Stocks and ETFs

How much can you learn simply by studying? You can read books, study information on web sites, attend seminars, and spend months in paper trading. Yet when that is all done, you still do not really understand investing and trading until you put money into a position and find out what happens. Key Point No
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The stock market is a culture based partly on persistent myths. To a large extent, belief in myths is wishful thinking and, in some cases, magical thinking. This is a belief in something that simply does not make sense. For example, if you believe that watching a baseball game while wearing the team hat or
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Whether you decide to approach the stock market as an investor or as a trader, or by combining both disciplines, your success is going to rely on how effectively you gain experience and knowledge and put your resources to work. Resources include your income and investment cash levels. Of course, the more money you have
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Options have dozens of uses beyond the basic strategies. They can be used to open spreads, for example. These are strategies consisting of opening two or more different options at the same time and on the same underlying stock, but with different strikes, or different expiration dates, or both. There are three different ways to
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Another basic strategy is the covered call, which is a two-part strategy. First you must own 100 shares of the underlying stock. Then a call is sold and the risks of going short are covered by the shares. In the event of exercise, your 100 shares are called away at the strike. As long as
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The rudiments of options are not easy to grasp, and for that reason trying some paper trading makes sense. This helps you to try out basic strategies, master terminology, and learn how the system works. However, paper trading is safe because no money is actually at risk, so its value is limited to the concept
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The option’s value is called its premium. This is the current value of each option contract. It is expressed as a single numeral with two decimal places. For example, an option might be priced currently at 2.40. This means it is worth $240. Value contains three distinct and separate parts, making valuation of options more
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There are two kinds of options, both traded publicly on the open exchanges. First is the call, which is an intangible contract giving its owner the right, but not the obligation, to buy 100 shares of stock at a fixed price. Second is the put, which is the opposite. The put gives its owner the
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Most investors and traders start out with two assumptions. First, their stock market activities are going to involve buying and selling shares of stock (either directly or through a mutual fund). Second, the sequence of trades is buy-hold-sell. Both of these assumptions can be challenged and the stock market universe expanded by also taking a
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Another aspect in combining analytical approaches is the resulting diversification this method provides. With fundamental analysis, you invariably end up diversifying by the attributes of competitive position or of dividend yield, or simply between different sectors and industries. With the technical approach, diversification is usually accomplished by degrees of market risk (price volatility). Key Point
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One method for combining technical and fundamental is a trading system based on the timing of a stock’s ex-dividend date. This maximizes your return on capital through dividend yield, while also allowing you to move in and out of positions. The ex-dividend date (also called the record date) is the day that stockholders earn dividends.
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For many investors and traders, the choice of a method for selection of stocks and timing is a matter of passionate belief. The true believers in one system are likely to completely ignore the other approach. A fundamental analyst makes a mistake, however, by ignoring or discounting the valuable intelligence found with technical indicators. Using
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The choice between investment and trading strategies does not have to be exclusive. It makes the most sense to combine both approaches in a manner that works for you and best serves your portfolio, conforms to your risk tolerance, and accomplishes the level of control you need and want. In selecting a company (the fundamental
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The tendency for investors and traders to go along with the crowd mentality is reinforced within the market itself. If you watch financial shows on television, you will notice a tendency to follow the trend. If the market has a huge drop in a single day, featured stories will include ‘Is this the correction we
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A contrarian does not have to be strictly an investor or a trader. The two philosophies can be merged into a single contrarian strategy. A good way to understand contrarian thinking is to equate it with the tendency within the market for people to (a) act impulsively, (b) overreact to virtually all news, good and
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A contrarian approach can be as simple as the technical observations of price swings made in a swing trading or day trading strategy, or far more complicated based on volatility indexing or trends in options trading. The swing approach relies on charting patterns. The most popular among these are the short-term trend, narrow-range day, and
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Distinctions are made between the philosophy of investing and trading (like the contrarian approach) and the kinds of investments themselves (like value or growth investments, for example). However, the contrarian approach contains some elements that make it compatible with value investing. So you can be a value investor, seeking companies with excellent management, competitive position,
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There is an important difference between a bear mentality and the contrarian trader or investor. A trader with a permanent bear mentality believes that market trends are always downward, even in bull markets. While the view is contrarian, it is unyielding. The permanent bear is right only half of the time. An equally common problem
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The value of contrarian investing is anything but settled science. It is controversial. If you believe that the market’s conventional wisdom is often wrong, then contrarian strategies will be appealing and potentially more profitable than following the crowd beliefs. History, whether of market activity or science, has demonstrated that the consensus is easily wrong more
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