Tuesday, April 29, 2008

Covered calls VS Dividends

There are 2 great ways to pull out monthly income from the stocks you own. These are covered calls and dividends. If you are going to hold a stock for a long period of time you would like to be pulling money from your stock both ways.

If you can’t pull out money both ways which way would be considered the better income? Let’s look at that for a second.

A dividend is when the companies pay you out money for owning their stock. They are relatively easy to obtain. The only thing you have to do is buy a stock that has dividends. The only problem with this is that in order to make a good income out of dividends you need to have a huge account.

Covered calls take a little more effort. Your money comes from other investors who are willing to buy your stock at a certain strike price in the future. For this right they pay you a premium. This can be a little trickier because you want to sell a strike price that you do not believe your stock will reach by expiration, but close enough to the stock’s price that you will get a good premium.

Some traders who do not care about the long term growth of their stock may actually choose to sell a strike price that they believe a stock will be at by expiration. This way they can pull out a profit from the premium and a profit from the stock.

This can be worth the extra effort. Between the two covered calls have a higher return rate. Where as a dividend may pay you 3-5% annually a covered call may pay you 3-5% monthly.

Many traders will prefer to trade covered calls because they are relatively consistent. Like dividends Covered calls can bring monthly cash flow on a consistent rate if you do them right.

For more information on how to trade the stock market visit http://www.stocks-simplified.com

Monday, April 28, 2008

Making a living by trading

Making a living by trading can be a great experience. Some see trading as far too dangerous. Others see trading as a great way to make money. And still others do not even know that it is possible to make a living by trading.

It is possible to make a great income from the stock market. There are many advantages to trading as opposed to other professions.

Trading will often give financial independence. Many traders have the ability to generate huge incomes from very little effort. Some traders may look at their portfolio for only half an hour a day. Giving them time to spend the rest of their day with their family or whatever else they want to do.

The major disadvantage to trading is that it is considered to be risky. Even though you can generate huge monthly incomes from time to time there are also times when you will lose money. Many traders will have losing months every now and then.

That is why investors will develop systems that will make money in the long run. Most traders will overlook the losses that they might encounter by knowing that overall their system is a money making system.

Because every trader will experience consecutive losses during times it is important for them to use proper risk management. Professionals will not risk more then 2-5% of their account on any 1 trade. That way they can still experience long sets of losses while making money in the long run.

Another thing they will tell you is you need to have excess profits. If you need $4,000 a month to live comfortably you don’t want to retire when you start making $4,000 a month, because unexpected losses will occur. A rule of thumb is you do not want to become a professional trader until you can make your desired 1 year income in 3 months or less.

For more information on how to trade the stock market visit http://www.stocks-simplified.com

Saturday, April 26, 2008

Not many people realize the dangers of dividends. They believe that shopping for stocks that pay out high Dividends is the best way to make money month after month.

The average person will look for stocks with high dividends. It doesn’t matter if it is a good company or what the price is doing.

The problem with that is because in order to invest successfully a trader must know something about the stock that they are investing in. Let us look at an example.

Stock A is trading at $40 but they pay out $.5 in dividends every 3 months. The only problem is that it has been in a downtrend for the last 6 months. Stock B is also trading at $40. It has been in a very nice uptrend for the last 6 months. The stock is strong; the only problem is that they do not pay out dividends.

Most beginning traders are likely to pick Stock A. They see it as a nice way to pull out income from their stock. Most professional traders would likely pick stock B. Because the stock has been in an uptrend it is likely to continue going higher. Likewise Stock A is likely to go lower.

After a year the buyers of Stock A made $2 or 5% return from their dividends. They accomplished in making an income. Stock A however is now trading at $24. This is because it was a weak stock to begin with. They may have only paid out dividends to get people to invest in their company.

The owners of stock B however didn’t get any income from their stock. They were however rewarded in buying a strong stock. The stock they once bought for $40 is now trading at $120. They made a 200% increase from this trade.

Most traders will make money by investing in high quality stocks. They do not care if a company is paying out dividends or not.

Now that is not to say that it is wrong to buy stocks with dividends. That just should not be the reason someone buys a stock. An extra 5% income from dividends is not going to make much of a difference anyway.
For more information on trading the stock market visit http://www.stocks-simplified.com

Wednesday, April 23, 2008

Why not to bottom pick

Too many traders don’t know why not to bottom pick. Not only that, some of these traders actually think bottom picking is a good idea. This is never the case.

It may be tempting to bottom pick. After all who wouldn’t want to buy a stock when it is at its lowest and sell it when it gets to its highest. The whole buy low, sell high ordeal.

The problem with bottom picking is that it is extremely hard to tell when a stock will make a bottom. The majority of stocks that have been going down in the past will probably keep going down in the near future. That is why most professional traders tell you not to go against the trend. Any successful attempt to find the bottom was probably more luck than anything.

The other thing people will try to do is to get into a stock after a crash when it starts to rally. BIG MISTAKE! Falling stocks will typically rally every now
and then right before they crash again. In fact successful traders will consider sell rallies during a bear’s markets good practice.

What you might want to consider is not buying falling stocks but shorting falling stocks along with buying stocks that keep going up. This way you are not expecting the stock to do anything other then what it has been doing.

Also instead of picking the exact bottom it may be beneficial to wait for the stock to stabilize and form an uptrend again before buying. This may lose the investor the opportunity to get in when the prices are at their lowest but the benefits of profiting more often will outweigh the potential profit you may have missed out on.

For more information on trading the stock market visit http://www.stocks-simplified.com

Monday, April 21, 2008

How options are priced.

Understanding how options are priced can greatly help you profit in today’s stock market. One of the biggest misconceptions about options is that they are 100% related to the stock’s price. This is not true, it is possible to buy a call option on a stock, the stock’s price goes up and the options price goes down.

That is because there are 2 different parts of an option. The first is called intrinsic value. This is simply the difference between the stock’s price and the options price. So if we buy a $90 call on a stock that is trading at $98 the intrinsic value is $8.

It would make sense for that option to be priced at $8. What you will find however, is that the option will be priced above its intrinsic value. The call might cost $9.5. The other $1.5 is the time value of an option.

This value gets its price based on how many days are left before the option expires. The downside of this is that as time goes by the lower the time value will go.

So, if that stock stays at $98 for a month the option price will have gone down even thought the stock’s price hasn’t changed. The time value will have probably gone down a lot by that time.

To make money on an option the stock must go up faster than the time value decays. Slowing down the decay of an options time value is just as important as finding a stock that is heading up. There are a few ways to do this.

1. Buy more time. Obviously an option 3 months away will decay at a slower rate than an option that will expire next week. Most professional traders will buy more time than they think they need to avoid time decay.

2. Buy an option with a lower strike price. The further in the money you buy an option the less time value and more intrinsic value it will have. Unfortunately the more in the money your option is the more you will pay for this option. But It helps to lessen time decay.

For more information on trading the stock market visit http://www.stocks-simplified.com

Saturday, April 19, 2008

Timing the market vs. buy and hold

There are two different types of traders out there. Those that try to time the market, these trades try to find the absolute best points in which to get in and out of a stock. The other type of traders is the ones who buy a stock and hold on for the long term. These traders believe that the markets may go up and down, but in the long term they go up.

So which trading method is better? If we had a contest right now, timing the market vs. buy and hold, which method would be the best way to pull money out? Of course everyone has their own biases on this subject, but let us examine it.

Investors who buy and hold buy long term companies in hopes that they will eventually go up. It helps to avoid all of the market volatility. When stocks go down you don’t really care because you are in the markets for the long term.

The bad part about this is that the markets do go down. In a perfect world where stocks just go up day after day buy and hold would be the undisputed best way to make money in the market. Because they do go down a buy and holder is not only losing money during crashes by keeping their position, but they are also missing opportunity.

If the markets go down 30% in a year is there a way to make money? If the market is moving there is always a way to make money. This is what gives market timers an advantage. Not only can they making money when stocks go up, but they can also making money when the markets fall. A buy and holder on the other hand will only make money when the markets go up.

It is true that a market timer has a much greater profit potential then a buy and holder, but did you know it could also be safer, if you do it right? That is right timing the market in some cases can be safer then buy and hold.

There are 2 major reasons for this. First, one of the biggest misconceptions is that if you buy a stock and hold it you will eventually make money. This is not true. Some stocks just go down, and down, and then bankrupt. You could lose money waiting for these stocks to come back.

Even if you diversify there is no guarantee that you will make money. The SPY is regarded to be a good market average. It is also said to go up 10% every year on average. But this is an average after many years.

If you would have bought the SPY in 2000 you could have paid $139 for it. At the time of this writing in 2008 the SPY is trading at $138.48. You would not have made money by simply holding it. In fact you would have lost $.52 after 8 years of holding. Clearly you would have to hold onto this stock for much longer than 8 years to make an average of 10% a year.

So let us say that you have 50 years to wait. 10% a year is pretty nice so you decide to buy and hold the SPY. The only problem with that is that you do not know that the SPY will go an average up 10% a year.

Could it? Probably it has in the past. Then again there is a famous saying, “past performance does not guarantee future results.” The SPY could go to $200 it could go to $50.

Market timers could make money ether way but buy and holder investors will only make money if their stock goes up. This makes timing the market not only have a higher profit potential but also could be safer if you trade it right, when compared to buy and holding.

For more information on trading in the stock market visit http://www.stocks-simplified.com

Wednesday, April 16, 2008

Should you use options when trading?

Options are very powerful investment vehicles. They offer a way to get higher leverage from your money in the stock market. To understand if you should use options you should first understand what options are.

When you buy an option what you are actually doing is buying the right to do something. Either buy a stock at a given price or sell it at a given price. There are 2 different types of options.

1. Call options give the owner the right to buy a given stock at a given price by a certain date. For example if you buy a January $80 call on stock XYZ you would have the right to buy the stock at $80 by January no matter what price the stock would be at.

2. Put options are the exact opposite of that. They give the buyer the right to sell a stock at a certain price by a given day. An example of this would be if you buy a January $80 put option on XYZ you would have the right to sell it at $80 by January.

The benefits of options are that they offer a way to make huge returns on your money. If you buy a stock that goes from $100 to $120 you would make 20% off of that trade. However if you bought the $100 call for maybe $5 you would have made at least $15 or 300% off of that trade.

The flip side of that is that you also encounter large risk when you deal with options. If that same stock went to $90 you would have had a 10% loss in your stock and a 100% loss in your option. That would have given you a loss that most people could not stomach.

The large risk of loss in options is why you should use proper risk management when trading with them. Never risk more than 2% on any 1 trade. That way even if you suffer a 100% loss in your position it is only a 2% loss in your portfolio.

Also if you are a strict option trader you should never trade with your entire account at once. You may have many option orders open at once but the majority of your account should be in safer investment or in cash.

These rules may limit the potential profit an option could make you but they also limit your loss. If you don’t limit your loses with options chances are your account will suffer. Options can be beneficial to you but only you can say if you can take the high risk high reward scenario options offer.

To learn more about options visit http://www.stocks-simplified.com/options.html

To learn more about trading the stock market visit http://www.stocks-simplified.com

Tuesday, April 15, 2008

what it means to be a great trader.

I bet you are wondering what it means to be a great trader. How can you go about becoming one. Well let us look at what it means to be a great trader.

As a trader your overall goal should be to make money. No big surprise there. But just how you go about this process will determine how successful you will be at this.

The first thing you must be able to do is to develop your own system. This should be a list of strict rules to follow. If you do not have the system written down in strict entry and exit strategies you could run into problems later on.

Once you have a strict system you must paper trade and back test it to make sure that it actually works. If it is working for you that is great. You may want to start trading with real money.

If you do trade with real money you are going to have to realize that there will be wins and losses for every system. You will have t be comfortable with losing money now and then. You must have faith in your system.

This will help keep the emotions out of your trading. However if you do experience a large run of losses you may want to stop trading and figure out why. Maybe your bullish system does not do so well in a bearish environment or vise versa.

In this situation you can both pull out and not trade when the markets are bearish or you can develop a bearish system for when the markets are bearish.

For more information on how to trade the stock market visit http://www.stocks-simplified.com

Monday, April 14, 2008

Traders VS investors, what is the difference and why should you care?

There are 2 different types of stock market experts out there. These are the traders and the investors. So what is the difference? Well the simple answer is that traders look for short term profits while investors look for long term profit.

The investors are the ones who try to find a group of high quality companies. They try to find companies that are underpriced and have the potential to grow in the next few years.

The overall goal of this is to put their money in these high quality stocks and then let it sit for years. By the time they want the money it should have grown quite a bit.

This is a safe way to invest. After all in the long run stocks go up. The S&P goes up on average 10% a year. If you just want your money to grow for 20 years long term investing in good quality companies can certainly help.

Investing in the long term can help weed out stress from short term volatility. You don’t care what happens to the stock in the short term because you are in for the long term.

The disadvantage of long term investing is you will miss ut on a lot of opportunity. For instance say you buy a stock for $46. Then a market crash happens, the stock goes down to $27 and when the economy recovers it goes back up to $50. You look at this like a good trade because you bought it at $46 and now is at $50. You made 4 points.

However you missed out on bigger moves. The stock moved 19 points down and 23 points up. That was 42 potential points you missed. Now you will never be able to get all 42 points but you can get the majority of them.

This is the goal of a trader. They are in the market to make money when the stock market goes up and when it goes down, and hopefully make more than a long term investor can.

Because traders are in the business of making money weather the stock market goes up down or sideways trading can often lead to consistent monthly cash flow. Unlike long-term investing which will typically only lead to gains after years in the market.

One of the biggest misunderstanding between investing and trading is that investing will lead to bigger gains in the long term. This is simply not true. Because of compound interest a short term trader can often lead to larger long term gains then an investor.

Most successful traders make trading decisions based on technical analysis rather than fundamental analysis. This is simply detecting patterns in the stocks that can lead to predicting price movements.

To learn more about trading in the stock market visit http://www.stocks-simplified.com

Friday, April 11, 2008

Should I use a broker?

Should you use a broker? Do they actually help you pick the “best stocks”? Probably not. In the old days only those big professionals knew how the stock market worked. The rest of the people barely understood what a stock was.

During this time a stock broker was very much needed. They kept people from making foolish mistakes with their money.

Today information about trading is all over the web. A search for “learn to trade the stock market” brings up over 400,000 results. With all this information around the web anyone with spare time can learn trading techniques.

Whoever has the time to learn and practice their trading will find that this huge “complicated” stock market can be really quite easy. There are no big mysteries that only brokers know about trading.

In fact using a broker to give you trading advice may actually hurt you. There are a couple major reasons why using a broker for advice can hurt your portfolio.

1. There is no guarantee that the “expert” broker is really an “expert”. You don’t know them; you have never seen their trades. It could be that the broker you are getting advice from has never made any real money trading stocks. Maybe they blindly put all their savings in random mutual funds and hope for the best you don’t know.

2. You need to follow your own rules. Ok so we will say that your broker does know a thing or two about the stock market. Should you take their advice now? No. Let us look at this example. You talk to your broker about stock $XYZ. They said that they like the stock. So, you buy it.

You don’t know why you bought it. What your target is or your stop. Maybe he liked it because he heard good news but bad news comes out the next day. You simply will not trade the stock the same way your broker does.

3. Nobody cares about your money as much as much as you do. When your broker gives advice it may be different then what he himself would do, why because he isn’t attached to your money. It will not affect his life if you are successful.

Maybe he will tell you to stay in a stock after a large down week. He uses his theory that stocks are a long term play if you hold onto it, it will eventually go up. What he doesn’t tell you is that if that was his money he would cut his losses short and find a better trade.

There are many reasons why you should not use a broker. When it comes to investing it is much better to find stocks based on your own research and experience.


Thursday, April 10, 2008

Mechanical trading VS Discretionary trading

Mechanical trading VS discretionary trading, which one is the better system? These are two different ways to trade the stock market. They each have strengths and weaknesses. First let us examine the difference.

Mechanical trading is trading with set buy and sell signals. When the stock does this, and this, and this you have to buy. When it does that, and that ,and that you have to sell. This system should be back tested. You will want to make sure that the system actually works before trading with it.

Many traders will start off by using this system and then switch to a discretionary system once they gain market experiences. This system incorporates fundamental analysis as well as interpretation into a stock. They no longer set rules exactly but now combine rules with their expectation of the company itself.

Trading with a discretionary system has many strengths when compared to mechanical. Since it incorporates Fundamentals into trading A discretionary trader may already have insight to what a company is likely to do beyond what technical’s will tell you. This gives the trader more vision when trading.

Another advantage it has is its ability to adapt to any market conditions relatively fast. This is untrue for other methods. While a mechanical system may work very well during an up trending market it may work terrible or even produce a loss during a sideways trending market. This could lead to delays. During these times you may experience a set of consecutive losses.

So does this mean that discretionary systems are better than mechanical? No, mechanical systems have many benefits. They can be just as profitable as discretionary systems can.

Mechanical systems are based on following strict rules and back testing. Any trader using this type of system should understand its greatness and its flaws. That is more than you can say for discretionary.

When you trade discretionary you do not know that your system will work for certain. There is no way to back test that type of trading. It could be that your way of trading doesn’t work and you will not know it until you lose $1000s of dollars.

Another major reason why using mechanical systems can be great is that it takes the emotion out of trading. You simply buy when your rules tell you to and sell when your rues tell you to. A discretionary trader cannot do this.

Because they have no set of rules, they have to interpret the company to help them decide what to do. This could often lead to emotional trading which could result in losses.

There is no way to say that 1 system is better than another. They each have flaws and advantages. I will say this however. When you are starting off it is much better to start with a mechanical system. You do not have much market experience and as such will not be able to interpret company fundamentals.

For more information on how to trade the stock market visit http://www.stocks-simplified.com

Monday, April 7, 2008

Breakout trading

Break out trading really can be one of the most profitable ways of trading. Traders have made millions thru breakouts. . It’s easy to do too; this is a step by step procedure that successful breakout traders do.
1. Find an uptrend. The First thing a trader must do is to find an uptrend. This is simply a stock that is making higher highs and higher lows. This is very important; you must trade with the trend of a given stock.
2. Most of these stocks will hit a top. Up trending stocks will often hit a resistance level. This is a level at which the stock hit and came down. For instance if a stock hits $80 and comes down that would be its resistance level.
Sometimes an up trending stock will get stuck between 2 levels. For instance let’s say after the stock hit $80 and came down it hit $75 and came up. Then the stock bounced back and forth between $75 and $80. This is called consolidation.
3. After you find an up trending stock that has hit resistance you wait. It will most likely break resistance at some point. When it does it is giving us a signal that this stock is going to new highs. A person who trades breakout would buy it at the break. The old resistance of $80 now becomes support.
4. After you buy it you would want to place a stop under the old resistance level just in case it comes down. You wait for the stock to move up. When it moves up you raise your stop. For example if the stock moves to $90 you might want to place your stop at $86. Eventually the stock will come down and you will get stopped out. The difference between what you bought the stock for and what you got stop out at is your profit.
5. The only tricky part about trading breakouts is deciding where to place the stop when the stock moves higher. There are many different approaches to this. Some traders will have a trailing stop so that the stop is always a certain percentage under the stock. Some traders like to manually set a stop.
Everyone is unique make sure you paper trade to find out what works best for you.

For more information on how to make money in the stock market visit http://www.stocks-simplified.com