A stock market guide for newbies

Playing the stock market is very much like swimming with sharks. It can be an exciting experience if the sharks mind their own business and ignore you, or you may end up being their meal.

Being a newbie I made my own mistakes and now I am more cautious before jumping and taking positions in any security. What I have noticed recently was that some stocks move up extremely fast without any good news. Or any news for that matter.
In today’s catastrophic global economic conditions, people are losing jobs at an alarming rate, or get reduced work week or pay cuts. Meaning that most of them- myself including- will consider playing the stock market as a way to supplement a diminished or lost income.

As opposed to the popular adage ‘Ignorance is bliss’, in the stock market ignorance means trouble if you don’t do your homework. Even if you do your due diligence, the risk is still there. Stock market is highly speculative and very much in the hands of unscrupulous individuals: money makers, pumpers and dumpers, bashers and the list goes on.

So instead of the old adages you grew up with- the only one I am still considering may be ‘Patience is virtue’- you have to learn the new ones, strictly related to stock market:

– Buy on rumors, sell on news- seems to be the most popular one
– As goes January, so goes the year
– Sell in May and go away

Buy on rumors; sell on news- that is the one mostly used by pumpers and day traders. If you have the guts to move fast, you can make money. Day trading is not for everybody. It’s very stressful and you need to have special software to monitor the market movement every minute basically. You have to be prepared to enter and exit a position in matters of seconds.
Fresh in mind is Vonage (NYSE: VG). The pump and dump on this stock was brutal. I was watching the stock going from $0.50 on August 25 to $2.40 the next day. Today, September 3, 2009 it was trading at below $1.50. Some people got caught into the pumping frenzy and probably took position closer to the artificial top of the pump. Whoever did the pumping was in and out within the same day with a good profit. The rest of the suckers are whining on various boards that the stock is manipulated by market makers (possibly) or kept artificially low because it’s subject to a buyout (less probable). This actually is a common denominator on every forum I have been. Dissatisfied investors/traders are speculating that any given stock that won’t perform according to expectations is subject to a hostile take over.

I started trading late in May, so basically I lost the most important part of the year. My understanding is that the best months to take new positions are November and December, when fund managers are selling securities to cover the profit requests from their customers. As well, it looks like most funds close their books in September, making this month a notorious one for a market ‘correction’.

Stay tuned, more to come.

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