Sunday, December 23, 2012

How To Be A Successful Investor In Stocks

When people buy stock of a company, the biggest misconception they have is that they are investing in one of the various investment options available, while the fact is that they are becoming one of the co-owners of the company. This investment option seems so tempting that people often directly take it on without any analysis. However, it takes a lot of effort for professional analysts to carry out fundamental analysis of stocks. This analysis gives an insight into the past performance and future potential of the company.

However, being a successful investor is also not rocket science. It just needs a bit of stock analysis and patience to meet your long term financial goals. To meet your long term financial goals through stock investing, you need to buy the stock at right price, wait for the time for it to appreciate, and then sell it out at the optimum time. Moreover, it pays you dividends along the way. Now the question arises, how do you do that?

Identify the right company to invest in, which will get you enough payback to meet your long term financial goals. This requires a bit of homework. You need to conduct the fundamental analysis of the intended company. Fundamental analysis involves the study of the earnings and growth of the company, its drivers, past performance, and future outlook..

The stock price is market-determined. It rises and falls everyday according to the current market conditions or the daily fluctuations in the economic conditions. However, it is the fundamental health of the company which determines its long term financial prospects. It is not always necessary that companies which perform well financially, also prevail in the news. The job of an analyst involves identifying such companies and looking at the long term performance expectations. Though, this won't guarantee continuous growth or 100% profitability, but such stock analysis will decrease the risk involved.

If we look at the daily price chart of the stock, the trend may indicate a direction. But it is not always advisable to track it daily unless you are a day trader. Stock prices are largely driven by market sentiments, and investor perception. Hence, they do not reflect the true worth of a company's stock. Fundamental analysis helps deduce the intrinsic value or true worth of a company. Apart from that, one should always keep an eye on the business cycle and the impact of competition affecting the company.

To become a successful investor in stocks, one needs to avoid committing some mistakes. One should avoid enthusiasm and not just keep buying the stock blindly. It is always better to first consolidate the position of your stocks before expanding or venturing into other sectors or stocks. Locking your gains will make sure that you are at a lesser risk. Sector analysis is a better way to filter out your trading preference and increase your earning prospects.

A stock's price showing an upward trend on a particular day doesn't mean that the stock will do well in long term too. This is the time, when you need to know the truth through fundamental analysis of the stock.

Wednesday, December 12, 2012

Online Trading Account With Lowest Brokerage

An investor who is new to the stock trading market will need to have an online stock trading account with a stock trading brokerage firm, because it is not easy to understand how and where to invest in a short period of time. Stock traders need to keep a close watch on the stock trading market regularly, gauging the performances of the individual companies as well as the overall sectors the companies belong to. These factors affect the rise and fall of the share prices, and hence the need to know when to buy or sell a stock. This comes as a reliable and convenient way for the investor to make effective decisions regarding his investments in the stock trading market.

An investor will need a demat account with a registered depository participant, which can be a bank or a brokerage firm, and a trading account with the brokerage firm linked to the demat account. The demat account will hold the stocks of the investor in a dematerialized or electronic form, unlike years back when the shares were in the form of physical certificates. The trading account will allow the stock trading, i.e. the buying and selling of stocks with the registered stock broker or dealer. Stock trading in India has grown very popular with more people trying their hands at it. And many of the leading private banks of India like ICICI Bank, IDBI Bank, HDFC Bank, SBI Bank, BOB Bank and Axis Bank are providing for the opening of a demat account and trading account together, along with a savings account.

The service charge rendered by the broker on the investor is known as the brokerage fee. And an investor interested in stock trading should find a broker who levies the lowest brokerage on him. In such a case, the brokerage fee will not eat up his profits, and the purpose of the investor to hire a broker in the very first place will be solved. An investor can choose from the type of brokerage account or broker as per his financial requirements. There are full-service brokers who offer extensive investment advice to their clients, but charge a very high fee for the efforts they put in. But usually, the online brokers are preferred by investors as their need of a secure platform for trading is fulfilled at a relatively lower price. The investor can also choose from various other factors, such as the variety of tradable assets, the tools used for analysis, or the speed of order execution and the extent of margin money, to decide on the type of brokerage account.

Hence the idea of getting an online stock trading account with a brokerage firm turns out to be the best only when it can provide its services with the lowest brokerage fees.

Thursday, November 29, 2012

The Calendar Spread Options Strategy - What Is It? How Do I Profit From Its Use?

Calendar spreads are one of the key non-directional strategies used by options traders to make money in any market. They are used in low volatility environments when a stock is not expected to move much in the next month or so (depending on the length of the trade) and/or when its options' implied volatility is expected to rise.

What are they?

A calendar spread involves the purchase of an option in one month and the simultaneous sale of an option at the same strike price in an earlier month, for a debit.

For example, let's say IBM is $200 on 1 February. We could purchase the April 200 call for $4.00 and sell the March 200 call for $3.00; a net debit of $1.00

Why would we do this?

The time decay on short term options should (usually, if the near the money) be higher than long term ones. Therefore we expect the March option in the above example to decay more quickly, widening the gap between it and the April options' values; and thus the value of the position.

For example lets say that IBM is still $200 on 28 February. The March call would be valued at around $1.75, all things being equal; the April call at $3.00. Hence the spread rises to $1.25. This is due to the March call falling by 42%, but the longer term April call only falling by 25%.

What are the risks?

The main risk is that the underlying stock moves too far up or down.

Notice that in the above examples we assumed the stock stays at-the-money at $200. And indeed calendar spreads are very profitable if they stay at the money.

Unfortunately the world isn't like that, and so let's look at the example above should IBM move to, say, $220 on 28 February.

Well our call options would both fall in value. The April one to $1.50 (rather than $3 in our at the money example). And the March one to $0.75 (rather than $1.75). Hence the calendar spread is now $0.75, a loss on our $1.00 original investment. The same effect works if the stock falls to, say, $180. A loss would ensue.

The reason for this is time value in options falls as a stock moves further away from the money. Hence any difference in time decay in absolute terms (and hence the value of the calendar spread) falls the further away from at the money the stock moves.

Why else would we do this?

The more subtle reason is volatility.

If we assume in the above example that implied volatility rises just after the original purchase; from around 15% to 25%, say. What would happen to our calendar spread?

Well, the April 200 call, originally $4.00, would rise to $5.50. And the March call from $3.00 to $4.00. Hence our calendar spread would rise from $1 to $1.50.

Therefore, one reason we would put on a calendar spread is if we believe implied volatility will rise.

The risk is, of course, that it falls.


Calendar spreads are a great way of profiting in low volatility 'boring' markets.

In future articles we will consider possible adjustments should the trade not go our way, and variations such as directional and double calendar spreads.

Sunday, November 25, 2012

Learn to Trade Options

Option trading can enhance your portfolio returns if used properly. Many traders use options as a speculative gambling adventure. Options are actually used for risk control and hedging. Professional traders use option systems as a risk aversion tactic.

Options are available on equities, exchange traded funds, currencies and commodities. No matter which assets you are trading, options can be used to enhance your position. An investment in time is required to learn how to use options but once you learn the basics the more complex aspects will come easy.

There are two kinds of options, puts and calls. You can buy them or sell them. The novice investor should stick to buying for starters. When buying options the risk is limited to the premium paid for the option.

If you buy a call it gives you the right to purchase the asset for the strike price selected on or before expiration. For example, if you buy a call on XYZ at the $50 strike price, you have the right to buy XYZ for $50 no matter what the actual price may be.

If you buy a put it gives you the right to sell the asset for the strike price selected on or before expiration. For example, if you buy a put on XYZ at the $50 strike price, you have the right to sell XYZ for $50 even if the actual price goes to zero.

The option GREEKS remain a mystery to many traders but they are pretty straightforward. They simply tell you how the option is expected to behave. If you want to be a good option trader then you need to learn the Greeks.

Delta is the ratio of the value of the option compared to the value of the asset. The delta of an ATM (at the money) call should be very close to +.50. This means that if the asset price increases by one dollar the option value will increase by fifty cents.

The delta of an ATM put should be very close to -.50. This means that for each dollar the asset decreases in value, your put option will increase in value by fifty cents. The opposite is true for an adverse price movement. Since DELTA is one of the GREEKS in option trading, I will discuss my view of the Greeks.

Delta is the most important aspect of option trading. An ATM call option may have a delta of +.5 which means for each $1 the price of the asset increases, the value of the option will increase by fifty cents. An ATM put option may have a delta of -.5 which means for each $1 the price of the asset decreases, the value of the option increases fifty cents.

GAMMA is the reason delta neutral trading works. Gamma is the rate of change of delta. Gamma is greatest at or near the money and is lesser deep in or out of the money. It is this increase or decrease in delta that make delta neutral trading work.

When you buy a stock you are making a linear trade. If the price of the stock goes up one dollar then you make one dollar. Option trades are non-linear. You can make more if the trade goes in your favor. You can lose less if the trade goes against you. This is the effect of Gamma.

THETA is the rate of change of the value of an option due to time decay. This tells you how much money you will lose (if buying) or make (if selling) each day due to time decay. VEGA is sensitivity to volatility which is very important. An increase in volatility can increase the value of your option. RHO is rate of change due to interest rates. It is a factor in option pricing.

When I am setting up a trade, DELTA is pretty much the only Greek I am interested in. I don't need the other values because I always GRAPH my trade and count up or down the chain ladder. I also do a quick VOLATILITY study. That's all I need (along with my technical analysis) to make a trade. I'm in the TMI camp. TOO MUCH INFORMATION! There is a lot to be said for keeping it simple.

Once you grasp the fundamental concepts of option trading, the other information can be added if necessary. Complex trades can be developed and simple trades will become second nature.Before trading options please read the publication "Characteristics and risks of standardized options", available from your broker.

Sunday, November 18, 2012

Three Tips For Penny Stock Trading

There are very few steps to start trading in penny stocks. Here are three important tips to get you going in the right direction by being smart with your money.

The money you will use to invest in penny stocks is money that you can afford to lose. Yes, money can be lost investing in penny stocks! Do not use the money that you pay your bills or need on an everyday basis. Penny stocks can be extremely unpredictable and although you might make a great deal of money it is also true that may lose everything. After you have built up a profit, you can re-invest your profits from past trades which will snowball your earnings.

The next tip is to make sure you get some knowledge about investing. This is without a doubt the single most important factor in determining whether your budding career as a penny stocks investor will be a spectacular triumph or a dismal failure. If you are a newcomer to investing of any kind there are various guides you can buy so get them and read every word. Do not spend any money until you have read these guides! These guides will help you get smarter with investing. They will not help you with specific decisions such as whether to buy a particular penny stock, or when to sell, but they will give you a good background on how it all works and are invaluable in building a good knowledge base.

The final tip is to not rush 'helter-skelter' into penny stocks without a plan! I repeat 'do not rush' head first into buying stocks. Before you invest any money, make an investment plan and stick like glue to your plan. This will give you discipline and will also help you organize your time and investments. Keeping things simple will result in less stress. Your plan should consist of the investments you are going to make, why and how much you are investing. Make sure you include your exit point which is the price you will sell your investment to take a profit or to prevent a big loss. How much time will you spend working with your investments each day.

Now that you have all the major elements in place you are set for the ride of your life; that is the world of investing in penny stocks. Remember that knowledge is the most powerful tool you have to make your penny stocks successful so start learning today. Take care of your money, and plan your investing.

Sunday, October 21, 2012

Stocks - Understanding the Risks

"Rule number one is don't lose your money. Rule number two is don't forget rule number one". (Warren Buffet)

Almost every year, a few penny stocks emerge from obscurity to make huge profits for their investors. Penny stocks which soar in value are often in "hot" industries; industries perceived as fast growing and offering great future potential. In recent years, "hot" industries have included mining, energy, health care, and high tech. Penny stocks can be extremely lucrative when they work out. However, the risks are very high. The vast majority of them fail for various reasons. Generally, playing penny stocks is more gambling than investing.

However, if you are determined to pursue the potentially huge profits penny stocks occasionally deliver and are willing to take the big risks; here are a few tactics I suggest for your penny stock portfolio.

1. Don't invest if your personal life is troubled. The market provides very expensive therapy.

2. Use a separate gambling account to buy penny stocks. This is money you are fully prepared to lose. It is money you will never need for your living expenses, family needs, emergency funds, retirement savings etc. Never mingle it with your regular investments or other accounts. Limit your gambling account to a tiny percentage of your liquid assets such as 1% or less.

3. Use stop loss orders religiously to help limit losses or protect profits. They can be a useful tool, however stop losses will not protect you if your stock loses much of its value or becomes worthless.

This is an example of how they work:

You buy ABC stock at $10 per share. You place a stop loss at $8. This means that if the price of ABC declines to $8, your stop loss order will become a market order and ABC will be sold at $8 or the best available price. However, there is NO certainty of the price you will ultimately get. In a fast declining market, ABC could sell for FAR less than $8. If ABC becomes worthless, your stop loss will likely be unfilled and you will receive nothing for your shares.

You can also use stop loss orders to protect profits if your stock rises in value. Some exchanges do not accept stop loss orders.

4. Never pyramid your profits to buy more stocks.

5. Let your winners ride. Raise your stop loss orders in an attempt to protect your profits. Don't sell just for the sake of taking a small profit.

6. Never buy penny stocks on margin (borrowed money).

7. Invest in companies based on simple ideas, products or services. As legendary investor Peter Lynch put it, "Never invest in an idea you can't illustrate with a crayon".

Friday, October 19, 2012

The Reality of Stock Trading As a Business

Internet Stock Trading

Internet stock trading is the next big level of the trading practice. It took how many years, and absolutely four centuries before the wonderful idea of trading conveniently pushed through and materialized.

Through the years, the systems for market transactions have improved a lot. There are practices that were eliminated, and several others were greatly and significantly modified.

All these because the system and the whole practice needs to be improved and needs to be boosted significantly and rapidly to cope up with the rapidly changing times and economies.

Thus, markets of today are truly the improved and modified versions of the stock markets of the yesteryears. No doubt about that.


Everything is going through a lot of changes. There are new and emerging technologies that are integrating into the current ones.

Most business transactions and systems are also being influenced and affected by these integrations between the technology and the business transactions.

One particular and clear example of such is the online stock market. The market is already interactive and active trading itself, but when it became online, the possibilities and potentials further boosted and sprouted.

Internet stocks make up for more convenient and adjusted stock market trading transactions.

Now, the trader and investor need not physically go the market to spend some minutes or hours trading their stocks. Now, even if they are still in bed, taking their lunch, watching the television, playing golf, or enjoying the out-of-town sights, they can still connect and buy and sell their stocks and shares.

That is the advent of the Internet. Through the years, the Internet has further improved. It need not cable wires now to be accessed. Internet is accessible now through Internet-service providers' wireless facilities, through satellite or through other and emerging technology like the Wi-Fi and the longer range version, WiMax.

Trading via the Internet

There are portals and online sites that facilitate for convenient and effective trading online of stocks and equities.

As mentioned earlier, these sites are provided with the necessary tools and software that would enable the distant stock market investor to make buy and sell transactions for stocks.

Trading through the Internet need not be hard and complicated now. Many of these Web sites are so user friendly, that sometimes you would find that it could be harder to run the Excel program than run the online stock market trading portal.

The features are also very awesome, that for sure, you would hold your breath and discover a lot of new programs and commands for yourself.

Get yourself a copy of these software, which are widely and easily accessible in the market today. Enjoy the thrill and advantage of the emerging technology and trend called the Internet.

Saturday, October 6, 2012

Why Should I Learn to Trade Options?

So you're interested in the market. Know a bit about a few stocks. Even invested in them. So why should you learn about options; aren't they for the professionals? Aren't they dangerous and complex? Shouldn't you stick to what you know?

Well many of us would say that it's traditional stock investing that's complex and dangerous. High frequency trading dominating trading volumes with one firm's algorithm battling another's, usually at the expense of the average retail investor; prices driven as much by offshore events as by company value; and regular wild intra-day swings all contribute to the current difficult trading environment.

However, at the same time, the actual process of trading has become much easier. Markets previously open only to professionals - derivatives, forex, offshore markets etc - are now available at the click of a mouse, at a reasonable commission, to anyone with a computer. So how to take advantage of this increased freedom, profitably?

Well, I'd suggest options are the best, most flexible, market available to the non-professional in today's environment. Why? Well, what's difficult about traditional investing is its restriction on 'betting' on the upwards direction of a stock; success is defined by picking those stocks that will rise.

Even if you choose a good company, buy it at an undervalue price and constantly monitor its performance - in other words you are a good value investor - it only takes a week of bad news from Europe or lower than expected US employment numbers or some other external shock for the stock to fall. There's nothing more disheartening that seeing your well researched investment in the next Apple, say, be somehow derailed by a shock on the Portuguese bond market (or some other such seemingly irrelevant piece of news).

So much for value investing; what about short term/day/technical trading? Many do make good money from the likes of trading technical support and resistance, the short term effect of news events such as the FOMC meetings or even scalping the forex market. However you need a level of training, knowledge and several months, if not years, of losses before you can find a reliable edge. I'm are also rather sceptical of some of the more esoteric methods touted as the holy grail of such approaches (a Head and Shoulders Fibinacci Elliot Wave anyone?).

Which leaves options which are, indeed, often dismissed as too complex, with a requirement for a high degree of mathematical sophistication, for the average investor. However I'd argue that options are actually the ultimate flexible, well, option for expressing a view on a wide range of expected market outcomes. With perseverance and proper assistance I believe any trader can do well.