How to Not-To Lose Money in Stock Market-V2.0

7/31/2019 How to Not-To Lose Money in Stock Market-V2.0

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How to NOT Lose Money in the StockMarket: A Simple System for Profits

Harry J. Chong

YoStreet Books(a division of)

YoStreet Media Ltd.Canada


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[Page Left Intentionally Blank]


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Copyright 2007 by Harry J. Chong

All rights reserved.

Every part of this book may be reproduced or transmitted in any form by

any means graphic, electronic, or mechanical without permission inwriting from the publisher, except by a reviewer who may quote briefpassages in a review.

Created in Canada

First Edition; January 2007

Canadian Cataloguing in Publication Data

Chong, Harry, 1984 How to NOT Lose Money in the Stock Market

(YoStreet Books)Includes indexISBN 9-05475-542-7Learning skills Handbooks, manuals, etc. I. Title. II. Series.

LG1984.P69 2007 111.391122 C69-135790-1

Charts by Yahoo Finance 2007

YoStreet Books(a division of)

YoStreet Media Ltd.

60 Carey CrescentMarkham, ON L3R 3E5

Canada


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Contents

ACKNOWLEDGMENTS

1. PART I: INTRODUCTION 6

2. THE BASICS 6

Question #1: What the Hell are Stocks?! 7 Why a Company Issues Stock 8 Why Should I Own Stocks? 8 What Determines the Price of a Stock? 8 Stocks vs. Bonds 9

Stocks an Emotional Rollercoaster 9 What is the Stock Market? 9 How to Purchase and Sell Stocks: Trading 10 Choosing a Brokerage Firm 10 Shorting Stocks 10 Options: Calls & Puts 11 Margin Buying 12 Pre-Market & After Hours Trading 12 Price to Earnings Ratio 13 Dollar Cost Averaging 13 Dividend Reinvestment Plan (DRIP) 13 Stock Splits 13 Penny Stocks 14 Mutual Funds 14 Index Funds 15 REIT: Real Estate Investment Trust 15 Arbitrage 15

1. PART II: THE SYSTEM, CHOOSING THE RIGHT STOCKS 16

1) Non-cyclical 16

2) Upward Momentum 17 3) Dividends 17 4) Increased Earnings 17 5) Debt to Income Ratio (DTI) 17 6) Increased Assets 17 7) Price to Earnings Ratio 17 Dos & Donts 18 Common Terminology & Definitions 20


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PART ONEThe first rule is not to lose. The second rule is not to forget the first rule.

Warren Buffett

Introduction

Warren Buffett is absolutely correct. DO NOT LOSE MONEY. Most people areonly concerned with the making of money, but they neglect the fact that part ofamassing wealth is by preserving what you already have.

And what is it that you need to do in order to preserve your current wealth andmake some MAD MONEY?! Educate yourself. Obviously youre trying to do that,because obviously youre reading this book. But I dont want you to skim throughit and flip to the interesting parts (if there are any) like most people do. I want youto read the whole darn thing and understand the basic underlying concept. Mostpeople never read past chapter 2so you better not be one of them or else!

Remember you cant expect to excel in this proverbial place known as the stockmarket if you dont educate yourselfproperly. And this is one way of doing it, byreading this book. After all, why make your own mistakes? Learn from otherpeople (namely me) and let me help you. So read this! Read it! Educate yourself!

And most of all DONT LOSE YOUR MONEY!

[Note: This e-book/e-document is a spin off of my previous e-book which I usedto sell online called, The Chong Stock Trading System. I have made severalchanges; notably Ive made it a lot shorter (the last one was only 24 pages!). Myreasons for this are one, so people will actually read the whole darn thing (youdbe surprised how little people read) and two, so its easier to understand andfocuses on the more important subjects.]

The Basics

Im not sure what level of trader you are...hopefully youre not one (a trader) butrather an investor. So I guess what I should be asking instead is what kind ofinvestor you really are. Unfortunately I dont know; technology hasnt yet reachedthat point -- thankfully. So Im going to assume youre a bit of a beginner. Ill helpyou learn the bulk of the basics as best as I can, but if you dont understand -- Im

sorry thats just the way I am. Just kidding; seriously though, take your time whentrying to learn and dont beat yourself up if you dont get it right away.

Theres no need to overwhelm your brain. Digest each bit one by one andcarefully think on what its trying to say. But if you find this book isnt explicitenough and isnt enough to help you, I would really suggest you read some otherbooks as well.


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There are a lot of good (and bad) books out there

I recommend beginning with: Learn to Earn: A Beginner's Guide to the Basics of Investing and Business, by

Peter Lynch

Then if you feel comfortable enough, move on to: Buffettology: The Previously Unexplained Techniques That Have Made

Warren Buffett The Worlds Most Famous Investor, by Mary Buffett How To Make Money In Stocks: A Winning System in Good Times or Bad, by

William J. ONeil

Okay! Have you checked out those books on Amazon.com & eBay? Alright letsget rolling then

Question #1: What the Hell are Stocks?!

Im glad you asked that question, but there was no need for swearing (just joking,swear all you want)

Stocks have many different names: shares, securities, and equities are the mostcommon. The term though that most accurately describes what stocks are is theword shares. A stock is literally a share; a share in a company.

Let me explain it this way -- Imagine for a second you own a bakery (congrats!).You bake a very large luxurious pie with very expensive ingredients, butunfortunately most of your customers cant afford it. You dont want that delicious

pie to go to waste. So what do you do? You cut it up into ten pieces and sellthem one by onegiving each customer, for every slice, 10% of the total pie.And that is their share.

Now a company is not a pie....sadly you cant eat itbut the principle does workin a similar fashion. You take something large and divide it up into enough partsso that pretty much anyone can have a piece, or as it is known in financialsterms, a share. Now remember while a stock is a fairly intangible thing it doeshowever represent a real part of a real company. If you own a stock you own apiece of that figurative pie, you are an owner, and you are entitled to its assetsand earnings just like every other regular owner.

But that doesnt mean you can arbitrarily derive assets and earnings away fromthe company. No that would be crazy and above all extremely inefficient. You area silent partner. And you cannot go banging on the door of the headquarters anddemand your money.

However that description may be somewhat misleading, because you are notentirely a silent partner. Much like the government you have a voice in your vote.


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Although unlike the government you are not limited to one single vote, you arelimited to the amount of shares that you own.

Normally one stock represents one vote. And your vote can be used to elect aboard of directors (those guys who help run the company) and in turn they can

also elect a CEO (Chief Executive Officer) who will, hopefully, make you a lot ofmoney.

Why a Company Issues StockCompanies issue stock for many reasons. The two most common are:1) For Raising Additional Capital (Money)2) For Liquidity (So They Can Sell Out More Easily)

However not all companies stock is available to individual investors. They firsthave to become what is known as, public. This essentially means they, thecompany, makes an offering to the general public to allow them to purchase

shares/stocks in their company. To initiate this they have what is called an IPO,or an Initial Public Offering.

To initiate a public offering, a company will often hire what is known as anunderwriter (a financial company). The underwriter will manage the sale of thestocks to large investors. Then in turn the large investors will sell their shares (ornot) on the open market; where you the individual investor can finally purchasethem.

Why Should I Own Stocks?There are two reasons why you would want to own stocks. The first reason is forappreciation in the stock, that is, a rise in the price of the stock; which hopefullyyou can later turn around and sell for profit. The second reason to own a stock isfor the dividend -- cash flow.

Many blue chip (large) companies pay what is known as a dividend. A dividend iswhen a company issues/gives cash to its shareholders -- thats you. Somecompanies however do not always pay in cash; they can also pay in more stock.But that is not very common.

What Determines the Price of a Stock?The most simplistic answer is: supply and demand. When there is little supplyand high demand the stock price will increase. When there is high supply and lowdemand the reverse is true.

However this is just a laymans explanation. You have to look at the underlyingfactors behind the stock and the company itself. You have to know what actuallydrives demand. A lot of it is speculation and guessing; but the main reason isanticipation of future earnings and income growth.


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Obviously you wouldnt want a company that is losing cash, you would want onethat is making money and at a fairly rapid rate. Because if their money isgrowing, your money is growing, and if their money is shrinking -- your money willprobably be shrinking too.

But how do you know whether a company is growing or not? How do you know ifits a good investment? Well you have to look at the fundamentals. You have tolook at the financials. You cannot only pay attention to the stocks that are hot.

Because in the short term the stock market is a voting booth, but in the long runits really a scale. So dont neglect the fundamentals; look at the incomestatement, look at the balance sheet, and look at the ratioscarefully.

Stocks vs. BondsStocks are the opposite of bonds. A stock is equity whereas a bond is a debt. Astock is more volatile than a bond, but it potentially has more upside. A bond

however is less volatile, but it has less upside. You will get exactly as you arepromised. Personally I think it would be a reasonable idea to be both in the stockand bond market; bonds for safety and stocks for growth.

Stocks: An Emotional RollercoasterTo make money in the stock market you have to be emotionless. You have touse rational thinking and not rely on your gut feeling. That will be difficult to dobecause everyone (as far as I know) has emotions. So before you go out thereand start trading with real money you should get some practice. You can sign upfor a simulator over the internet and its absolutely free. Here is an excellentwebsite where you can sign up and practice with fake money:www.investopedia.com

What is the Stock Market?The term stock market is just a general description; it is not an actual place. It is

just used to describe the trading of stocks as a total. However you can visit theexchanges. An exchange is a company (commonly with a physical location)where stocks are facilitated and traded.

An example of an exchange would be the NYSE, or as it is know to most, theNew York Stock Exchange. You cannot however directly trade shares at anexchange unless you have a seat (membership). And these are very expensive;theyre often more than a million dollars a pop.

If you really want to trade you have to go through a brokerage and pay them fees(commissions).

How to Purchase and Sell Stocks: TradingFor the individual investor, purchasing and selling stocks is fairly simple. All youneed to do is sign up with a brokerage firm (a company who will help facilitate


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your trades -- for a fee of course) and youre ready to go. Oh and also youll needsome money.

Choosing a Brokerage FirmThere are many brokerage firms (brokers) to choose from (yes weve all heard

the joke that theyre called so because they make you go broker). And the task tochoose one can be quite daunting. Fortunately for the small investor there aremany economical and easy to use brokerage firms.

There are two main different types of brokerage firms. The first one is a regularbrokerage. This type of brokerage is commonly seen in movies, you know -- theone where they call up their pal Slim and ask them for a hot tip. But signing upwith this type of firms is usually expensive. Not necessarily because thecommission rate is high, but rather because there are conflicts of interest.

The broker makes money by encouraging you to actively trade, and you save

money by not trading. Luckily a second type of brokerage exists. They are calleddiscount brokerages. But dont let the name fool you. It doesnt mean theyreactually offering a discount or are cheaper, it just means they dont have a handin what trades you ultimately decide to make. They will not make anyrecommendations on what to buy and what to sell and they will not encourageyou to make any trades. It is entirely up to you.

I would recommend that you use a discount brokerage (as opposed to a regularone) because you have wide variety of options and companies to choose from.There are many discount brokerages today and many of them are online andtheir prices and features are very competitive.

But like anything else you should always read between the lines. Many of themhave hidden fees (e.g. inactivity fees) and charges. Avoid the brokerages withthese fees; they are confusing and are usually a real pain in the rear.

Try to sign up with a brokerage that has integrity, good service, and no hiddenfees. And dont be afraid to switch if youre not getting the level of service youdesire.

Personally I cannot make any recommendations myself. I have only been withone brokerage. But dont let this deter you in your hunt for a suitable brokerage.There are a wide variety of companies and there is definitely one out there tomeet your specific needs.

Shorting StocksSometimes the (stock) market veers into a downward direction. But how do youprofit from a falling stock? You short!


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Hey! Dont get angry! I wasnt calling you short! No youre not short, what I meantwas uh, how do I describe it.Shorting is another process of trading, but insteadof buying the stock you borrow it.

You borrow the stock and sell it immediately. Then if things have gone your way

and the stock drops as you have anticipated, you will then do what is known ascovering. Since you sold a stock that you do not own, you have to cover it -- youhave to return the shares to the original owner. Hopefully the price has droppedsubstantially and you can purchase the stocks back at significantly cheaper priceand whatever is left in between will be yours to keep, or your profit.

Now dont worry if you dont grasp this concept at first its difficult to understand,but think of it like this

My friend has a Sammy Sosa rookie baseball card. I ask him if I can borrow it fora short while. He agrees. But unbeknownst to him I expect the price of the card

to drop (because Sammy Sosa is doing a drug test) so I take it and sell it rightaway.

I keep the money in my pocket and wait for the price to plummet. Fortunately forme it goes as expected and the price drops in half. So I go out and buy anotherSammy Sosa rookie card in similar condition to the one I borrowed from myfriend and gleefully return it. And the difference is my profit.

However if the price had gone up I would have be in big trouble. I would have tobuy the card back at a higher price and take a loss; hence the reason why I donot recommend shorting. Its too complicated!

Theres also the fact that the most amount of money you can make is 100%.Which is a lot, but when you go long (the opposite of shorting) and hold yourstock, the upside is theoretically unlimited. But in a bear market (a decline)shorting could be a wise optionspeaking of options

Options: Calls & PutsOptions are known as derivatives, meaning they have no actual value inthemselves, rather they derive their value from association with something else,in this case a stock.

Although they have no value per se, an option can still be quite useful. There aretwo different kinds of options: the call option and the put option. The call option isa contract where the seller agrees to let the buyer have control of their stock, andpurchase the stock at a later date for a specific price (known as the strike price).The put option is the exact opposite of the call option. Rather than having theoption to purchase at a specific price, the buyer has the option(s) to sell at aspecific price.


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[Call and put options are not free by the way; a buyer must pay a premium to theseller in order for him or her to engage in the risk of an options contract.]

The call option works in the buyers favor when the price of the stock goes up;thus allowing him or her to call in/purchase the stock at the predetermined price

of the seller.

Conversely the put option works in the buyers favor when the price of the stockdeclines; allowing him or her to sell the stock at the predetermined price as setby the seller. You may notice that this tool is very similar to a short sale in thatbenefit to the buyer come from a decline in the equitybut it is not the same.

Note: There is a lot more to options than what is explained above (you can tradethem as well) but that in itself is a whole nother book. But if you would like tolearn more about them, look for a book called: The Complete Idiot's Guide toOptions and Futures, by Scott Barrie. Or you can just look it up on

Wikipedia.Com!

Margin BuyingMargin buying is when a trader or investor borrows money from an institute (i.e.the brokerage) to purchase his or her stocks. This use of leverage can bebeneficial, but there is a large risk because, like the gains, losses are alsomagnified. And like any other form of borrowing, interest must be paid on theloan and there must also be collateral for the institute to repossess in the case ofany absorbed losses on the buyers part.

Personally I would not recommend buying on margin to purchase stocks -- evenif your brokerage gives you that option. It is far too risky and requires meticuloustiming and attention to technical detail. But if you trade for a living it may just beup your alley. But if youre a normal small investor like me, I would recommendgoing long, buying, and holding.

Pre-market & After Hours TradingThe stock market is normally opened from 9:30 AM to 4:00 PM, a total of 7hours. However not everyone can trade at this time, so there is what is known asextended hours: pre-market and after hours trading. This simply means extendedtrading time before and after the normal market hours.

Though not every brokerage firm gives you this option, many do. If you have ahectic schedule but work or are busy during the regular nine thirty to four oclockhours but want to monitor your trades, it would suit you well to participate in pre-market and/or after hours trading.

Pre-market hours are from 8:00 AM to 9:30 AM and the After Hours Market isopen from 4:00 PM to 6:30 PM; which give you approximately a total extensiontime of four hours.


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Price to Earnings RatioThe price to earnings ratio, or P/E ratio for short, is a commonly used metric todetermine how much one is actually paying for a stock based on its earnings, orprice divided by earnings.

I personally believe consideration of the P/E ratio is important; however it is notan end all to measure what a stock is actually worth. You have to take intoconsideration many things such as, the growth of the company, its liabilities, itsassets, its profit margin and its overall efficiency to earn money.

Picking companies with lower than average P/E ratios is a good rule of thumb,however it is not an end all, to ultimately choosing your investment.

Dollar Cost AveragingSometimes an individual cannot afford to buy his or her shares all at the same

time; or they are not particularly good at market timing and would prefer toaverage the cost of their stocks over a periodic series of purchases.

I personally do not like dollar cost averaging. One, because of commissions,depending on which brokerage youre with, is usually high. And of course youwant to avoid these fees at all costs (well not all costs).

Secondly, if you choose the right company and it has an upwardmomentum/movement, it would not be wise to dollar cost average because youwould decelerate the proliferation of your gains in addition to increasing yourexpenses through commissions that you would have to pay to the brokerage firm.

Dividend Reinvestment Plan (DRIP)If the stock you purchase pays a cash dividend, you can usually sign up for adividend reinvestment plan with the company. A dividend reinvestment plan, or aDRIP as it is commonly known, is a program wherein your dividends are used topurchase additional stock in the same company.

In my opinion a DRIP is a fantastic way to grow your money. By reinvesting yourdividends you can compound your gains. In other words you will make money ontop of the money you are already making.

Stock SplitsWhen a stock rapidly increases in price or reaches a very high market value,companies will often opt to have what is called a stock split. A split is when acompany makes preexisting shares into more shares. A split however does notincrease the value of your stock.

A (2 for 1) split is similar to exchanging a ten dollar bill for two fives. It is prettymuch the same thing, except now you have two bills. The only upside of a split is


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that the increase in shares may allow investors with less money to enter themarket.

I do not recommend buying stocks merely because they are splitting. Thoughthey can an indicator that a stock has a strong upward momentum and may

continue increasing in price. However this is now always the case, so be wary ofpurchasing stocks based solely on its ability to split or to make change.

Penny StocksPenny stocks are stocks that are cheap in price, usually as the name indicatescosting mere pennies per share. Many people are attracted to penny stocksbecause they appear to be a bargain (quantity over quality). But this of course isa falsehood.

Penny stocks are usually cheap for a reason -- because the earnings are cheap.They are either non-existent or very little. The majority of people do not make

money on penny stocks, and those who do, do so through manipulation (fraud) ofthe market.

So dont be left holding the bag, stay away from penny stocks and stocks with noavailable or little information.

Mutual FundsA mutual fund is a form of collective investment that pools money into varioussecurities such as stocks and bonds. It is a way for a small investor to buy alarger portion of the market and diversify with less money. Mutual funds arevery similar to stocks in that they are traded just like stocks (i.e. a closed-endfund) but in spite of this similarity they are actually quite different.

There are two main types of mutual funds: open-end and closed-end funds. Anopen-end fund sells and redeems their shares at Net Asset Value (NAV). Thatmeans the more people put their money in the more the fund grows and the morepeople take out the more it shrinks.

A closed-end fund however can trade at a higher or lower price than their NAV,because they are treated just like a stock and they can be listed on an exchange,

just like any other regular company.

[By the way they are called closed-end because there is a set amount of shares,whereas in an open-end fund the amount of shares depend on the amount ofpeople whom invest; which theoretically can almost be limitless]

It is not recommended (by me) to buy into mutual funds (they usually havemanagement fees; also known as loads). But if you must, please choose anopen-end fund, because what you see is what you get.


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Index FundsAn index fund is a fund comprised of numerous companies chosen to represent aparticular industry, sector, or principle. It is useful for spreading risk and beingdiversified. Although in my opinion owning an index fund in order to own a broadamount of stocks is silly. You will get a mediocre or at best average return.

But if you are unaware of what you are doing, it may be safer for you to haveone, because it is highly diversified and holds a large amount of differentcompanies.

The NASDAQ-100 (QQQQ) is an example of an index; it is comprised of stock in100 major companies.

REIT: Real Estate Investment TrustReal estate investment trusts are similar to stocks. They are traded on anexchange and normally have a fair amount of liquidity. REITs like anything have

their both benefits and disadvantages. Lets first begin with the advantages

The main advantage of an REIT is in the way it is structured; allowing it tonormally pay lower taxes. However, it is required to pay out a minimum amountof its income to qualify for those tax benefits and relief, so that usually results in ahigher than normal dividend.

This can be seen either as an advantage or disadvantage. But since manypeople own REITs specifically for cash flow, this may be exactly what they maywant.

The main disadvantage of an REIT is that there is usually a large amount of longterm liabilities. Because most of an REITs earnings have to be paid out in cashdividends, income is lost and cannot be used for reinvestment or to pay downdebt. In other words to generate cash flow an REIT must constantly borrowmoney and use leverage to create earnings.

In my opinion it is more preferential to own your own real estate. After all whatsthe point of real estate if its not real?

ArbitrageArbitrage is a broad term to describe the practice of taking advantage ofdiscrepancies or differences in the market in order to benefit (financially).

A common type of arbitrage is M&A arbitrage, or Mergers & Acquisitionsarbitrage. M&A arbitrage usually happens between two companies; oftencomprising of one large and one small entity. The larger company though isnormally the one (entity) that does the acquiring.


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And when a company is acquiring or doing an acquisition, specifically a publiccompany, there can be discrepancies in the market of what the price on theexchanges actually are and what a company is offering to pay.

For example, Company A wants to acquire Company B. Company A announces

they will acquire Company Bs shares at a price of $100 in cash. The stock ofCompany B subsequently shoots up in price on the open market.

However the price on the exchange only reaches $95, thus creating a $5 spreadbetween the offering price and the price on the open market. Therefore if thestock is bought by an investor for $95 they will receive $5 in profit once themerger and/or acquisition is complete at $100 a share.

As you can see because of the nature of an arbitrage deal it is commonlyreferred to as risk-less profit. And it is; unfortunately the spread between themarket price and what is usually offered for a company is not significant; perhaps

3-5% at best. And given the cost of commission and the length of time to closethe deal it is not usually worth it, although if you do have an enormous sum toinvest it is a good way to generate more money.

PART TWO: THE SYSTEM,CHOOSING THE RIGHT STOCKS

Now that you have learned the basics you can now go on to learn my system andsee how I screen for stocks. Lets begin!

1) Non-Cyclical Avoid buying into companies that are highly cyclical; especiallyif you are going to buy and hold. Companies that tend to have extreme profitsand extreme losses, depending on the business cycle are a no-noavoid themlike the plague!

Exceptions Sometimes I will make an exception if the company itself is anexception. For example, Toyota Motor while in a cyclical industry (automobiles) isnot necessarily subject to the cycles bestowed upon its competitors such asGeneral Motors and Ford.

Somehow they have seemed to create a consistent and constant demand for thevehicles they produce. I dont know exactly how, but this would make it anexception and therefore a possible investment.

[Take note that I am not giving a stock recommendation for Toyota Motor (TM)but it is a good company as of speaking.]


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2) Upward Momentum Choose a stock with an attractive chart, one that hascontinued to climb upward throughout the years and has a consistent diagonal(view the maximum chart). But try to avoid the stocks with highly vertical climb,because they tend to come down as quickly as they went up. Though this is notalways the case it is usually true.

3) Dividends Pick a company that consistently pays cash dividends andconsistently raises them. Use the dividends received to reinvest into the samecompany in order to compound your return (DRIP).

4) Increased Earnings Buy into a company that has increased their earningsyear in and year out. Look at the maximum amount of income statements. Try toget into a company with a yearly minimum 18% growth in earnings.

Make sure growth in income roughly matches that of growth in revenue;otherwise increased earnings may only be due to sporadic windfalls (e.g. a sale

of a companys division and/or assets).

5) Debt to Income Ratio (DTI) Take the total liabilities of a company and divideby its total income for the current year. The amount you get should ideally nottotal more than 12. There are however exceptions for banks and/or companiesthat make the bulk of their income by taking on the responsibility of numerousfinancial liabilities; the maximum amount here for the DTI ratio is 60 or less (thelower the better).

6) Increased Assets Sometimes companies make income by liquidating theirassets. So avoid companies that have slowly declining assets.

7) Price to Earnings Ratio Try to find a company that is selling for a reasonableamount. Dont buy companies that are too expensive. I really dont have auniversal rule of thumb here for P/E ratios though because there are so manydifferent industries (with a lot of exceptions, i.e. tech). But if you need a rule ofthumb and would like to play it safe, I would not recommend buying intocompanies that have P/Es of 25 or more.

But you should note it is different for every industry. For example while a hightech company could garner a P/E as high as 35 and can still be considered agood investment, a mining company however could have a P/E of 15 and still beconsidered very expensive.

[Remember: An ideal P/E ratio for a company depends a lot on its growth. If theE is growing (earnings) the forward P/E should become lower in time.]


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Picture of a Company Which Meets My Criteria: PepsiCo (PEP)

1) Non-Cyclical People will always drink and eat Pepsi products.2) Upward Momentum As you can see in the above chart, from 1983 to

present PepsiCo has been and is steadily moving in the upward direction.3) Dividends - Note the light blue Ds -- these are all the dividends Pepsi

has paid out over the years and they are continually increasing payments.The current dividend yield is 1.90%.

4) Increased Earnings In the year 2002 Pepsis income was $3.3 Billion.Today it is over $4.0 Billion (as of 2005).

5) Debt to Income Ratio Total liabilities divided by present earnings isequal to 2.30.

6) Increased Assets 2002 total assets were $23.4 Billion, today that total is

$31.7 Billion.7) Price to Earnings Ratio The P/E is fairly high but is reasonable when you

take into account earned income and glance at their balance sheet. TheP/E ratio is 22.

8) Cash Flow I dont normally pay attention to the cash flow (Im all aboutthe bottom line) but you may look at it if you wish to have an extrameasurement of security. Cash flow is great in determining the short termhealth of a company.

Dos and Donts

Dont buy a stock based purely on the dollar amount; cheap does not alwaysequal a bargain (i.e. penny stocks).

Sometimes things dont work out the way you plan; so DO have an exitstrategy. Put up a barrier to how much you are willing to lose (say 5%) andstick to it. Usually when a stock declines 5% or more it usually continues to gothat way.


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Dont try to buy at the bottom. When you think its at the bottom it goes evenmore bottom! Buy on momentum and upward movement! That way you knowthe bottom is behind and it has already passed.

Dont take advice from people who dont know about the stock market anddont buy on a whim.

Dont trade excessively because commissions and fees quickly add up.

Well thats it! Thats the end of this book! Thank you! I hope you enjoyed it!

For More Books Please Visit: http://www.lulu.com/harrychong

There you can get free stock recommendations and/or e-mail me for personalfinancial guidance on your stock portfolio.

THE ENDCopyright Harry J. Chong 2007


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Common Terminology & DefinitionsBefore you invest and learn more about stocks you should try to learn most of thecommon terminology and definitions (trust me itll make things a lot lessconfusing). Below you will find these terminologies and definitions

Bullish Its going up!

Bearish Its going down!

Bottom-line This word has its origins in accounting where the total profit or lossis written on the bottom line

Cash Flow Cash flow refers to the amount of cash being received and spent bya business during a specific period of time

GAAP Generally Accepted Accounting Principles

NASDAQ National Association Securities Dealers Automatic QuotationsSystemwhew!

NYSE New York Stock Exchange

TSX Toronto Stock Exchange

P/E Ratio Price to Earnings Ratio, price divided by earnings

Bid How much the buyer is willing to pay for a stock

Ask How much the seller is willing to let their stock go for

Open The first selling price of the stock in the (intra)day

Close The last price of the stock in the day

High The highest price the stock sold for in the day

Low The lowest the stock sold for in the day

Intraday A single trading day

Volume The amount of shares trading/traded

Moving Average The average a stock has moved over a certain amount ofdays, e.g. 20 DMA (Day Moving Average), 50 DMA, 200 DMA

OTC Over the counter, not listed on an exchange


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IPO Initial Public Offering

Index An index is made up of multiple stocks that are best believed torepresent that particular sector, e.g. the Dow Jones Industrial Average (DJIA)

pertains to industrial type companies and is made up of the 30 most widely heldand major industrial companies

NAV Net Asset Value, assets minus liabilities

Book Value Similar to NAV, but calculated on a per share basis as opposed toan entire company

Profit Margin Expressed in the form of a percentage this represents how mucha company keeps from every dollar of revenue (sales)

Revenue Sales, how much a company sells and/or has sold

ROI Return on Investment, how much an investor receives from his/her initialinvestment, expressed as a percentage

ROE Return on Equity, net income divided by average stock holders equity

Shareholders Equity The owners residual interest in assets of a companyminus its liabilities

DRIP Dividend Reinvestment Plan

Compound Interest Interest from an investment that also earns interest

Documents

How to Not-To Lose Money in Stock Market-V2.0