5 Keys To Stock Option Trading

Stock option trading offers the skilled trader more potential for making a fortune option trading than almost any other form of online trading in today’s market. The degree of controlled risk along with superior leverage allows a knowledgeable option trader the chance to make huge profits but an aspiring option trader must have a solid foundation of education about what makes up a sound option trading method in order to have a long term success at option trading. There are five essential keys that any option trader must understand when developing a winning stock option system.

First, you must understand the degree which time affects the premium of the option you are considering trading. There are two parts you must consider when factoring time into the stock option trading decisions. The first thing that you must take into account is the intrinsic time left on an option. Since options have a limited time period of anywhere from 30 days to several year depending on the particular option that you bought you must be sure that you purchase the correct option containing enough time on it to insure that time decay doesn’t erode your investment away before your position has enough time to be profitable.

The second skill of trading options profitably is factoring time into your trading system in relation to trading a particular stock option and knowing the statistics of your option trading methodology or option trading setup by knowing the average holding period of a trade signal. If your average holding time for an option trade is seven days then you don’t want to buy an option with three months of time premium left on it because you would be paying more for the extra time with the option’s purchase price. Nor would you buy an option with less that 30 days till expiration as time decay would erode the value of option so quickly that even if the option’s underlying stock movement moved favorably to you the time decay would prevent you from realizing a gain in the option itself.

The third thing to profitable stock option trading is understanding the relation of volatility between the market, the underlying stock that underlies the stock option, and the effect is has on the value of the option itself. When the general stock market as an index goes thru periods of volatility or low trading ranges the stocks that make up the market tend to follow overall trend and also begin to experience periods of low overall volatility which in turn can cause derivative like stock options to become cheap or low premiums. But if the market’s volatility rises it is likely that individual stocks will follow the trend causing stock option premiums to increase in value given that the market moves in the trader’s favor. The next key in how to trade stock options successfully is having a stock option trading method that takes these key factors into consideration while giving clear entry signals, clear exit signals, a defined system of trade management, and a profit factor greater than your average loss over a series of trades. Knowing the ins and outs of various trade setups is useless if you don’t have a trading methodology that guides you in every step of the trade process. A solid trading method holds you by the hand and defines each step while leading you to being a consistent winner in the markets and a profitable trader when all is said and done.

Finally, the fifth and final key to successfully trading stock options is yourself, particularly your trading psychology. Human beings and there mental makeup are extremely complex so it is extremely important that stock option traders not only have a sound stock option trading methodology but the discipline to follow their trading methods. You can give two people the same exact winning trading system but it is very common for them to have different results. Invariably, the one that has the ability to remain as detached from his losing trades as well as his winning trades while maintaining the discipline to follow the system’s rules no matter the trading result will emerge the greatest winner in the end.

Using these five keys as a basis to develop your stock option trading methodology can help you avoid the mistakes and pitfalls of many beginning option traders. By understanding time decay, factoring an option’s time into your trading method, how volatility impacts a stock option’s value, what defines a reliable stock option trading methodology, and your own trading psychology you now have a foundation to develop into a winning stock option trader.

Stock Trades

Does investing in stocks eat all our hard-earned money? You definitely need help. No one likes to eat their crows and if you wish to earn something big, stock market is a perfect place to be. Investing in stocks can earn you big bucks and vice versa. However, to avoid a situation to loose your savings it is important to make well informed and calculated investments.

Stocks are volatile and their prices experience a great difference with passing times. Investing in them can make you earn early money as compared to any other assets. However, long-term investments are considered to be better return payer for investing in stocks.

There are many things that have to be taken into account in order to improve your returns. There are special strategies that need to be followed while investing in stocks. When the share prices go up, it reflects strong market condition and appreciation. It is advisable, during that time to sell your shares of a particular company that were brought at lower rates. Moreover, stocks of those companies may be purchased or retained in case of increasing share value of those company stocks. Well, it should be kept in mind that even if the market is on hike, individual companies may experience downfalls. Thus, each company shares are to be handled accordingly.

Despite of downfall in market, some company shares experience a hike but that does not indicate to bulk buying of them as a downfall in the market generally tends to affect individual shares to a great extent. For example, downfall in NASDAQ even affects much other country’s share market and resulted in their low streams. Hence, the shares for those companies, which are expected to recover, soon must be purchased.

Apart from these market moods there are few techniques that may assist you to earn big amounts.

* Set your goals: it is important to create your own financial goals to make a target to be achieved. Creating your feasible standards motivates a person and tends you to be open to new techniques to achieve them.

* Know yourself: know the reason for investment and the motive behind it. Money is a means to an end and not an end itself. Always follow this rule and set your own statistics to trade.

* Anticipate and calculate: stock market is all about anticipating the returns and calculating the risks. It is important for any investor to make an estimate for the returns. However, degree of risks involved is an important stratum that is generally over-viewed by investors. To earn money, it is important to calculate the risks that are to be bared and the results in case of failure.

* Develop your asset strategy: asset allocation must be well distributed and thought of. It is not advisable to invest in only one stock at big amounts. Try and allocate funds to various shares and equity in small amounts. That distributes the amount of risks and avoids huge losses.

* Automated trading: sometimes making the trading automated gives you a break and enable traders to control their emotions. To have better focus on the stocks. Thus, having patience and keep cool tends to increase your rewards and returns.

* Learn, learn and learn: learning is a never-ending process that applies to share investment too. To learn technical and trading techniques provides you an upper hand over other investors. Try to experiment sometimes beside routine strategy. This way keeps a trader motivated and provides him with better probability to earn more.

* Be consistent: consistency and regularity definitely pays. If you want to earn more benefits, be a long-term player in share market, which entails better return prospects.

* Maintain a balanced portfolio: always maintain a portfolio, which has exposure to equity and tends to support purchasing power. Each portfolio must be balanced to have a combination of Largecap and Midcap stocks.

Stock Traders

The conventional perceptions about the stock traders are no longer true in present scenario of online trading. There was a time when stock traders meant people shouting at each other holding pens and paper on the floors of the stock exchanges. Today major portion of the stock market trading is done online. Some of the most Stock markets are nothing but a network of computers where trading is done online. Whether it is a virtual or brick and mortar stock exchange, the online trading stock options have made the stock market more accessible and popular amongst the common man. The myths about stock market trading are gradually dying in mind of the masses and people are investing in the stock market in never before manner.

There are some distinctive advantages that the online stock traders enjoy. The process involves no middle man. All you need to do is open an account with an online broking company and you will have all the online trading stock options open for you. You can do your research and the company you will have your account, which will provide you with extensive help and regular feedbacks on the stock market and stocks of your preference. Then you need to take your own decisions and buy and sell stocks on your own. No clumsy paper works and lengthy waits to receive the share certificates. The trading is done on the real time and you will see the stocks in your account whenever you log in.

Another advantage of the online share transactions is that stock traders can pay less commission compared to traditional stock market trading. With the online share portals you need not pay excess brokerage for certain stocks. You can invest according to your requirement and resources. There is no lower or upper limit and the trading stock options are many like the day trading or limit and long-term investment. In a nutshell you will have complete control over your stock market trading and can effectively plan your investments.

These online brokers offer diverse online trading stock options. They are professional at services and online stock market investment solutions. Their extensive research facilities and regular and detailed guidance to the registered stock traders tends to benefit traders. The cost of trading with online brokerage firms is significantly low. The Automatic Investments price may be as low as $1 per trade and the real time trades may get as low as $1.5 to $3.0. The fractional share buying facility lets you buy portions of an expensive stock. With just a few clicks of the mouse you can open a trading account at these companies. There are different types of accounts for stock traders that are offered including Individual Accounts, Joint Accounts, IRA's (Individual Retirement Accounts), and Education Savings Accounts.

Individual Account – Individual account is the share trading account that is opened by one person. To open an individual account you have to be an US Citizen or Resident Alien, with a valid Social Security Number and must have attained the age of majority in your state.

Joint Account - A Joint Account can be opened for stock trading for two or more people. To open a joint account each of the account holders must have attained the age of majority in their state of residence. The age of majority is when you are entitled to full legal rights as an adult.

Individual Retirement Account - It is a personal retirement savings program that offers tax advantages to share traders. We are offering Traditional IRA, Roth IRA and Rollover IRA options.

Education Saving Account - An Education Savings Account (ESA) is a trust that is set up to pay the educational expenses of the Designated Beneficiary. The beneficiary is the minor for whom the account is being opened. It is essential that the beneficiary is minor that is his or her age is less than 18 years at the time of opening the account.

However, there are many other terms that are provided by many companies and it is left at your choice to get the deal that suits your requirements. So, start investing in the stocks and online brokerage firms are there to extend their guiding hand.

"Stagnant" & "Down" Scenarios

If we apply the covered call strategy to the stagnant stock scenario, we take a negative return scenario and turn it into a positive. Remember, when we sell an option, we receive a premium for doing so.

When the stock does not move during the option's life, the extrinsic value of the option goes to zero. The money paid for the option goes to the seller. We'll take a look at how this sets up.

Let's go back to our previous example with the stock trading at exactly $9.50. We sell the front month, at-the-money call, which would be the 10 strike call. We sell the front month 10 strike calls at $.50. As time goes by, there is less chance for the option to become "in-the-money". As this happens, the extrinsic value lessens and finally, after Friday expiration, the option is worthless.

The stock finishes at $10.00 and you have received no capital appreciation but you have received the full $.50 of extrinsic value from the option sale. If the studies are correct and selling the premium works 80% of the time, then you will collect approximately $4.00 per contract sold over a year.

As the examples demonstrate, writing covered calls against a stagnant stock can provide you with an acceptable return instead of frustration, wasted time and capital.

The "Down" Scenario

In the final scenario, where your stock purchase is headed down into negative territory, the covered call strategy can help minimize your losses. Although picking losers and incurring losses is inescapable, it can be minimized and controlled. Let's take a look at how the buy-write can help us do that.

For example, let's say you bought a stock for $9.50 and at the end of the month the stock had traded down to $8.50, you would have a $1.00 loss on our investment.

However, if you had sold the 10 strike calls for $.50, you would only have a $.50 loss. You would have a $1.00 capital loss in the stock, but a $.50 option gain from selling the option, which would expire worthless.

If you were going to buy the stock anyway and incur a possible loss, it is better to take a $.50 loss than a $1.00 loss. In this down scenario, the option premium received helped to offset the capital loss.

If the stock is down more than the amount you received for selling the call, then the option premium serves as an offset to the loss of the stock.

However, you can still make money in the "down scenario" using the covered strategy if the stock is only down a small amount. There is a scenario in the buy-write strategy where you can profit from owning a stock that is lower than where you bought it.

Going back to the previous example, you bought a stock for $9.50 and you sold the front month 10 strike calls for $.50. At expiration, the stock finishes down $.20 at $9.30 You would have incurred a $.20 loss on your stock.

However, with the stock at $9.30, the 10 strike call that you sold for $.50 is now worthless. So, you have a $.20 loss on the stock and a $.50 gain from the option premium sold. This leaves you with a gain of $.30 on a stock that is down $.20 since the time you purchased it.

To recap: in our third scenario, the "down scenario," your loss will be offset by the option premium you received, hence your loss will not be as severe. You still may incur a loss, but it will be minimized, and minimizing losses is a key to successful investing.

Timing the Exit of a Trade After a Large Move

There are many examples of market blow-offs and subsequent crashes. It is a very difficult balancing act trying to decide whether to get out during the parabolic move, and possibly leaving huge gains on the table, or to hold on with the risk of overstaying the market and giving back much or all of the gains. There is no easy answer. However, many lessons can be learned from observing past large market moves and the inevitable crashes that followed. Gold in 1980 was a good case study, as was the Nasdaq blow-off in 2000. Many individual stocks make great studies as well, including many recently.

Is there a common characteristic that can warn of danger in a timely way? Does a bell ring at the top to suggest we stop acting like pigs and should take our profits? No, there isn't one bell that rings at the top, but there are many little warnings.

Sentiment indicators do try to give a warning when everyone seems to be on the same side of the trade. If almost all traders have the same opinion, and are all positioned on the same side of the market, who is left to buy or sell? This is obvious, but how do we measure it. Traders who agree on the current price, but disagree on value will characterize a healthy market that has room to move. If everyone agrees on both price and value, the market is sure to go the other way.

Most futures markets and stock indexes have many sentiment indicators that give an estimate of bullish or bearish bias. In addition, futures traders have the Commitment of Traders weekly report that separates the large traders, small traders, and commercial interests. The problem with these approaches is they are terrible for making timing decisions. Markets can stay overbought or oversold for months on end. Even extreme readings don't help when the market is in a sustained trend. And, I believe the market character has changed in recent years, and the sentiment indicators are becoming less and less useful. Everybody knows about them. What everybody already knows won't help much.

However, I still find one sentiment indicator that works almost perfectly. When a market has had an extended, directional move and if a market pundit is asked if the trend has possibly been pushed a bit too far, and the answer is "This time it's different," that's a sell signal. It is never different. It always looks different at the top because all the fundamentals that caused the previous price advance are now known, and reported by the media, and already in the price. What had caused prices to advance is now being learned, and now everything looks so bullish that it seems obvious that price has to now go up. But it already has gone up. It's now too late. The bus has not only left the station; it has already arrived at its destination.

I'm a visual person; therefore I view the ups and downs in the market visually, like a vehicle going up or down a hill. Imagine a bus going along a flat road with few passengers. Someone can easily get on the bus at each stop. This goes on for a few miles. The bus starts to climb a gradual hill, while more people get on at each stop. All of a sudden most of the seats are full. The hill the bus is climbing starts to get a bit steeper. It is a hot summer day. More and more passengers get in at each stop. Now it is standing room only, and the bus is climbing a very steep hill. It is struggling, trying to make it up the hill. A little bit of steam starts to come out of the engine compartment, but nobody notices. At each stop people keep climbing aboard. The passengers are oblivious to the straining of the bus. They are talking or reading. They just want to get to their destination. Now the bus is overcrowded and overheating. People are hanging out the windows and holding onto the outside of the bus. It keeps trying to get up the hill, barely moving at this point. One of the passengers asks a neighboring passenger if he thinks the bus will make it, citing an example of a previous bus trip where the bus broke down. The neighboring passenger replies "this time it's different, the bus was fixed since that trip." Right at that moment there is a big clunking sound with steam coming out of the engine. The ride is over. All the passengers get out in the worse possible location. Of course, the next day the bus is fixed and the whole process starts over.

So, back to markets and price charts and away from buses. There are some clues from the price charts, that in my opinion, are more direct and timely than watching sentiment. Divergences between prices making a new high, which are accompanied by lower oscillator readings, are an early warning. The problem is that there can be many divergences in a series before the market finally pays attention and turns around. In my experience, there will be a series of small divergences, and then one last push to a high accompanied by a larger divergence. Also, most likely going out to a larger time frame will show an overbought reading and possibly a divergence in that time frame as well.

Another clue is in the price bars themselves. There will often be a large bar up, or series of bars up, on unusually high volume. Often prices will accelerate into a parabolic curve on the last impulse move up. Other times will be the reverse; a large impulse move, followed by shallower and shallower impulses up. The former is probably a result of short covering, and the latter a result of traders just trying to keep the bull alive, despite declining momentum. Sometimes the conclusion will be left with one bar up there all by itself, with lower bars on each side. This is called an island reversal. This is usually a very timely and reliable signal when it occurs. But it is rare. And beware the retest. When perfect patterns appear, the market will often want to test one more time, just to make sure. Many times there will be upthrusts, or tall spikes, that fail, usually with the bars closing near their lows. The market often needs to retest these upthrust attempts many times, so don't be surprise to see a series of these upthrust bars at major peaks, often accompanied by declining volume, and declining oscillator readings. If prices fail to attract more buying and instead succeed in advertising for sellers, then it is best to leave the party on these failed attempts. It is hard to do because all the commentators and market letter gurus are saying the biggest gains are just ahead.

It is extremely difficult to pick a top. Markets can start to exhibit clues to a reversal, and then out of the blue the market takes off to the upside again. For more reliability, it is best to wait for a confirmation that a previous swing point low is taken out to confirm a trend change. However, in a runaway market this swing point is often far away and too much of the profit would be given back waiting for this point to be taken out.

There is no perfect rule for timing these events. Most of the time I get out too early, and if not I usually got out too late. It is easier to get out on strength, when the commentators on CNBC are jumping up and down with joy that the market, or stock, will never stop climbing because "this time it's different." It's far better to get out when everyone wants to buy, than when everyone is looking to sell. It is difficult psychologically to then watch the market climb ever higher without you being on board. It is even more difficult overstaying the trend and giving back much of what you had on paper.

What Are Your Options When the Market Takes A Nosedive?

It is inevitable that in your trading career numerous downturns in the share market will occur from time to time.

Now you have a few choices available to you but this also depends on what sort of trader you are as to the effect it will have on you at this time. "There are basically four types of trader which we will discuss below.

I . If you are a long term trader you won't be too concerned about selling your stocks currently held in your portfolio as you know from past experience that the market will regain its equilibrium and eventually return back to normal.

2. If you are a medium to short term trader then of course you see your immediate profit going down the drain. But if you have learnt from past experiences (hopefully) you would have had a stop loss set in place to lock in those profits or to cover you against substantial losses. So therefore your losses are minimal. You can then buy back those same stocks at bargain basement prices.

3. But if you are like the average trader who did not employ a stop loss and was not prepared for any downturn then you have two choices

A. You will do what the majority do and that is to panic and begin selling your stock at whatever the market price is currently at or B. You can sit back and pray that the market does not go down too far. You then still have the option of selling or waiting till you stock starts to regain in value. Which could take time? In the meantime your cash is tied up and any profit that you could have made elsewhere goes begging.

4. Now if you are a day trader then because you don't carry any open trades overnight the downturn does not affect you in the slightest. In fact you are delighted, you can sit back and watch the chaos and the bloodletting unfold around you. You see it as chance to make some quick profits once the market starts to do a u turn upwards

The thing I like about a market correction is that it also affects the "Blue Chips" as well sometimes in the vicinity of 5 to 10% if not more. This is the time to go bargain hunting. There is an old truism," Buy in gloom and sell in boom." And that still holds today

How Long Should I Backtest An Online Daytrading System?

I am frequently asked how long one should backtest a online daytrading system. Though there's no easy answer, I will provide you with some guidelines. There are a few factors that you need to consider when determining the period for backtesting your online daytrading system:

Trade frequency

How many trades per day does your daytrading system generate? It's not important how long you backtest a daytrading system; it's important that you receive enough trades to make statistically valid assumptions*: If your online daytrading system generates three trades per day, i.e. 600 trades per year, then a year of testing gives you enough data to make reliable assumptions*. But if your trading system generates only three trades per month, i.e. 36 trades per year, then you should backtest a couple of years to receive reliable data.

Underlying contract

You must consider the characteristics of the underlying contract. The chart below shows the average daily volume of the e-mini S&P:

It doesn't make sense to backtest a trading system for the e-mini S&P before 1999, because the contract simply didn't exist! In my opinion it doesn't make sense to backtest an e-mini trading system before 2002 because at that time the market was completely different; less liquidity and different market participants. I believe that a reliable testing period for the e-mini S&P are the years 2002 - 2004.

The problem is that many traders over-use the functions provided by the different backtesting software packages and think more is better. Many so-called system developers try to imply that the longer you backtest the better and more robust your system will be. That's not always true.

Conclusion

When backtesting you need to know these things. It's not enough to just run a system on as much data as possible; it's important to know the underlying market conditions. In non-trending markets like the e-mini S&P you need to use trend-fading systems, and in trending markets like commodities you should use trend-following methods.

Trend Trading or Counter Trend Trading - Which is Best?

When I first starting designing and testing trading systems, back in the early days of personal computers and trading software, I immediately gravitated toward counter trend trading. I would put up a stochastic, before I even knew what it was measuring, and my eye went right to all the divergences. A divergence is a basic counter trend pattern, where the price makes a new high, for example, and the indicator makes a corresponding lower high, thus forming a divergence with the price. The idea is that the new price high was not confirmed by momentum, which in this case was losing strength. When this pattern is seen, it is thought the market might have put in a high for the move, and it might turn around and go in the other direction.

I liked the idea of picking tops and bottoms. I was getting really good at it, at least on paper. I thought I had found the Holy Grail of trading. It all looked so easy. Almost every new high or new low on the chart was accompanied by a very clear divergence pattern. These patterns just jumped off the charts, screaming at me. I thought I had found the key to my trading plan, and it was going to be to be able to pick the point of a trend change. In other words, I was going to become an expert at picking tops and bottoms.

Then I started trying to trade all these easy patterns with real money. For some reason, whenever I would take a trade on one of these patterns the market didn't know it was supposed to reverse. It would just keep going in the direction it had been going. I would get several divergences and the results would be the same. That is, of course, until I got so burned out trying to catch the reversal and I would give up. Then, like magic, the perfect divergence pattern would appear, but I would not be in the trade.

I would caution anyone who thinks that they can pick the spot, with any accuracy, of a top or bottom in the market. I know many gurus and market timers claim to be able to do it. It can be quite gratifying to pick the top of a market, especially when all the media and analyst are on one side of the market, and you go the other direction and win. It gives you a very brief sense of superiority. You could see something that nobody else could, and you made a profit with this knowledge. However, after engaging in this activity for any length of time, one should review the account statements to really see if this has been a profitable way to trade.

It is remarkable how the eye can pick out major highs and lows on a chart, and to see many reasons why the top or bottom was so obvious. Maybe there was a classic three drives to a high pattern, or a head and shoulders pattern, along with diverging momentum or volume. It makes picking tops and bottoms look so easy. But if you analyze the chart more carefully, you’ll probably find two or three times as many set-ups that fail. The mind somehow glosses over the failed set-ups and goes right to the successful patterns.

After many frustrating attempts unsuccessfully using the stochastic indicator, I decided to study with the person who developed the indicator. I flew to Chicago to study with George Lane. Here was the guy who developed the indicator that almost everyone at that time was using to spot divergence patterns, and he talked me out of trading divergences, except in rare case. He only used the stochastic as a confirmation if many other conditions of trend change were present. I still like that indicator, but I use it in an entirely different way now. The time spent studying with him probably saved me years of frustration and a lot of money avoiding losses.

When thinking about trend change there are some things to keep in mind. First, trends tend to persist; often longer than you think is logical. When trends are up they often climb that wall of worry. Worry that the market will collapse without warning and take away your profit. Worry that the fundamentals don't justify the prices being traded. Logic might dictate taking profits, but there is worry of leaving money on the table. Uptrends tend to end more leisurely, at least in the stock market. For the public, it is easier to decide to enter a market or take profits in the calm of rising prices, where only greed is the factor. In down markets, traders often panic, and margin calls with fears of losing your home are often a motivator that results in more urgency. Therefore, bottoms can form quickly and sharply. Futures markets seem to be a bit more even regarding uptrends and downtrends, due to the nature of the mix of traders involved. A sideways trending market, or a market with a perceived lack of trend, will often lull traders into complacency, and with attention elsewhere, breakouts into a trend can be missed.

To summarize, I find the best strategy is to find the main, confirmed trend, whatever indicator or method used to determine that trend. Then trade only in the direction of that confirmed trend. Trading pullbacks, such as flag patterns, will usually offer the safest entry points. Trends have smaller cycles within the larger cycle. There are usually pullbacks within the longer term trend. One can still trade turning points of these smaller cycles, as long as they are in the direction of the longer-term trend. I will accept kicking myself for the few times I see major tops or bottoms that I will most certainly miss. This is a small price to pay for missing many losing trades resulting from trying to buck the trend. There are always trends somewhere, and in some timeframe. Going against the trend is like jumping into a river flowing rapidly in one direction, and trying to swim in the opposite direction. It is difficult and exhausting to do. It's much easier to float down the river in the direction that the current wants to go. The ego is more gratified in going the opposite way. The ego is also one of the most difficult aspects of trading to overcome.

Good Stock Investments - How To Spot The Best Stocks For Your Portfolio

So what are some good stock investments for your portfolio? Just about everybody wants to know this. The truth is, the answer all depends on what type of investor you are.

There are really two types of investment strategies you can follow-short or long term. Therefore, the stock you decide on largely depends on your overall strategy for making money with the stock market.

For instance, if you have a long term outlook, good stock investments would be larger companies such as Disney, Microsoft, etc. While these companies many not offer the biggest opportunities for short term growth, they are very stable companies that you can be sure will turn a profit for a long time.

However, if you are short term investor, good stock investments will likely be smaller, more risk companies that have big growth potential. Keep in mind, you never want to invest in the companies long term, as that will likely be financial suicide; however, if you know how to determine trends, short term you can make a killing of these types of companies.

If you are short term oriented investor, you likely will not be very concerned with a companies overall health; instead, you will look at it’s stock price trends, the overall market trends, and try to decipher what you think the stock will do compared to the market. This is huge difference from a long term outlook, because short term investors don’t take into account a companies’ overall financial health, because there is no need to.

Short term, the market mis-values companies based on investing trends. For instance, once people start investing in one company, its’ stock price will start rising. Many people often jump aboard.

This will cause the stock to rise significantly above what the company is really worth. In the other scenario, when many are selling it in masses, the stock price will fall substantially below the fair market value of the company.

The bottom line is, you need to determine which strategy you feel most comfortable and confident with. Good stock investments will be different depending on which strategy you choose to adopt. No matter which way you choose, the important thing is to make a decision, and commit to following it no matter what.

Picking An Internet Stock Broker

Believe it or not, a very important step in increasing your financial success is by choosing an appropriate internet stock broker.

You may be asking yourself, "What makes an internet stock broker appropriate?" Three things: cost to trade, in depth analysis of your portfolio, and in depth analysis of the stock market in general. Allow me to hit on each one of these individually now.

The first, the cost to trade a stock. I'm sure most of you have been searching the web and have come across ads where the brokerage company states, "Only $4 a trade!". I'm sorry, but, unfortunately this is not as straight up as it originally appears. Sure, you can pay only $4 a trade, but, you can only trade for $4 if you commit to a trading schedule. What does that mean? For instance, allow me to use the stock brokerage company I used to trade through: Sharebuilders.

Now, don't get me wrong, Sharebuilders is not a bad internet stock brokerage company. The company is great for beginner's because it has a glossary of terms and a few e-documents that explain things like options and puts. They also appeal to beginners because of their advertisement which states you can trade for only $4. You can trade for only $4, but, you have to commit to a trading schedule. Also, you only can get that deal if you commit to buying X dollars of such and such a stock every single week of the month. Basically, you will be paying $16 a month, instead of the $15.95 that it usually cost to trade on sharebuilders.

So, my first advertise is, shop around, call the 800 number, and ask what it really cost to place a live trade. I would much rather save my money for a month, and buy all the stocks at one time with an additional fee of $15.95, then have a computer buy it for me automatically every single week for $4.

Second, in depth analysis of your portfolio. What exactly does this mean? Well, your portfolio is the name we give to every single stock, mutual fund, ETF, money market fund, bond fund, bond, etc. that you own. Depending on each investor's own goals they should invest accordingly. For instance, say I have $25,000 that I'm investing for my child for when he goes to college. I don't need to touch this money for about 18 years and I also want to increase this money greatly because the cost of attending a university for four years by then will be close to $300,000. Therefore, I would invest my money in large company's hoping for long term, aggressive growth. On the other hand, if I needed the money in a a year or two, it would be much wiser just to open a CD account and also put money in a general money market fund. Believe it or not, there are internet brokerage accounts that will analyze your portfolio according to your goals and how long until you need your money.

Third, in depth analysis of the market. Now, they may or may not give you individual analysis of stocks, but, you don't need that. That's what I'm for! But, some company's make you pay for in depth reports in sectors. these reports range from $10.00-$400.00! Make sure to look for a company that does give out these reports for FREE!

Trading Stock Options

If you've been trading stocks for some time and have never tried options, then you may want to give them a go. Stock options are more speculative but offer flexibility, diversification and control to protect your stock portfolio or create more investment income. So, here are some things you should know about options.

An option is a derivative, meaning its price is based on an underlying asset. These underlying assets can either be stocks, Indexes or ETFs. An options trade involves giving someone the “right to buy or sell” a certain stock at a certain price by a specific time. Options help the investor to purchase stock at a lower price and to gain from a stock price’s rise or fall. If you buy an option to purchase securities, then it's called a “call” option. If the option you buy is to sell securities, then it's a “put” option. There is also a put and call option, whereby traders purchase both calls and puts on the same stock, with agreed prices and by an agreed date. Buying an option gives you the right, but not the obligation to purchase the asset at a specific price (called the strike price).

The hardest part of options trading is understanding all the jargon. But once you understand all the technical names, you'll soon find out that basically what you really need to know is which way you think the stock price is going to go in the near future. Once you have an idea what's going to happen, then all you need to do is use the right option trade to profit. For instance, if you expect a stock's price is going to increase, then you would purchase a call option on that stock.

Options are not issued by companies like stocks are. All options that exist are "written" or sold by another trader somewhere. Therefore, you are directly betting against that person if you buy an option.

For Call options, if the price of the underlying asset is below the strike price of the option then it is "out of the money," when the price of the asset crosses above the strike price it is called, "in the money." This too works the opposite way for Put options. The price of the option has the greatest percentage moves when it crosses from out of the money to in the money but out of the money options also have the most risk.

So if you don't want to risk large amounts of capital, but still want to use a smaller amount of money to gain from price variations, options trading can be the answer. There are very few risks and an option buyer cannot lose more than the price of the option, the premium.

There is much more involved with trading options, but these are just some of the most basic concepts to help you get started. The bottom line, is that options trading is something that you should only try once you've spent some time learning about the stock market, and if you can make decisions calmly when the pressure is on. A lot of information must be learnt before an educated trading decision can be arrived at.

High Risk, Moderate Risk and Low Risk Investments

For those looking to invest, you should know that many investments can be categorized as being high risk, moderate risk and low risk. Investing is not difficult, but you should always put lots of thought and planning into it. It is also extremely important to educate yourself about the many different investments available to you so you can find those that fit best with your specific situation and lifestyle. Here are some tips regarding the three categories of investing.

Low Risk Investments
While low risk investments are usually very low key and rarely are extremely glitzy or publicized, they do offer conservative investors a way to save money for the short or long term without the risk involved that you find in other forms of investing. Low risk investments usually pay the lowest yields, but are far less volatile than many other types of investments. Low risk investments include money market funds, certificate of deposits and some types of bonds. Low risk investments are perfect for those that want to make sure there money remains safe and secure. While low risk investments don’t offer high returns, they do offer stability and security for those that can’t afford to lose money or would just like to avoid as much risk as possible. Expect low risk investments to pay out yields of 1% to 5% annually.

Moderate Risk Investments
Moderate risk investments are perfect for those that are interested in investing for the long term and would like to earn moderate yields. Moderate risk investments are usually certain kinds of stocks, bonds and mutual funds that pay handsomely over the long term. While generally riskier than saving money in a bank, for those that are looking to invest for the long term, historically speaking you will grow your money quite nicely. Moderate risk investments usually use the power of compound interest and time to create a nest egg from 10 to 40 years with regular savings. For instance, saving 1K per year at an interest rate of 10% for 30 years can return close to 200K. Moderate risk investments usually return yields of 5% to 12%.

High Risk Investments
High risk investments are those investments that if you are lucky can return huge yields, however the downturn is that they can be extremely volatile and in many cases instead of getting rich off your investment, you find yourself losing some or all of it. High risk investments include penny stocks, international stocks, some types of Forex trades, etc. The sky is the limit for returns, but many high risk investments- if considered a winner should return yields that range from 10% to 30%++.

Teach Your Kids to Invest

You might not realize it, but one of the most important lessons you can teach your kids is how to invest properly. One of the major pitfalls that many adults fall into is money problems. Teaching your children early on the benefits of investing, how to invest and the importance of personal finance can have a huge impact on their lives and careers. Here are some tips on some of the lessons you should teach your child.

The Earlier the Better
Even when your child is 8 or 9 years old, teach him or her how to save. Giving your children an allowance is a great way for them to understand the importance of money and savings. One technique to use is to reward them when they successfully save money. When children are in their teens, you should encourage them to open a savings account and deposit money into it each week or month. Teaching your children how banks work and the ease in which they can save money can help them in later years.

Teach Children the Importance of Building Credit
Children grow up very quickly and it won’t be long till they apply for a credit card. Talking to your children about the ups and downs of credit is extremely important. Don’t wait till they are packing for their first semester at college to teach kids the basics of credit cards, it is important to start much earlier. When shopping with your kids show them by example how to use credit cards effectively, talk to them about how interest works and how credit cards on the whole work. Encourage kids not to buy things impulsively, instead to plan out their purchases for maximum satisfaction. These are all lessons that can help children avoid the pitfalls of credit cards.

Investing for the Future
As a parent, your goal is for your children to be extremely successful and never have money problems. One of the ways to help your children on the right path is to discuss with them investing for the future. For many kids, retirement is not a concept that they can relate to, but buying a house or nice car might be. Teach your children the ways in which they can invest, what tools they need to invest properly and how to use the power of compounding interest.