Wall street comes up with a new twist that can if youre not protected. Make you feel like its not worth it to be involved in our stock market. I cant tell you when theres bad news involving ipos and say how can people take this anymore . The abuse . The answer, frankly no other choice. You cant make enough money in any other asset class particularly bonds where the rates are so so low. To be able to retire or take the trip you want. Pay for tuition. Bonds cant pay that tuition. You got to own stocks. You need a survival handbook. Thats what im giving you tonight. The Insider Trading scandaling of the 1980s. I traded through that. That had to do with machines gone wild. Didnt have anything to do with the economy. It looked like it was going to get weak because of the crash. We do seem to have ratcheted up the unfairness in the last couple years. I dont mean the economic fallout. Who can forget the event that was the long awaited facebook fiasco . May of 2012. Now this was a one in a lifetime opportunity to bring people back to the stock market who fled. A company that is coming public and had a sterling reputation. A loved product. Quirky. But no more than google. The company had tons of money on hand. They didnt need to be greedy. It was have been an unbelievable moment to price the deal reasonably so everyone won. No. They offered a price that was the top end of the range. Maybe the company was being moved by desk top to mobile. Something that turned out to be true. And the deal flops in a horrible way. Making matters worse, the nasdaq became public on. And couldnt get the stock open. The deal fell apart. No one could sell the machines. Total chaos. Confusion and overvaluation. A close classic opportunity to people back to the stock market was botched and we had an event that drove people to the sidelines. Just like in 1999 2000. How about where the market briefly lost 10 trillion bucks because of a computer glitch. I was on tell vacation when it happened. It was one of the most embarrassing events i have seen. Who can trust that mechanism with her life savings . It seemed like a smoke and mirrors. How about the latest round of trading scandals. This time the biggest one snared a Hedge Fund Manager who ran billions. And that raja gupta the director of goldman sachs. Got two years in the slammer. The travtty the government overlooked. Many people who knew that those returns were too outrageous to be real including people who whistle blew to the sec or the firms connected to sec capital. How do you protect yourself from this . First, it cant be stopped. There will always be fraud lens. You cant get fraud and never know when its going to strike. Therell always be down markets. Even devirsfy occasion which we call the only free lunch caused you to lose less in the year. The great destruction of wealth. Lets say nothing can protect you if you own stocks. But what i can do is offer some simple rules that will let you have more confidence in the stock market even if you think portions are rigged or beyond your comp hengs and the first rule, know what you own. I know it sounds simple. How does this protect you from the myriad ways . Youll be able to take advantage of the mechanical lunacy and buy more at lower prices. If i was using limit orders not market orders. Second, if you know what you own, you can handle a stock. Take facebook. Pretty good company. Maybe you can buy it on the way down if you actually knew it. Third, if you know you own what you own, then who really cares about guys like the raj or the gupta . What does it mean . If you know what you own, you are in control. How do you know if you know what you own. In other words, a lot of people think they know what they own. Its a real issue. Heres my answer. Its a practical way to look at it. First say you stocked me coming out of the Stock Exchange down at wall street and this happens five or six times every day. Lets say you shot at and say what duke about that x, y, z, corp. Tell me what it does. Do you know the majority of the time people dont know answer. They dont know either answer. They got some tip they saw some chart or heard from an uninformed source. But they have no idea what business it is in or how its even doing. They dont even know in a lot of cases what it makes, how it makes its money. They dont know if it pays a dividend or makes money or pays you know, losing money. They have no idea. I see this all the time. People say should i buy more or cut my losses. I come back and say why dud you buy it and if you dont know, of course, you should sell. Ask yourself those same questions. Can you answer them . Do you know them . If not, you shouldnt be investing in that stock. Or shouldnt be investing in any stock until you do. Theres always good mutual funds. Can you tell me what it does and why you bought it. And give me say a three sentence pitch about what its good. If you cant, dont bother me and dont bother buying. Yourself going to lose yourselves big time money. Lets go to scott in colorado. Caller hey, jim, i have a question about price tar gets. When an analyst sets a target price how does that fit in my planning for evaluating stocks and when does that target expect to be fulfilled by the analysts . One of the reasons why im neutral is because these analysts as the stock goes down, they keep making their price targets lower and as it goes up they make them larger. It isnt that valuable. What i find valuable is what they think the stock is going to earn. And then we try to apply a multiple to it. So the key thing is the earnings estimates in the future. Thats why stocks trade where they do. Profits. And then we can figure it out on a case by case basis. Dont use the price targets. Steven in california. Caller hey, booya to you. Booya back. Caller i had a stock with a reverse stock split. Are they trying to make it more interesting for other companies or are they just trying to save money . No. Its a great question. What theyre trying to do is save embarrass. Citigroup did this. They felt a stock that was under 5 wouldnt attract institutions. They like to buy stocks over 5. It was a way to gusty it up a little. It doesnt help or hurt. But makes a stock more investable to institutions whether you think it should or not. Everyone needs the stock market. Everyone needs a Survival Guide to the stock market. And its a jungle out there. So the way were going to start is if you know what you own and can explain it to me, then you can buy more if it goes down. Mad money will be right back. Bulldog oooh bulldog mattress discounters 197 mattress Sale Television announcer get a serta mattress, any size, for just 197 each piece when you buy the complete set. The 197 mattress sale. Bulldog oh boy Television Announcer . Ends sunday. Mattress discounters female announcer youreduring sleep trains triple choice sale. For a limited time, you can choose to save hundreds on beautyrest and posturepedic mattress sets. Or choose 300 in free gifts with sleep trains most popular tempurpedic mattresses. You can even choose 48 months interestfree financing on the new tempurchoice, with headtotoe customization. The triple choice sale ends soon at sleep train. Sleep train your ticket to a better nights sleep welcome back to cramers stock market survival school. Im giving you your ged in trading and ba in investing. And your masters in what to do when the machines rise up. Kind of like terminator 2, judgment day. Look what happened in may of 2010. Maybe youll get your doctor rat in making money when everyone is losing it. We may not be able to control the amount of pain the market throws away but we can control the house of pain. How we deal with it. We can deal whether were prepared or positioned for the pain. So we dont lose more money than we should. Im going to explain the risks that you need to watch out for in order to guard and expand. Im talking about how you can deal with the risks that come from being a human being. Simply being human. There are many of them. If youre not careful, you could do more damage to your portfolio than any external force, any negative that takes down stocks. Basic investing mistakes can lead to losses. I want to make your portfolio safe to ensure youre in a position the make money. Not lose it no matter how broke or rigged the game may seem to you. I dont think it is. But i do not quibble with those who think it is. Its too hard. In a tough market you cant afford to make the easily avoided mistakes regular investors find themselves making all the time. Here are my rules. Immu niezing yourself against huge losses. Lesson number one is know what you own. Each stock requires time and home work. Got to be able to explain to me what it does and why you bought it. Never, ever buy stocks on margin, do not borrow money from your broker to purchase stocks. These are not homes you can live in if they go done. Its okay to take out a mortgage in that case. Its a piece of paper. And that can go down in value threatening your nest egg. The brokers always wanted to make a lot of money. In reality its a great way to wipe yourself out. You cannot take losses. Once you get deep in the red, the calls come in and cover what you owe. Its not safe. Nobody needs that level of risk. Nobody. I consider margin the equivalent of using in professional sports. Starts off great, et cetends ba. Lesson number three, well, its just so crucial i got to explain again. Never use market orders. Now when you pick up the phone and call your broker and tell him the buyer sells stock but dont name a price, thats a market order. What youre doing is giving that broker permission to fill your order at any old price the market gives you. So lets ask that. U i dont go to the market and buy this head of lettuce at any price. Would you do that . Ill take any price you give me. No, you would never do that. And you shouldnt do it with the much more expensive things called stocks either. Market orders are how people ended up selling proctor and gamble for 38 a share. When the machines took over and tumbled and nearly 1,000 points the flash crash in the time it took me to walk out on the set and sit there for a few minutes. With all the stories about investment banks, you recognize the broker may be a great and helpful person. His top priority isnt to get you the best possible price. He works for a brokers house. His job is commission. And thats how hes often paid. Thats why i dont have any conflicts here. I dont want your commission. Have i asked for fees . No. Thats why you have to trust me. You use limit orders. Its the easiest thing to do. Over time can save you a small for chul. Tell your broker the highest price and lower price. That way you will get your price or if the stock isnt there. Then the trade wont happen. Thats okay. You got to protect yourself. Always use limit orders. Not market. Never forget the lesson of the down 1,000 point debt. It can happen again and it wasnt bogus for those who used market orders. Those trades happened. They got hosed. I need you to make money on those down days. Buy stocks at your price. If you use limit orders rather than market orders, buy or sell, you will get hurt a lot less than others who dont know better. These are the first steps to making sure you survive a horrible market. Rather than getting blown out. After the break ill try to make you even more money. If energy could come from anything . Or if power could go anywhere . Or if light could seek out the dark . What would happen if that happens . Anything. The ca illac summer collection is here. During the cadillac summers best event, lease this 2014 ats for around 299 a month and make this the summer of style. Tonight were going back to school. Stock market survival school. When the market is in awful shape and broken, there are worries that the system isnt working correctly. We know it can happen even in outrageous bull markets. Every investor knows stocks sometimes go down. Nature of the game. Dont be in the game if you dont think that. There are times they go harder than others. At times when they go down relentlessly and the agony is unbearable. I am going over three lessons. Always know what you own, never use market orders, these are basic rules but basic because critically important. Essential to building and maintaining your wealth. I got four more lessons to help. From losing more money. First this is to the need to know what you own. It takes time, it takes home work. I understand. If you can give it a 15 minute overview. Much less, you might as well be g gambling. The only way you can feel confident is by doing the work and understanding the companies in your portfolio. That means its not safe for many homeowners to own more than 10 stocks at once. Many of you own far more than that. I did at various times. I can understand that. When you get above ten you run the risk of running your own mutual fund. Theres no good reason to own 30 stocks when 10 high quality diversified names will due unless youre a full time home gamer. Its like having a Part Time Job in addition to the one you have. Ten is just right. More than ten, youll start skimping on the home work and thats dangerous when stocks seem to go down a lot. When were in a bear market, its horrendous to have that many stocks. Dont own too many dollar stocks. I accept lower dollar digits. I mention them all the time. They help by making the market investing interesting. They allow you to keep your head in the game. While its safe, the emphasis is on the singular. Not more than that. As tempting, they shouldnt make up your whole portfolio. Theyre risky. You want to coal gates. Know Company Stock falls below 10 bucks for doing well. Hence, why i told that gentleman earlier why Many Companies like to do 10 for 1 reverse splits. It may seem like under 10 names have less downside than other stocks. Single digit stocks can go to zero, or more than one, you may just be gambling. Next lesson, this is one i beat over your head every wednesday but it is so critical. Im going to tell it to you again. You must be diversified. It dont cost you nothing but saves you money. I make that point in jim cramers real money. No matter how many times i say it though, i know many of you still too many of your stocks in the same sector. I cant believe after all these years why shouldnt you put all your must be in one hot sector . Why do you have to spread it around . When the hot sector could make you money . Because the biggest risk out there is sector risk. When some big bad event happens, one that can damage an entire sector, only some of your stocks will go down if youre diversified and others will go up. Same with the bank stocks in 2008 2009. When the market is getting killed day after day its important to have dividend stocks. What i call ahys accidentally high yields. Most people dont realize the importance. You know what, like i told you earlier, going back to 1926, 40 of the return from the s p 500 is coming from reinvested dividends. When you forego dividends youre giving up the gains over time to make from stocks. All the reasons becoming more compelling in a down market. Thats when they really give you that cushion. Yes, theyre even a trampoline. As the prices go lower, their yields go higher making them attractive to other investors and giving you a better return for owning the things. You can buy stocks safely on the way down. I cant emphasize enough how important that fact is. In a horrible market there are so few stocks you can feel confident buying, especially the accidentally high yielders, used to have small yields, but because share prices have gone down, the yields have become big and theyre one of the few groups you can feel comfortable with. Accidental high yielders worked better during the financial crisis. They still work. Whenever the market gives you these dif debit bargains. Those big dividends for company that is can afford them, well, they are bargains. Mark in my home stay of new jersey, mark. Booya, jim. Booya, mark. Caller do companies have to publish their dividend rates . Remember, what i care more about the price that you buy the stock at, not the price you do it with the dividend you do it with it. Its cheaper without it. Theyre not something you should worry about. What you should worry about is buying high quality stocks. A fantastic newsletter that is all this. Lets go to louis in california. Caller good, dr. Cramer. Thank you. Caller i have a question of diversification and risk. I watched your show for several years and newly retired. I followed your advice to buy a good company. It dips a bit. Every time i sell. I allocate the profit in dividends received as a return on my capital leaving the profit allocated remaining shares of the position. So now i have four stocks 60 to 100 owned with money and thats a profitable booya that is perfect. Can i help you . Caller heres the question. The other four stocks at risk that i have are diversified and balanced and most have some profit but some overlap the other stocks. Which is more important, diversification and balance of the whole portfolio or diversification and balance of those shares still owned by my capital . You know what im going to do, this is the first time i ever had this question. Im going to say that if youre playing with the houses money, im going to bless the diversification because youre not going to give it back. You can because you have already won. How about josh. Caller i was wondering the futures market . I hate it. I wont use it. I think people that use it are lazy and looking at how europe was and asia was. We trade stocks, not futures. Quite simple. Youve got more tools for your survival now. We noted too many stocks. We know limit the number of speculative stocks. Because they tend to trade together. Diversification is key and we know to focus on high yielders particularly in times of trouble to reduce your risk. In a world thats changing faster than ever, we believe outshining the competition tomorrow quires challenging your Business Inside and out today. At cognizant, we help forwardlooking Companies Run better and run different to give your customers every reason to keep looking for you. So if youre ready to see opportunities and see them through, we say lets get to work. Because the future belongs to those who challenge the present. All night i have been teaching you part of cramers stock market survival school. Going over things you can do to minimize your down side. Read the original sequester scares. I want to go further. In order to deal with increased risk from a market going up a great deal, you need to understand what those risks are and what might cause the next selloff and be familiar with forces causing your stocks to get hammered that you may not even know about. When the market corrects and you know its going to have to, you need to know why. You need to know whats hurting your stocks. Now we like to think when a stock goes up or down its because whats happening at the company. Companies that do well get well and companies that dont. If this is decline, the connection between the company and stock can be thin and youll see the Good Companies get ta