That being said, you really have to know how to invest in stocks in a variety of markets and economic conditions if you want these types of returns.  You generally won’t get this type of ROI by sitting on your hands the whole time.

It’s not difficult to learn how to invest in the stock market.  Even beginners can get started almost right away with the right investment strategy.  If you want to get started right away as you learn the basics, consider investing in a broad market index fund like the SPDR ETF, which is a vehicle that tracks the S&P 500 composite index.

You can also look at the Vanguard Total Stock Market Fund which tracks 3,000 stocks in an effort to match the broader US stock market.  Both of these index funds have historically produced the returns of 8-12% a year that I was talking about.

But again, if you want to get exceptional returns, you will need to do some learning.

Finding a Financial Advisor

Before you do anything, you should find a financial advisor.  A good one will do far more than just give you investment advice about individual stocks.  They will help you create a comprehensive investing strategy that is based on your risk profile, time horizon and financial objectives.

This doesn’t mean you should give up ownership of your own finances.  No one will care more about your personal finances than you.  You cannot hand this responsibility off to someone else.

At the same time, you don’t want to reinvent the wheel.  You can also benefit from another perspective as well as any research and investing ideas they might be able to offer.

You could go with a standard stock broker, but there are a lot of downsides to doing that if you are a beginner investor.  I would look for a fee based investment advisor that you can trust and feel comfortable with.  Some of the larger fee based advisory firms are Edward Jones and Ameriprise Financial Advisors.

Online Stock Market Trading Account

The next thing you will probably need to do is set up a trading account with a stock broker.  Most people these days go with an online stock broker.  The big ones that most investors use are Etrade, TD Ameritrade, and Scottrade.  Just put a “.com” after their name and you are there.

Stocks or Mutual Funds?

Again, it really depends on how active you want to be.  If you want someone else to manage your money for you, you should invest in a mutual fund.  If you are very interested in the stock market and would like to pick your own stocks, you can do that as well.

If you are going to stock pick yourself, be warned.  Most people cannot average market returns.  If you don’t beat the market, there is no point in actively picking your own stocks.  You might as well invest in a S&P 500 index fund ETF.  You would get better returns, cheaper transaction costs and with the fraction of the time investment.

Time Horizon

It is important that you consider your time horizon when investing.  If you are young and have 20-30 years before retirement, you should be a little more aggressive.  You should look at investing in small cap growth stocks or a mutual fund that does the same.

If you are older and closer to retirement age, you should be more conservative.  That means investing in large cap stocks that offer dividends with low risk of capital depreciation.  You should also start reallocating your assets into bonds and other fixed income investments as well.

Rebalancing Your Investment Portfolio

There is a spectrum to follow.  As you get older, you should get progressively more conservative in your investment strategy.  You do this with something called re-balancing.  This is where you check in with your portfolio regularly to reallocate your assets based on your time horizon.

For example, let’s say you want 80% in stocks and 20% in bonds.  In 3 months from now, your stocks may appreciate to 90% of your portfolio and bonds 10%.  To rebalance to get you back to your optimal ratio, you should sell your stocks and buy bonds.  Either that, you can leave the stocks the same and allocate more capital from elsewhere to your bonds.

Introduction

First of all, the stock market is a financial exchange where buyers and sellers get together to trade shares or stock in public companies.  Public companies issue shares of ownership in their company.  Some may have 1,000 owners, some may have 1 million owners.  In either case the owners are said to own stocks in that company.

In stock market investing and trading, those owners can freely sell their share of the company to a buyer for the market price.  Or they can buy additional shares in that company or in another company.  The stock market gives investors and traders an avenue to do this freely, efficiently and it streamlines this whole process.  These are basic things you need to know whether you are doing stock market trading or day trading for a living.

Terms and Definitions

Here are some stock market investing basics terms and definitions you will need to know to understand what’s going on in the market.  You can find these terms and learn more about them in stock market for dummies 101 books that I will eventually do a post on.  In the mean time, here are some of the more important ones that you would learn in most stock market courses and tutorials.

The Dow – When a CNBC reporter refers to the Dow, she is referring to the Dow Jones Industrial Average.  This is the average of the share price of 30 of the largest and most influential stocks on the New York Stock Exchange.  The Dow typically is looked at as an indicator of the state of the US economy.

S&P 500 Index - This is another composite of companies compiled by a credit rating agency called Standard & Poor’s, hence the S&P.  The 500 part refers to how many companies are included in this index.  S&P has a set of criteria to pick the 500 most important companies in the US.  This again is used to indicate the health of the US economy and stock market.

Share Price – Refers to the price of a single share of a company.

Market Cap – Also known as market capitalization, this is a measurement of the company’s size.  It’s calculated by taking the share price and multiplying it by the number of outstanding shares.  The 3 main categories of market caps are large-cap, mid-cap and small-cap.

P/E Ratio – This is the price per earnings ratio.  It gives an indication of how much real money a company is earning relative to it’s share price.  If their P/E is high, that means the price is way higher than what they are earnings, which means there is a market expectation that this particular stock will go up at some point in the future, the earnings will rise significantly, or both.

Stock Broker – Everyone needs one of these in one form or another to buy and sell stocks.  A broker trades shares on your behalf and you pay them a commission each time you do it.  Back in the old days, you’d have to call them on their landline to place an order.  You can still do that, but most people have an online brokerage account that they trade from these days.

Mutual Fund – This is when a money manager puts together an investment portfolio and let’s other people get in on it.  It’s like if you were picking stocks to invest in and other people started to ask you to do it for them.  You are basically paying a professional to invest your money for you and you pay them a management fee.

Investment Portfolio – This is your overall basket of stocks, bonds and other assets that you have invested in.  If I own shares in GE, Microsoft and Coca-cola, I would say that those stocks are in my investment portfolio.

Diversification – This is an important concept to understand when you are developing your investment strategy.  Diversification is the idea that you don’t put all of your eggs in one basket.  By buying a variety of stocks, bonds and other kinds of assets, you are diversifying your risk.  If one goes down the tube, you have other assets to make up for it.  It is unlikely that all of your assets will tank.  And if one does extraordinarily well, it will make up for the losses.  But you have no way of knowing which ones will do well and which ones won’t, so you buy all different kinds.

I hope this stock markets basics overview helped you.  Again, if you want to learn stock market 101, there are plenty of books out there.  In fact, you can check out our best investment book store on this website.

Related Articles

Natural Gas ETF

Many investors are sitting on the sidelines right now figuring out the next phase in our global economy.  They are sitting on cash, US Treasuries or gold.  These are all super defensive plays.

Then there are the risk takers who are trying to find deals.  Among the sectors where you might find undervalued stocks are in the financial sector and technology.  Banks have been struggling since the 2008 financial crisis.  They have not fully recovered.  There is also nervousness about the exposure to European debt and new financial regulations that are coming down the pike.  But for the true believers, they are confident that banks will recover and thrive in the long run, making these good stocks to buy now while they’re cheap.  This includes all the bankers right now taking stock options in lieu of cash bonuses.  If these insiders didn’t believe it, they wouldn’t be taking their bonuses in stock.

Defensive Stocks – Strong Now, Strong Later

Many experts and analysts are recommending defensive stocks as good stocks to invest in right now.  Defensive sectors would be things like healthcare, consumer staples and utilities.  Many are also advocating that you should invest in large multinational corporations that have a strong presence in the emerging markets.  This will give you financial strength to weather any downturns, but also offer opportunities to leverage the massive growth in developing economies.

You generally think of defensive stocks as those that you invest in when there is a downturn in the economy.  But I like the following defensive stocks because I think they will continue to be strong even when the economy is no longer in a recession.  The thing is that if you do strict valuations, it looks like the entire stock market is undervalued.  So when the economy recovers, it should cause a rising tide that raises all ships, including defensive stocks.  They are one of those win-win plays.

Johnson & Johnson (JNJ) - I really like JNJ.  They are the largest health care company in the world, in an industry that is ever growing.  They have extremely strong brands for consumer products all around the world.  They also have a strong business on the medical technology end as well.  As the world grays with increasing numbers of the elderly, a massive and emerging middle class in the emerging markets and just the nature of the health care industry in general, I think JNJ is very well positioned to take advantage of significant growth over the next decade.  They are also lending money to European banks.  That means they have a lot of cash.

Exxon Mobil (XOM) - Again, another company that will win either way.  This is the largest company by market cap on the US stock market.  That makes them a safe haven asset when the economy is going south.  But in addition to their defensive qualities, they also have great long term prospects for growth.  They are always finding new reserves of oil.  But they are also investing in other energy sources as well like natural gas.  I think they will be a huge player in the natural gas power generation business in years to come.  I’m bullish here because I think gas will become a major player in the power generation industry in the US.  It burns cleaner than coal and safer than nuclear.

Growth Stocks – Speculation Play

If you are a speculator and looking for high growth stocks to buy, here are the ones you want to watch.  Remember, with the potential for high returns also comes equal downside risks.  Especially right now, only use money you can afford to lose on these stocks.

Google (GOOG) – This stock has been going up higher and higher for at least the last 10 years.  They don’t seem to be letting up.  On the fundamental side, their market share is growing as well as the market itself.  They are starting to get into the social networking space as well with the recent release of Google+.  The thing you want to watch for is their operational costs.  It’s been rising very quickly due mostly to hiring costs.  I don’t foresee that stabilizing at any point.  Just make sure the earnings are growing faster than rising costs.

Apple Inc (AAPL) – This is another technology stock with great potential.  With each new release of an iPhone or iPad device, the stock continues to climb.  They have the “wow” factor down and I don’t see this changing any time soon.  Their new server farm in Charlotte, NC just went online as iCloud.  I think this is going to make a huge long term difference.  But in the short term, you have very regular releases of new versions of their flashy devices.  As long as they keep that up, the stock will continue to rise.  Although Steve Jobs is no longer here with us, he probably left a road map for Apple to follow for the next 3-5 years.  The question will be whether Tim Cook will be able to execute on those plans.

Netflix Inc (NFLX) – I’m not as crazy about this one.  Their stock price has risen considerably for sure.  Even the great speculator George Soros is said to be holding this stock.  But I think the growth is going to be short-lived.  Publishers don’t like them and that will only hurt their licensing costs.  In addition, their business model of streaming movies and TV shows has relatively low barriers to entry.  I think if Google buys Hulu as it’s rumored to be, I suspect Netflix might feel their final blow as a speculative growth play.  I would put this in the category of stocks to not buy right now or one to look for short selling opportunities.

Stocks to Buy in a Recovery

Cyclical stocks are ones you want to invest in during a time of economic growth.  The ideal time to get into these stocks is right when a recession is turning into a sustained recovery.

Ford (F) - I like Ford for several reasons.  First of all, I respect this company.  They were the only ones not to receive a government bailout.  They stuck it out on their own and survived.  Now they are thriving.  But I need a little more than respect to want to invest in it.  They have a strong presence and penetration into emerging markets.  They have been able to adapt to the new environment they find themselves in with low cost, smaller vehicles.  They have the pulse of the emerging market consumer.  In addition, and this is very important to me, their financials are very strong.

JC Penny (JCP) – JC Penny is what they call a consumer discretionary stock.  These are companies that do well during good economic times because they sell stuff that people don’t absolutely need.  I like JC Penny in particular because they have not been doing well.  Yes, that’s right.  I like them because of their failure.  That is because they are turning their failure into an opportunity and the best success stories start out that way.  In their failure, they have hired a master retailer to become it’s next CEO.  Ron Johnson has been the brains behind Apple’s spectacular success with their retail stores.  He also has a design background, which you can see when you walk into an Apple store.  If you wonder what his potential contributions could be, just walk into one of their stores and get the Apple experience.  Johnson is an innovator and I think he’s going to lead a retailing revolution.

Emerging Market Stocks

The emerging markets are growing at an incredible pace.  Most retail investors do not have access or the information necessary to access these markets.  You can invest in them indirectly with stocks that have a lot of business interest in these regions.  These stocks are a bit risky, especially if we start to see a slowdown or even a bubble pop in countries like China, India, Brazil, Russia and Southeast Asia.

Caterpillar – This company makes heavy equipment like backhoes and diggers for the construction industry.  This sector has taken a hit in the US and the Western world, but is booming in other emerging economies.  As long as there is this building boom in developing countries, you will see companies like Caterpillar do well.  The only thing to watch out for is if and when a potential building bubble in China bursts.  Then you might see it screech to a halt temporarily.

IBM – I like IBM here because they are providing the hardware and IT infrastructure necessary to equip these economies with the technology to grow.  Their server business will only get better as these economies develop.  In addition, they are providing the hardware for cloud computing, which is the next mega-trend in technology.

Yum Brands! – This used to be the restaurant arm of Pepsi Co.  They were spun off a few years ago.  You would recognize the brands that they own like Pizza Hut, KFC and Taco Bell.  They also do A&P Restaurants as well.  That is why you are seeing combo restaurants in many places now.

They are actually doing quite well.  They are also well-positioned to take China by storm.  If you know any Asians, you know that many of them love Kentucky Fried Chicken.  I’m not exaggerating.  Just think about how much you can scale this demand in a place like China.  As the middle class grows in that country, there will be tons of opportunities for this brand to expand.  KFC is doing even better than McDonald’s in China.

Index Fund Investing

Everyone is trying to beat the market by finding the best stocks to invest in.  From professional money managers, to institutional investors on Wall Street, to the retail individual investor on main street, to those looking to skim on penny stock investing, everyone is trying to out-do the stock market.  But the harsh reality is that a few actually end up finding the top stocks to invest in.

Research studies are starting to recognize that only a handful of investors actually beat the market consistently over time.  So if a professional money manager for a large mutual fund management company can’t consistently beat the market, an individual investor should be wary of stock picking for himself.

That is where index fund investing comes in.  You don’t have to spend hours to find good stocks to invest in.  Instead, you let the market pick them.

The reason why index investing is highly recommended by so many smart investors, Warren Buffett being one of them, is that over time, they will almost surely give you a return.  Now instead of beating the market, you are trying to grow with it.  Historically, the market has always grown over time.

Penny Stock Investing

If you are looking for hot stock tips, you will probably run into many penny stock investing opportunities.  These are abundant, especially online.  They tout really cheap stocks and how you can get in on the ground floor.

Historically, many frauds have come from penny stock investments.  They are hard to catch or even see on the radar because they are so small.  The SEC has a hard enough time watching the big blue chips let alone tiny IPO’s.  In addition, many of them are based outside of the US, which also helps them fly under the radar.

All I have to say here is to be careful of penny stock investing.  The only smart way to do it is if you know the company personally or can walk down to their operations and see with your own eyes that it is a legitimate company.

The other problem is that liquidity is horrible on these stocks.  That means you won’t get the optimal entry and exit prices on these stocks.

Financial data from Sageworks was used to do some of the analysis for this post.

Related Articles

Natural Gas ETF

Day Trading for a Living

Stock Market Trading

Disclaimer

Remember that investing is a very risky activity.  You can lose all or most of your initial investments.  Consult a licensed financial advisor before implementing any investment strategy.  Historical performance is no guarantee of future performance.  No one can accurately predict the future, at least not consistently over time.  The writer of this article and owner of this website do not own any of the stocks mentioned in this post.

Value Investing

This method involves finding undervalued stocks that have good fundamentals.  The best investments will be those with solid financials, good leadership and a wide competitive edge.  The most famous value investor and arguably the best in the world is Warren Buffett.  He finds companies that have a good solid business model and ones with a competitive advantage over others’ in it’s industry.  Then he does a valuation of thecompany based on his own criteria.  If his valuation is higher than what the market is giving it, then he buys the company.  The basic essence of this method is simple.  Find good companies that aren’t being given credit for it yet.

Growth Investment Strategy

The investing strategy seeks to find stocks with a hot growth potential. This would include technology companies with patented and industry disruptive innovations that are hard to duplicate.  It would also include scientific companies who’s research and development department is coming up with hard to reproduce discoveries.

Growth investors also look for companies that have a good potential to be acquired by another company.  This would include companies that were started for the sole purpose of being bought up by a larger, well-capitalized company.  It would also include companies that would even be acquired through a hostile takeover.  This scenario would be ripe for the stock to spike.

Needless to say, growth investing strategies can be a little more risky because it primarily looks at stock price rather than the fundamental business of the company.  It is also tailored more for investors that tend to look for short term profit taking opportunities.

Mutual Funds

Investors can also opt out of doing the stock picking themselves and invest in a mutual fund.  A mutual fund investment strategy allow an investor to entrust their money with an experienced money manager to allocate his funds.

For the privilege of allowing a fund manager to invest your money, you have to pay a fee.  The management fee is based on the expense ratio, which is the percentage of the value of the fund that goes to operations and overhead of the fund such as administration and salaries.  There may also be a fee that goes on top of the expense ratio.  Those without this extra fee is called no-load funds.

There are many types of mutual funds.  You can find those that do value investing as their approach.  And you can also find growth funds that seek follow the growth investing approach.

Actively Managed Funds

There are two types of mutual funds you can invest in.  The first and most recognized kind is the actively managed fund.  This category of mutual fund has a money manager, or team of money managers, that actively seek out stocks to put into their portfolio.

Based on their investment approach and criteria, they go out in search of good companies to invest in.  Some, like many hedge funds out there, also use very sophisticated stock market trading strategies to run their funds.

Many keep communications with the companies they invest in and companies even have regular conference calls for these managers and analysts.  Some go as far as visiting the companies’ operations on site and in person.

As can be expected, the expense ratio and thus the management fees tend to be higher for actively managed funds.  Obviously it takes a lot more work and expenses to manage a fund this way.

Passively Managed Funds

Alternatively, you can also invest in passively managed funds. Typically these are index funds that track a particular stock index, like the S&P 500 or Dow Jones Industrial Average.  By letting these indices pick your stocks for you, not only are you saving a ton on operational expenses, but you are also tracking composites that have historically proven to rise over time.

The expense ratio and fees for a passively managed fund is a lot lower than for actively managed funds.  Oftentimes it’s not even a real human being who’s putting the stocks in the fund.  Many times it’s a computer that automatically invests the fund according to whatever index they are following.

Exchange Traded Funds – ETF

Another vehicle that has grown in popularity, with good reason, for the last few years are exchange traded funds, also known as ETF’s.  ETF’s are like mutual funds in that they are a basket of a variety of stocks.  But they are unlike traditional mutual funds in that they are traded as shares on the stock exchanges just like any other stock.

There are several advantages to ETF’s which account for it’s rise in popularity.  First of all, because ETF’s trade like shares on the stock exchange, you don’t pay a management fee to own it.  All you do is pay your usual commission to your stock broker or online broker.

Secondly ETF investment approach allows you to buy and sell shares during normal trading hours.  With mutual funds, you are only allowed buy into them once at the end of the trading day.  ETF’s allow you to react to market changes that might affect the stocks in your basket.

Many companies that offer mutual funds are starting to offer ETF’s that mirror their mutual funds.  For example, the Vanguard Small-Cap Value Index Fund has a corresponding ETF called the Vanguard Small-Cap Value ETF.

Another benefit is that you can trade entire sectors with it.  For example, if you are green and like alternative energy companies, you can invest in a natural gas ETF to cover the entire sector.

Investing by Market Capitalization

Here is a quick stock market for beginners overview of market cap.  Market capitalization, also known as market cap, is the measure of the size of the company.  It tells you how much the market thinks the company is worth as a whole.  The market cap is calculated by taking the share price and multiplying it by the number of outstanding shares.  There are generally three major categories of cap-size, small-caps, mid-caps and large-caps and an investment strategy that follows each one.

Small-caps are companies worth less than $2 billion.  These smaller companies tend to be more risky and volatile in it’s share price, but it also has the most room for extraordinary growth and returns.

Mid-caps are companies worth more than $2 billion, but less than $10 billion.  As the name might indicate, the risk and returns of mid-cap stocks tend to be moderate.  It is less riskier and with less room for growth than small-cap stocks.

Large-caps are companies with a market cap of more than $10 billion.  These are giants like Exxon Mobil, Coca-cola and Walmart.  These companies tend to be less risky.  In fact, investors flock to them during times of economic crisis as a safe haven for their money.  But like this would suggest, large-caps also have the least amount of room for spectacular growth.

Conclusion

None of these investment strategies don’t have to be stand alone.  These general strategies can be mixed and matched to come up with a comprehensive approach.  You can invest in a growth fund that focuses on small-cap companies.  Or you can invest in an index fund that tracks the S&P 500, which would mean investing mostly in large-cap companies.  Or you may want to invest in an ETF that picks mid-cap companies with a value investing approach.

In fact, a multiple combination of these strategies should be used in a diversified portfolio.  A financial advisor may be able to give you the investment advice you need to tailor a strategy that fits your needs and life circumstances.  There are an endless number of alternatives and options when it comes to investing.  I hope this will get you started on the right track to develop a portfolio that is right for you.

ETF Fund List

Here is a natural gas ETF list that is exclusively in gas (not including oil).

• United States Natural Gas Fund (UNG)- Commodities
• ETFS Natural Gas (NGAS) – Commodities
• iPath Dow Jones-UBS Natural Gas Subindex Total Return ETN (GAZ) – Commodities
• First Trust ISE-Revere Natural Gas Index Fund (FCG) – Equities

Here is a list of natural gas ETF funds that are involved in both oil & natural gas, a common pairing because gas is a natural by-product of oil production.

• SPDR S&P Oil & Gas Equipment & Services ETF (XES)
• IShares Dow Jones US Oil & Gas Exploration ETF (IEO)
• PowerShares Dynamic Oil & Gas Services Portfolio (PXJ)
• ProShares UltraShort Oil & Gas (DUG
• ProShares Ultra Oil & Gas (DIG)

Canadian ETF tracking the NGX Canadian Natural Gas Index:

• Claymore Natural Gas Commodity ETF

Although there are many ways to play this market, there are some experts that say the best natural gas etf is one that invests in equities instead of commodity futures.  The only one currently in that category is the First Trust ISE-Revere Natural Gas Index Fund (FCG).  The reason is because futures are tricky.  These funds don’t hold long term securities.  Instead they have massive transactions every few months when the futures contracts come up.

Fueling the Growth of Natural Gas

Here are several very good reasons why gas should rise considerably in demand over the next few years.  It is good investment advice to look into this industry as a possible growth sector in the coming years.  Companies like Exxon Mobil have bought natural gas companies like XTO Energy for $41 billion, which should give you a indication of where this industry is headed.

• It burns up to 30-60% cleaner than oil or coal power.
• With global initiatives to reduce climate change emissions, gas is the best alternative to take the place of oil.
• It’s also our best chance to get off of our dependence on foreign oil.
• The US has enough to fuel our consumption for up to the next 100 years.

Climate Change – Cleaner Burning Fuel

Gas is known as the cleanest of the fossil fuels.  It has shown to emit up to 30% less carbon emissions for vehicles and 40% for power generation than oil.  And it can burn as much as 45% cleaner than coal.

When it comes to power generating industries, gas will win out.  Nuclear power is always a clean option, but a very complicated issue.  Then there is coal, which is very dirty.  If you think that world governments will eventually put a tax on carbon emissions, it would be a safer bet to build a gas power plant than a coal powered one.

Climate change has become one of the defining issues of this generation and it will continue to be in the forefront for the next 50-100 years.  With this public consciousness about trying to reduce our greenhouse gases, natural gas is the obvious choice to cleaner energy.

Wind and solar technology is cleaner than gas.  Even so, much of the advances that are required for wind and solar to replace oil is still very far off.  The conversion of our vehicles and power generating needs can be a lot more easily done with natural gas.  In fact, much of it is beginning to already occur.

There are many cars, trucks and buses that are already running on gas in the US and across the globe.  As the negative affects of oil become increasingly felt, gas will be the hero to save the day.

Foreign Oil and National Security

We have seen the significance that foreign oil plays into global geopolitics.  Many have pointed out the national security issues that dependence on foreign oil brings up.  Critics say that our dependence on oil to run our economy makes us vulnerable to oil producing states like those in the Middle East.

In fact, many have said that our invasion of Iraq was largely fueled by our need for Middle Eastern oil.  No matter how true that may be, everyone agrees that our need for foreign oil is a huge national security and economic problem.

Gas is probably the best alternative to get off our dependence.  Currently, the US has 238 trillion cubic feet of proven gas reserves domestically.  There is an additional estimated 1.8 quadrillion cubic feet more of gas underneath our feet.  This reserve could fuel the US economy for decades to come without the need for foreign oil.  It would also buy time to develop other sources of renewable energy like wind, solar and biofuel.

Natural gas companies have come up with a way to extract gas from shale.  Extracting shale gas has become one of the most significant methods of getting gas in the US.  Now this method is being used in other parts of the world like Canada and South America.  Shale gas technology could equalize power over gas prices worldwide, making them cheaper overall.

ETF – Exchange Traded Funds

There are several advantages to investing in ETFs.  First of all you are investing in entire sectors or a basket of securities.  That means you can take advantage of market growth, not just individual companies.  This keeps you diversified across a single sector.  Also, by utilizing this investment strategy you can trade during the normal market hours. This is in contrast to a mutual fund where you can invest only once a day at the end of the day.

Natural Gas Power Generation

Another important factor is power generation.  Nuclear power used to be the next big thing in energy just a few years back.  The hoopla was complete with President Obama going to the groundbreaking of a South Carolina nuclear power plant.

Now with the price of natural gas going down and the supply going up, gas power plants are going to be the next big thing.  They are cheaper than nuclear and cleaner than coal.  What more can you ask for?

Fracking – New Drilling Technologies

There is a new method of extracting gas called fracking.  This is where enormous amounts of water, chemicals and sand are used to blast pores into shale rock.  Then the gas is extracted from places that were previously in accessible.  This has revolutionized this industry and brought new life to this industry in the US.  There are some criticisms and environmental concerns that have not be definitive as of yet.  Once they are, it will be addressed by this industry and the US government.

Traditionally, Central Bankers control the fate of an economy by manipulating the money supply.  When they lower short term interest rate targets, markets rise as liquidity floods the system, and when they raise short term interest rate targets, markets fall as liquidity tightens.  Thus goes the typical monetary policy and economic cycle.

In 2008, the Fed lowered interest rates to near 0% in a desperate attempt to stave off another Great Depression and total economic collapse.  When a Central Bank lowers rates that low, it essentially backs itself into a corner.  If the economy does not respond to near 0% rates, what else can it do to stimulate economic growth and create demand?  Enter Quantitative Easing.

QE

Quantitative Easing is a form of monetary stimulus, in which a Central Bank injects huge amounts of capital into the economy by purchasing treasury securities.  Proponents of QE methods believe this extra liquidity can bolster demand and spur economic growth, while detractors believe it simply increases our debt, falsely inflates asset prices, and has little real positive economic affect.

In July 2010, Fed Chairman Ben Bernanke testified before Congress and stated that the Fed was ready and willing to initiate a second round of QE if economic conditions warranted it.  The first round of QE that originated from the implosion of 2008 had come to an end, but the U.S. economy was still very weak.  Immediately, the market rallied and began an aggressive upward climb, as market participants began pricing in a second round of QE.

As you can see in the chart above, the market rallied significantly during all of QE2.  QE2 has now come to an end and the Federal Reserve is determining what it is going to do next.

Yesterday, Mr. Bernanke testified before Congress just as he did in July 2010, and Mr. Bernanke had a very similar testimony.  He stated that he believed QE2 had done its job, which critics largely disbelieve, and he said that the Fed was closely monitoring economic conditions in order to determine whether another round of QE is necessary.  Mr. Bernanke did state that the Fed would be willing to inject additional capital into the economy in the form of QE3 if economic conditions warranted it.

This rhetoric from Bernanke was not totally unexpected, but the market rallied significantly, nonetheless.  The Dow Jones Industrial Average rallied nearly 200 points on the day off of Bernanke’s comments before the market sold off heavily in afternoon trading.  The market seems unwilling to push price aggressively higher, but the mere mention of a QE3 possibility was enough for aggressive buying to flood the market for several hours.

Where Do We Go From Here?

After an aggressive rise over the last year, U.S. equity markets will most likely move into a sideways market within a few hundred points of the HI’s at 12,870.  U.S. economic data is continuing to show that the economic recovery is struggling.  Unemployment is still uncomfortably high and growth is muted.  This combination will most likely cause the equity markets to begin correcting to some degree.

However, more talk from the Fed concerning QE3 will most likely be enough to push the market higher to test the 12,870 level.  On the flip side, if the Fed remains silent and decides to hold off on QE3, there may be little incentive for buyers to pay this high of a price.  In that instance, we could see a deeper correction, with the Dow testing the previous lows at 11,875.  A break below 11,875 or a break above 12,870 will be a strong indication of trend continuation in one of those directions.

Berkshire Hathaway

This once textile mill company is now the world renown investment holding company of the most famous investor in the world Warren Buffett.  He bought this company on his long journey to his billions and turn it into the parent the all of the businesses he now owns.

The best way to invest money into this success story is to simply buy stock in his company.  It’s a very expensive stock for the class A shares.  They go for over six figures.  You can also get class B shares for less than a $100 a share.

Berkshire Hathaway and Warren Buffett have been known for their integrity and keen sense for value.  They have also been made famous by picking good stocks to invest in for many decades.

BlackRock

They are one of the biggest investment companies in the world.  They are actually the biggest asset management companies in the world with $3.6 trillion under management.

They have been historically known for their actively management funds.  Now, after their acquisition of Barclays Global Investors, they also have a big chunk of the passively managed fund business, also known as index funds.

You can invest in their stock BLK.  You can also become one of their asset management clients if you have that kind of capital to invest.

Goldman Sachs

These guys are the kings of Wall Street.  They always seem to be able to figure out a way to make money, no matter what the regulatory or market climate may be.

They will face some challenges up ahead, but they will still continue to be one of the best investments for 2011.  They have already made a ton of money on their stock market trading business, although they are no longer calling it that because of the Frank Dodd Financial Reform bill that was passed.

In spite of the challenges ahead, I think they will continue to figure out how to make money.  They have been accused of using unethical means to get there, so consider that before you invest in them.  Just like BlackRock, you can either invest in their stock or become one of their investor clients.

Related Articles

Natural Gas ETF

How to Invest in the Stock Market

Day Trading for a Living

Many investors and analysts watch the money supply closely.  That is because it can be a leading indicator for inflation, which is not good when it happens too fast.  Essentially, when the money supply is larger than the supply of good and services, you can expect inflation.  That is because there is more money out there than to buy stuff with.  So then people simple start charging more for their goods and services.

If you’ve done any kind of stock market trading in any emerging market in the last 20 years, you have probably seen this.  It’s basically monetary policy gone awry.  It especially happens when central banks start to just print money with no or little regard the the money supply.  When this happens, you see rampant inflation.

M1 and M2 Money Supply

There are two categories of money supply.  M1 is basically all the money that is in circulation.  It includes monies going around to pay for stuff, like your light bill.  It’s also the money that is in your checking accounts.  Let’s just call this liquid cash, money that is actively circulating in the economy.

Then there is M2.  This is M1 plus the following things.  It includes money in savings accounts and money market accounts.

Fed Policy

Although M1 and M2 money supply is really important to track, the Fed no longer has targets for it anymore, not since 2000.  They just decided it’s better to just leave it along and just focus on interest rates in relation to economic growth and expansion, inflation and deflation.  To make along story short, they made some mistakes trying to micromanage the money supply back in the 1970′s, which caused the recession in the 1980′s.  They just decided interest rate management was more important and money supply management hurt more than it helped.

Even the best investments will be affected by the Fed’s monetary policy and money supply.  Although the Fed no longer plays an active role in trying to control the money supply, it is still vital that you understand this concept.

The monetary policy in the United States and most other countries are determined by the central bank.  In the US, the Federal Reserve Bank makes these policies.

The main event of the Fed happens 8 times a year at the Federal Open Market Committee.  This is a meeting that includes all of the 7 officials on the Board of Governors.  It also includes the head of the New York Federal Reserve Bank as well as the presidents of 4 out of 11 of the other Federal Reserve Banks in different parts of the country.

These meetings can’t give you individual stock picks.  It doesn’t work that way.  They won’t tell you which are good stocks to invest in.  Rather, it tells you on a macro level how the Fed’s decisions and policies might affect the market as a whole.

The thing that most investors watch is what the Fed will do with interest rates.  I’ll talk a little bit about how this came to be the most important aspect of these meetings.  But suffice it to say, this one little number is what the world markets watch with held breath.

If you read or watch any financial media, you’ll find speculation about the Fed’s interest rate predictions everywhere.  It’s almost like idle talk sometimes because everyone is trying to predict what this central bank will decide.

In fact, it can be outright humorous.  Fed watchers will listen closely to the Chairman’s speeches to decipher what their next move is going to be.  It’s like trying to break a code or something.

Big Deal About Interest Rates

Here’s the big hoopla about interest rates.  Essentially, higher interest rates will slow down the economy and lower ones will speed it up.  When an economy is in recession, the central bank will lower interest rates making money cheap to borrow.  This greases the wheels of commerce, businesses start expanding, hiring more workers.  Then those workers, who are also consumers, go out spending money, expanding the economy even more.

When the economy starts to overheat and to grow too fast for it’s own good, the Fed will raise interest rates in an effort to slow it down.  That is because when the economy is growing too much, too fast, something called inflation starts to happen and that’s not good for the economy either.  It’s important to get this because even the best investments will be adversely affected by interest rate hikes.  So as an investor, it’s important to understand where the interest rates are and how any changes will affect your portfolio.

That means there are investment opportunities for the savvy investor.  Here are some of those potential opportunities.  Remember that investing is risky and you should get investment advice from a licensed professional before risking any money.

Stocks To Buy

I like just about any major stock in the Pharmaceutical industry except Merk & Co (MRK).  It looks like the entire industry is undervalued, again, except for Merk.  Their multiples are extremely high in the 120′s compared to other stocks in this industry but I still haven’t figured out why.

I like Johnson & Johnson (JNJ) as well as Bristol-Myers Squibb Co.  Their P/E ratio is in the 12 range.  The best investments will have a low P/E relative to the industry.

I especially like Johnson & Johnson because they aren’t a popular stock right now due to their major recalls last year.  But I believe this is still a strong company, and being a bit of a contrarian, I think this stock is undervalued.

Here are some of the individual stocks I like for 2011.  I like Wal-Mart (WMT).  Yes, they took huge hits during the recession as dollar stores took their market share, but I believe they will recover in force.  I like them because I believe the current concerns about Wal-Mart causing their stock to be undervalued.

Index Funds

The US economy is in recovery mode.  That generally means that the stock market has hit it’s floor when it comes to prices.  I really believe the the economy is recovering ahead of the US stock market, which means there are some good bargains for value investors.

In fact, I believe that there are so many bargains that I think a play on the entire stock market would actually be a good idea.  That generally means investing in an index fund.

As I am doing my stock research, I am not only seeing company after company that may potentially be undervalued, but I’m also seeing entire industries that are undervalued.

You can start with an S&P 500 index fund.  Many investment firms offer this as a fund, including the iShares S&P 500 Fund by BlackRock (IVV) and the Vanguard 500 index fund.  These funds track the companies in the S&P 500, where you can invest in the best of the stock market.

You can also go all out and invest in the entire stock market as a whole.  The Vanguard Total Stock Market fund is one that does just that.  This fund invests in 3,000 companies in the US stock market to mimic returns for the entire market.

One sector index fund I like is the natural gas ETF equities fund.  It’s actually pretty sensitive to the price of the actual commodity.  Regardless, I think this is a great industry to be in and a good long term investment.

Stock Picking

If you are into picking individual stocks, I would go for large cap companies that are in the emerging markets.  Developing economies are set to grow at a faster pace than the developed world.  The best investments for the average Main Street investor who does not know how to invest in oversees stocks, investing in large companies trading on the US stock market with heavy interests in the developing world would be a good play.

Financial Analysis

I do my financial analysis using Sagework’s Profitcents Public.  It translates financial statements into plain language.  It also does a valuation of stocks and industries using the discounted cash flow method.

Related Articles

Stock Market Trading

Day Trading for a Living

Types of Advisers

There are basically two types of financial advisers.  Unfortunately, they don’t always necessarily represent themselves in these categories, even though it’s the most important distinction they could make.  I’m not saying one is necessarily better than the other, although I do lean a specific way.  Regardless of my opinions, it is important for you to understand the differences so you can make up your own mind with the best information available.

Commission Brokers

These are the most familiar in pop culture.  These would be people like stock brokers and commodities brokers.  They may even represent themselves as advisers, but they are really salespeople.  These guys usually just give stock tips or general research on specific companies and economies.  They don’t sit down and help you come up with an overall investment strategy.

It’s important that they ultimately make their money on trading commissions or by selling specific investment vehicles.  You need to understand where their money is made in order to understand how they motivated.

Remember that commissioned brokers make their money by selling you stuff, not by giving you advice.  Any investment advice they give you will be to the end of you buying or selling a security.  Although this doesn’t necessarily mean they will give you bad advice, it means that whatever the advice is, it will encourage you to have high activity.

In addition, many of these brokers may get more commission on investment products that are offered by their institution.  You need to keep this in mind when you are getting advice from these guys.

If you’re just doing stock market trading without thinking about long term investing, this may not be important to you.

Fee Based Financial Advisers

These are advisers who make a flat fee by giving you advice.  They will most likely go over your entire personal financial situation with you before making any recommendations.  They may even help go over some materials on how to invest in the stock market with you so you understand your investments.  In addition, they won’t make any commissions when you buy a stock or mutual fund.

If you want the most objective advice as possible, I think you will have the best chance with fee based advisers.  They are not motivated to sell you specific investment products.  In addition, they won’t push you to buy a bunch of stuff unless it’s to your benefit because it won’t really make a difference to their bottom line.

Related Articles

Natural Gas ETF

Day Trading for a Living

Best Investments