CHAPTER 1

Start Here

Before we get into the details in later chapters, I want to make sure you seethe primary goals—the big picture—here.

So let's start with a quick look at the investing forest, then we'll startexamining the trees.

If you ever start to feel a little overwhelmed as we go through the checklistsand charts later in the book, take a breather and come back here. You may evenwant to put in a bookmark or dog-ear this page as a reminder.

That will help you stay grounded and focused on what matters most: Using basicrules and routines to both grow—and protect—your money.

How to Protect Your Money

The Basic Game Plan for Making Money in Stocks

Action Steps

How to Protect Your Money

Talking about how to protect your money—how to avoid big losses—isnot the most exciting way to kick off a discussion about building wealth. Butit's absolutely critical.

Job #1 in making money in stocks is to protect the money you already have.

And you can do that just by following two basic rules. They will protect youeven when—in fact, especially when—the market becomes volatile andslips into a downtrend.

When we go through the Selling Checklist later in the book, you'll see severalcommon signals that tell you it's time to lock in your gains or cut any losses.Over time, you'll become better and better at spotting those signs, but fornow—at a minimum—be sure to stick to these two rules. They'll helpyou safeguard your money as you learn new ways to grow it.

1. If a Stock Drops 7% to 8% Below What You Paid for It, Sell. No QuestionsAsked.

This one simple rule puts a cap on potential losses—like having insuranceto protect you against whatever the market does. Simple and sensible.

You'll find it's much easier to grow your money if you follow this rule. Insteadof trying to make up for larger losses, you'll be adding to and compounding yourgains.

I can't emphasize enough how important this rule is.

Every investor—including legendary traders like Bill O'Neil—makesmistakes. But successful investors quickly acknowledge those mistakes— andcut their losses short. Always. You should do the same, and you can do it byfollowing this one simple rule.

See the Selling Checklist section for more on this rule—and how I learnedit the hard way.

2. Only Buy Stocks When the Overall Market Is in a "Confirmed Uptrend"

IBD's study of every market cycle since 1880 shows 3 out of 4 stocks move in thesame direction as the overall market, either up or down.

The "overall" or "general" market refers to the major indexes, primarily theNasdaq Composite, S&P 500, and Dow Jones Industrial Average.

When the market is trending down, about 75% of all stocks will eventuallydecline with it.

Does that sound like a good time to buy stocks? To keep the odds in your favorand make it much easier to grow your money, be sure to only make new purchaseswhen the market is in an uptrend.

As you'll see in the next section, "The Basic Game Plan for Making Money inStocks," you'll know if the market is in an uptrend or downtrend simply bychecking the Market Pulse inside IBD's The Big Picture column.

Only make new buys when the current outlook is "Confirmed uptrend."

See the Buying Checklist section for more on this key rule and how to apply it.

Protect and Prosper

Most people start out focusing on what stocks to buy and ignore the otherabsolutely critical part of the puzzle—when to sell.

All too often, a new investor won't realize he or she needs some sell rulesuntil after suffering a large loss. Don't let that happen to you!

Start off right by sticking to these two basic rules. They'll help protect yourmoney as you learn to pick winning stocks and prosper.

The Basic Game Plan for Making Money in Stocks

We'll go through the CAN SLIM® Investment System in the next chapter, butfor now just understand that by using this approach, you can:

• See when the market trend is changing so you'll always know if it's time to buystocks or take defensive action.

• Identify stocks with the most potential by looking for 7 traits the biggestwinners typically display just before they launch a major price move.

Then, using the routines and checklists in this book, you'll see the specificsteps you can take to make money in:

• Individual stocks

• Exchange-traded funds (ETFs) that cover the Nasdaq and S&P 500

• Or a mix of both stocks and ETFs

The focus of this book is on individual stocks. The biggest winners in a strongbull market can go up 100%, 300%, even 1,000% or more. In the bull cycle thatstarted in March 2009, Apple, Priceline, Lululemon Athletica, Ulta Beauty, GreenMountain Coffee Roasters, Chipotle Mexican Grill, Rackspace Hosting, 3D Systems,Michael Kors, and many others did just that. In other words, the huge, life-changinggains are made by zeroing in on the true market leaders—andyou'll see how to do that using the Simple Weekend Routine and Buying Checklist.

That said, you can generate solid gains following the ETF approach we'll go overin a minute, and it takes less time.

Should You Invest in Stocks, ETFs, or Both?

The choice is up to you. There is no right or wrong answer, and you can alwaysdo both: Put a certain percentage of your money into individual stocks andanother portion into an index-based ETF.

Many CAN SLIM investors follow a mixed approach, and I think it's an excellentway—especially for new investors—to get started.

Basic Game Plan for Making Money in Exchange-Traded Funds (ETFs)

As we'll see again and again throughout this book, staying in sync with thegeneral market trend is the first crucial step to making money—whetheryou're trading stocks or ETFs. The reason for that will become crystal clear ina minute.

What is an Exchange-Traded Fund?

An ETF is essentially a "basket" of stocks compiled into one "fund" that you canbuy and sell just like an individual stock. It could be a sector-based ETFfocused on a particular industry, such as energy or real estate. Or it could bean index-based ETF that tracks the S&P 500 or another index as a whole.

For this game plan, we'll...