Excerpt Adapted From: The Financial Shepherd®–
Why Dollars + Change = Sense by Glen Wright and Sy Pugh
Many times we hear that the market trades up 40 points or down 40 points on any given day. These comments reflect the importance of the overall stock market in determining the price behavior of individual stocks or bonds. Some experts feel that this is the key and major factor in determining the securities selection (buying or selling). They feel that the stock market is what matters most, not individual securities. Others feel that the individual company is the only factor when buying a security. Analyzing these various forces in the stock market is known as technical analysis.
We feel that studying the market is only one element in the security analysis process and it is helpful in making decisions.
For example, think about the fall of 2008. There were some companies that remained profitable and their outlooks remained bright. In fact, there were even a few banks that hardly felt the “financial meltdown.” However, their stock prices still fell because the overall stock market fell. Therefore, it is important to watch the overall outlook of our economy; it’s important to see the big picture and keep both short-term and long-term goals in mind.
There are many types of technical analyses available, but here is a list of the most common ones:
- Charting
- Market Volume
- Breadth of the Market
- Short Interest
- Odd Lot Trading*
I could write a book on technical analysis because of its profound effect on stock market determinations. However, we will cover that topic at another time – I just want you to be familiar with the term and its relevance to the industry.
Odd lot trading is a term that you need to know. As a matter of fact, the impact of this phrase is one of my motivations for writing this book. I remember early in my career speaking to a seasoned veteran Wall Street trader, and he told me he used odd lot trading as a way to diversify or sell a security all together.
Understand that many people and most institutional investors buy stocks in even lots (multiplies of 100). However, small investors may not be able to afford even lots so they but in lots smaller than that multiple – which are called “odd lots.” For example, if you wanted to buy stock in XYZ company, and it costs $203 per share, usually an investor would buy at least multiples of 100 shares; so let’s say 500. That would cost ($203 x 500) $101,500 plus trading costs. But what if you wanted this stock and only had $2,000; then you could only buy nine shares ($1,827 + trading costs). That would be considered an odd lot trade which frequently works against small investors and puts them at a disadvantage.
Adding insult to injury, small investors are notoriously wrong in their timing of buying a security for a couple of reasons:
- Small investors usually get crucial information last (too late).
- They usually wait until the news is great before they buy.
Remember, when it comes to investing, the goal is to buy low and sell high. When the news is great, it’s usually about something that has already happened – and that is too late. As a Financial Shepherd, your responsibility is to get in the game, learn the lingo, and stay in the game until you win.
As we said previously, what goes up must come down. Conversely, what goes down will also eventually come back up. Decades upon decades, we’ve seen that the market ultimately corrects itself – even in the face of huge trade and financial deficits and uncertain economic times. It is fairly certain that there will be more down days ahead, but when these days arrive, they open up huge opportunities to invest. The lesson I want you to remember is to keep saving so that you can invest like the professionals and take advantage of these good opportunities when they come along. When the market corrects itself, the pros win and win big – and you can too!
