Stock Market – Investing 101

May 1, 2014 |

Different aspects of the stock market. Most investors don’t realize other aspects of the stock market are usually never mentioned. That there is other forces affecting stock markets besides Warren Buffet’s value based investing. That world is called the institutional accumulation and distribution share flow. The way this works is like any business in the world, buy at wholesale prices and sell at retail prices just like Wal-Mart, Costco, and any other big box store. The stock market is no different. There are institutions (hedge funds, major banks with trading floors, mutual funds, etc…) that buy stocks at wholesale prices which are always after a correction or sell off in the stock price.

This is the area where they accumulate a huge portion of shares of most big companies. Companies that institutions focus on are usually worth billions of dollars in Market Cap, and depending on how many shares are outstanding the price of the stock is usually at least 20/share and above. Once the institution has accumulated enough base load shares they will continue to buy in smaller quantities but they will typically drive up the price of the stock 15 to 35 percent or to new highs of the stock until massive profit potential is reached. This is where positive news comes into play to attract buyers. Only to start the distribution phase which is profit taking at premium retail prices, and the result is a massive correction in the stock price. These institutions will typically sell their shares over a number of days to lock in profits. This is where the stock price comes down 20 to 50 percent and usually forcing investors to take their losses and traders who had their stop losses pending out as well.

This is the other world not many people know about unless they work on Wall Street or have been educated by market insiders. The trick is to identify these areas or prices where the accumulation or distribution is happening. We use specific technical analysis to identify these areas, and to post them in the simulated trades section of the website. Every position we educate our subscribers to take is after the stock has sold off usually in the range of 20 to 50 percent off. The more the company sells off the less of a risk it is to buy.

(This section only pertains to simulated buying and selling in a demo account for educational purposes only). The buying is done in a controlled manner using protection orders or stop losses. Stop loss orders are used to limit risk. Once we identify what prices to buy a certain stock at we calculate how much risk we will take in the form of losses if the stock price was to drop and prove us wrong.  Example. Stock abc is down 30 percent to 25$/share, we identify a price range at which we believe the stock price will turn to the upside. Based on a hypothetical example, we expect this stock price to go up from 23$/share based on technical analysis and good price opportunity (stock being on sale). Now based on our analysis we would put our stop loss order at 22$/share.

To put it all together, what this means is if the stock price came down to 23$/share we would buy it. If it were to go down to 22$/share after we bought it our stop loss order would trigger and would take us out of this position for a calculated loss or risk that we are comfortable with.  If the stock went up from 23$/share to let’s say 30$/share we would start to sell shares and lock in profits just like an institution would at retail prices.

PSW Education

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