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
Tuesday, April 29, 2008
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
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
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
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
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
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
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
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