Stock Investing Guide

Penny stocks get a bad wrap. Many think penny stocks are all bad news and destined to lose investors millions. Obviously, that’s not true. So before we hear another uninformed trash talker, Mark Louie is hear to clarify things a bit. Enjoy…
Prejudices of Penny Stocks By Mark LouieAugust 11, 2008
Don’t ever judge a book by its cover. Chances are…it’s a good book. Otherwise it would have never been published. The same goes for penny stocks…
There are several accusations about penny stocks that can make an investor hesitant and timid to invest because of a “risky no-gainer gamble” stereotype. These statements are exaggerated and erroneous…
Learning the truth about what you heard in the past…might be a wealthy opportunity for the future…
Here is the top three…
Misconception #1: Penny stocks are priced low because they are poor performing companies.
Penny stocks are usually small and newly created companies. While still trying to get established, penny stocks are analogically infants and toddlers compared to large-cap adult companies. With great parental guidance from a superb managing team, penny stocks can hold a promising future.
Hints: Do your research! Get background information. There may not be an abundance of information on the company because of lack of media attention. So research patiently and vigilantly.
Check if the managing executives and board members are respectable and passionate towards the company. A positive staff is always going to produce great work and show that through the company’s bottom line.Make sure the company is in a growth position and if they are compatible with future trends and markets. A company’s willingness and desire to expand is a good indication of the value of a company to potentially rise.
Another good way to analyze a company is by reviewing a company’s financial reports and accounting sheets. 10-K annual reports are a great source to attain information. Comparing and analyzing numbers throughout the years will show the “guts” of a company that you won’t read or hear about in the news. However this process can be challenging…
In compliance with SEC rules, companies have to report their financial records. Inside executives know that these records are easily accessible and can show the value and worth of the company. As a loophole, firms will try format the reports differently every year to make the evaluation more difficult and tedious to analyze.
Misconception #2: Penny stocks are all frauds.
Some investors have fallen victim to the “pump and dump” scheme — a system where spammers will buy a stock and then hype it up by sending out positive e-mails and internet ads causing the price of the stock to jump. While the price is up, spammers will sell at a net gain, causing the price to fall, leaving their victimized investors holding the bag.
Hints: Go back to the basics. One of the primary rules to investing…never…ever…invest on tips and rumors. Chances are, your source is wrong or you’ll get in too late…
Do your research! Make sure you know what you are investing in. Make sure your sources are honest and ethical and act upon the interests of its investors and clients. Tips are only ideas. Investments should only be made on your own personal conclusionsEvery stock bares risk. Whether they are priced from $0.01 to $1,000, or a microcap or a large-cap company. Barriers to entry and competition are high these days… Since a majority of penny stocks are young and small companies, its common for penny stocks to default under a competitive market.
In fact, penny stocks are one of the fastest and easiest ways to make double or even triple your money. It’s a whole lot easier for a $2 stock to jump to $4 than a $60 to $120.
Hints: Do your research! Are you starting to see a pattern here? Make sure the industry sector of the company is compatible for future market trends. Analyze the company by generating different scenarios. For example… Would the company be affected by high oil prices? Is their innovative product going to be the high in demand? How would they perform in a recession?
Generally, the more risk you have, the higher the yields can be. If you enjoy risk and want to make big-time returns, by all means go ahead and invest irrationally. But if you are risk-adverse, go back to the basics and diversify your portfolio.
There you have it, three truths to investing…
These common misconceptions are the response to investor’s bitterness of poorly managed securities. For what it’s worth, that’s up to you. But with sufficient research and a promising future market, penny stocks can yield gains far greater than you could have imagined

One of the most frustrating parts for many gold bulls during the run up in gold was the bear market-like nature the underlying mining stocks. Intuitively, a rise in the metal should help the share price of underlying gold stocks. One of the key factors in understanding how many mining companies' share prices went down despite mining having reserves to a rising commodity is knowing that the price of the costs to mine for gold was increasing at an even faster rate. One of the best gauges to assess this is the gold:oil ratio. At the beginning of the year, this ratio sat at approximately 10:1, meaning the price of an ounce of gold was ten times the price of a barrel of crude oil. The ratio fell to as low as 6.4, levels not touched since 2005. With the ratio at 7.18, if the gold:oil ratio can rally higher again, being that the ten-year average is about 12.1, or nearly double that of the recent low, a nice pop in gold stocks could ensue.

Penny Stocks: An Introduction

Penny stocks are hated, loathed, even detested. Why? Because Wall Street is scared of penny stocks…It is afraid to take some chances, even if the rewards far outweigh the risks.

Take a look at just a couple of penny stock examples…
Ascent Solar Jumps 763% Advanced Battery up 1,510 in 10 months











Source: Big Charts Source: Big Charts
Both of these companies traded for practically nothing and ended up bringing in huge profits for their shareholders. You won’t see any blue chip stock do that; gains like these are reserved for penny stocks.
Now, I know what you’re thinking…Not every penny stock will do that. What about the ones that go bankrupt and fall apart?

Well, you’re right. Some do collapse. It takes hours of research and analysis to find the ones capable of quadruple-digit gains, opposed to the ones that go belly up.

But even so, many people just dismiss penny stocks without even truly knowing what they are. Here is a brief overview…

Penny Stocks: A Sea of Definitions
The definition of a penny stock has been debated for years. Everyone has his or her own idea of the exact meaning.

Some say that penny stocks are simply stocks that trade for pennies per share. Others say they are anything under $5 or $10 per share. Even if a stock passes the price-per-share requirement, some still won’t consider it a penny stock unless its total market capitalization (i.e., the total market value of the company) is under $1-1.5 billion.

For our purposes, let’s define “penny stock” as anything with a market cap under $1.5 billion and trading for under $10 per share.

Some so-called analysts won’t even consider anything that trades on a major exchange a penny stock. So let’s take a look…

Penny Stocks: Finding Tiny Companies on Huge Exchanges

To keep it simple, there are three major exchanges in the U.S. you should be familiar with: the New York Stock Exchange (NYSE), the American Stock Exchange (Amex) and the Nasdaq. Despite what some say, penny stocks are traded on all three of these. (In fact, spreading your penny stock portfolio across the three isn’t a bad idea, either.)

The Nasdaq is the most common for penny stocks, for a couple reasons:

• It is very tech heavy, meaning there are a lot of technology and biotechnology companies listed. (Most tech companies are penny stocks)
• To get listed on the Nasdaq, compared with the NYSE, for instance, is much cheaper, which is important for small companies. (For a company starting with 50 million shares initially, it would cost two times as much to get on the NYSE than on the Nasdaq.)

That being said, there is another, relatively smaller set of stocks traded elsewhere…

Penny Stocks: OTC Investing Isn’t as Scary as Wall Street Says

Over-the-counter (OTC) investing is most likely new territory for you, as it is for most investors. Companies that trade OTC are usually one of two things: 1) tiny companies without the capital or manpower to get listed on a major exchange, or 2) foreign companies looking to pick up some U.S. investors to raise extra capital.

The former is more important. Don’t get me wrong, but foreign companies traded OTC are usually very large companies without the ability to double in size easily. But the tiny ones can. So OTC companies can also bring enormous gains.

There are two main ways that over-the-counter companies trade shares: on either the Pink Sheets or the Over-the-Counter Bulletin Board (OTCBB).

The Pink Sheets is not an exchange like the Nasdaq or Amex. It's only a quotation service. The only requirement a company faces on the Pinks is that it must have at least one market maker quoting its stock. Financials do not need to be disclosed.

This scares off 99% of potential investors. The truth is many solid companies are covered in the Pink Sheets. It just takes a little extra research.

The OTCBB is just like the pink sheets, except it has a few more requirements.

You see, before 1990, the over-the-counter securities market was a Wild West show. Not complete lawlessness, but close to it. So that year, the SEC started the Over-the-Counter Bulletin Board as part of the Penny Stock Reform Act. The OTCBB’s main purpose was to bring more quotation and last-sale information.

By 1999, the OTCBB had evolved to the point at which every company had to report regular financial information. This sets it apart from other markets, specifically the Pink Sheets.

The fact that Wall Street continually misses is it doesn’t matter where you find these penny stocks. The only important thing is digging in and finding the ones that are ripe for huge gains.

As the broad market dropped in June the small cap stocks (S&P 600) started to outperform the large cap stocks (S&P 500) as the RS chart broke out to the upside on 6.04.08. Since then the small caps have lost just 3% but the large caps are down 7.4%. IJR resistance at $66-67 with support at $60-62.

Price congests a bit and then heads higher, again making a new high for the move. The change in behavior was there for all of us to see if we were looking.
I’ll remind you again: This is ONE potential price scenario. Let’s see another. Can you tell which is real and which was just a potential price scenario?
Just as important, see if you can see the change in behavior in this next scenario before you I point it out.






Price isn’t looking as bullish in this scenario. It’s cascading lower and had no trouble trading below the 38.2 percent retracement. Once it re-stored its energy, it spiked lower, easily breaking the 50 percent retracement area and trading right to the 61.8 percent retracement area before forming another Energy Coil.
Do you see a change in behavior? Plunge? Pullback?


I may have tricked you on this scenario! I think there are two changes of behavior, although it’s the second one that really sets the tone for the probable path in price.
The first change in behavior comes in the form of higher lows and the failure of price to retest its low at the 61.8 percent retracement area. But that’s not enough to go on.
The second change of behavior, once again, is the break above the top of the Energy Coil.
But we have two nice cascades lower here and quite a nice pullback in price. Do you think you know the probable path of price going forward?
Plunge? Pullback?

Once again, the change in behavior gave us all we needed to know IF we paid attention and saw it. Price had no trouble climbing back higher. Will it make it above the down sloping Upper Median Line or is that an area to look for a high probability short entry? From this point forward, do you think price is going to plunge or keep trading higher?
Have you decided which scenario really happened? Not sure yet? Let me throw you one last curve!

In this scenario [remember, we’re going to look at a number of them and then you get to choose which was the actual price action as it played out and which were just ‘alternate possibilities’], price breaks back above the top of the Energy Coil and closes above it with great separation. This is a sign of strength and just as important, after a nice sell off, it is a change in behavior. This is price giving us a clue about the probable path of price.


Looking at the chart above, is price likely to head higher now or head back into the Energy Coil?




I’ll bet most of you saw this one coming. Once price closed above the top of the Energy Coil—which was price’s change of behavior—the buyers were completely in control of this market. Price quickly made a new high.
Was this the ‘real’ price action? Let’s see another potential way that this may have played out before I ask you to make a final choice.Well, this is different. Price easily broke below the 38.2 percent retracement area. It’s testing the 50 percent retracement area, actually. And once again, after a quick sprint in one direction, price has formed an Energy Coil. Price is re-storing energy. Do we have ANY clue yet about the probable path of price from this point forward?
Once again, this price scenario leads to a break above the top of the Energy Coil. And although the price action is not as vertical as it was in the prior scenario, it IS making higher highs and higher lows, a sign of strength. Once again, price gave us a change of behavior that was easy to spot IF you were looking for it. Once you start paying attention to what price is doing while it forms each and every bar, you’ll begin to see these changes in behavior.
Alright, let’s take another vote: Is price headed higher from here or back to the Energy Coil? It’s come off its highs quite a bit. Do you have an opinion? Will it trade lower and break back into the Energy Coil or head higher from this point?

Now let me throw in another clue: The day after those double tops formed, while riding in the car with my wife, she asked me if I had any long-term grain positions on. I gave her an odd look and then asked her why she asked [my wife literally NEVER asks about my positions or how trading is going]. Her answer was simple and to the point: “Odd we haven’t had a hurricane yet, huh? I heard on the radio this morning there may be a tropical depression forming.” Sometimes you just have to admit your spouse is smarter than you are…and of course, after all these years of not asking, she had obviously been listening and watching. If she hadn’t mentioned it, I would have completely missed the news about the potential tropical depression forming—and I probably would not have been as alert for a potential trade.
Let’s see what price had in store for us over the next few days:
When my wife told me about the potential tropical depression, I added in this down sloping red Median Line and its Parallels. Three days later, price tested the down sloping Upper Median Line Parallel and closed below it with good separation. But note that price is still fairly close to its all time highs. Is this a pullback in a strong up trend caused by the ‘threat’ of a potential tropical depression or is it the beginning of a new down trend?
What do you think? Are there any other tools I can add to help you ‘read’ the market?






I talked earlier about the geometric contractions and expansions. These are signposts on the ‘Market Maps’ for me, because so many people use them and look at them. My first rule of thumb is very simple: If you are in an up trend, price really isn’t showing any sign of weakness until it can get through and close several times below the 38.2 percent retracement. And looking at the chart above, you can see that price is a very long ways above that area.
That’s all the clues I have for you right now. Do you have an opinion yet? Plunge? Pullback?
Before you get too excited, let me stop you and remind you that we’re going to look at several scenarios. And then I’ll tell you which one really played out and which were just possible outcomes that never happened. Is this the real outcome? What do YOU think?
On the chart above, price came down to the 38.2 percent retracement. What else should we be noticing on this chart?



Price not only came down to the 38.2 percent retracement level, it then formed a gorgeous Energy Coil. Remember Itzhak Bentov’s assertion? The buyers and sellers are about equal at this area apparently, so price is resting, re-storing its energy before making its next move.
The NEXT move! That’s what you want to know about, right? Do you have an opinion? Is this a pullback in a strong up trend or a pause in a new down trend? What would price have to do to show us the probable path of price?

Markets trend, congest, and then they can return to the original trend or start an entire new trend in the opposite direction. Reading the signs along, or the ‘Market Maps’, is interpreting the context of the market at any given time. Good traders then make decisions on the most probable path price is likely to take—and if they cannot discern a probable path, they wait patiently until the market shows them one. Once they’ve chosen a probable path for price, they look for high probability trade entries with acceptable sized risks and quality risk reward ratios. If they can find all these things, they enter market orders and wait to see if the market let’s them in. And then the fun begins!
There are many things in a professional trader’s toolbox to help them make these trading decisions. Some traders rely strictly on technical analysis, some on fundamental analysis; some use a mixture of both. And each trader has a different mix of tools. For example, my favorite technical analysis tool is the Andrews Median Line, though I also use tools like geometric retracements [most traders refer to these as ‘Fib’ retracements even though they were used by the Greeks in Euclid’s time] and measured movements. I certainly look at the qualities of each and every price bar as it opens, unfolds and closes to detect whether buyers or sellers are in control and how each bar relates to the prior bars—I suppose you’d call this ‘tape reading’ these days.
And although I don’t ‘consciously’ rely on fundamental analysis, my educational background and 37 years as a professional trader mean the fundamentals are generally there rolling around in my head, so they do come into play, whether I like to admit it or not.
I thought you might all enjoy looking at a series of charts and playing a game of deciding ‘which is the real outcome’! Of course, to do this, I’ll trust you won’t look at current prices in this market for the past several months—do yourself a favor and just go along for the ride and see how each possibility plays out. There’s no wrong answer. All of these could have happened, but one of them did and was an actual trade.
We’re going to be looking at the soybean futures, so before we start, let me give you a fundamental clue that many of you don’t know: When trading grains, there are two insider secrets I am willing to offer you that come directly from the Chicago Board of Trade Grain pits:
There is a famous weatherman on Super Station WGN [or Channel 9 in Chicago]. His name is Tom Skilling and he ALWAYS gives a ‘tease’ of his major noon weather forecast that starts at 12:20 pm CST at 12:06 pm. If you are ever in Chicago while the grain pits are active in the summer, you can see the pit trading come to a halt at 12:05 pm CST as the traders listen to Tommie’s ‘tease’, hoping to get an edge on the rest of the trading world that waits for his ‘full’ forecast at 12:20.
If you have a grain position in early summer and the market is trending, always remember that once the first tropical depression forms [or the first hurricane], all bets are generally off in terms of the trend. If it’s been a hot, dry summer, this generally signals the breakup of that weather pattern. So if you have a nice chunk of profit in a grain position and the first tropical depression hits, you might think about taking your money and standing aside for a bit. OR if a major trend has stretched the market out in one direction or the other, that first tropical depression may be the first crack that leads to a change in trend!
One last thought before we start with charts: I don’t know why geometric retracements or progressions work—and I consider 38.2 percent, 50 percent, 61.8 percent, 1.272 percent and 1.618 percent the major retracements and projections.
One interesting suggestion was put forth in a work, Stalking The Wild Pendulum, by a fine theoretician named Itzhak Bentov. He pointed out that if you put two or three pendulums in a sealed room and started them at random so that they were out of synchronization, they would exert an unusual influence upon one another and would soon be swinging back and forth in perfect unison. He gives many other examples of this same phenomenon throughout the universe and even within our own bodies! Perhaps the vibrations that make Median Lines and Geometric contractions and expansions are similarly governed and so often find themselves stabilizing when buyers and sellers are about equal. And then once the market has reached its most efficient state [recovered its energy by resting once it is within this synchronized state], it then begins anew on the most probable path. I’ll let you decide if this idea makes sense.
Let’s look at the soybean futures market now!


You can see on the chart above, price has been in a very strong up trend, moving from just over $10.50 per bushel to a high of almost $16.37 dollars a bushel in a rather short time. I can’t point to any one sign of weakness, but I see some cracks that might lead to something: Price left double tops at the high of the move and then turned lower and broke below a mini Swing Low—obviously the last two bars on this chart are very weak price action. Note also that the sell off came on wide range bars, so there are eager sellers, people that WANT to get out, either because they bought near the recent highs or because they are watching their profits vanish and they want what’s left of their money NOW.

What if you took the double tops and the potential forming tropical depression and used them as your ‘change in behavior’? Are those two enough to entice you to sell a test of the down sloping Upper Median Line?
Remember, price still hasn’t traded down to test the 38.2 percent retracement, so it’s still very strong. Price DID trade below a mini Swing Low, but it hasn’t traded below any major Swing Lows.

Williams shakespeare wrote several years ago that 'some men are born great;some archieve greatness;while some have greatness thrust upon them.This is a convenient point for kickstarting our discussion.
There have been arguments on the source of leadership skills just like greatness.Some believe that leaders are born with their DNA lined with the art of leadership.Others believe that leadership is attained by the aquisition of a variety of skills and some other people believe that leadership is stumbled upon.Thoughts,time and experience have revealed to us that leadership may not be pinned on any of these singular views.Some people are born with great leadership intuition.Others have to work hard to develop and hone it.But either way it evolves,the result is a combination of natural ability and learned skills.One of those abilities and skills is intuition.
Intuition,which is the ability to know the path to take from a point where three paths meet,having not taken the routes before.Intuition which I choose to refer to as 'HIDDEN SIGHT' helps leaders become readers of the numerous intangibles of leadership.If you have followed this series,the question in your heart by now should be 'What has this got to do with investing? Let me quickly follow that by noting that intuition makes leaders to be readers of trends and trends is about much of taking investment decisions.Everything that happens around us does so in the context of a bigger picture.Leaders have the ability to step back from what is happening at the moment and see not only where they have gone,but also where they are headed in the future.
Because leadership permeates everything you do,you can begin to consider investing in this context.If you are caught in a web,you don't say you've lost all your investments,gotten your hands burnt and you are a loser.Your leadership abilities make you see beyond now and restrategize for better results.It's as if you can smell change in the wind and follow it through.
To me,of profound importance is the fact that leaders are matters of their resources.A major difference between mere achievers and leader is the way they see resource.Successful individuals think in terms of what they can do.Successful leaders,on the other hand,see every situation in terms of available resources:money,raw materials,technology and most importantly,people.They never forget that people are their greatest asset.For example,you may have all the money in the world to invest with,you can only be successful if you tap the wisdom of people that know how to go about it.Otherwise,you will lose that money in exchange for wisdom ultimately.Leaders are readers of themselves.Good leaders develop the ability to read themselves:their strenghts,skills,weaknesses,and current state of mind.They recognize the truth that no one can produce great things who is not thoroughly sincere in dealing with himself.There is no doubt that who you are,dictates what you see.To further illustrate this,let me share the tale of two men.
Mark and his friend Beck was vacationing with their family at a small lake community in the woods.As the two men sat on the porch of their cabin overlooking the lake and miles of beautiful forest,they started to talk.
And Mark said to Beck:I'll tell you what I look out there.........I see the underdeveloped resources of three states.I see a syndicate development consortium exploiting over a billion and a half dollars in forest products.I see a paper mill .........Now I ask you,what do you see?.I just see trees,answered Beck.Well says Mark,'Nobody ever accused you of having a grand vision.
Beck saw trees because he was there to enjoy the scenery.Mark saw opportunity because he had a developed mind with the ability to turn intagibility to tangible.How you see the world around you is determined by who you are.Leadership is really more of art than science.The principles of leadership are constant but the application changes with every leader and every situation.That's why it requires intuition.Without it,you can get blindsided,and that's one of the worst things that can happen to a leader.If you want to lead long,you've got to obey the law of hidden sight.That means you need numerous experience and that can only come by numerous activities and actions in your endeavours.If you believe it,you can become it.

Leadership is sensitive and categorical.You are either one,a leader or not.That's one of the beauties in being able to relate the theme to investing.In investing you are very clear and unambiguous.You are either making money or losing it.If you think your investment is at a stand still and you factor time into the equation,you will discover that you are rather retrogressing.
It is proven that followers need leaders who are able to effectively chart a course for them.When they are facing life and death situations,the necessity becomes painfully obvious.The truth is that nearly anyone can steer the ship,it only takes some energy,but it takes a leader to chart the course.You and I know that any dummy can propose to invest in stocks but it takes more than a dummy to consistently make profitable investments.
Quoting jack welch,the former chairman of General Electric;'A good leader remains focused;controling your direction is better than being controlled by it'.In life,you either take what life itself delivers to you or you demand what you want from it.
You can choose to be toosed around by every wind while you can also decide to follow only the direction you wish to go.I know of some people who have decided to invest their savings and leaving it to chance,believing that you are bound to win some and lose others.I can also tell you of people who have chosen to be what I can sophisticated investors;neither giving room to any loss and combating every setback fiercely.It's all about what you see and what you plan towards.Leaders who adopt this law do more than control the direction in which they travel;they make others travel the same path.
The true leader is the man who sees more than others see;who see farther than others see,and who sees before others do.That's why as a great investor,you should see beyond the present state of a market.You should understand the signs of the seasons in the market bull or bear.That is leadership.It is not isolated to any field,the laws are universally applicable.Every past success and failure can be a source of imformation and wisdom,if you allow it to be.Successes teach you about yourself and what you are capable of doing with your particular gifts and talents.Failure shows what kind of wrong assumptions you've made and where your methods are flawed.If you fail to learn from your mistakes,you're going to fail again and again.That's why effective preparation starts with experience.But they certainly don't end there.No matter how much you learn from the past,it will never tell you all you need to know for the present.Leaders in the real sense gather information from many sources.They get ideas from members of their circle of activity and beyond.They talk to people in their organisation or activity group to find out what's happening at every level.And they spend time with leaders from outside the organisation who can mentor them.Being able to navigate for others require a leader to posses a positive attitude.You've got to have faith that you can take your people all the way.If you can't confidently make the trip in your mind,you're not going to be able to take it in real life.On the other hand,you also have to be able to see the facts realistically.You can't minimise obstacles or rationalise your challenges.If you don't go in with your eyes wide open,you are going to get blindsided.Realistic leaders are objective enough to minimise illusions.They understand that self-deception can cost them their vision.Sometimes it's difficult balancing optimism and realism,intuition and planning,faith and fact.But that's what it takes to be effective as a great leader of all times .
Major barriers to successful planning are fear of change,ignorance,uncertainty about the future and lack of imagination.John maxwell sums up this principle with the phrase'PLAN AHEAD'.When you fail to plan ahead,you have planned to fail.
These could help you in preparing not only to be a leader but also to be a good investor.
*Predetermine a course of action.
*Lay out your goals.
*Adjust your priorities.
*Notify key personnel for help.
*Allow time to succeed.
*Head for action.
*Expect obstacles and problems.
*Always point towards the successes.
*Diligently review your plans.
Remember the secret of this law of preparation is to work towards it.It's not the size of the project that determines it's acceptance,support and success,it's the size of the leader.It's not the size of your funds that determines your investment success,it's your preparation to be successful.

We will be discussing risk as it relates to investing.Risk is a household name in the investment world.You hardly talk about the stock market without mentioning risk.As a result,people have developed erroneous conclusions about risk and risk tolerance in the investing world.Many a time,it is discussed without understanding what it really means.
Topmost on investors' mind when discussing risk is how its knowledge can help to reduce or remove losses from their records.And many others will ask:How can understanding this concept help investors in diversifying their portfolios? I hope you will find this class worth your while.
An often talked about cliche is that of what i'll refer to as 'age-based' risk tolerance.It is conventional wisdom that a younger investor has a long term time horizon in terms of the need for investments and can take more risk.Following this logic,an older individual has a short investment horizon,especially once that individual is retired,and would have low risk tolerance while this may be true in general,there are certainly a number of other considerations that come into play.First we need to consider investment.When will the invested funds be needed?
If the time horizon is relatively short,risk tolerance should shift to be more conservative.For long term investments,there is room for more aggressive investing as time happens to offer more opportunity for capital appreciation even in a less responsive market.
Time is an absorber of risk when it comes to investment as long as you have not made fundamental flaws in your choice of stocks.However,I will always advice that you be careful about blindly following conventional wisdom.For example,it is often said that when you are retired,you must shift everything to conservative investments;Some sophisticated investors have long retired and are still investing in companies that look risky.They have grown to have their own investing principles to follow,which means you also have to develop your own style of investment rather than follow the conventional way of investing in what others term as 'risky or non-risky'.
RISK CAPITAL:By definition,networth is your total assets minus your liabilities.Risk capital is capital that can easily be converted into cash or money available to invest or trade that will not affect your lifestyle if lost,which should be an important consideration when determining risk tolerance.Therefore,an investor with a high networth can assume more risk.The smaller the percentage of your overall networth the investment or trade makes up,the more aggressive the risk tolerance can be because losing it at that point will not be as painful as when you lose what you have based your retirement's survival money on.
Unfortunately,those with little to no networth or with limited risk capital are often drawn to riskier your house stocks' because of the lure of quick,easy and large profits.The problem with this is that when you are trading with your house rent' it is difficult to have your head in the game.Also when too much risk is assumed with too little capital,an investor can be forced to sell his stocks too early even at a loss.
DEFINE YOUR INVESTMENT OBJECTIVES:Your investment objectives must also be considered when calculating how much risk can be assumed.If you are investing for a child's future education or your retirement,how much risk do you really want to take with those funds?
INVESTMENT EXPERIENCE:When it comes to determining your risk tolerance,your level of investing experience must also be considered.It is often said that experience is the best teacher.I think that concept is fully applicable in the investing world though it's better not to experience some things.There are many assumptions one can make if he is not yet in the stock market; or better put,if not an educated investor.
It is prudent to begin new ventures with some degree of caution and investing is no different.Get some experience before committing too much capital.Always remember the old idea behind striving for 'preservation of capital' it only makes sense to take on the appropriate risk for your situation if the worst-case scenario will leave you able to live to invest another day.
There are many things to consider when determining the answer to a seemingly simple question ;What is my risk tolerance? The answer will vary based on your age,experience,networth,risk capital and the actual investment being considered.Knowing your risk tolerance and keeping to investments that fit within it should keep you from financial ruin.

Making money from stock markets requires trading in the stock market. Prudent buying, holding and selling of stocks generate profits and money. Stock trading is the function that interacts and organizes in the stock market. This market involves buying and selling of millions of shares all over the world, and generates profit. A share of this profit comes to the successful trader in the stock market. That is how s/he makes money from the stock market. It is a mystery how this large a volume and value of trade is accommodated in the system of trading. These financial markets are marvels of technological capacity. As a beginner, you must understand essentially how the market works. You don’t have to know all of the technicalities of buying and selling stocks. The first and foremost you need to know is the functioning of the exchange floor, irrespective of whether you trade through the floor or electronically. When the market opens, hundreds of people are seen fast moving about shouting and gesticulating to one another, staring at monitors, and entering data into terminals, or busy on cell-phones on the exchange floor. It looks like a complete fiasco. However, by the time the end of the day approaches, the market has worked out all the trades, and is all set for the next day. These are the steps in a simple trade on the exchange floor of any major Stock Exchange: You instruct your broker to buy a number of shares of a company at the current market price. The broker’s order department passes the order on to their floor clerk, the dealing official, in the exchange. From this person it goes to one of the firm’s floor traders whose task it is to find another floor trader wanting to sell that number of shares of the company you wanted. Each floor trader has particular knowledge of which floor traders deal in what stocks. The two come together on a price and seal the deal. The notification process moves backward along the line and your broker gets back to you with the final price. You receive the confirmation notice in the mail after a few days. For the individual investor, you frequently can get almost instant confirmations on your trades, if that is important to you. It also facilitates further control of online investing by putting you one step closer to the market. Beginners should avoid complicating things trying to get rich in a day by venturing into every nook and cranny without knowing a thing or two about them. There are many types of trading like day trading, swing trading, futures and so on. Instead of trying to do a little bit of everything, it is profitable to concentrate on a single type that is simple to understand for you. To begin with, you need a broker to handle your trades – individuals don’t have access to the electronic markets. Your broker accesses the exchange network and the system finds a buyer or seller depending on your order. Choose the right broker rationally. This is a crucial point of money making from stocks. You then need to anticipate the behavior of prices of stocks. Price is the immediate cost of a share and potential source of profits. And this price behavior is so dicey that it keeps everybody in the game quite excited. This is what generates the profits or losses that are made by investing in this market. Don’t worry if you find it very difficult to infer the price, because it really is difficult. It is frequently seen to be irregularly moving all along the day. Yet there are patterns to be figured out and expectations work quite often. Depend on your comprehension and your broker, who must be a professional. Never bypass understanding fully the cause(s) behind a bad result when it occurs. Learn from your experiences, document them, and keep reading them once in a while.

Many investors get a lot of anxiety chasing mutual fund returns, hoping that history repeats itself while they are in the fund. In fact, a fund which has already yielded large returns has less of a chance to do so again when compared with its peer group. A better idea, rather than stressing out over the vagaries of the financial markets, is to look for wisdom in time-tested, academic methods. Once your high-quality investment plan is set up, relax. Let your investment compound understanding that the plan is rooted in knowledge, not hype.

Good Soil
As when growing a garden, you want to invest in good soil (strategy). Accordingly, you can expect there to be some rainy days (bear market) with the sunny (bull market). Both are needed for overall growth. Once a garden (money) starts to grow, don't uproot it and replant, lest it wither and die. Set up your investment wisely and then let it grow. (Check out our related article Digging Deeper Into Bull And Bear Markets to learn the characteristics of the two types of market conditions.)

Academic research creates good soil. The body of knowledge about the market goes through a rigorous review process whose primary goal is truth or knowledge rather than profit. Thus, the information is disinterested - something you should always look for in life to make wise decisions.

Greatly distilling this body of knowledge, here are a few key points to remember when it comes to in the stock market.

Risk and return
This concept is similar to the saying "there is no free lunch". In money terms, if you want more return, you are going to have to invest in funds that have a greater probability of going south (high risk). Thus, the law of large numbers really comes into play here, since investing in small, unproven companies may yield better potential returns, while larger companies which have already undergone substantial growth may not give you comparable results.

It is very easy to jump into stock investment bandwagon following others to make money, but without strong investment philosophy straight from beginning, it is quite difficult for you to be successful. Not only in stock market but in any investment decision you ever do.
It takes me years after investing in stock market to discover these basic investing rules. It is not my intention to impose new rules to investing, but you'll be on the winning side if you know the basic rule of the game.
Companies are approaching bankers, wealthy individuals and public investors asking for money. Therefore, only capable investors (at least have the money) should invest in the stock market. Though not the fastest way, saving money is the easiest method to accumulate wealth. How much money will you be saving is depend on your financial goals, income capability and time availability. I myself allocate 30 to 50 per cent of my salary as a 'forced saving' to expand my investment muscle. Find out how much you should save from Having money to invest is just not enough. After all, you aren't going to invest with your medical fund are you? Lying at home without proper medication just because you'd lost the money in the stock market should be the last thing you ever want to be happened.
Under normal circumstances, you should not seriously consider investing unless you had satisfied at least one of the three following conditions:
You have six months income worth in savings. Understanding your objectives is the major part of successful investing, and many don't have them since the very first day they start investing.
Ask yourself, do you invest:
For short-term, medium-term or long-term? For your kids' education, buying new homes or for retirement?For income (dividend) or for growth (capital appreciation)?
Specific goals can direct you to specific investment plans. Having definitive investment plans will then make your stock investment practice much easier. More importantly, you are not influenced by the crowd; not easily tempered by the bull market and not panic in bear market.
There are always risks in investment. In stock market, the risks include:
Individual Financial risk. Probability that you went broke, either because you lose your jobs or businesses. You didn't know when you get fired due to downsizing or business went down due to stiff competitions.
Companies Business risk. Probability that the companies that you invest in went down either due to stiff competitions, mistakes in business directions or corruptions in it's own management.
Stock Market risk Sometimes, the stock you invest in has nothing wrong but because the market sentiment went down, will also effect the price of your stock.
Your current assets equal to your current liabilities.