The Cottage Stock Investor
With broadband Internet pushing deeper into cottage country, the dream of working from the lake is becoming a reality. One way to do it is by trading and investing in dividend-paying companies.
How to Invest and Trade from the Cottage
The information and resources now available on the Internet make it much easier for the average cottager to earn a few extra bucks by investing in dividend-paying stocks and taking advantage of market volatility to trade shares in good companies.
It is now possible to do all our research online and use some basic interactive training tools to get started and learn the ropes without risking the cottage while we’re at it.
Remember, we are trying to live at the cabin, not lose it.
Investing in stocks can be risky and people who are not familiar with the financial industry should consult with a certified professional financial advisor before quitting their jobs and heading to the cabin with the laptop.
But for people who are properly prepared and fully understand the risks, the possibility of spending the entire cottage season at the lake is very enticing.
A balanced approach
Longterm investments in solid companies that pay increasing dividends can provide a steady stream of cash-flow.
At the same time, extra money can also be generated by taking advantage of trading opportunities when excellent companies see a short-term drop in their share prices.
We aren’t talking about being a day trader.
We always approach a trade as investors but a good investment decision also means selling the stock when it has reached our target price. Sometimes that happens over a short period of time.
How do you start?
You need a self-directed trading account to buy and sell your stocks online. The major banks all have these accounts available and your specific bank will be happy to set up an account for you. Otherwise you can open an account with a company that specializes in self-directed trading accounts.
There are lots of choices and it is worth taking the time to shop around to see which one is best for your situation.
The basic stock investing strategy
Every time you watch BNN or CNBC the analysts on the shows inevitably talk about the Fundamentals and the Technicals.
Simply put, the fundamentals of a company refer to the day-to-day operations. The analysts looks at price-to-earnings ratios, debt-to-equity ratios, cash flow, etc. They also take into account the competitive position the company has in its industry and the general outlook for the economy and market as a whole.
If the fundamental ratios are good, the overall industry is doing well and the company seems to have a solid plan moving forward, then analysts tend to be more positive about the company’s future stock-price potential.
Technical analysis relates to the pattern the company’s stock has charted over a specific time period. There are a number of popular metrics that the technical analysts use to determine whether or not a stock is likely to go up or down in the near future.
Most of the self-directed accounts have a built-in research tool that will produce these charts for you. Yahoo Finance also has a simple system which is free.
When to buy a stock
The idea is to buy the stock of a company that has strong fundamentals yet the stock price has come down recently and is at a technical point that suggests it is near the bottom of its drop.
It is a good idea to look at companies that are the best in their industry and pay dividends that tend to go up every year. This way, we can sit on the stock and get paid a bit while we wait for it to go up to our sell price.
When looking for the point to buy, the favourite technical metrics are the RSI, MACD, and the 50-day and 200-day moving averages.
When the RSI drops to a value below 30, and the MACD chart is also approaching the bottom of a U pattern, the technical guys start to get interested. If the stock has been trading up and down within a consistent range for a year or two, the investors and traders will take a serious look at buying the stock.
If the stock has been trending upward for a year or two, and the stock is coming down to its 50-day moving average or its 200-day moving average and has previously bounced upwards when it hit these points, then the traders also look at buying the stock at the previous support price.
When to sell a stock
People are generally better at buying low than they are at selling high. Basically, you don’t want to get greedy. Set a price increase that seems reasonable based on the historical pattern of the stock and when it reaches that point, sell it and look to start again with another stock that you have been watching.
If the stock blows through your sell point and continues higher, don’t beat yourself up thinking you missed a big gain. Discipline is the key to consistent gains. Think singles and doubles, not home runs.
In the event that the stock doesn’t bounce but actually continues to go down despite what the charts, fundamentals and the pros on TV suggest it should do, it is important to set a stop-loss price where you will sell the stock and take a little hit. Otherwise, you might end up taking a big loss. Set your stop-loss sell point tight to your buy point. Keep it well within your comfort zone for the size of the loss you are willing to take.
If stock trading were an exact science, every joe trader would be rich. External and unforeseen events can change investor sentiment in the blink of an eye. This is why it is important to protect ourselves and get out early on the downside.
Remember, the lower you let it go, the harder it will be to make it up on the next trade.
So, that’s the basics for being a cottage stock investor and trader.
Before jumping in with real money, take a few months to practise with simulated investments and see how you do. Once you are comfortable with the system, you can start to trade with your own money.
Remember to start out slowly, pick good companies in an industry you are familiar with, don’t be greedy and cut your losses quickly.
Written by: Andrew S. Walker
Go to the Ideas for Working From The Cottage page.