gains tax at your normal rate of taxable income. It’s won’t be a lot unless you buy and sell and buy and sell a lot. It’s okay to sell before just realize that you will incur taxes. Don’t be surprised. If you think the stock will go down you would want to sell. It would be better to keep your profit and pay taxes instead of trying to avoid taxes that the stock tanks and you lose all profit.”

  • Every January you will receive a summary document from Robinhood (or other trading exchange… but why would you cause it will cost you more). Before you file your taxes, you will need to have that end of the year document  

  • Keep in mind that if you have someone to do your taxes, you will have to pay more for that.  Save it out of your profits, if you need be.

• WASH SALE and TAXES

  • The Wash Sale Rule is very confusing but it could affect your taxes in a big way. This will only apply to you if you trade stocks instead of holding them for a long time. If you sell a stock for a loss and then buy that stock or a similar stock back within 30 days, you won’t get a tax benefit from the loss. In fact, it will hurt you. Learn more about Wash Sales.

• I will buy a small position in a company, say 2-4 shares.  I may only buy one share. If that stock goes up, I let it go up and don’t chase it.  I will have another day to buy another stock that is on sale or that one may come back down below my avg price. As it drops, I will buy more.  However, you have to know if it is bad stock, once it starts really tanking, I may just have to sell and then buy something else that can go up so I can recoup my losses.  Selling my first stock for a los was really hard; I felt like a failure. I lost money. Now I will do it and move on without thinking and then take another stock up!

• USUALLY, because I don’t want to be a pig, I will start thinking about selling stock around 12-15%, unless everything I have been reading and hearing is telling me that this stock has a lot of room to run.  For example, I have Intel (INTL) as of this writing and have made 30% on it. I am keeping it because they are in the internet of things and automatic driving. It will be a long time before I sell out of it.  

• Now I might trim a little off, say a quarter of my holdings or even a half, and then hop back in IF it goes back down.  If it doesn’t go back down, I ride it on up and don’t look back on what I could have had. Don’t be a pig.

• Sometimes, I will sell all 25 stock of a company at 10% because I want to raise cash in case the stock market as a major drop where I can buy more of that stock or another stock I have my eye on.

Here are a few more of Cramer’s insights:  (Listen to his Rules for Trading Stocks on MadMondy - iTunes - An oft repeated show.

• The first rule has become a pillar of Mad Money, and that's the notion that bulls make money, bears make money, but pigs get slaughtered.

• It's OK to pay taxes on your gains. Too many times investors refuse to lock in gains for fears of a big tax bill. But Cramer cautioned that it's better to have a taxable profit than no profit at all. Cramer's bottom line? Make peace with the tax man and don't get greedy.

• Don't buy all at once. Never sell all at once, either. You'll never be good enough to time the market perfectly, Cramer cautioned, and if you're wrong, you'll be really wrong. That's why it's always better to buy in stages. Your goal is to get the best price over time, not the best price for today. Be patient, and wait for opportunities to arise

• Making money in the stock market doesn't just happen, it takes a little work -- homework, that is. If you don't have at least an hour a week to dedicate to your portfolio, Cramer said you're probably better off investing in a good S&P 500 index fund. ou have to visit a company's website and learn about what it does. Then you have to listen to the conference calls and know what the analysts are saying and what's in the news. Only then can you truly understand why you'd want to own it and what you should expect from it.

• Diversify, diversify, diversify, Cramer told viewers. Stocks trade together, which makes sector risk one of the biggest challenges investors face. Nearly 50% of a stock's action, up or down, comes from the sector it's in.

• You are often your worst enemy" and second, "no one ever made a dime panicking."Humans are full of emotions, but emotions are not part of investing. If you've done your homework, then you know what you own, why you own it and when you plan to sell it. Don't let emotions make you deviate from your plan.

• It's all too easy to get defensive when your stocks are falling, but it's important to remain logical and ask yourself if your homework thesis still fits the current environment. If not, then it's time to sell those laggards at the next sign of strength and move onto what's working. If you don't have a catalyst, or reason to own a stock, it shouldn't be in your portfolio.

DIVERSIFY OR DIE

You never want to “put all your eggs in one basket.” In other words, you want to diversify or spread out your risk when investing.  Typically, financial advisors will say to have cash, bonds, stocks (both small cap, mid cap, large cap, in both US and developing markets).  What all that means is that you don’t want to put all of your money in one kind of financial tool or you might lose it all. You want to spread the risk so that if something goes really low, you probably will still have some of your money in other account vehicles that are going up.  The AVERAGE is what you want to focus on. You may have one fund or stock or bond losing 3% (-03%) but another stock making 13%. So you would be averaging a 10% gain. 

If you are young, I would be more aggressive (more risk means more potential return). However, you can lose more money in an aggressive account. Conventional wisdom says to have more money in bonds the closer you get to retirement. That said, I have nothing in bonds. I am almost full risk.

MONEY: Part One: Basics. Part Two: Investing. Part Three: Trading.)