Tag Archive | "investing advice"

Trading Call Options

Trading Call Options – What Is A Call Option?

Trading Call OptionsTrading call options is a powerful trading tool that any stock market trader or investor should consider to give them an advantage when trying to profit in the stock market.  Trading call options is not as simple as buying and selling stocks because making money holding a call option requires the underlying stock that the call option is based upon to go above a specified price (strike price) before the option expiration date.

An Option is a financial product that is comprised of a contract to buy or sell a specific amount of the option’s underlying instrument (which is a stock or commodity) at a specified price on a future date.

An Option contract to buy a specific amount of the option’s underlying instrument at a specified price on a future date is known as a Call Option.

Trading Call Options – Call Option Trading Strategies

There are a number of trading strategies associated with trading call options.  Since call options have an expiration date, timing is very important when considering the use of call options in a trading strategy.  Stock market traders and investors use call options in their trading and investment strategies for a variety of reasons, including:  speculating that a stock is going to make a move higher, purchasing a long position in a stock via options at a fraction of the price of actually purchasing the stock, and to protect the downside risk of buying a stock, if the trade does not work out and the stock falls in price.

A trader or investor buys a call option to profit from an anticipated move higher in the price of the underlying stock that the call option is based upon.  If the stock that a call option is based upon reaches the call option’s target price (strike price) and rises to a level above the target price that is high enough to cover the premium (fee) that is paid to purchase the option, then the call option trade is profitable.  The higher the underlying stock moves above the target price for the option before the expiration date, the higher the profit is for the buyer of the call option.  One of the advantages of using call options to play an anticipated move higher in a stock is that if the underlying stock moves significantly higher, the call option could increase by a much higher percentage than the actual percentage move in the underlying stock.

Traders and investors also buy call options in lieu of buying shares of a stock because call options can be purchased for just a fraction of the cost of buying shares of a stock.  This allows traders and investors to commit a much smaller amount of money to play a stock’s anticipated price movement higher versus actually buying the stock, which frees up their trading and investing capital for other purposes.

Call options are popular with some traders and investors because they protect the downside risk of playing an anticipated move in a stock’s price.  If the stock does not move higher as anticipated, and instead moves lower, the loss associated with buying a call option is limited to the premium that is paid to buy the call options on the underlying stock.  Whereas, the loss associated with buying a stock can be substantial if the stock makes a significant unanticipated move lower in price.

Those who wish to start trading call options and using call options as part of their investing and trading strategies are encouraged to learn as much as possible about the options market and the various ways call options can be traded.

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Advice On Stocks – Definitions and Valuation Methods

Advice On Stocks – Stock Definitions

Advice on Stocks – Stock Definitions

Advice on Stocks

Finding advice on stocks via the Internet, including stock definitions and valuation methods, can be confusing due to the vast amount of information available on this topic.  The following is a concise one-stop source for advice on stocks.

A stock is a financial security that is sold by a corporation that represents a share or fraction of ownership in a corporation.  Corporations issue stock to raise capital for various needs, such as business expansion.  There are two types of stock that a corporation can issue that have specific rights and privileges associated with ownership:  a common stock and a preferred stock.

A common stock includes company ownership rights.  A person who owns common stock in a corporation has the right to vote on a slate of board of directors and on policies proposed by the company or other common shareholders.  If a company enters bankruptcy and is eventually liquidated, holders of common shares are last in line for reimbursement, with preferred shareholders and holders of debt, such as bondholders, having priority.

A preferred stock usually has no voting rights associated with ownership, but will often include a legally defined dividend that is payable to preferred stockholders before a dividend is paid to holders of common stock.  Preferred shareholders are given preference over common shareholders in the event of liquidation of company assets.

There is a variation of preferred stock called convertible preferred stock, which is a preferred stock that can be converted into specified number of common shares after a specific date has passed.

Advice on Stocks – Stock Valuation Methods

There are many valuation methods used by both individual and professional investors to help them determine the actual value of a stock and to make informed investment decisions.  The most common and most widely used stock valuation method is the price-to-earnings ratio (P/E ratio).

The P/E ratio is a number that is derived by dividing the price of a stock by the past year of reported company earnings per outstanding shares (known as trailing earnings).  For example, if ABC Corp is selling for $40 per share, and it earned $2.00 per outstanding shares, then ABC Corp’s stock has a P/E ratio of 20.

Turning a P/E ratio valuation into a useful real world valuation is a lot more complicated.  This is because there are many factors that can affect the P/E ratio going forward, including the future stock price, future changes in the number of outstanding shares, and future changes in earnings.  P/E ratios are also valued on less tangible measures, such as the industrial sector that the stock is in and whether the overall stock market is in a bull market (rising) or a bear market (falling).  For example, if ABC Corp’s stock has a P/E ratio of 20, whether or not this P/E number is overvalued or undervalued is dependent upon not only whether the earnings in the future will keep pace with or exceed the prior year, but is also upon the industrial sector that ABC Corp is in and where the overall stock market is heading.  For a banking stock, a P/E ratio of 20 would be considered high regardless of other factors.  However, for a technology stock, a P/E ratio of 20 would be considered low, especially in a bull market.

PEG ratio has become a popular stock valuation method because it builds upon the P/E ratio to include a stock’s earnings growth rate.  The G is for growth.  To calculate a stock’s PEG ratio, use a forward P/E estimate for the year ahead and divide it by the anticipated earnings growth rate for the year ahead.

Other common stock valuation methods include (but are not limited to):

  • Book value
  • Earnings per share (EPS)
  • Earnings yield

An investor can often save themselves from doing complicated stock valuation analysis by reading stock analyst valuation assessments, since many stock analysts publish advice on stocks based on various stock valuation methods..

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Stock Market Advice – Definitions and Strategies

Stock Market Advice – Stock Market Definitions

Stock Market Advice

The best stock market advice is to first understand the definitions of what the stock market is comprised of and to understand basic strategies that are used to make money in the stock market.  The Internet has opened up a wide array of stock market advice that is easily accessible to investors, including stock market definitions and basic strategies, which are outlined below.

The Stock Market is really a collection of stock trading markets, which themselves are comprised of thousands of individual stocks.  The major stock trading markets in the United States are the New York Stock Exchange Euronext (NYSE) and the National Association of Securities Dealers Automated Quotations (NASDAQ).  In 2008, The American Stock Exchange (AMEX), which was considered another major stock trading market, was purchased by the NYSE, and is now a division within the NYSE.  The NYSE and NASDAQ have stringent listing requirements for companies that wish to have their stocks traded on their stock markets.  These requirements include such metrics as maintaining:  a minimum number of shareholders, a minimum bid price for the stock, and a minimum market capitalization.

In addition to the major stock trading markets, tens of thousands of company’s stocks trade on Over The Counter (OTC) stock quotation systems, which include the Over The Counter Bulletin Board (OTC BB) and OtcMarkets.com (Pink Sheets).  Stocks that trade on the OTC BB do not have to meet any listing requirements, with the exception that they must be fully compliant in their reporting to the Securities and Exchange Commission (SEC).  There are no listing requirements for stocks that trade on the Pink Sheets.  However, Pink Sheets has its own tiered ranking system for stocks that trade on their quotation system.  This ranking system segregates companies based on their reporting status to both the SEC and to Pink Sheets.

There are three major Stock Market Indexes that are used to gauge stock market performance, including: the Dow Jones Industrial Average, the NASDAQ Composite index and the Standards and Poors 500 index (S&P 500).  These indexes are comprised of companies that are selected based on their representation of segments of the economy.  The Dow Jones Industrial Average index focuses on industrial companies.  The NASDAQ Composite index focuses on technology companies.  The S&P 500 index is a broader index that focuses on a wide variety of companies.

Stock Market Advice – Stock Market Investment Strategies

Stock market advice as it pertains to stock market investment strategies comes down to one basic investment rule that is known as buy low sell high.  The whole point of investing in the stock market is to make money, and to do so you have to buy when a stock is low and sell it when it is high.  To better understand what a stock is and how to value a stock to determine when to buy and sell, see Advice On Stocks – Definitions and Valuation Method.

Understanding how the stock market performs in relation to economic cycles can improve your investment performance.  Many of the best buying opportunities in the stock market occur when the economy is going into a recession and a stock market selloff occurs.  There’s an old saying on Wall Street, “buy stocks when nobody else wants them”.  This is perhaps the best stock market advice of all, since eventually the stock economy will grow again, companies will report growing earnings, and the stock market will respond by moving higher.

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