Investing word of the day: Correction

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source: http://seekingalpha.com

We have seen this lately in the local stock market after the DOW went to the red. Also due to the three or four days that the PSE defied DOW thus this week it is expected to slow down after a great uptrend for the past days, so what then is correction or market correction?

As usual I got this definition from Investopedia.com:

"A decrease in the market price of an asset or entire market after extensive price increases. A technical correction occurs even when there is no evidence that the increasing price trend should cease. It is often caused when investors temporarily slow down their purchases of securities, which commonly leads to a pullback toward a short-term support level."

Layman's explanation:

It is a decrease of the market after a extended uptrend.  Generally when the market has enjoyed a continuous increase in price it will come to the point where it is at its highest point thus it will start to pull back. An analogy used by most is the bouncing ball analogy. Just like the bouncing ball, stock market is not always in an uptrend mode at any point it will go down and it will bounce back again.  

That is why it is important to learn how to time the market. When prices are down it is the best to buy because sooner or later it will bounce back or it may even surpass the previous highs. In relation to the Law of supply and demand when the stock market becomes saturated meaning either the buys or sells is more than the other it will surely create a change. When prices are rising sellers dominate the market because everyone wants to profit and when it is a downtrend buyers dominates it because it is a bargain market. 

The stock market is any ordinary market that we know. It is always buy low sell high. You don't sell at below cost if you are in your sane mind, you are trading for profit. Correction is that time when as Investopedia.com says there is no apparent reason for prices to go down its just that prices are to high and in order to sell prices should be lowered to attract buyers.

So bargain hunters lets go shopping!

Links worth checking:

http://uk.reuters.com/article/idUKLNE63F01120100416

http://www.ctv.ca/generic/generated/static/business/article1582086.html

Is stock investing gambling?

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sources: http://www.game-bler.com/ , http://www.leap.us/

I had a chance to chat with my ex-girlfriend this week, and as usual the friendly chat is everything under the sun. (It is nice to have my ex-girlfriend as a friend without the hassle of looking back in the past so I hope all couples who parted ways could still be friends one way or another but again this is just my suggestion, an advice).

So I told her that she can invest in the stock market at only Php 5,000.00 and she said "isn't that gambling?" So I ask her why she think stock investing is gambling, she has two good points on her argument:

1. There is risk involved

2. The market is unpredictable

So I thought about it and answered her "I beg to disagree but stock investing is not gambling."

This kind of thinking is one of the reasons why the Philippines has a very small percentage of its population engaged in investing. Filipinos are afraid to even try it because of the stories they hear for example a businessman who invested all his money in a particular stock is now in debt and without work because the stock he bought crashed big time. Another reason is that  people think that companies are just using their money for personal gain thus they don't want to participate in the stock.

Going back to the important things one must always remember when one starts to or even decide to participate in the stock market:

1. Invest only your free cash.

2. Invest in stocks of fundamentally sound companies

3. Always learn and don't stop learning

4.You only lose when you sell your stock below your total 
    purchased cost

5. Time the market

Let me relate these pointers why stock market is not gambling.

Gambling is when one puts everything he or she has against something which is uncertain, relying only on pure luck. That is why I and my friends have always advice to only put your free cash in the stock market. Yes it is due to the risk involved that everyone sees it as gambling. But the risk in stock market is what we call a calculated risk. You can always decide whether to go on or not in buying or selling because we have a basis like financial report and performance, on time news updates, and regulatory bodies that implement laws that safeguards us investors unlike in gambling where due to your desperation to recover your loses you bet your last centavo hoping against all hope that you will win this last time around without any basis. It is so calculated that is why we even advice only your free cash to really make sure you don't regret if the stock you bought will be at a negative for quite some time.

There are stocks that we call speculative and their are what we called fundamentally sound. The good thing at investing in stocks with good fundamentals is that no matter what happens they wont easily be affected by financial troubles. They will surpass and will remain standing, and they will be there and will still give you profits in times of harsh financial conditions.

Stock investing commands continues learning or what the Japanese termed Kaizen. Even the veteran like the likes of Warren Buffet still do their homework doing due diligence before buying stocks of companies. Probably this is one of the reasons why so many avoid the topic or even the idea of investing in stock, its nosebleed. With the so technical and so complex concepts and words to learn many have avoided it. But I always say this, you are the investor so don't be afraid to ask. Many think that it cost a lot to learn about stock investing but with the invention of the internet information is all around us.... and one of the best ways to learn is to share what you know and listen to other person's perspective. Always remember always be humble to learn about stock investing even if you have a PhD degree or MBA.

Again many people are afraid to invest in stock market because they think they are losing when their portfolio is in the read. I remembered when I first made my first investment: mutual fund at Philamlife. At that time it was the beginning of the subprime crisis in the US. I asked the fund manager who was also a former seminarian like me and said that the problem why the market continues to fall is because people panic and starts to withdraw form the stock market thinking that they will lose there hard earn money. In accounting we call this unrealized loss or in layman's term paper loss. This is, as the term says, not real loss. As long as one does not sell a stock which has a value lower than one's purchase cost, one has not lost yet. It only becomes a lost when it is realized by way of selling it below its purchased cost.

That same thing applies to the stock market, remember they are just the same that they are traded in the market but with this difference: no matter how good quality a mango is it will still rot, no matter how bad the times is a stock with good fundamentals will still stand after the storm.

I have this idea why people lose in the stock market, they look at it as gambling thus they do gambling approach by betting all they have on wrong stocks without proper timing, impulsiveness, and limited information. That is why I started blogging about stock investing to share my ideas at the same time attract ideas of others. In a way it is a collaborative way of learning by looking at others perspective.

Though it is not gambling I would like to borrow my friends advice---- trade at your own risk :)