| > | | | | risky. If the opposite happens and the prices almost |
| Let’s briefly describe The Stock Market for | | | | don’t change at all, it is said to be a low volatile |
| those who are new to the financial world. | | | | stock — if there are not sudden and |
| What is The Stock Market? | | | | unexpected price changes, then the investment is less |
| It is by definition a market in which shares of | | | | risky. Traders usually prefer volatile stocks, because |
| companies stocks are bought and sold. Let me explain | | | | they seek to profit from sudden price changes in a |
| this. When companies start growing they need to find | | | | short period of time. Investors prefer steady, slow but |
| investors willing to invest on the company. They need | | | | secure growth. They don’t like surprises very |
| to rise money to keep buying machines and products | | | | much. |
| and to expand their businesses. At the same time | | | | What are derivatives? |
| many investors want to find companies where they | | | | Derivatives are financial instruments that derive their |
| can invest their funds, so they can receive passive | | | | value from the underlying assets. There are a wide |
| income from the growth of those companies, which | | | | variety of derivatives and they are flexible instruments. |
| usually cause a growth on their portfolio of invested | | | | Some derivatives for example may derive their value |
| funds. | | | | from other underlying derivatives. The main idea is that |
| How is The Stock Market organized and why? | | | | they do not convey ownership like stock shares, they |
| Companies discovered a long time ago that the most | | | | just establish rights and obligations. |
| profitable, easy, fast and effective way to find the | | | | Derivatives are a little bit harder to understand than |
| investors is through an organized system, in which | | | | stock options. There are many different kinds of |
| there is liquidity, and through which all interested | | | | derivatives on the financial markets. Even experienced |
| individuals could bring in funds to keep developing their | | | | investors may know some of them, but not all of them. |
| businesses and enterprises. That originated The Stock | | | | I will briefly mention the most commonly used, Options |
| Market, which have been evolving and improving for a | | | | and Futures. |
| long time. People can trade and invest on this market | | | | What is an option contract? What are stock options |
| through Exchanges. For example the New York Stock | | | | contracts? |
| Exchange, or the American Stocks and Options | | | | If you buy an option you have the right but not the |
| Exchange. Exchanges are regulated agencies, which | | | | obligation to purchase something, whatever it is that is |
| facilitate the transactions between buyers and sellers | | | | specified on the contract. In the case of stock options |
| and ensure the fairness of each transaction for | | | | you have the right to purchase shares. Option |
| everyone. Stockbrokers also facilitate transactions for | | | | contracts use specific terms. They also include a |
| their clients and earn a commission for doing so. | | | | period of time in which you can exercise the option, |
| What is the difference between a trader and an | | | | which means you can buy the underlying asset. If you |
| investor? | | | | don’t exercise the option on the specified period |
| On this market like in many others you can be and | | | | of time, then your option expires worthless and you |
| investor or you can be a trader/speculator. Investors | | | | loose the premium, the money you paid for the option. |
| are corporations or individuals that want to invest an | | | | Why are options so famous, so useful and so |
| amount of money, usually a large amount, and keep on | | | | important? Option trading can make you earn much |
| the market for a while to profit from a long term trend. | | | | higher return on your investment or they just can |
| They want to grow their money, but they also want | | | | make you loose everything fast. In other words you |
| safe investments. They are not gamblers. They usually | | | | can leverage your investment. You can have |
| have large amounts of available funds so they can | | | | explosive profits, but you must be willing to accept the |
| afford to leave their money on the market for months | | | | high risks involved with option trading, you can loose it |
| and some times even many years (2-5 years and | | | | all fast. Remember that if you don’t sell the |
| more). Traders and speculators usually want fast | | | | option contracts that you bough or if you don’t |
| profits. They may or may not have large amounts of | | | | exercise them on the period of time specified on the |
| available funds for trading and even if they do, they | | | | contract, then you just loose your entire investment. |
| don’t want to risk them too much. This is | | | | Sometimes people start trading options without even |
| because traders usually take considerably higher risks | | | | knowing this! All of the above may sound a little |
| than investors do. Many of them not only trade shares | | | | confusing for new traders and investors. Stock options |
| of stock, but also derivatives. I explain that bellow. To | | | | contracts may require you to study for a while before |
| get bigger profits they incur in biggest risk. Many of | | | | you can start to understand the entire process or how |
| them are those that want to become rich in a few | | | | they work. I didn’t mention here definitions like |
| months. They want higher than average results. In fact | | | | the following. What is a call option? What is a put |
| they want the highest possible results. Many traders | | | | option? What is the option delta? What are the |
| and speculators loose all their money on The Stock | | | | Greeks? What are options on futures? What |
| Market while others make fortunes. I think that | | | | are compound options? What are exotic options? And |
| knowledge, sound reasoning and common sense are | | | | many, many more. Even when it sounds complicated |
| three major factors affecting the outcome of any | | | | for those that have no previous experience trading |
| financial decision that you make. | | | | options, once you learn its inner workings and all the |
| What are stocks, stock symbols and stock shares? | | | | processes related to them, you can profit big time |
| The term stock usually refers to the name of the | | | | from these derivatives. Remember that in any |
| company or symbol. For example the stock symbol | | | | business knowledge is the key to success. |
| for Microsoft Corporation is MSFT. When you want to | | | | What are Futures Contracts? |
| check quotes or check the graphics on your account | | | | A futures contract is an agreement to buy or sell |
| you enter the stock symbol and get all the information. | | | | something, it could be a commodity or a stock for |
| What are traded through exchanges are shares, | | | | example, at a specified price on a particular date on |
| shares of stock. A share is a piece of ownership. | | | | the future. For example you make an agreement to |
| Think about this as a pizza where the pizza is the | | | | buy 100,000 shares of Microsoft Corporation at $50 |
| stock or the company and every slice is a share. | | | | each two months from now. At the same time, |
| There are companies with millions and millions of | | | | someone somewhere is making the same agreement |
| shares, (slices) while others have less shares. When | | | | but instead of buying, that person is selling. These |
| you buy, sell invest or trade, you are commonly dealing | | | | contracts are traded through exchanges which take |
| with the companies shares. Usually if the companies | | | | neutral positions so they don’t loose. |
| increase in value, you make money. If the stock price | | | | What’s the deal here? For example if today is |
| rise you make money (If you have a long position, | | | | January 1st, and you agree to purchase the stocks |
| which means you bought the shares). Other factors | | | | above by April 21st under those specified terms and |
| could affect your profits also like news, rumors and | | | | conditions, and if the current stock prices is $45 per |
| market sentiment. | | | | share check what happens. If the stock price rises in |
| Do I need a stockbroker to become a trader or | | | | value from January 1st to April 21st let’s say to |
| investor? | | | | $75 per share, then you receive the contracts at $50 |
| You can seek the advice of a license professional, a | | | | each share and immediately sell the contracts at $75 |
| stockbroker, or you can trade by yourself using the | | | | per share so your profit is huge. If the stock price goes |
| Internet. There is an increasing number of individuals | | | | down, you can sell the contracts before April 21st so |
| that are investing and trading from the comfort of their | | | | you don’t loose that much. This is another kind |
| own house. To do it by yourself you will need to sign | | | | of derivative that is very profitable for many traders. A |
| up with a brokerage firm like E*Trade or TD | | | | very important fact is that you can also leverage your |
| Warehouse or any other. There are many out there. | | | | trades with this kind of derivative and get better |
| You can choose which one fits your interests and | | | | results, but at the same time, you incur in higher risks. |
| your needs. Once you sign up and fund your account | | | | If you want to learn more about the subject above |
| you can start trading for yourself. Although people | | | | visit the website bellow, which is full of valuable |
| often like to have a stockbroker make all the trading | | | | information that can turn you into a very wealthy |
| for them. | | | | person — (courtesy of John Kaka). John has |
| What is volatility? | | | | years of experience on subjects related to business, |
| I will define volatility in my own words. It is has to do | | | | finance, wealth building, how to profit from e-books, the |
| with price fluctuations, how fast and often prices | | | | stock market, forex market, real estate, employment, |
| change. If the stock price decreases and increases | | | | true home based business opportunities, how to attract |
| fast and too much in a short period of time, it is said to | | | | amazing wealth to your life, and everything related to |
| be very volatile — the prices change too often, | | | | money, business and finance. |
| too fast and the difference is big, so the investment is | | | | |