Online Stock Trader

Archive for April, 2009

As a stock market investor you would know that buying a stock for a particular company entitles you as the investor partial ownership in the corporate entity that issues the shares. To put it another way you are purchasing an “equity” participation in the company.

You will find that the best part of the US stocks traded and listed in the stock exchanges are known as equity securities. Trading in stocks is pretty simple. You make your selection, buy the stock at the listed price and then sell it if the value increases if you choose to do so. You can also earn dividends from the company while you own a stock.

This article is about helping you with Learning Options Trading. Time to learn just what they are? To make it simple, an option is really just a contract.

The difference with a stock and a stock option contract is that the purchaser of a stock option is that they do not take ownership of anything. An option contract gives the right to its owner to buy or sell the underlying financial instrument on which it is based.

The type of options most commonly referred to in financial circles is known as “equity options”. You may be interested to know there are different expiration dates for the options. The “regular” options can have expiration dates up to 9 months from the time of issue. There are also options known as LEAPS. They can have expirations of upwards of three years.

Now lets dive into a bit more detail about an option contract. Equity options just like stock are classified as securities. To get more specific equity options are called “derivative” securities. If you don’t know what that means it is simply that the value is in part based on, or comes from, the value of the particular underlying stocks.

Due to the fact that equity options are securities it makes them tradable items on any of the exchanges in the USA that list equity options. If you are looking to trade equity options if should come as some comfort to you that exchange listed equity options are overseen by the Security and Exchange Commission (SEC).

The process of stock trading has of course evolved a lot over the years as technology as developed. In the early part of the 20th century you had to physically visit a stock brokers office or trading room to buy and sell stocks.

When the postal mail became into common use you could then buy and sell stocks by mailing a letter to your broker, of course today nobody would dream of doing either of these.

Today the most used method of trading is either using the telephone or stock trading online. When using the telephone to trade stocks you can still do it by speaking to a broker and giving them your clear instructions, or you can do it all yourself by using some form of menu system using the digital key pad.

But by far the most common form of trading is done online, so what do you need to know about stock trading online?, more than you may think!

Here are some points that you may not have considered:

1. Virtually every broker can do stock trading but what about options, Forex and futures?. While you may not be interested in trading either Forex or futures it is quite likely that at some time you will want to trade options online, even if it is just covered calls. Make sure that your chosen broker allows you to trade all the markets that you want to.

2. Of course the fee’s charged by your online broker is an obvious point to check, the fee’s can vary a lot and if you are doing hundreds or thousands of trades a year it can add up to quite a lot of cash. Did you know that you can just call up your online broker and ask for a reduced commission charge?, yes you can, I’ve done it. Of course they don’t advertise it but if you do a lot of trades they will want to keep your business.

3. Have you planned what you will do if you are in a trade and your internet connection goes down for any reason, it could be a power failure, problems with the internet or your PC crashing?. If you are day trading you will want to telephone your broker and manage your trade, probably you will just want to close it. How will your broker deal with your call, will they answer quickly, will they look at charts for you and describe what is going on?. Make sure that your broker has good telephone support.

4. Are your trading funds safe?, make sure that your broker is a member of SIPC, the Securities Investor Protection Corporation, which protects against losses caused by the financial failure of the broker-dealer, but not against losses resulting from depreciation in a security’s value. Usually trading accounts are protected by the Securities Investor Protection Corporation (SIPC), up to $500,000 (including up to $100,000 for cash claims).

Whatever you decide to do, before trading stocks, options or anything else make sure that you get a good trading education by reading the best trading books that you can.

Risk tolerance is crucial for the stock market for beginners crowd. When you begin to understand how to invest in the stock market, you’ll start to see that each person has his or her own risk tolerance level , which should be taken into account. The investment professional you choose must know this so he can assist you with finding out what your risk tolerance might be. Then, that professional should assist you by researching which stock market investments suit your risk level.

It’s a commonly believed misconception that “risk tolerance” refers only to how you feel about risk.Nothing could be farther from the truth. There is a lot involved in deciding your own risk tolerance level, and emotions are only a piece of the overall picture.

Determining your risk tolerance, with regards to stock market investing basics, requires awareness of multiple factors. One is that you have to know how much money you have available to invest, and the other is that you are thoroughly aware of what you are trying to achieve financially. As an example, if you plan to take retirement in 12 years and you haven’t even started saving for retirement yet, you will need to sustain a high risk tolerance and do some aggressive investing to reach your financial goals by the time you want to retire.

On the other hand, If you start investing your money for retirement while you’re still in your early twenties, your stock market investing risk tolerance will be low. Getting into the habit of investing early in life will create a situation that means you can grow your money slowly with less risk. When you combine this with what you know about your emotional reaction to investing, the proper investment formula for you will be revealed. It’s hard to ascertain this for yourself, so experts recommend that people use a dependable professional who can expertly assess you risk tolerance and assist you with investing for retirement.

Understanding your personal risk tolerance will help you find your own investment approach and help you and/or your broker choose investments wisely. Even though there are myriad investment types, investment styles come in only three types – and those three styles tie in with your risk tolerance. Those three styles are called aggressive, moderate and conservative. But I will save the explanation of those for another article. Those will be clarified in a future article.