Online Stock Trading Basics: The Brokers

Each trader has unique goals. This will result in having different styles of trading or investing, and require a different type of broker. Just like you could eat all of your meals with a spoon, sometimes a fork really comes in handy. The same thing applies with brokerage firms. Full Service Brokers offer the widest level of products and services to their clients. You generally have access to firm generated research (Some of it is trash, some of it is surprisingly very good).

With most full service brokerage firms you will have one person you work with (your broker), part of whose job it is to get to know you, your situation, needs and objectives. He is available throughout the day if you have any questions about the market, need some help researching the fundamentals of a company or to place a trade for you.

Full service firms are generally geared to a person who does not watch their investments on a very active basis. Due to the extra level of service commission costs are the highest with full service firms. A good Full Service Broker is a valuable ally in the markets, especially if you are a new investor and need some help with your long term planing. Due to the cost structure they would not be well suited for trading actively.

Online Brokerage Firms are a relatively new development on the scene and have experienced tremendous growth over the last 5 or 6 years. Most of them offer a flat rate commission which tends to be very low since they do not have the high overhead that a Full Service Broker has. With some of them orders are submitted directly to the market, with most when you request to buy or sell something an email is sent to a broker who then places your trade. Examples of Online Brokerage Firms would be Charles Schwab, Fidelity, Etrade and Ameritrade. Online Brokerage firms are well suited for Position Traders and less active Swing Traders.

Direct Access Brokers are the newest type of brokerage firm. They specialize in the needs of active traders primarily through the use of proprietary, non-web based trading software that offers you direct access to the market. Many of these packages integrate real time quotes and charging, and nearly all of them have dynamic account updating. While costs have come down substantially at Direct Access Firms (When I started trading it was $25.95 per side to trade stocks regardless of your size) you should still expect to pay more with a direct access broker then you would with an Online Broker. Some of the more popular Direct Access Brokerage firms are MB Trading, Cybercorp, Terra Nova Trading, E-local Trading and Interactive Brokers.

A note of caution, some of the Direct Access Brokers have had a tendency to be rather unscrupulous. I have personal experience with management and many of the "front line" employees of each of the firms listed above and you would not go wrong with any of them.

Online Stock Trading Basics: The Exchages (NYSE and NASDAQUE)

The NYSE is the largest stock exchange in the world. Trading takes place via a specialist whose job it is to match the best bids and offers in order to provide liquidity to the market. When there is not enough outside interest the specialist is required to step in and provide liquidity for the market from his own account. His job is to maintain a fair and orderly market, and for the most part these professionals do a very good job of doing that. Your order is sent in via SuperDOT directly to the specialist or your brokerage firms trading floor booth. The order will then be matched with an offsetting order(s).

When you enter an order on the NYSE it will go to the specialists book if it is not tradable right away. Once in the book your priority is determined A) by the amount of time the order has been in (first come, first serve) and 2) by size of the order (larger orders have priority).

I find that when trading NYSE stocks I am generally able to get filled at better prices when trading size. It is also possible to get to know the "personality" of a specific specialist (it is after all one person), and many of the most successful professional scalpers specialize in a few NYSE issues using their knowledge of the particular specialist.

The National Association of Security Dealers Automated Quotation service (NASDAQ) is a computerized network that handles the quotation and exchange of Over the Counter (OTC) securities. It is a negotiated market where the brokerage firms negotiate trade prices directly with each other and through ECN's.

Just like a specialist is charged with providing liquidity on the NYSE, a Market Maker serves that function on the NASDAQ. Market Makers are brokerage firms acting as a dealer on behave of themselves. Each stock has representation from several firms who maintain its market

The Electronic Communications Networks (ECNs) are relatively new, having grown out of SOES. They allow the individual trader to act in a manner similar to the market makers and interact directly with each other as agents, and not through dealers. Traders can post bids and asks directly to the Nasdaq system and have them broadcast to the entire system rather then have to go through a Market Maker. Some of the major ECNs are INCA (Instinet) ISLD (Island) and ARCA (Archipelago). Arakne-Links Directory

Online Stock Trading Basics: Trading ... Why trade?

Why should I take the time to learn to trade? What are the advantages I can gain by adding a trading approach to my investment plan? Hopefully by showing you the advantages of a short term trading style I will address the question "Why should I learn to trade". Not long ago, being a short-term trader was seen as a stress and anxiety filled endeavor. It was seen as very risky when compared to the "safe" approach of by and hold. However, over the course of the last year we have seen many of the nations most popular stocks, many which were said to be "safe long term investments" loose upwards of 50% of their value. A few have gone out of business leaving long term investors holding the bag. Watching a stock you own drop 50% or more in a matter of weeks (or even over the course of a year for that matter) is a very stressful situation indeed. This is an experience that the nimble and astute short-term trader never has to go through.

It is during the times of extreme turmoil in the market that I am always the most grateful that for the most part I am a short term trader and not an investor. As at trader, during these times which may be very stressful and upsetting to an investors, I may be making even more money than I was when the market was going up. How is that? I can go short. As a trader, I can barrow a stock from a current shareholder and sell it at the current market price. Later, when the price of the stock is lower, I can buy it back and return it to the original owner. In this way I can profit when the market moves lower. It’s a well-known fact that stocks will fall faster than they go up as investors’ panic. During other times, the market will become very uncertain. It is during these times, when the market moves lower, then higher, then lower, then higher that I, as a trader will sit in cash. While I am in cash, I have no exposure to the market and can not loose money no matter what happens. Selling short and sitting 100% in cash are two advantages long-term investors do not have. For my money, they are two of the greatest luxuries in the world

Another advantage of short term trading is the accuracy that can be achieved. Think of it this way: What will you be doing in 5 minutes? You can probably safely say you will be sitting here attending this seminar. There are not many external factors that could come into play to change this. What will you be doing in 3 days? It’s fairly likely that you can tell me what you will be doing in three days. You probably have at least part of it planned out, and very little is likely to change that. Now, let me ask you what you will be doing in 18 months? Or in five years? How sure can you be? Not nearly as sure as you can be when I ask what you will be doing in 5 minutes or 3 days because there are so many outside factors that could come into play. This is the advantage of a trader. As a short term trader, my time frames run anywhere from 5 minutes to 3 days. Long term investors must project out 18 months to 5 years. Much harder to do with any degree of accuracy.Short term traders all understand that they are really just playing the odds, and they know that the odds of being right and making a profit over the short term are greater than those of being right and making a profit over the long term. It is true that 100% accuracy can never be achieved, but all short term traders understand that by using a few simple tools, they have moved the odds into their favor. By operating in the short term time frame and using the tactics we will go over today, and the tactics we teach in depth every day through our Real Time Trading Room a good trader can achieve results of 10% per month or more.

COACH (COH) Trading Portfolio Analysis

As regular readers of my blog realize, one of the tasks I address on this website is to share with you an actual trading portfolio that I own. These stocks are derived from stocks discussed on this website, and are managed with the same strategy that I advocate elsewhere: selling my losing holdings quickly at an 8% loss limit, and selling my gaining investments slowly and partially as they appreciate. Coach (COH) has been one of the top performing stocks in my portfolio.

I acquired my shares of Coach on 2/25/03 with a cost basis of $8.33/share. I currently own 102 shares which closed 3/3/06 at $36.12/share, giving me a gain of $27.79 or 334% since purchase. I have sold portions of COH seven times since my purchase, at 30, 60, 90, 120, 180, 240, and 300% appreciation levels. My next planned sale would be 1/6th of my remaining shares at a 360% appreciation level or 4.6 x $8.33 = $38.32 or if the stock retraces to 50% of the highet sale point (1/2 of 300% = 150% or 2.50 x $8.33 = $20.83) then I shall be selling all remaining shares to preserve my gains.

Let's take an updated look at this stock which has been a fabulous choice for my portfolio.

First of all, let's review what the company does. According to the Yahoo "Profile" on Coach, the company


"...engages in the design, production, and marketing of fine accessories worldwide. Its products include handbags; women’s accessories, such as wallets, wristlets, cosmetic cases, key fobs, and belts; and men’s accessories, such as belts, wallets, and other small leather goods; and business cases, such as computer bags and messenger-style bags, as well as men’s and women’s totes; outerwear, gloves, hats, and scarves; and weekend and travel accessories, such as cabin bags, duffels, suitcases, garment bags, and a collection of travel accessories. The company also offers watches, footwear, eyewear and sun glasses, and office furniture under Coach brand name. Its products are sold through direct-to-consumer channels, including company-operated retail and factory stores, online store, and catalogs, as well as through indirect channels, including department store locations in the United States, international department stores, freestanding retail locations, and specialty retailers. As of October 1, 2005, the company operated 199 retail stores and 85 factory stores in North America; and 107 department store shop-in-shops, retail stores, and factory stores in Japan."

And how about the latest quarterly report?

On January 24, 2005, Coach announced 2nd quarter 2006 results. For the quarter ended December 31, 2005, net sales grew 22% to $650 million up from $532 million the prior year. Including 'option expense', net income grew 37% to $174 million or $.45/diluted share, up from $127 million or $.32/diluted share the prior year. These results exceeded the company's guidance of $.43/share as well as analysts' expectations of $.44/share. In addition, the company raised guidance on the rest of fiscal 2006 with earnings of at least $1.33, ahead of the analysts' consensus of $1.20. Coach was 'hitting on all cylinders', you could say, beating consensus with strong earnings and revenue growth as well as raising guidance for the rest of the year. These are the kind of things in an earnings report that drive a stock higher from my perspective.

And how about the Morningstar results?

Reviewing the Morningstar.com "5-Yr Resatated" financials on Coach, we can see the steady growth in revenue from $600 million in 2001 to $1.7 billion in 2005 and $1.9 billion in the trailing twelve months (TTM).

Earnings have also been steadily increasing from $.24/share in 2002 to $1.00 in 2005 and $1.21/share in the TTM. The share float has grown slightly from 358 million in 2002 to 377 million in 2005 and 383 million in the TTM.

Free cash flow is solidly positive and growing with $165 million in 2003, increasing to $450 million in 2005 and $506 million in the TTM.

The balance sheet is solid with $746 million in cash, enough to more than enough pay off both the $347.7 million in current liabilities and the $51.5 million in long-term liabilities. With the other current assets of $435 million, we can calculate (comparing total current assets to current liabilities) a current ratio of over 3.

What about some valuation numbers on this stock?

Looking at Yahoo "Key Statistics" on Coach, we find that this is a large cap stock with a market capitalization of $13.85 billion. The trailing p/e is a bit rich at 30.07, but the forward p/e (fye 02-Jul-07) is a bit nicer at 24.41. Thus, with the solid earnings growth expected, the PEG works out to 1.32. (PEG's 1.5 or less are reasonable imho, and 'cheap' if they come in under 1.0).

We can see how expensive this stock really is if we examine the Price/Sales ratio relative to stocks in the same industrial group: "Textile-Apparel Footwear/Accessories", according to the Fidelity.com eResearch website.

Coach (COH) tops this list with a Price/Sales ratio of 7.3. This is followed way back with Nike (NKE) with a ratio of 1.6, then Timberland (TBL) at 1.5, Wolverine World Wide (WWW)at 1.2 and Rocky Shoes and Boots (RCKY) with a Price/Sales ratio of 0.6. So certainly from this particular criterion, this stock is not any kind of bargain!

Going back to Yahoo for a few more valuation numbers, we find that there are 383.36 million shares outstanding with 376.84 million of them that float. Of these, 7.18 million are out short representing 1.90% of the float or a current ratio of 2.6. Since I use 3.0 as a cut off on this particular statistic, I do not find the level of short interest very significant.

No cash dividends are paid and the last stock split was a 2:1 split 4/5/05.

What about the chart? If we look at a "Point & Figure" chart on Coach from StockCharts.com:

We can see that the chart is an absolutely gorgeous graph, which, except for a dip down to $2.50 in September, 2001, the company has bee charging higher with unbelievable strength for the past 4 1/2 years! The stock, if anything, is over-extended, with the price far ahead of its "blue line" of support.

So in summary, this stock has been very kind to me. It has appreciated steadily and I am actually waiting for a 360% appreciation move to sell another 1/6th of my holding. Beyond this, the latest quarterly report was strong with the company beating expectations, as well as raising guidance. The past five years on Morningstar are without a blemish, with revenue, earnings, free cash flow, and the balance sheet looking fabulous. The p/e and PEG aren't too rich but the Price/Sales ratio is definitely higher than any other stock in its group. Finally, the chart looks quite strong, if a bit over-extended.