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Stocks to buy

Stocks to buy

Buying on margin clearly emphasizes that you are buying your stocks with borrowed money.

In case if you are buying stocks outright, you pay $5,000 for 100 shares of a stock that costs $50 a share.

Remember they are yours as you've paid for them free and clear.

But on the other hand when you buy on margin, you are borrowing the money to purchase the stock. For instance, you don't have $5,000 for those 100 shares. In general a brokerage firm could lend you up to 50% of that in order to purchase the stock. All you required is $2,500 to buy the 100 shares of stock.

Majority of brokerage firms set a minimum amount of equity at $2,000. This clearly means that you have to put in at least $2,000 for the purchase of stocks.

What's more in return for the loan, you pay interest. Most importantly the brokerage is making money on your loan. In addition they will also hold your stock as the collateral against the loan. In case if you default, they will take the stock. They have very minimal risk in the deal.

Theoretically speaking one way to think of buying on margin is that it is often comparable to buying a home with a mortgage. As a matter of fact you are taking out

the loan in the hopes that the value will go up and you will make money. Furthermore you are in control of twice the amount of shares. All you have to see is the added chunk of profit exceed the interest you have paid the brokerage.

Though, there are risks to buying stock on margin. In an ideal scenario the price of your stock could always go down. By law, the brokerage will not be allowed to let the value of the collateral, in other word the price of your stock go down below a certain percentage of the loan value. In case if the stock drops below that set amount, the brokerage will issue a margin call on your stock.

The margin call means that you will have to pay the brokerage the amount of money, which is mandatory to bring the brokerage firms risk down to the allowed level. In case if you don't have the money, your stock will be sold to pay off the loan. On the other hand if there is any money left, you will be sent it. In number of cases, there is little of your original investment remaining after the stock is sold.

There is no denying that buying on margin could mean a huge return. But there is also the risk that you could lose your original investment. As is pretty much the case with any stock purchase there are risks, but when you are using borrowed money, the risk is increased.

Buying on margin is generally not a good idea for the beginner or normal, every day investor. It is something that technical investors even have issues with. The risk can be pretty high. That's why make sure that you understand all of the possible scenarios that could happen, good and bad.

The new high/new low ratio (NH-NL) ratio has been around for plenty of years but different investors use this indicator in different ways. Few investors plot the ratio on a chart using the number zero as a neutral designation with positive numbers equaling more new highs than new lows and a negative number equaling more new lows than new highs based on a specified period of time. On the other hand few have developed and used the NH-NL ratio in a completely different way from some of the more popular methods.

They started to follow stocks making new highs while reading the paper Investors Business Daily many years ago. They didn't use the news highs as an indicator but they only studied stocks to buy from the list. As they became a more experienced investor, they subconsciously started to gauge the market while noting if the new highs were increasing or decreasing.

After the stock market bubble burst in the year 2000, few of these started to record the difference between the daily new highs and the daily new lows. They would enter them into an excel sheet along with the price and volume of the major market indices and study their relationship. After some years, you will be convinced that the major market tops and bottoms could be located easily by aggressively studying the price and volume of the major indices and studying the ups and downs of the NH-NL ratio.

The general market indices more often than not give investors false moves in all directions and many market services and investors have developed new indicators to help assess the market to try and pinpoint turning points without great success. Majority of these secondary indicators are successful in showing the investor if the market is weak or strong but they fail to pinpoint the strength or weakness of a turning point with great accuracy. In addition many of these secondary indicators give false signals along with the general market indices.

With several years of concentrated study under their belt using this method of the NH-NL ratio, investors have accurately protected money during downturns and have accurately guided buys when the market has reversed and started a new sustained up-trend (not a head fake).

How do you use NH-NL ratio

You can start by recording the daily new highs and new lows from Investors Business Daily (my preference) but you could use any free or paid service on the web. Over the last few years, investors have developed key levels that the market must reached or violate to trigger certain actions.

In an ideal scenario the average must have a minimum of 500 stocks per day for investor to consider risking over 50% of their cash in new positions (the new leaders). Furthermore once the weekly averages reach 800-1,000+ stocks per day, you know that the market is in a full fledged rally and you can start to commit your entire trading stake and use margin.

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