Wall Street Outsider

Options traders make money if both bear and bull markets. An advanced form of stock trading, it has the potential to reap considerable rewards in any market. However, with substantial rewards come substantial risks. Before venturing into the exciting world of trading options, it is best to become familiar with the various terms and techniques associate with options trading.

Before you begin trading, you will need to open a trading account with a brokerage firm. Normally, there are two kinds of accounts you may open. You can open a cash account, or you can open a margin account. A cash account allows you to use only the cash in your account to make purchases. A margin account allows you to use your holdings as collateral to borrow money to make investments. Obviously, if you spot a potentially lucrative investment opportunity, a margin account will allow you to take a larger position, but if things go wrong, you can end up owing the brokerage.

Now, it is time to familiarize yourself with a few terms that are unique to trading options. The first two define what type of option you will be trading. There are put options and call options. A put option gives you the right to sell the underlying stock at an agreed upon price. The call option gives you the right to purchase the underlying stock at an agreed upon price.

This agreed upon price is known as the strike price. This is a price that the underlying stock is to be bought or sold when the option is exercised. This price is agreed upon when the option is signed. The strike price has a significant effect on the premium that you will pay or be paid for an option.

The premium is the price that the right to buy or sell costs. You may have heard this term used in the real estate market when someone purchases an option to buy. This means they control the property until the expiration of the option. The option premium is normally determined by three factors: the volatility of the underlying stock, the expiration date of the option, and the strike price.

The expiration date is an extremely significant day. In America, the expiration date of an option will always fall on the third Friday of the expiration month. The option must be exercised before the expiration date. Once the expiration date has passed, the option is void.

These are just a few basic terms that you need to be familiar with before even considering trading options. There is much more to learn before you are ready to venture into the market. Many novice option traders begin by using practice accounts to perfect their strategies before risking actual assets.

Nasdaq is the oldest and largest electronic stock exchange market in the world and the second largest stock exchange overall (as measured by market capitalization). Only the New York Stock Exchange is larger. It was originally formed in 1971 by an organization called the National Association of Securities Dealers (NASD). The name stood for “National Association of Securities Dealers Automated Quotations”. In spite of retaining the original acronym in the name, the founding organization no longer owns it. It is currently owned and run by the NASDAQ OMX Group.

Nasdaq did not begin as a stock exchange. It began as an informational service which, as the original name implies, only showed stock price quotations (bid and ask prices). This alone was disruptive for its time as it helped reduce the price spread (the difference between high and low prices on the market), much to the dismay of brokerages who made a lot of their money on the spread.

Over time, the services it offered gradually expanded. Initially, most Nasdaq trading was done by phone rather than electronically. The 1987 stock market crash was a watershed moment which helped firmly establish it as an electronic trading service. During the crash, many market makers basically stopped answering their phones. In response, Nasdaq instituted the Small Order Exchange System, an electronic means to enter orders. Up until 1987, Nasdaq was still routinely referred to as the OTC (over the counter), which was the system it replaced. The crash was a sort of coming of age moment for the market.

Over the years, Nasdaq has continued to break new ground. In 1992, it cut a deal with the London Stock Exchange — the largest stock market in Europe and fourth largest globally — thereby forming the first ever intercontinental linkage of securities markets. Nasdaq is generally viewed as a force for change in a historically conservative domain. It is credited with making US capital formation more accessible to the global market and fostering world economic growth.

In 2007, this new fangled upstart of the world’s securities markets acquired the oldest U.S. stock market when it purchased the Philadelphia Stock Exchange, originally created in 1790. In its relatively short life, it has become a well established and respected player in the world financial markets. It has long styled itself “the stock market for the next hundred years”, a claim which no longer smacks of hubris.

Dividends are profits paid to shareholders in proportion to how many shares they own in the company. Mutual funds also pay dividends on the realized earnings of the fund. For publically traded companies, dividends are usually paid in the form of cash, though it can be paid by other means like the issuance of additional shares.

Unless you own a large amount of stock in a particular company or mutual fund (at least in terms of dollar value, not necessarily in terms of number of shares), a dividend check is not likely to be much money. In part for this reason, one of the best means to grow your portfolio and plan for your future is to put that money back — or, more accurately, never take it out — by participating in a Dividend Reinvestment Program, also known as a DRIP.

Since your dividend check is likely small and not really part of the regular budget, you probably will not miss it if you just never get it. If you sign up for a DRIP, the dividends get used to purchase new shares. Since the check is likely small, it will probably actually only purchase a portion of a share, something you cannot normally do. If you are on a tight budget, being able to purchase a portion of a share for a few dollars is a great deal. It allows you to further your investment goals without first having to save up enough to buy a full share.

If you have been given a gift of a few shares of stock (or won a few from the company for which you work, as happens occasionally), this is the perfect means to start investing a very small amount of money regularly, watch it grow, and start learning how the investment world works. If it is a strong company experiencing good growth, dividend reinvestment combined with stock splits can grow quite the tidy nest egg over the years, without putting a crimp in the family budget.

It can also teach you lessons from experiencing it firsthand that simply reading about it will never convey. The knowledge and financial wisdom gained will then pay dividends of their own for years to come. But these dividends will come in the form of making more informed financial decisions, seeing the value in taking advantage of even small opportunities, and planning for the future.

When trading Forex, stops are crucial to money management. Without them, you risk losing all of your account. If you are constantly monitoring your trade, you may be able to limit the damage, but it is bad money management, and in the end, you will lose more money than you gain.

The biggest secret to successfully trading Forex is money management. Most traders lose because they do not use methods to preserving their account. Before you ever place a trade, determine where you will place your stop order, also known as a stop loss.

When you place a stop order, it gets you out of the market if a trade goes against you. This limits your losses. Without it, the trade could run against you until you get a margin call, which can destroy your account.

Many successful traders recommend that you never risk more than five percent of your account. Accordingly, if you have a $10,000 account, you should not risk more than $500 on a trade. Therefore, set your stop order to get you out at a loss of $500 or less. That will leave $9,500 in your account. You can survive over 20 losing trades at this rate.

In addition to knowing where to place the stop order, you need to know what the profit potential is. Never place a trade unless you can make two to three times the risk. If you researched and determined your risk is $500, the profit potential should be from $1,000 to $1,500.

You can place a limit order to get you out of the market with a profit. As a result, if your profit target of $1,500 is met, the limit order would get you out of the market with that profit before the price goes against you.

You do not have to place a limit order if you are confident that prices can go in your favor for a longer period. In this case, you could use a trailing stop to lock in profits. If you placed your protective stop 30 pips below the price and the price moves in your favor, the trailing stop would stay 30 pips behind it until the price turned to meet it or you exited the trade.

Stops in Forex are vitally important. Never place a trade without that safety net. It may cause you to get knocked out of some trades early, but overall it will keep your account alive.

Preference shares must be better than common shares. Right? They have the word preference in the name. The answer is yes and no. Preference shares or preferred shares are a creation of marketing. They are no better than common shares, but they are different.

The two primary differences between preference shares and common shares are these. If the company faces liquidation, preferred shareholders get first claim on any liquidation proceeds after secured creditors. Second, preference shares boast a higher dividend than common shares. Preference shareholders also have priority when dividends are released. You will be paid first if a dividend is released.

This means that preference shareholders are not concerned about capital growth. They are concerned with income growth. Preference shares are issued by companies because they are preferable to taking out a bank loan. The issuing can alter the terms of their preferred shares. They might not be able to alter the terms of their bank loan. In return for supplying the company with capital, you gain a higher dividend than the current market rate. Companies will often offer preferred shareholders the opportunity to convert their preferred shares to common stock at a discount on a future date.

There are obvious drawbacks to owning preferred shares over common shares. Firstly, you have no voting rights. Companies are under no obligation to pay you your yearly dividend. If they declare they will not pay a dividend in a given year, you have no recourse. If a preferred stock is noncumulative, they are under no obligation to make up the lapse in the following year. If the preferred stock is cumulative, you will be paid in full when the issuing company decides to pay a dividend. Preferred stocks do rank above common shares in a company’s capital structure, but they are still behind issued bonds.

Preference shares are certainly an investment to consider, but they are not necessarily better than common shares. They are just different. The added benefit of priority over ordinary shareholders and the possibility of cumulative dividends do make this type of investment an attractive option. There is also the possibility of converting preferred shares to common shares at a future date. Preference shares are an uncommon investment instrument, and they are not generally issued during normal times. They are issued when the market has gone a bit sideways. This makes them inherently risky, but Warren Buffet bought preferred shares of Goldman Sachs during the banking crisis and saw a remarkable return. Like all investments, it depends on when and what you buy.

Futures trading is also known as commodities trading, and it has the reputation for turning thousandaires into millionaires and millionaires into thousandaires. To say the futures market is volatile would be an understatement. Unlike the stock and or bond markets, there are no underlying assets involved with futures trading. It is one hundred percent speculation. Only the FOREX market is comparable, and that market comes with its own unique set of rules and vocabulary.

Futures trading involves making a bet on the rise and fall of the price of certain commodities such as corn or coffee. The terms sell and buy do not mean that you are purchasing or selling a commodity. The term used is entirely dependent on the direction you think the price will go. When you sell a commodity, you are betting that the price will drop. When you buy, you are betting that the price will rise.

For example, if you were going to take a position regarding oranges, you would either buy or sell a futures contract in anticipation of the price rising and falling. You would buy if you thought the price of oranges would rise. You would sell if you thought the price would fall. Neither the buyer nor the seller of a contract needs to own any actual oranges, but there must be a buyer and a seller. Both buyer and seller must have sufficient funds to cover their potential losses in order to write a futures contract.

A farmer has an orchard full of oranges that will not ripen for months. He worries that the price may drop before he can get the oranges to market. He can sell a futures contract that guarantees that in three months he will be paid a set price for his oranges. The price he is paid is independent of the current market price. The buyer of this futures contract thinks the orange grower is wrong. He thinks the price is going to go up. Therefore, he buys the futures contract in anticipation of the price increasing. He hopes to sell the contract before the oranges are delivered.

The reason the futures market exists is to preserve the market’s liquidity. Those who trade futures ensure that the changes in price are small and manageable rather than large and catastrophic. A stable and orderly market is preferable.

There is money to be made in futures, but it is not a market to enter unaware. On the surface, it seems easy, but commodities traders spend months or years researching their particular market before making a play, and you should do the same.