Diversification Is Key To Success When investing in Stocks, Bonds, Mutual Funds, , FOREX, Commodities and ETF’s and just about every other legit investment available. Why is it that some people only buy one or two stocks? Others may have 15 stocks but have 50 percent of their investment assets in just one of those 15 stocks. In Wall Street we refer to this type of behavior as concentration. Some firms call it over-concentration. When this happens in a brokerage firm it is always considered dangerous. It is so dangerous, in fact, that if the brokerage firm is using a concentrated stock position as capital, then the market value of the security in question is given a haircut. This means that the full market value of the security is chopped by some fixed percentage in any capital computation. In other words, if you are over-concentrated, you don’t get full value. Some of you may have margin accounts. Its always best to have cash ownership of stocks you invest in. If you own stocks on margin, it is our opinion that you will get sold out on margin. Normally in a margin account you put up 50 percent of the value of the stock you acquire in cash. If equity falls below 35 percent, you get a margin call. Now, brokerage firms love it when clients have 15 or 20 different stocks in a margin account. If there are some bonds in that account, guess what, they love it even more. Why? Because brokerage firms know that stocks represent risky investments. Something can always go wrong in any one situation....
Diversification Is Key To Success When investing in Stocks, Bonds, Mutual Funds, , FOREX, Commodities and ETF’s and just about every other legit investment available. Why is it that some people only buy one or two stocks? Others may have 15 stocks but have 50 percent of their investment assets in just one of those 15 stocks. In Wall Street we refer to this type of behavior as concentration. Some firms call it over-concentration. When this happens in a brokerage firm it is always considered dangerous. It is so dangerous, in fact, that if the brokerage firm is using a concentrated stock position as capital, then the market value of the security in question is given a haircut. This means that the full market value of the security is chopped by some fixed percentage in any capital computation. In other words, if you are over-concentrated, you don’t get full value. Some of you may have margin accounts. Its always best to have cash ownership of stocks you invest in. If you own stocks on margin, it is our opinion that you will get sold out on margin. Normally in a margin account you put up 50 percent of the value of the stock you acquire in cash. If equity falls below 35 percent, you get a margin call. Now, brokerage firms love it when clients have 15 or 20 different stocks in a margin account. If there are some bonds in that account, guess what, they love it even more. Why? Because brokerage firms know that stocks represent risky investments. Something can always go wrong in any one situation....
Although there are hundreds of terms that are used in the financial language, beginners have to understand first the most important and commonly used words. Option – is the right of the buyer to either buy or sell the underlying asset at a fixed price and a fixed date. At the end of the contract, the owner can exercise to either buy or sell the option at the strike price. The owner has the right to pursue the contract but he or she is not obligated to do so. Call option – gives the owner the right to buy the underlying asset. Put Option – gives the owner the right to sell the underlying asset. Exercise – is the action where the owner can choose to buy (if call option) or sell (if put option) the underlying asset or, to ignore the contract. If the owner chooses to pursue the contract, he must send an exercise notice to the seller. Expiration – is the date where the contract ends. After the expiration and the owner does not exercise his or her rights, the contract is terminated. In-the-money – is an option with an intrinsic value. The call option is in-the-money if the underlying asset is higher than the strike price. The put option is in-the-money if the underlying asset is lower than the strike price. Out-of-the-money – is an option with no intrinsic value. The call option is out-of-the-money if the trading price is lower than the strike price. The put option is out-of-the-money if the trading price is higher than the strike price. Offsetting – is an act...
Understanding the components of option trading clearly outlines how much advantage a trader has. Without a doubt, people who have sufficient knowledge of a certain trade have better chances of profiting from it. In the same way, a trader who is knowledgeable in options trading has better control of his profits. In this article, three basic concepts will be presented. Let it be noted that the information covered here are intended for neophytes in options trading. What is option trading? Option trading is a category of trading stocks, bonds or any type of assets that acts more like a contract, which allows for liberty to buy or sell the asset but does not necessarily oblige the holder to exercise his powers within a certain period of time. In layman term, it simply means “buying” the right to buy or to sell an asset within a specified duration. It should be noted that buying the option is very different from buying the stock itself. What are the types of options? There are two types of options: the calls and the puts. Both of them work in exactly opposite principles. The calls are options that provide the right for a holder to buy a certain asset at a specific price, during a specific period. This investment will be profitable only if the stock would increase during the period of the option. Calls are also oftentimes considered long positions. The puts, on the other hand, are options that provide a holder to sell the asset at a certain price, within a specific period. This will yield profit for the holder if the...