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Although it may seem obvious to most stock market swing traders there are a number of simple rules that you can follow which will ensure that you have more success when buying stocks:
In the USA stock market there are 3 major indexes which are each made up of a basket of stocks, they are the S and P 500 (also known as the S&P500), the DOW 30 and the Nadaq 100. These stock indexes generally only contain major blue chip stocks, as long as you buy from these 3 groups you will at least know that you are getting a well known solid stock.
For example the DOW 30 contains major industrials and large multinational stocks such as Home Depot (HD) and Johnson and Johnson (JNJ) whereas the Nasdaq 100 mainly contains techical companies such as Apple (AAPL) and Miscrosoft (MSFT).
Always buy a stock that is liquid, this means that it is a highly traded stock, this will enable you to quickly buy and sell at the price you want without having a delay. You will also get a lower spread, thats the difference between the BID and ASK price of the stock. For a stock to be considered highly liquid it should trade at least 500,000 shares per day, ideally even more.
It is best to aviod stocks that are bellow as this usually means the company is in trouble, although with the bear market of 2008/9 there have been a lot of good stocks at bargin prices between and . Avoid buying a stock below at anytime.
Another consideration is options, does the stock has options?, this will be important if you want to trade options around your stock, such as a covered call, or you may want to buy a PUT option in order to protect your stock.
Be very cautious about buying a stock just before it’s earnings release, stocks often drop significantly if you come out with a poor report. Earnings releases are 4 times a year with one of them being the annual report.
If you are going to trade options make sure that you learn how to trade by getting some good education. There are many swing trading strategies that work well with stocks in todays volatile markets.
Trading options is both similar to and different from trading stocks. There are many ways to make money trading stocks from going long to day trading.In this regard,options and stock trading, are similar.
The starting point for learning options trading is knowing the difference between an option and a stock. An option is merely the right to purchase a particular stock at a specific price over a specific period of time.The price of the stock itself can fluctuate, as we all know,over the expiration interval so there’s the usual volatility factor in market prices.
Options, on the other hand, expire on a specific date, so you’ll need to exercise them on or before that date. And you don’t even have to exercise your option if you so choose. Plus, you can purchase an option for a fraction of the actual price of the stock.Options traders can leverage their investment by being able to trade more stocks.They can acquire the option to buy a $100 stock for only a fraction of that price.Hence, they can acquire options for more stocks than if they were actually purchasing the stocks outright.This ability to leverage your investment makes options very attrative.
There are different types of options,too. “American” options can be exercised any time before their expiration date, while ”European” options can only be exercised on the expiration date itself.And just to complicate matters, where you purchase the option has nothing to do with it’s being American or European.The European options tend to apply to indexes whereas American options apply mostly to stocks and bonds. And most options expire the Saturday after the third Friday each month. But U.S. markets are closed on weekends, so “American” options expire on the third Friday of the month and ”European” options the following day.
An option is a contract that gives you the right to sell (a put option)a stock or buy (a call option) a stock on or before its expiration date.There are several strategic choices when you purchase an option. You can exercise it any time either before or on the expiration date.Or you decide not to exercise it and try to sell the option before the expiration date and recoup a portion of your investment. If the option expires and you don’t exercise it, you lose your investment.Let’s look at these situations more closely:
Let’s say you buy an option for Acme Chemicals Corp.You can buy a $20 stock for only a $2 options cost. Now most options contracts require a minimum purchase of 100 shares, so you’d have to pay $200 (for 100 shares) for the contract.Acme’s stock price rises to $25 two weeks later and rather than waiting for the expiration date, you decide to take your profit and run. You exercise the option, acquire the stock for $20 and turn around and sell the stock right away for $25.After you deduct the $2 acquisition cost per share, you’re left with a $3 profit, or $300 less brokerage commissions.Pretty conservative, but you made money.And that’s good!
But consider the opposite scenario. What happens if the Acme’s share price doesn’t rise. What happens if the price of the stock falls below $20? If you sold your options for half of what they cost you, in this example,you’d only be out $100. Just remember that just because you own an option, you do not have to exercise it. So you can sell the option and recoup a portion of your investment. This is better than acquiring 100 shares of Acme’s stock outright. You can jump in and exercise the option when you know you will make a profit, or you could wait it out until the expiration date and make your decision then. I personally think the more conservative approach is more likely to result in consistently positive returns, albeit perhaps lower than a more aggressive strategy. But that’s just me. Higher risk, higher returns. Higher profits. And potentially greater losses.And like other investments.
This is just a simplified explanation of what trading options entails. It is more complicated than this and you should really educate yourself before you commit much of your capital to it. The best options trading trading tutorial I know is the one taught by David Vallieres, which you can review here and the video above from the free demo video series he provides. I think this course is the best because you’ll not only learn how to trade options, but you’ll also learn how to make money.
