My Goal on This Page is to Make You A Smarter Trader by Teaching You all the INs and OUTs of Trading Equities (Stocks), Options, Bonds, Forex Ect… Let us start with Stocks and Options after all they are meant to work together to help you hedge risk!
most people should be familiar with the idea that if you buy a stock and it goes high you make money if it goes lower you will loose money, but with over ten thousand stocks in the US Indices alone how do you know which stocks to pick to make you money? All publicly traded stocks or required to report their financial figures quarterly (every 3 months;) along with those reports they also forecast how well or how poorly they see their company preforming in the upcoming 3 month to a years’ time: This is known as reporting earning and future earning. In a nut shell those two concepts are what make a stock go up and down. Analysts take a look at a company’s financial reports for thing such as assets/liabilities and how much product they sold and compare the numbers to the company’s previous quarter as well as the company’s future projection and come up with an Earnings Per Share Number. they also look for Revenue Growth, and Same Store Sales Numbers ECT… IF ALL THE NUMBERS MEET OR BEAT EXPECTATIONS THE STOCK GOES UP IF JUST ONE OF THOSE NUMBERS DOES NOT THE STOCK HAS THE POTENTIAL TO STAY WHERE IT IS OR DROP DEPENDING ON THE SEVERITY OF THE MISS. THE BIG FACTORS IN STOCK RISES AND FALLS ARE: Earning Growth and Future Earning Growth (EPS, AND FEPS GROWTH) and Revenue Growth, and Same Store Sales Numbers (applies to retail sales stores) THESE ARE JUST A FEW AND BY NO MEANS ALL OF THE FACTORS!
So many of you may be asking your selves why can’t I just plug in all the factors into a Screener pick a stock that meets all the criteria buy it and watch it go up. The Answer is a stock’s financials are only 20 percent of the story the other 80 percent is divided between Investor Sentiment and Politics.
Keeping in mind all the variables discussed above, you may be asking yourself how am I supposed to make any money? There are few ways: first is dividends. Dividends are given by most well established Companies on the Stock Market. It’s a way of saying “thank you” to the individual investor for holding on to The Company’s Stock. As long as The Company’s Stock price does not fall below where the investor originally bought in, and The Company makes no changes to their dividend. The investor’s investment in that Company will grow, and even if it dips a little bit from where the investor bought in the dividend gives them a little protection on the “down side” (For tax purposes dividends come in two main categories “Qualified” and “Ordinary:” A Qualified Dividend generally means that an investor is taxed 15 to 20 percent on that dividend. An Ordinary Dividend means that an investor is taxed according to their “Personal Income Tax Bracket.” Please consult your Tax Adviser for more information!) A word of caution, If your dividend paying stock takes a tumble your dividend will provide little comfort to you so just be careful when owning stocks just for their high dividends. High dividends are usually a sign that companies need money they use their high dividends to get you to invest.
Another way to make money in the Markets’ are Buying and Selling Options. Options came about in the early 1970s is a way for an investor to hedge the risks mentioned above. For example let’s say you own 100 Shares of “IBM” at 200.00 but you are worried that “IBM” is headed for troubled times ahead you cam buy 1 put option at 205.00 (for a price lets say $225.00) which usually represents 100 shares of stock and gives the owner of that option the right but not the obligation, to “Put” their IBM Stock to the “seller of that “Put” Option at 205.00 at the end of a specified period of time. That is a mouthful what does it mean in lay-mins terms? It means that for a price (in this case 225.00) I can sell my IBM stock to another investor for 205.00 dollars. In this very simplified example all I would loose is the price I paid for the “Put” Option (225.00 dollars)
I just gave you a very simplified example of Options; but let’s step back and define what an Option is. An Option is derived from its underlining stock it gives its owner the right but sometimes not the obligation to buy or sell that stock at a previously agreed upon price after a specified period of time. Another thing to keep in mind is that when buying or selling an Option you are usually buying or selling a contract. An Option Contract usually represents 100 shares of its underlined stock, and is commonly referred to as a “Standard Options Contract.” A Non-Slandered Option Contract usually refers to an Option Contract less than 100 share of an underling stock. This may occur when a company is being bought out by another company. There is now also Mini Options to allow smaller investors to participate in stocks with high prices like Apple. Mini Options usually represent 10 shares of an underlined stock. If you are not sure consult your broker. Options are not only limited to stocks there are also Options that fallow Indexes; known as Index Options but they are a bit different and we will get to them soon!
Next however, lets define what you can do with an Option Contract (You can do four basic things:) you can “Buy a Call” (which gives the Owner the right but not the obligation to “Call Away” the underlined stock at a higher price. For example if IBM was trading at $190.00 but you thought it was going to go up to 200.00 with in a specified period of time, for a price, you could buy x number of Option Contracts at $190.00, if IBM goes up you could then obligate the seller of that Option to gave you the IBM Stock for $190.00 a share or you could sell it back on the Options Marketplace. If IBM does not go up “as a Buyer” you are not obligated to do anything you could simply let that Option expire and all you would loose is what you paid for the Option Contract. As a “Buyer of Options” you pay for the Right but you are not obligated to Exercise your Options. Sellers of Options however, are obligated to give up their Option Contract! We will get too that in a bit. For now just keep in mind that in an Option Contract there are 2 sides “A BUYER AND A SELLER”)
We will get to “SELLING A CALL,” “BUYING A PUT” AND “SELLING A PUT” SOON STAY TUNED