3.- step 1 - searching for stocks

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5-Step Investing Formula

Online Course Manual

Step 1: Searching for Stocks

www.investools.com

2005 INVESTools Inc. All rights reserved

3Section 3 of


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THE 5-STEP INVESTING FORMULA Step 1: Searching for Stocks

page 2 of 22 2005 INVESTools Inc. All rights reserved.

www.investools.com

SECTION 3 Step 1: Searching for Stocks

Using a Prebuilt Search .........................................................................5

Navigating the List of Stocks .................................................................7

Section ContentsSection Contents
http://www.investools.com/http://www.investools.com/


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INTRODUCTION

SECTION 1 Getting Started

Logging into the INVESTools Investor Toolbox

Support Links

Workshop Review

Account Information

Subscription RenewalTechnical Support

Contact an Instructor

SECTION 2 Introduction to Investing

Tolerance for Risk

Setting Goals

Asset Allocation

Tax Exposure

Brokerage Firms

Introduction to the 5-Step Investing Formula

THE 5-STEP INVESTING FORMULA

SECTION 3 Step 1: Searching for Stocks

Using a Prebuilt Search

Navigating the List of Stocks

SECTION 4 Step 2: Industry Group Analysis

Top-Down Analysis

Big Chart

AutoAnalyzing All Stocks in a Group

Best & Worst Industries List

SECTION 5 Step 3: Fundamental Analysis

Phase 1

Phase 2Price Pattern

Volatility

Zacks Report

Market Guide

News

AutoAnalyzer

SECTION 6 Step 4: Technical Analysis

Technical Indicators

Moving Averages

MACD

Stochastics

Volume

Support & Resistance

Buy Signals

Money Management

Sell Stop Orders

How Many Shares to Buy

Sell Signals

Insider Trading

SECTION 7 Step 5: Portfolio Management

Creating a Portfolio

Managing Your Portfolio

Paper Trading Account

BONUS SECTION

SECTION 8 Bonus Topics

TurboSearch

Index Tracking Stocks / Exchange-Traded Funds

Dow Jones Industrial Average

The Diamonds (DIA)

S&P 500The Spider (SPY)

NASDAQThe Qs (QQQQ)

SECTION 9 Introduction to Options

Advantages/Risks of Options

Leverage

Call Options

Put Options

Covered Calls

SECTION 10 Appendix

Phase 2 Stock Scoring Form

Phase 2 Quick List for Zacks Report and

Market Guide

Investment Tracking Record

SECTION 11 Glossary

Course Overview


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Searching for a stock is the first step to systematic investing. Knowing how

to look for stocks puts you in control of your investing. Good investors are not

controlled by their investments; instead, they control their investments. You,

too, can do this using prebuilt search tools to find positive stocks quickly and

easily... making it a cinch to be consistent and in control of yo ur investing.

Experts in both investing and technology have put together the Investor

Toolbox prebuilt searches to find specific stocks according to certain criteria.

These searches are also backtested, which is a process of looking at historicalresults generated over time. Only searches that have performed well are

posted.

The Investor Toolbox offers over 50 different prebuilt searches to help you

find potential investment candidates. Each prebuilt search looks at all the

stocks in the database using specific screening criteria and displays the top 25

stocks that most closely match the criteria of the search you choose.

With a simple click of the mouse, you can easily find 25 of the best stocks

from the entire database in just a few seconds.

Step 1: Searching for Stocks


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Using a Prebuilt Search

To use the Investor Toolbox prebuilt

searches, follow these three steps:

Step 1:

Click on the Searches tab located on the

Investor Toolbox main toolbar.

The main search page will appear with

more than 50 different prebuilt searches to

select from, as seen here.

One of the first questions people often ask

is, Which of all these searches should

I run? Because there may be some

confusion as to which search you should

use when you first start out, we put together

a list of our instructors favorite searches.

Each instructor offered a search that he/she

has found good success with to put in thelist. These searches are listed at the top of

the page.

You can click on the notepad icon for an in-

depth description of a particular search.


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When you click on a search notepad icon, a

screen comes up describing that particular

search in detail. It tells you exactly what

criteria the search is looking for and how it

works to find investments.

Caution: Dont get too caught up in how

the searches work. How they are built is

not important. What is important is finding

good, solid stocks.

Step 2:

To perform a search, click on one of the

prebuilt searches. For the purpose of

this example, well use Great Earnings,Sales, C.F. Growththis search looks for

companies with great earnings, sales, and

cash flow growth.

The computer then searches its database of

over 12,000 stocks to find the top 25 stocks

that best meet the criteria of the search you

selected.


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The top 25 stocks are displayed on the

search results page, as seen to the right.

Note: Dont just buy the first stock on the

list. Statistically speaking, the 25th stock is

as good as the first because it is still one ofthe best stocks out of 12,000 found by the

search. Also, just because a stock appears

in the search results does not mean its one

you want to invest in. Its not unusual to

eliminate many of these stocks as you go

through a more rigorous analysis (described

later). You are looking for the best of the

best, not just a good stock that matched

search criteria.

When looking at the search results table,

if a stock symbol has four or more letters,

the stock is traded on the NASDAQ or theover-the-counter exchange. If the stock

symbol is less than four letters, it is traded

on the New York Stock Exchange or the

American Stock Exchange. When you

click on any of the symbol links listed on

the search results page, a graph of that

particular stock comes up.

Step 3:

Scroll down the page to see the entire listof the top 25 stocks that meet the criteria of

the search you selected.

Navigating the List of Stocks

The search results table consists of

ten columns made up of the following

information:

Select: Allows you to quickly view charts

of selected stocks or automatically add

selected stocks to a portfolio.

Symbol: The ticker used to represent a

company. Each symbol is a clickable link

that takes you to the stock chart.

Name: The company name.


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Group: The stocks industry group symbol.

This symbol is a link that takes you to a

chart of that industry group (discussed later

in more detail).

Options: Signifies whether or not thatparticular stock offers options. It is a

clickable link that takes you to the options

available for that company, if applicable.

Price: The current stock price, per share.

Phase 1: The undervalued filter of the

stock, which is used in fundamental

analysis (to be discussed).

MG-Zacks Combined Score: Automated

fundamental score (discussed later).

Price Pattern Score: Automated price

pattern score (to be discussed).

Volatility: Automated volatility score (to be

discussed later).

Stock Symbol

Once youve selected a stock to look at

we will use Corinthian Colleges (COCO)

for the purpose of this exampleclick onthe stock symbol link.

This brings up a one-year stock graph for

that company.

Note: In the right-hand corner above

the stock graph are arrows next to stock

symbols. These symbols are the previous

and next stocks in the list of stocks returned

from your search. The arrow links allow

you to click to the next or previous stock

graph on the list. You can continue through

the list of 25 search results by clickingforward or backward on the arrows next to

the symbols.

The graph is always a 12-month graph

by default, with the most recent month

appearing on the right side of the graph.


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Below the chart are the time span buttons,

which you can use to change the time frame

of the graph. For example, when you click

one of these buttons, you can bring up a

one-month (1-M) or five-year (5-Y) graph

of a stock (as well as the other time framesnoted).

On the one-year chart, each bar of data

represents one full day of trading (the high,

low, and closing price of each day).

If youd like a better view of a recent buy

or sell signal, you can magnify the signal

by using the one-month, three-month, or

six-month view. On these charts, each bar

still represents one full day of trading. The

buy and sell signals will appear exactly the

same on each of these charts.

This is an example of the one-month graph

for COCO.

If you use the one-day, five-day, or ten-

day charts, each bar represents just a few

minutes of time. This information gives

you day-trading signals, which are different

from the buy and sell signals on the one-

month to one-year charts.


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If you click on the five-year or ten-year

chart, each bar of data represents a full

week of trading. These charts provide long-

term buy and sell signals that are at least

five times longer than the signals on the

one-year chart. If you are more interested in

the buy-and-hold strategy, these signals are

more appropriate.

This is an example of the five-year graph

for COCO.

The indicators are automatically applied to

a chart. To remove these indicators, click

on the Basic Chart link in the menu on

the left-hand side of the page.

Looking at a chart without the indicators is

not a necessity, but the capability is there if

you want it.


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The interactive graph is a powerful charting

tool developed for our more advanced

students. It is not something covered in

detail in this class.

To bring up an interactive graph of thestock, click on Interactive Chart in the

left-hand menu.

This chart includes additional tools for

basic and more advanced technical analysis,

including trendlines, historical on-screen

data and other customized features.


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Interactive graphs also allow you to use

candlestick charting and other tools, if you

prefer.

Industry Groups

To look at the industry groups of the stocks

in your search results, go back to the search

results page and go over to Groups in the

fourth column.

All industry groups consist of three letters

that identify the industry group. If you click

on the industry group symbol (.EDU inour example), it brings up a graph of that

industry group. The period in front of the

symbol notates its an industry group.

Note: The period must be included when

you manually enter the industry group

symbol into the Quote field; otherwise

the system tries to find the stock EDU

instead of the industry group.

The basic function of the industry group

chart is to tell you which way the group is

moving and if institutional money (such as

mutual funds) is moving into the stocks in

that group. If this is happening, the group

will generally move up. Industry group

movement often affects stock movement, so

look to see which direction the industry is

moving. You want to invest in stocks with

uptrending groups, as this shows support

for continued upward movement in the

stock.


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There are times when youll find an

excellent stock opportunityeverything

about it is great, except its industry group.

You almost always want the stocks

industry group moving upward, as this

shows that institutional investors areentering the industry group stocks a key

ingredient to significant moves in stocks.

Back on the search results page, click on

the industry group of our example stock

(COCO), which is .EDU.

The graph for .EDU will appear.

In our example, the industry group is

clearly trending upward.

Options

Back on the search results page, click on

the Options link.

Note: If this column is blank for the stock

youre looking at, there are no options

available for that stock.


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Clicking on the options link for a stock

brings up the option quotes table for that

stock. The table lists all available options

(both calls and puts) for the stock.

Information on stock options is coveredin detail in the INVESTools Investor

Education Basic Options course; however,

we will cover some of the basics here.

An option is a contract that gives the buyer

of the option the right to buy or sell a stock

at a set price before the option expires.

Think of it as a lease-to-own on a house:

lets say you pay cash (premium) to the

owner of a house and receive a contract

that allows you to buy the house at the set

price (strike price) of $150,000 before thecontract expires (expiration date). If you

pay $2,000 for a lease-to-own contract, it

gives you the right to buy the house for

$150,000 anytime you want as long as

you do so before the contract expires.

During the term of the contract, suppose

some large multimillion-dollar homes

are built on your same street, increasing

the value of your house to $200,000. You

have a contract that has intrinsic value of

$50,000 (200,000 - 150,000 = 50,000).

At this point there are three things you can

do with your contract:

1. Nothing: let it expire.

2. Exercise it: buy the house for

$150,000 and then sell it for

$200,000, for a $50,000 profit

(minus the original premium of

$2,000).

3. Sell it: sell the contract to someone

else for $50,000, giving that

person the right to buy the house

for $150,000.


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Option contracts work in a very similar

way:

1. They have an expiration date set

at 11:59 a.m. the 3rd Saturday of

the expiration month. Since the

markets are not open on Saturday,

most traders refer to the expiration

as the third Friday of each month,

as that is the last day contracts are

traded on the open market.

2. They have a strike price, which

is the price at which you agree to

buy or sell the stock.

3. They have a premium, which is

the amount of money exchanged to

buy and sell the option contract.

Key Points of an Options Table

Looking at the options table for COCO,

the stocks current price ($56.69) and its

change for the day (-$0.59) appear in the

upper right-hand corner.

On the left-hand side of the table are the

call options. You want to buy call options if

you expect the stock to increase in value.

On the right-hand side of the table are theput options. You want to buy put options if

you expect the stock to drop in value.

Separating the calls and puts on this table

is the expiration date column (October) and

the strike prices of the available options.

Other key facts about options:

Each option contract controls 100

shares of stock. Option quotes are

displayed on a per-share basis. To

calculate the true cost of one optioncontract, multiply the quoted option

price by 100.

The last day to trade option

contracts on the open market is the

third Friday of the month indicated.


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You do not have to hold an option

until the expiration date; they trade

every day in a similar manner to

stocks.

An important difference between astock and an option is that an option

expires after a certain length of

time. As a result, if the underlying

stock price does not move as you

expected, the option you hold will

expire worthless.

Now that we have the basics of an option,

lets look at an option trade versus a stock

trade.

In this example of CTSH, the stock has

been moving steadily higher since early

June. In mid-August, the stock shows three

green arrows, one on the 30-day moving

average, one on the MACD, and one on

the stochastics. The stock also trades in

an uptrending industry and scores well in

Phase 2. In other words, during this time,

the stock is giving a buy signal (which

you will learn about in detail later in the

course).

If we wanted to, we could buy the stock atits current price of $30.20 or we could buy

an option on the stock instead.

In our example of CTSH, well look in

the options table at the October options.

We want a strike price that is close to the

current price of the stock, like the October

$30 call option listed.

The ticker symbol for the October $30 call

on CTSH is UPU JF. It is trading at $1.80

x $1.85. If we buy it, it would cost us $1.85

per share or $185 per contract (remember,

each option contract controls 100 shares).

So to control 100 shares of stock costs only

$185 using a call option versus actually

buying 100 shares of the stock, which

would cost $3,020.


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Once we buy UPU JF, we have the right to

buy 100 shares of CTSH for $30 anytime

before the option market closes on the third

Friday of October. Our goal, however, in

buying an option is not to buy the stock,

but instead to sell the option and make aprofit.

Looking at CTSH four weeks later, it

reaches $39 per share and starts to decline

in value, just as the MACD and stochastics

are showing red arrows. At this point it

looks as if the stock is starting to pull back.

Even though the stock is still in an uptrend,

it is starting to show signs of weakness.

This is a point at which many option traders

consider selling the option they previously

bought.

At this point, the option ticker symbol UPU

JF is trading at $7.40 x $7.60 and can be

sold for $7.40/share.


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The difference between the option trade

versus the stock trade can best be seen

in the comparison table. To purchase the

option would have cost $1.85/share versus

$30.20/share for the stock. The option has

much less money at risk.

Even with 1/15th the investment, you

would have made almost exactly the same

amount of money with the option as you

would have with the stock. The return on

investment, however, was dramatically

different. The option returned 300%, while

the stock returned 18.7% over the same

time frame.

The one drawback to this option trade

versus the stock trade is that the option is

a timed investment and is good only untilthe option market closes on the third Friday

of October. You can, however, choose

an option with a longer expiration if you

believe it will take longer for the stock

to make its upward move. The more time

you buy in an option contract, the more

expensive it will be but also the more

conservative it will be.

Options provide leverage, which is a

double-edged sword. Used correctly,

leverage can be an investors most powerfulally; used incorrectly, it can be an investors

worst enemy. Education is the difference.

Options have been used for years to both

reduce risk and exposure in the market and

accelerate returns. As you progress with

your investing education, you will want to

learn more about this area of the market

an area many of our students have cited as

incredibly profitable.


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Price

The stock price is listed in the

Price column of the table. This price is

updated throughout the day on a 15-20

minute delayed basis.

Phase 1

The Phase 1 score, used for fundamental

analysis purposes, is listed in the next

column. For COCO, the Phase 1 score

is 5/2. Phase 1 scores are explained

in greater detail in the chapter entitled

Fundamental Analysis.

Phase 2 Scores

Also listed are the automated numerical

scores for Market Guide-Zacks, pricepattern, and volatility, which will be

discussed in great detail in this course.

You can also click on selected stocks to

import directly into a portfolio of your

choosing (dont forget to save the stocks

once added) and View Selected Symbols

as Chart Thumbnails.


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In addition, you can sort the search results

by any of the headings listed: Name,

Group, Phase 1, MG-Zacks, etc., by

clicking on that column heading. In this

example, they are listed according to the

MG-Zacks scores.

Select

From the search results table you can

also select stocks to put in a portfolio to

watch. To do this, select the box next to

the stock(s) you want to put in a watchlist

portfolio.

Once youve selected the stocks, click

on the Copy selected symbols into a

portfolio link. This will save those stocks

in a watchlist portfolio, which you will

need to title.


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Step 1 Summary

The prebuilt search tools in the Investor

Toolbox make it quick and easy to find

potential investments from a database of

over 12,000 stocks.

A computer-based search tool is

unemotional, bringing back the best-of-

the-best stocks many youve never

heard of. The results match the criteria in

the particular search youve chosen. This

will help you to be more rational in your

decision-making process and more effective

in your investing.

No matter how good a system you have, it

wont work if you dont follow these three

important investing characteristics:

1. Discipline: follow the system.

2. Patience: wait for signals.

3. Controlled emotions: trust your

own analysis and take input, but

dont be overly swayed by the

opinion of others; do the right thing

for the right reason and know why

youre doing it.


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THE 5-STEP INVESTING FORMULA Step 1: Searching for Stockswww.investools.com

2005 INVESTools Inc. All rights reserved. Neither INVESTools or its subsidiaries nor any of their respective officers, employees, representatives, agents or independentcontractors are, in such capacities, licensed financial advisers, registered investment advisers or registered broker-dealers. Neither do they provide investment or financialadvice or make investment recommendations, nor are they in the business of transacting trades. Nothing contained in this manual constitutes a solicitation, recommendation,promotion, endorsement or offer (buy or sell) by INVESTools, or others described above, of any particular security, transaction or investment.

Warranty disclaimer: The content included in this manual and the Investor Toolbox Web site is provided as is, without any warranties. Neither INVESToolsno any of its subsidiaries or affiliates make any guarantees or warranties as to the accuracy or completeness of, or results to be obtained from using, any of itsproducts or services (including any content therein). INVESTools and its subsidiaries and affiliates hereby disclaim any and all warranties, express or implied,including warranties of merchantability or fitness for a particular purpose or use. Neither INVESTools nor any of its subsidiaries or affiliates shall be liable to youor anyone else for any inaccuracy, delay, interruption in service, error or omission, regardless of cause, or for any damages resulting therefrom. In no event willINVESTools nor any of its subsidiaries or affiliates be liable for any indirect, special or consequential damages, including but not limited to lost time, lost money,lost profits or lost good will, whether in contract, tort, strict liability or otherwise, and whether or not such damages are foreseen or unforeseen with respect to anyuse of our products or services. In the event that liability is nevertheless imposed on INVESTools or any of its subsidiaries or affiliates, such parties cumulativeliability for damages under any legal theory shall not exceed the amount of fees you paid for the particular product or service. This warranty addresses specificlegal rights; you may also have other rights, which vary from state to state. Some states do not allow the exclusion or limitation of incidental or consequentialdamages, so the above limitation or exclusion may not apply to you.

The principals and employees of, as well as those who provide contracted services for, INVESTools have not promised, represented or warranted that you will earn a profitwhen or if you purchase securities. It is recommended that anyone trading securities should do so with caution and consult with a broker before doing so. Past performancesof any principals and employees of, as well as those who provide contracted services for, INVESTools or any of its subsidiaries or affiliates may not be indicative offutur performance. Securities used as examples presented in this manual or the Investor Toolbox Web site are used for illustrative purposes only and do not constitute arecommendation to buy or sell individual securities. They should be considered speculative with a high degree of volatility and risk.

Trading securities can involve high risks and the loss of any funds invested; trading options can result in the loss of more than the original amount invested.

No part of this manual may be reproduced in any form, by any means, photocopying, electronic or otherwise, without written permission from the publisher.

3.- step 1 - searching for stocks

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