Wednesday, May 31, 2006

Protect Your Stock Market Investments

investments & trading

Protect Your Stock Market Investments By J. Foley

It is very easy to lose the entire stock market investment unless you have a rational approach to protecting them. Losing can be smooth and fast through misreadings and mistakes. Protecting your stock market portfolio is synonymous with being able to steer clear of these errors.

To protect your stock market investments, it is imperative that you limit the losses on adverse stocks. Accept that it is impossible to know for sure which way the stock is headed next. Hence a disciplined trading strategy is a must for limiting losses on stocks that don't go your way.

Taking a system of disciplined research for understanding your errors is necessary for protecting your stocks. Never indulge in too much risk taking. Investing is synonymous with taking risks; but the risks have to be calculated in relation to the potential returns. Every reasonable investor has a limit to his/her risk tolerance, and to be smart you have find out and respect your personal limit.

Straying past the tolerance limit can be disastrous. This may lead to bad decisions spiraling out of control, involving the pumping in of more and more money in stocks that don't even seem to be very good prospect.

Investors can avoid these problems if they will simply know where their level of risk tolerance is. It is easy to find. Just listen to your inner call for a caution.

Invest in anything unless you understand it thoroughly, will make your stock market investment insecure. There is nothing foolish in not understanding an investment prospect. If you don't understand it, call a pass. If you find you have made a wrong choice, accept that bad things happen and take a little loss rather than allowing it to become big by dragging it further.

Try to form an idea of the fair price and buy at that, and ignore market hysteria. Similarly, if nothing has fundamentally changed with the company you possess stocks of, except that the stock is dropping along with the market, good investors will not be frightened off a good price and prefer sitting tight to selling for a loss.

It is wise not to jump in or out reacting to any hot price signal. Experienced investors do that occasionally but that is likely to drag you to buy high and sell low, a position contrary to the collective wisdom on winning.

Everything that can lead to win-win spots in the stock market can protect your stock market investment. Buying low and selling high is, of course, a standard win-win proposition. To achieve that, one has to be serious, meticulously research-oriented and needs to document every move and the perceived reason behind it.

Avoid penny stocks, day trading and swing trading unless you are an expert in those areas. Analyze every wrong step you have ever taken, and figure out what would have been the best move, so that in similar future scenarios you are in a better position to take the right decision.

investments & trading
Article Written By J. Foley

Tuesday, May 23, 2006

Option Trading Strategy That Works !

investments & trading

Option Trading Strategy That Works! BY J. Foley

An option is a contract conferring to the owner the right to buy or sell a specific stock at a specific price in the future.

'Call options' give the right to BUY the stock at a certain price, and 'put options' give the right to SELL the stock at a certain price. That particular price is called the 'strike price', and owner is allowed to buy or sell at that strike price at any time before the expiration date of the option.

Being an active investor in option trading requires knowing the in-s and out-s of buying and selling options. To win the gains and rewards from option trading, you will have to learn the basics of various trading methods. You need to get up to speed with various strategies and learn to use them efficiently, in order to survive in the options market. If you're averse to this kind of hard labor, you had better follow a mutual fund manager who will do this for you.

You should note that option stocks have some differences with share stocks or bonds. An option stock may consist of commodities or any marketable product. Option trading strategy involves taking contingent plans of action to buy and sell these options in a manner that entails maximum expected profit.

The profitability in this trade comes from the volatility (a measure of shift potential in prices) in the prices of these options. In general, when you experience very high option implied volatility (meaning downfall is highly imminent), selling should get priority over buying, because in these situations options become quite expensive.

What kind of strategy should you follow in options trading? Which stock do you invest in – should you just follow a tip, or quality, or analyze trends in the market to get the best deal?

For making profits in option trading, you must have a measure of volatility and your strike price at the right time. For beginners or those who have little time to spare, it is often wise to get a membership of agencies with expert trading advisers. They alert you when they see great trading opportunities, and also remain for you in their trading room to answer your questions. There are plenty of them these days.

Besides, there are good dependable software programs that analyze and measure volatility with acceptable accuracy. As for example, the OptionVue 5 options analysis software helps you survey all options according to specified criteria such as implied volatility and statistical volatility levels. It also helps to identify markets that might be tradable using a ratio writing strategy. Many different kinds of market are included in these programs, and trends are worked out on the basis of past six years' information.

'High implied volatility' is a situation when options are expensive in terms of historical average levels. Since option implied volatility eventually returns to its historical mean, it would make good sense to sell at this high volatility when it is at the extreme levels (say the 99th percentile).

Another strategy is to work out your contingent plan of action through your own analysis of volatility and the expected range of strike prices using software and detailed stock information.

By mixing and matching various options trading strategies cleverly, you can sometimes even profit from stocks that have little or no movement over time. This is not a very easy thing to achieve, though.

Sometimes even when there are consistent bull and bear debit spreads and high implied volatility, buying strategies are often very poorly priced. When it reaches a trough, the collapse in high-priced options right after a sharp drop in implied volatility takes out much of the profit potential.

So, as has been pointed out time and again, even if you are correct in timing a market bottom, there may be little to no gain from a big reversal move following a capitulation sell-off. There are strategies for avoiding this. One needs to learn these strategies from professionals or academics studying this sector, or from quality agencies. Option trading is a big money game, provided you play it right.

investments & trading
Article Written By J. Foley

Saturday, May 20, 2006

Mutual Funds - Better Than Individual Stocks ?

investments & trading
Mutual Funds – Better than Individual Stocks? By J. Foley

Though it cannot be said in general that mutual funds are always better than individual stocks, it still cannot be denied that they usually involve lower risks, less money and generally yield lower but safe returns.

It all depends on the risk attitude of the investor. This is understood clearly by looking at the disclaimer attached with any mutual fund options that are nearly identical with that applicable to any other (kind of) stock. They have their advantages and loopholes like any other form of investment. And as in other forms of investment, one has to be fully aware of potential pitfalls and while driving high with mutual funds, has to be alert enough to avoid them.

Mutual funds are seemingly the easiest and least stressful way to invest in the stock market. Quite a large amount of new money has been put into mutual funds during the past few years.

Briefly put, a mutual fund is a pool of money contributed to by individual investors, companies, and other organizations. There will be a fund manager hired to invest this cash with a primary goal that depends upon the type of fund. The manger usually diversifies in a manner such that the net average earning is expected to be considerably positive. S/he may be a fixed-income fund manager. In that case s/he would work hard to provide the highest return at the lowest risk. On the other hand a long-term growth manager should try at least to beat the Dow Jones Industrial Average or the S&P 500 in a given fiscal year.

But that is what any successful investor attempts to do, and anyone with a similar approach can be expected to make the same earnings.

It all depends really on the overall investment climate and the sectors in which funds are flowing in. Diversification is definitely a good approach when it comes to successful investing by a reasonable investor. But with mutual funds, there is that the controllers may over-diversify.

Diversification minimizes the inherent risks of stock trading by spreading out the capital over many stocks. But over-diversification is again a bad thing.

First, an investor gets into many funds that have significant mutual implications, thereby losing out on the full benefits of risk stretching that diversification affords.

Secondly, over-diversification may decrease your overall return. By hitting too many poor through mediocre funds, the investor reduces the return by missing the potential of a few well-managed funds.

It is true that mutual funds play it safe. This is because mutual funds are actively organized by a professional money manager who keeps constant checks on the stocks and bonds in the fund's portfolio. As this is her/his primary occupation, s/he can devote much more time to choosing investments than an individual investor. This provides the investor with the peace of mind that comes with informed investing without the stress of analyzing financial statements or calculating financial ratios.

But on the negative side, a mutual fund, unless open-ended, must remain confined within a fixed portfolio. Even with open ended mutual funds, the range of potential is often low as compared to what is available to an investor free to choose any stock s/he likes.

Besides, mutual funds some times come as load funds in which the investor has to pay the sales commission on top of the net asset value of the fund's shares. Also, the dollar-cost averaging strategy is just the same with mutual funds as to any common stock.

Of course, fixing such a plan can substantially reduce your long-term market risk and result in a higher net worth over a period of ten years or more.

Hence considering the stress, agony and risk that any stock may involve, mutual funds look a shade better than independent trading, if low but steady is ok for you.

investments & trading
Article written By J. Foley