How Does Stock Market Trading Work?

December 5th, 2009 at 01:18am Under Stock Market

Stock market trading is a popular way to earn money with unlimited earning potential when you completely understand how things work. And with a few basic how to’s, it can be easy to get started.
So What is Stock?
Stock is actually owning part of a company. Each share of stock stands for a small slice of ownership in the overall corporate pie. When a person holds more shares, he owns a larger portion of the company. Owning a greater portion of the company means bigger dividends are earned by the shareholder when the company profits.
About The Stock Market
The stock market is the forum where publicly held company stock and related financial instruments are traded. Financial instruments may include stock index futures and stock options. Stock market trading is the actual sale or purchase of commodities or securities in the stock market itself.
The Two Ways To Trade
Basically, there are two methods of stock market trading. The traditional way of trading occurs in an open outcry manner on the stock exchange floor of the stock market. Modern stock trading is conducted via electronic exchanges and all occurrences take place in real time online.
On the stock exchange floor, the stock market trading atmosphere is chaotic and noisy. The stock market is filled with hundreds of people gesturing, shouting and rushing around when the stock market is open. Stock traders are seen chatting on phones, entering data into computer terminals and watching the consoles closely.
With online stock market trading, computer networks are used as opposed to trading off the stock market floor. A large network of computers is employed to match sellers and buyers in the electronic market instead of using human stock brokers. Although this method is not as bustling and exciting as the stock market exchange floor, it is quicker and more effective.
How To Get Started
What is the first step to take when stock market trading? Whether a person decides to invest electronically or on the stock market exchange floor, the first step is to get an investment broker.
To start traditional stock trading on the floor, a person requests the broker purchase a said number of shares on the market. Once the request is made, the order department for the broker forwards the order to the floor clerk. The clerk then alerts a trader to locate another trader who will sell the shares the investor wanted. The deal closes when the two traders agree on a price with notification sent back the same way. Ultimately, the broker gets in touch with the investor to tell him the final price for the shares. The entire process may take awhile, based on the current market and stocks. After a few days, the investor will finally receive a confirmation in the mail.
Investing electronically is much faster and far less complicated. Computers match the buying and selling of stock in real time. Savvy investors have the distinct advantage of instant updates on stock trade happenings.

By admin

Writing Puts – An Introduction By Brad Castro

December 23rd, 2008 at 09:55pm Under Option Trading

Writing puts can be a great source of income. It can also be a great way to purchase stock at a significant discount. And the best news is that writing puts is a relatively simple process.

How Does It Work?

The official definition of a put option is a contract that gives the holder the right, but not the obligation, to sell 100 shares of a certain stock at a certain price by a certain date.

But a simpler way to think about puts is to consider them basically to be insurance policies. For example, if I own 100 shares of the XYZ Company which trades at $33/share, I can purchase a put option that gives me the right to sell my stock for $30/share anytime up to and before the expiration date of the option. Like all insurance policies, I have to pay a premium, and purchasing a put option is no different.

And why would I want to sell my stock for $30/share when it’s trading at $33/share? I wouldn’t, of course, but what happens if the share price really tanks? If the stock drops down to $20/share, my put option would give me the ability to sell the stock for $30/share. Sure, I’d be out $3 per share plus the amount I paid for the put, but I wouldn’t be down the full $13 per share that I would’ve had I not purchased the put in the first place.

In short, by buying a put I, in effect, have insured my stock at $30/share.

Become an Insurance Company

Writing puts simply places you on the other side of the trade so that you become the insurance company. When you write, or sell, a put you receive a cash premium in exchange for giving someone else the right (but not the obligation) to sell you their stock at a certain price by a certain date. If the stock stays above that price (called the strike price) you keep the premium and the put expires worthless. Ah, a successful insurance venture.

Of course, the stock might fall below the strike price, so it’s always important that you only write puts on stocks that you’re willing to own at the strike price selected. And it’s also important that you have the necessary funds to purchase the stock in case you’re assigned (i.e. the put holder exercises the option).

The Case for Writing Puts

If done properly and intelligently, writing puts has two distinct benefits:

1. Income Generation – As long as the stock remains above the strike price, you can generate a steady stream of income. You can treat the income like a special dividend and spend it, or you can accumulate it and grow your cash reserves so that you’re able to write even more puts in the future.

2. Acquiring Discounted Stock – Say a stock you like is trading at $42/share and you think it’s already attractively priced and you would be willing to own it yourself if it came down some in price. Let’s suppose you wrote a put on it with a $40 strike price and an expiration date one month away for a $2 premium (or $200 in cash since you each contract represents 100 shares of the underlying stock). Think about what you’re actually doing–you’re getting paid $200 to offer to buy a stock for $2/share less than what it’s currently trading at. And if you do get assigned? Factoring in the premium you receive, you don’t actually pay $40/share, you pay $38/share.

Conclusion:

Writing puts, like any kind of option trading, is not for everybody. And it’s not without risk either. But it may be worth your while to conduct further research to determine if the strategy has a place in your portfolio.

About The Author:

Brad Castro is a practitioner and promoter of Leveraged Investing, or option trading techniques and strategies designed to simulate successful value investing. Leveraged Investing has two objectives: to acquire stock in quality companies as cheaply as possible and then to squeeze more returns from those stocks once they’ve been acquired. Please visit http://www.great-option-trading-strategies.com for more information.

By admin

TRENDS IN STOCK MARKET TRADING

October 11th, 2008 at 08:45am Under Guest+ Option Trading+ Stock Market

Trade the trend for the trend is your friend is a popular slogan in the stock market trading. For an investor to profit in his or her stock trading efforts, such one must make a deliberate effort to learn and understand the trend trading strategy.

The index for evaluating trends in the stock market is the year low and year high of a stock. This index implies the highest price and the lowest price in which a share was sold or bought in the last 52 weeks .The up and down movement of share prices in the stock market follows a regular cycle. If the stock price goes up, it will definitely go down. Conversely, if it goes down, it will go up. All stocks listed in the stock exchange must as a matter of constancy experience their up and down moment, whether they like it or not. It is the character of the market. It therefore beholds that having an understanding of this strategy can create an astronomical profit for any investor.

It is important that an investor considers the price before he enters the stock market. Buying into a stock within the year high figure indicates that one is buying at a high price. Thus, negating the “Buy low”, Sell High” principle. On the other hand, it’s advisable that a potential investor buys into a stock when the price is “within” the year low in order to take good profit from such transaction.

To do this, create a table of stock(s) of interest against price(s) every week, and months over a couple of years. Detail study of the table will reveal a trend. That is, year high and year low that will follow a regular pattern. It is pertinent that after determining the best price to enter the market via the stock trend analysis, that we compliment it with an analysis of the present health of the firm for positive confirmation. Key index to look out for are PE ratio, Earning per share (EPS), Profit after tax, Quarterly Reports, etc. This information can be accessed readily via yahoo finance. Once done, the next step is to hit the google search box and look up all recent articles about the company in the press, recent contracted signed or revoked, takeovers, mergers, litigations, change in managements composition, insiders’ information; and any other report that can impact positively on the fortunes of any organization.

Trading the trend is a sure-fire strategy that can create obscene profit into your account. Once you get acquainted with this stock market trading tip, earning becomes easy and exciting.

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