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FAQ’s
Here are some questions members often ask our analysts or make an important point. It’s a good place to look first if you need an answer to your own question.

How do I get started? I don’t know anything about options trading.

Jacob Mintz: I recommend reading my Guide to Options Trading; it breaks down the various definitions and strategies that we use. Start off by reading about calls, then move on to puts. Once you understand the fundamentals, options are not that complicated. When you’re ready to start, trade one contract and track how the option moves. When you’re more comfortable, execute two contracts. My Buy Alerts, Sell Alerts and Updates tell you exactly what to do, and you can always ask me any questions by email.

Can you recommend options brokers?

Jacob Mintz: I had email conversations recently with several subscribers on the subject of commissions. Some were paying between $5 and $10 an option contract. In my mind, that is ridiculously expensive. Commission rates continue to come down, and you should be paying close to $1 an option contract.

If you are paying more than that, simply call your brokerage provider and ask them if they can meet the industry standards. Many subscribers have made the call, and gotten better rates. The worst your broker can say is no.

There are many online brokers, so competition has forced commissions down significantly in the last few years. I use Interactive Brokers. I find that its commission structure is extremely competitive, and the system is relatively easy to use. As a reference point, I pay around $1 a contract. That said, I have no additional relationship with them, nor is this an endorsement. My point is that you should make sure you’re paying a competitive rate on commissions!

How much capital should I start with?

Jacob Mintz: The beautiful thing about options is it doesn’t take much capital to gain large market leverage. You certainly don’t need more than $1,000 to put on many of the trades I suggest, though many of my readers trade much higher amounts.

In Cabot Growth Investor, I’m trying to understand how you decide how much to buy of a particular stock in your Model Portfolio. Do you overweight some ideas? Underweight? And how many shares should I buy?

Mike Cintolo: There’s a short answer and a long answer to your question. First, the short version: When fully invested, we have 10 stocks in our Model Portfolio (we run a concentrated ship, as do most growth investors), so any new purchase is going to be about 10% of the portfolio. Thus, if you have a $100,000 account, you’d buy $10,000 worth of stock, however many shares that turns out to be.

That’s the general method. In practice, it’s a touch more complicated. We have 10 “slots” in the Model Portfolio, so when we add a new stock, the amount of money we dedicate to it is: Total Cash divided by the number of empty slots.

Example: We have six stocks in the Model Portfolio, and thus four empty slots. We also have a cash position of $50,000. Then we decided to buy one new stock. Thus, we’ll take $50,000 divided by four = $12,500, which is what we’ll buy the new purchase. Note that we don’t care about buying round lots of shares—we care about the dollars invested.

In practice, though, it’s easier and nearly the same to simply invest about 10% of your account in each new recommendation.

I’m a new subscriber to Cabot Top Ten Trader and I’m wondering if you have any ideas on how best to use the service—there are many recommendations and I can’t buy all of them, so how should I go about selecting those stocks to target?

At its heart, Cabot Top Ten Trader is a source of new ideas for the investor that wants the first four or five steps of the process done for him (find the strongest stocks, analyze why they’re strong, suggest prudent buy ranges and loss limits, offer follow-up advice, etc.) but can then take it from there.

That said, we do have a few pointers when starting out. First, of course, begin with the Top Pick, which is the stock we think has the best combination of fundamentals and technicals.

Beyond that, you should keep your eyes open for new themes or sectors that emerge. The obvious example recently has been the boom in “old world” stocks, which began popping up on our screens in mid-November. Such group moves often provide great entry points, especially when the group hasn’t been doing much in recent months. We always try to point out any bullish group action when we see it.

I have a few stocks (some small caps and some large caps) that I currently have a loss on. And I don’t have a good feeling for whether or not they’ll come back. Do you have any general advice on what to do in this situation? I’m a long-term investor, so have time to hold and wait for a better exit price. But I don’t want to wait forever.

The bottom line for me is that if I don’t have a lot of confidence in a stock—of any market capitalization—then I probably won’t hold on to it. If it’s near the end of the year and I can lock in a loss to offset some taxable income, then I’ll probably do it. But more specifically to the stocks, the basic question you always want to ask is this: why would I want to have money tied up in a low confidence stock when there are a plenty of other options that are performing well? You can almost always find a performing stock with a similar risk profile to a loser you are holding. And if you have a high degree of confidence it the performing stock, then it makes sense to swap out of the loser. In the Cabot Small-Cap Confidential portfolio, look at the stocks currently rated “Buy.” Those are the ones I have high confidence in right now and, I’d suggest swapping into any of them over an underperforming small cap.

I am a subscriber to your Cabot Emerging Market Investor newsletter. What trading platform do you recommend for me so I may purchase some of the securities.

Paul Goodwin: All of the stocks recommended in Cabot Emerging Markets Investor trade on U.S. exchanges and can be bought using an online broker such as TD Ameritrade, E*Trade Financial, Schwab, Fidelity or any other. A little shopping around will find the service with the best combination of trading fees, research resources and news that feels best for you.

I just joined Stock of the Week and have a question. When you recommend a stock and the price jumps 10 percent the next day like SUPN do you recommend waiting for a pullback to jump in? Your report suggested jumping in if there was a favorable reaction today to the earnings report but with the stock now up 10%, I’m wondering if you’d advise waiting on a pullback.

Tim Lutts: Thanks for asking. In general, when investing in true growth stocks like SUPN, strength is good; momentum is your friend. So I would treat the current mid-day retreat from the high of 50.30 as a buying opportunity. But don’t overcommit. Start with a pilot position, and average up if the stock does what we want.

You recommend holding 35-45 stocks? How does one do this with less than a million dollar investment? You also recommend buy position sizes that can make a difference. Can you elucidate this?

Chloe Lutts Jensen: I don’t recommend you buy all the stocks in the Cabot Dividend Investor portfolio. Instead, figure out how many stocks you want to own when fully invested. Many of our members prefer 10-15, but it’s a personal choice, based on how much you’re investing and how many stocks you want to keep track of.

“Buy enough to make a difference” means your positions should be large enough that if, for example, one stock goes up 25%, it should have a meaningful impact on your portfolio. If you own 50 stocks, it probably won’t.

Once you’ve figured out what a manageable number of stocks is for you, only buy the recommendations that best fit your investing goals. Since you say growth is a major goal, you might want to buy our 10 recommendations with the highest growth potential (with that many stocks, you should still be able to diversify quite a bit by risk level, yield, etc.).