Stock Trading Tips

February 12, 2009 by Tyrone
Filed under: Investments

I have been involved in stock trading for quite some time now. Due to the question of one of my avid readers named dlanor from Saudi Arabia, here I am now sharing some stock trading tips that readers can use to trade stocks.

But before anything else, for the beginners in the stock market, you might want to read my article on how stock market works to familiarize yourself on the stock market.

Once you already got familiarized with the stock market and started doing stock trading, here are some of the useful tips that I learned from my stock trading experience:

Stock Trading Tip No. 1: First of all, I’ve seen a study conducted by ATR-Kim Eng Securities comparing the monthly stock returns on election years as against any other “normal” year. As seen from the graph, the month of August, historically is considered as the “ghost month” in stock trading since it is in this month that registered the lowest yield as against other months whether election year or not. You can also see from the graph that historically, the month of December gives the most yield and so it “may” be good to buy stocks on the month of August when stocks are low and later sell it on December when stocks prices are picking up.

Stock Trading Tip No. 2: Don’t buy in smaller volumes. If you have enough capital to spend in stocks, then try to buy huge volumes of your favorite stocks because if you buy in smaller volumes, then chances are you will incur higher stock trading fees such as broker’s commission, VAT, etc.

Stock Trading Tip No. 3: Transaction costs in buying vs. selling stocks. Each time you make a transaction, whether buying or selling stocks, you will incur transaction fees. Based on the transaction costs that I learned, it is “more expensive” for you to sell stocks than to buying it because selling stocks incurs a much higher transaction costs.

Here in the Philippines, the following transaction costs are associated with buying and selling of stocks.

Transaction Costs in Buying Stocks:

Commission - 0.25% of Gross Amount or Php 20, whichever is higher
VAT (Value Added Tax) - 12% of Commission
SCCP Fee - 0.012% of Gross Amount
Philippine Stock Exchange (PSE) Fee - 0.011% of Gross Amount

Transaction Costs in Selling Stocks:

Commission - 0.25% of Gross Amount or Php 20, whichever is higher
VAT (Value Added Tax) - 12% of Commission
SCCP Fee - 0.012% of Gross Amount
Philippine Stock Exchange (PSE) Fee - 0.011% of Gross Amount
Sales Tax - 0.5% of Gross Amount

In applying these fees, let’s use the following sample: Suppose Tyrone bought 100 shares of Ayala Corp. (AC) at 290 per share. He then sold it at 295 per share. How much did he gain NET?

Computing for the following transaction costs written above:

In buying 100 shares of Ayala Corp. stock at 290 per share, you will pay a total of 29,087.87 broken down as follows:
Gross Amount: 29,000
Commission: 72.50
VAT: 8.70
SCCP Fee: 3.48
PSE Fee: 3.19

Suppose, the stock went up by 5 and the price now became 295 and you intend to sell it, you will just collect your NET GAIN of 29,263.12 broken down as follows:
Gross Amount: 29,500
Commission: 73.75
VAT: 8.85
SCCP Fee: 3.54
PSE Fee: 3.25
Sales Tax: 147.50

In effect, the total gain that you had from buying 100 shares of Ayala Corp. at 290 per share and selling the same 100 shares at 295 is:

Total Net Income from Selling less Total Net Cost in Buying = 29,263.12 - 29,087.87 = 175.25

For the convenience of my readers, I prepared an excel sheet of transaction costs in buying and selling stocks. Just input your gross amount and it will automatically compute its net income from selling and net costs in buying stocks. You can download it here.

Stock Trading Tip No. 4: Don’t post too many orders at the start of the trading. If you have time to monitor your stock trading, then you should not post too many orders at the start of the trading. You should watch the trend of the trading day. Buy when you see a trend that the stock price is going down and sell when you see a trend that the stock is going up. Generally, you should post orders in the middle of the trading like around 10am to 11:30am to have a good view of the stock price that you intend to buy or sell. Stock trading is from 9:30 to 12:10 noon.

Stock Trading Tip No. 5: Look for the P/E ratio. Price-Earnings Ratio of the stock ‘may’ tell the profitability of the said company. This is the ratio between the stock price over its earnings. The higher the P/E Ratio, the higher the profitability of the company. BUT do not solely rely on this ratio. It may indicate that a high P/E ratio means that the stock is overpriced because of some manipulations.

Stock Trading Tip No. 6: Buy back of shares or major acquisition. Companies also disclose to the stock exchange when will they buy-back their shares. Usually, this happens towards the end of their fiscal year because they want their ‘books’ to look good. This is called window dressing. Look for companies that disclose a buy-back of their shares. As the date of the buy-back approaches, there’s a high probability that their stock price will climb. Also, some companies buy-back their shares to take advantage of its depreciated value in the market especially if they think that the current price of their stock in a bearish market does not reflect the true value of the company’s shares.

Additionally, there are also disclosures about a company acquiring a significant percentage of stocks of another company. These instances will probably increase the stock price of the company being acquired as the date of the acquisition approaches.

Stock Trading Tip No. 7: Look for the 52-week range. I’m not good in technical analysis with in stock trading. But one way of gauging to know if the current stock price is high or low is to look for their 52-week high and 52-week low. The 52-week range is the highest and the lowest the stock price of the company closed in any given trading day in one year. It’s a gauge of how much the stock price has appreciated over a one-year period time frame. For example, the 52-week low is 250 and 52-week high is 400. Definitely, to increase probability of profits in stock trading, don’t buy at a price too close at 400.

Stock Trading Tip No. 8: Look for stocks that declare dividends. Dividends are passive income that companies give to their stockholders. Look for the companies that declare these dividends whether a cash dividend or stock dividend. Generally, when the ex-date of the dividend declaration approaches, the higher the price of stock will be.

Stock Trading Tip No. 9: Look for actively traded stocks. These are stocks that are in the “hot seat” where there are a lot of buyers and sellers. Surely, the law of supply and demand will apply here. If there are a lot of buyers than sellers, then stock price will tend to go up. However, if there are a lot of sellers than buyers, then stock price will tend to go down.

Stock Trading Tip No. 10: Watch the Federal Rate (FED) Rate Cuts. Generally, if the FED declared a rate cut on its Federal Open Market Commitee Meetings, stock prices will tend to go up and rally. To know why, you can view my article on how federal rate affects investors.

Stock Trading Tip No. 11: Watch for economic indicators such as consumer confidence index, inflation rates, unemployment rates, gross domestic product, gross national product, etc.

Watch for any inflation news. There’s an inverse relationship between inflation rate and stock prices. Definitely, the tamer or the lower the inflation, the higher the probability that the stock market will rise. In contrast, a high inflation rate will give the possibility of stock prices to go down. This is evident when the oil reached its peak of almost $150 per barrel last July 2008 when investors dumped their stocks! Why? Because a high inflation rate causes the raw materials costs of companies to go up. And with higher costs and less revenues, definitely companies will post losses. Added to this, a high inflation encourages consumers to reduce spending on non-basic items. In turn, corporate profits either drop or post slower growth, leading to lower valuation of stocks.

Watch for indices such as consumer confidence index, housing prices and housing sales, employment rate, Gross Domestic Product or GDP, Gross National Product or GNP, etc. The higher the value of these indices show that the economy is doing well. And when the economy is doing well, then companies may post huge profits and therefore stock prices will tend to go up.

Watch for writedowns or net losses of companies. This is no doubt. If there’s any news of big writedowns from any of the largest banks caused by the credit crunch which stemmed from the subprime mortgage crisis, then definitely investors will dump their stocks. Why? Because writedowns mean huge losses to these companies hence stock prices will go down.

Watch for Credit Ratings. Credit rating agencies such as Fitch Ratings, Moody’s Investors, and Standard & Poor’s are some credit rating agencies that rate company’s credit. They either rate the company’s bonds, credit default swaps or CDS, and credit facilities. Any downgrade will push the stock prices of these companies to go down.

So there you are my stock trading tips that I learned in my stock trading experience. I don’t claim I’m a good stock analyst but I’m trying to learn these things as part of my financial education.

With these stock trading tips, definitely you can trade stocks even you’re not an expert in technical analysis like me.

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