Recently, I was contacted by Schwab to see if they could be of help to me. I have a very small investment account with Schwab. I was surprised that they would even contact me, given that I’m such a small player. But they did. Their advice has proved invaluable. I’m passing their advice to you in this post. I want to thank Schwab for having the customer service to work with a small fry like me.
Principles
First, manage risk, then invest to earn profits.
Second, they told me I should not care how high a stock price goes. In the model I will show you below, I understand and agree with this point. For those who trade, in this method, you do not put an upper bracket (limit order) on when you want the stock to sell.
Third, it is a “get rich slow” mentality.
Fourth, while risk is always involved in trading stocks, it does not need to be highly risky.
Fifth, if you can be happy with a 12% – 16% annual rate of return, then this method is for you. The returns will not be 16% on day 1. It will take 52 weeks to realize these gains, and there will be ups and downs along the way.
Last, get to know “trailing stop” orders. They are how you will manage risk.
I will use the web version of my Schwab stock account. You will need a brokerage account at schwab.com to follow along. A brokerage account is free, and it will take several days to fund it initially.
Method
First, you need to select a stock to buy. To do this, click on the Research tab, then click Stocks from the Research Tools list.
The next page will be similar and different from what is illustrated in the next screenshot. You will have a different list or no list at all (to the right of the input search box). This screenshot shows certain stocks that I have looked at.
Next, click on the Schwab Stock List link.
This next screenshot is an example of what the Schwab stock list looks like.
Notice several things:
First, in the left Choose Criteria pane, you can select the categories, sizes, and other slicers to whittle down the list to the type of stock you are looking for. I look at several factors that are easier to find using the Schwab Street Smart application (free download here). For example, I see what percentage of a stock is shorted, which means how many traders are betting that the stock will go down in price instead of up. I tend to avoid that stock if it is above 5% of the total outstanding shares that are shorted. But that’s just me. Your thoughts might be different.
Second, notice that all the stocks are listed as “A” under the Schwab Equity Rating list. Stick with A-rated stocks. B-rated stocks are good but don’t purchase the C- or D-rated stocks. Why stay with A-rated stocks? Well, Schwab tells us. In the user interface, click on the Learn More About Schwab Stock Lists in the upper right-hand corner of the page. A pop-up box will appear with the title Learn More.
Now, click on the Schwab Equity Ratings Performance tab.
What do you see: their claim that for all 52-week periods since May 6, 2002, on a rolling, weekly basis, their A-rated stocks have given an average return of 16.22%. That’s over 21 years of results. Now, who do you think is better at picking winning stocks? You or a team of professionals at Schwab? I’ve proven I know how to lose money. So, I answer this question with this answer: The professionals at Schwab know a lot more about how to pick a winning stock than I do. So I will trust their picks.
Now, referring back to the Schwab Stock list, some stocks will be newly listed. For example, you’ll notice the word “new” under AMPH and CMC. This designation means these stocks were recently added to the list.
Fourth, notice only 67 stocks (at the time of this writing) are on this list. This number will vary, but it won’t grow to be hundreds.
How to Trade
For illustration only, I will select to trade Abbott Laboratories (ABT) stock. So, I click on the stock symbol, ABT…
…and that takes me to my trading screen:
Click the Trade button. You will be taken to the first of three screens that allows you to buy or sell a stock (I have blacked out personal information that normally appears on this screen, such as the account nickname and number, the amount that is available to trade and the current number of stocks held, if any, in this account.)
In the Action drop down list, select “buy”. In the Order Type drop down list, select “market”. This combination of choices means that your order will execute as soon as it is placed at the market price of the stock. I won’t get into limit orders, or entering an order for longer than a day, and other options that appear on this screen. That is outside the scope of this post. Be sure to enter the number of stocks you want to buy. My illustration is buying only one stock, but you may want to purchase more than one share.
Review your order and make your purchase.
Now, to manage your risk, you’ll select “Place Another Order” on the confirmation page of the order process (not illustrated). When you choose this button, you’re returned to the same screen where you started your order to buy stocks. This time, however, we’re not going to buy more stocks but instead, place a trailing stop order on the stock price.
Stay with me here.
The screen will look like the one here once configured properly:
The trailing stop order is a market sell order that will automatically sell the stock *IF* the price drops from the highest price the stock has achieved since you purchased it by more than the percentage you input in the Trailing Amount input box (you may need to re-read this sentence a few times). You can choose either points or percentages. I like percentages, but the principle is the same. Select “Good Until Canceled” in the Timing drop-down list (180 days) and then move through the screens to finish your trailing stop order.
Understanding Trailing Stop Orders
A trailing stop order is a way to ensure that you lock in profits on a stock by setting the maximum amount you are willing to lose from the stock’s last highest price (if that high price exceeds the price at which you purchased the stock in the first place). Trailing stop orders “follow” or “move with” the stock price and are calculated against the last highest price of the stock. The starting point for calculating the “last highest price” is the price you purchased the stock.
Example:
Let’s say that you purchased Stock A at $10/share, and you set the trailing stop order at 10%. This means you’re willing to lose $1 (10%) on that stock, should the price go down. If the stock never moves up beyond $10 and the price drops below $9, then the system will automatically sell the stock once it hits $9 because you had set the loss to be a maximum of $1, or 10% of the value of the stock price when you purchased it.
But let’s assume the price of the stock goes up to $15. Recall that the 10% trailing stop follows the price of the stock. If the price now drops to $13.49, which is one cent more than 10% of $15 ($1.50), then the system will execute a market sell order, and you will have locked in a profit of $3.49.
The trailing stop order is how you lock in profits and limit your losses. This feature is also why you don’t care how high the price of a stock might go. With a trailing stop order applied, the higher the price, the more profit you have locked in. If the price goes to $20 and then drops to $17.99, the system will execute a market sell order, and you will have locked in a profit of $7.99.
Real World Example
Recently, I purchased five shares of PLTK – Playtika – at $11.53/share or $57.65. This stock is on the Schwab A list. After buying the stock, the next day, for about 30 minutes, the price of the shares jumped to $12.66, marking a new high point for the stock since I bought it. The jump represented a ~9% increase. I had set my trailing stop loss percentage at 7%. The price then went back down to below $11.53, so my stop loss order was triggered, and the system executed a market sell order at $11.85/share for a very small gain of $1.63 (total) or a 2% gain. Had the stop loss order not been in effect, I would be underwater on the stock because it dropped well below $11.53 for some time.
While the numbers are very small, the method is what I’m interested in. This example illustrates how this method can work in our favor without having to go through the gyrations of trying to figure out the support and resistance lines, manually set the sell brackets, and so forth. This method is a nifty way to trade without watching my trades all day.
The Schwab stock list allows you to focus on good stocks that are more likely than not to increase in value. The trailing stop loss percentage will enable us to trade without becoming a day trader. And over time, we should be able to experience a 12% – 16% rate of return.
I have been using this method now for nearly two months. What has been encouraging is how my portfolio has grown at a slow, sometimes moderate, pace, even on days when the Dow has been negative by over 100 points.
Disclaimer
I am not offering any advice on which stocks to purchase or sell. I am only outlining a method shown to me by Schwab which has been helpful to me.
If you want to discuss this in more detail, please ping me at bill@bibleandbusiness.com.
Bill English, Publisher
Bible and Business
Comments are closed