Anyone considering investing in the stock market has to do it seriously, and not treat it like a pastime. Thorough research must be carried out on the companies whose stocks are being considered. Successful investment is all about correctly predicting the change in the price of a stock sometime in the future. Doing this successfully involves logic, skill, and, of course, a very small amount of luck. (more…)
The stock market isn’t just about stocks, you can also trade in options. Options are contracts that a trader has to buy or sell. Options are also called derivatives because they derive their value from the underlying financial asset, which is usually a stock or a stock market index. The right to buy is called a call option and the right to sell is called a put option. You buy a call or put option when you expect the stock market to rise above or fall below a certain price limit (the strike price) within a particular time frame (the expiry date.) In the case of a put option, the strike price is the minimum limit at which you want to exercise the contract and is bound by a lower limit of $0. A call option, on the other hand, has a limitless strike price which makes it popular with investors.
You Can Strike if You Want To…
You can exercise your options contract any time before the expiry date if it crosses your strike price. You can also wait for your profit margin to increase, but then you risk the current trend reversing by the expiry date. There is no obligation for you to exercise your options; a contract that is not transacted by the expiry date automatically expires, but the cost of your options contract is not refunded.
How it Works
Here’s an example to help you understand the benefits of options vs. regular stocks. Say there is a stock trading at $40. You buy a call option contract of 10 stocks for a strike price of $45 by paying $2 per option. Your investment is 10 shares at $2 each for a total of $20. If the stock price does not cross $45 before the option expires, you lose your $20. If the stock price goes to $50 and you choose to sell, you take the price of the stock (50) minus the strike price (45) and multiply the remaining sum (5) by the number of stocks (5×10). In this example, you receive $50. If you subtract your initial investment cost of $20, your profit is $30. This is a whopping 150% profit. In normal stock market trading, you would have simply bought the stock at its current price by paying $40 for 10 shares, or $400 and then sold it later at $50 for 10 shares, or $500. That would give you a $100 profit, which is 25%.
Not for Novices
Because it involves predicting the future price of a given stock, options trading is not ideal for novice investors but is great for those who have a good understanding of stock market trends. Options trading requires constant vigilance of the stock market compared to trading in stocks. The market is volatile in nature, so options have higher risk involved, but there is more profit to be made as well.
A stock exchange has many publicly traded companies listed under it. These companies are categorized based on the total value of their tradeable shares; this is called their market capitalization, or market caps for short. Market cap value is determined by multiplying the share price (Net Asset Value) by the number of outstanding shares. This figure is a good indication of the public estimation of a company’s worth; investors and analysts evaluate a company’s stocks based on its stock market cap, rather than its sales or total assets.
The Different Types
The most common types of market capitalization are large cap, mid cap and small cap. These limits are not officially defined; each stock market index uses its own limits for the various market caps. They are usually in percentiles, since actual dollar values will constantly change with inflation over time. A percentile system for setting limits on market caps also ensures standardization across countries.
Go Big (or Medium) or Go Home
In times of economic crisis and the resulting volatility in the stock market, investors prefer the relative stability of large cap stocks, usually those with a market value over $10 billion. These stocks are more suitable as long-term investments for things like a retirement account. Mid cap stocks are mid-way between large caps and small caps. These companies have a market value somewhere between $1 billion and $10 billion. The companies at the lower end of this market spectrum bring some volatility and can be used to diversify an investor’s portfolio.
It’s the Little Things…
Small cap companies have a market value lower than $1 billion. These companies are either new or have faced financial troubles and suffered a loss. Because of their low market values these companies have more potential to grow, albeit at a higher risk. Small cap stocks are more suited to young people with a higher risk appetite that are looking to make large profits fast. Very recently, the term micro cap has been introduced for finer classification of low cap companies. These are very small companies that have gone public and are trading on the stock market at a market value lower than $250 million. The NAV of these stocks can soar aggressively, but they can also sink equally as fast.
The best option for investors is to build up a balanced portfolio with a mix of stocks from each market cap. This will maximize your profit while mitigating much risk.
There are many companies listed on the stock market. Sectors are a method of grouping these companies based on the category of industry under which they fall. Many analysts and experts predict the movement of sectors, instead of tracking the stock prices of individual companies. The sector indices, in turn, decide the index of the stock market at large.
Most stock market traders follow 11 sectors; financial (or banking), energy (power, oil and gas), technology, communications, transportation, health care, basic materials (raw materials like wood and precious metals), capital goods (aerospace and manufacturing) and consumer cyclical (automobiles and entertainment), utilities and consumer staples(food and beverages). Of these, the first 9 are Cyclical stocks, while the last two are Defensive Stocks.
Cyclical vs. Defensive
Cyclical stocks tend to follow the up and down cycles of the underlying industry and have more volatility. Their trends may also be seasonal. The 9 cyclical stock sectors are independent of each other; some move up while others move down. Defensive stocks remain steady, even during periods of economic turmoil or financial crisis, since people can’t live without these products. Stocks that fall under these categories should be a part of every portfolio to lend it a degree of balance and protection. Keep in mind that while the demand for these goods does not go down when the stock market is bad, their demand remains constant when the market surging too.
Amongst individual sectors, energy generally does very well since it’s the backbone of any country’s progress. Division by sector also helps compare the performance of any given company to others in its category. If a stock continually shows a negative trend against the majority of the stocks in that sector than it is time to let go of that stock. As a general rule of thumb, you should sell stocks of companies whose sectors are falling and pick up new stocks from rising sectors.
The ideal portfolio should contain stocks from a mixture of sectors. This allows the entire portfolio to benefit if one or more sectors do well on a given trading day. If you are a novice you need to study the stock market, understand sector trends and then pick individual stocks from companies that follow the general trend within a sector.
Oil commodity traders place bids on contracts for oil futures,which are legally binding them to either buy or sell in the oil market in the future at a predetermined price. They can be traded on the commodity exchange. The common duration for trading in futures in the oil market is three months ahead, though even longer durations have been used. (more…)
Certain companies on the stock market are tracked using a method known as the stock market index.These indices are used as benchmarks for the performance of any individual stock or a group of stocks. These stocks still have a unit price that fluctuates in response to local and international market conditions and they can be bought and sold as well.
There are various stock exchanges and indices that dominate world trade and are interdependent on each other. The S&P Global 100 is a global index that includes companies based all over the world. It is owned by Standard & Poor’s and consists of 100 multinational, large-cap, companies from 29 countries.
A national stock market index tracks the performance of local stocks listed and traded on exchanges within that country only. There are several such indices that are famous, each one influencing the other’s trends. NASDAQ, which stands for the National Association of Securities Dealers Automated Quotations, is an American stock exchange that was founded in 1971 and has the most trading volumes in the world. The NYSE is the New York Stock Exchange. It is the largest exchange, in terms of market cap, of it’s kind globally. It is also nicknamed the Big Board.
In the U.S., the Dow Jones Industrial Average, known popularly as the Dow Jones or Dow 30, is a stock market index. It was invented by Charles Dow, A Wall Street Journal editor, and Edward Jones, a statistician. It follows the trading pattern of 30 public companies from day to day.
The Financial Times and the London Stock Exchange, or FTSE, was founded in 1984. The FTSE 100 index (known playfully as the footsie) tracks 100 companies listed on the London Stock Exchange. The Nikkei 225 is a stock market index for the Tokyo Stock Exchange. It came about in 1950 and is calculated on a daily basis. It is owned and managed by the Nihon Keizai Shimbun newspaper, known as Nikkei for short. It is the Dow Jones’ counterpart in Japan. The Australian Stock Exchange is based in Sydney and maintains indices in combination with Standard & Poor’s. For example, S&P/ASX 300 tracks the top 300 companies listed on this exchange.
Based on their time zone differences, Sydney’s stock exchange opens first, followed by Tokyo, London and finally New York. On any given day, the trend of a major exchange will affect the general mood of the stock market traders when the next stock exchange opens later in the day.
Some swear that gold is the only safe investment. In fact, there are many benefits to delving into the precious metals market. Precious metals hold their worth exceedingly well, not surprising considering they have been used as currency for millennia. If you are looking to begin dabbling in the world of precious metals, read on for a little history and some tips on the market itself. (more…)
New investors in the oil commodity field are often confused with the various terminology used by trading experts, brokers and investors on trading forums. There is no need to worry;we are here to simplify the glossary terms used in the oil market. (more…)
There is nothing quite as hot as the precious metals market in the turbid climate of today’s economy. Gold, silver and platinum, among others, are still performing extremely well. With the prices of precious metals at hundreds or even thousands of dollars per ounce, breaking into the metals market may seem like a rich man’s game. That is not the case, though; anyone can get into precious metals with the right strategy. There are a few ways to own metals and choosing the right one for you can be difficult. (more…)
Silver has quietly become one of the best bargains in the precious metals market. The extreme underpricing of silver can be put into perspective by comparing it with gold. Gold is currently more rare than silver, but certain trends point to that relationship reversing in the future. Gold is currently being mined at a rate of one ounce for every ten ounces of silver. However, while most gold that is pulled out of the ground is stockpiled in various gold depositories worldwide, silver is primarily used for industrial purposes. Precious metal investors have not yet caught on to this dynamic, and are still investing in gold at a rate of $8 to every $1 invested in silver. (more…)