Trading refers to the practice of buying and selling financial instruments within the same trading day such that all positions are usually closed before the market close for the trading day. Traders that participate in day trading are called active traders or day traders.
Some of the more commonly day-traded financial instruments are stocks, stock options, currencies, and a host of futures contracts such as equity index futures, interest rate futures, and commodity futures.
Day trading used to be the preserve of financial firms and professional investors and speculators. Many day traders are bank or investment firm employees working as specialists in equity investment and fund management. However, with the advent of electronic trading and margin trading, day trading has become increasingly popular among casual, at home traders.Stock trading is a way many look at becoming financially independent, especially from the jobs they dislike. There are many stocks to trade out there, but knowing the right ones is difficult. There are terms such as bear and bull. These terms talk about the type of market. Then there are terms related to stock options, short sells, and sell stops. When you are looking to invest it is very important to understand the stock market before you begin to trade. Below is a look at the terms mentioned along with different research materials available to help you trade stocks.
You’ll read in the news everyday about stock options. These financial instruments are usually best left to experienced traders who don’t mind taking more risk. A stock option allows the owner to purchase shares of a stock at a specific price point. Company executives will typically be compensated for their work by being issued stock options. For example, if a CEO receives 100 000 options, he may be able to buy them as soon as the share price moves above say, $0.50. He doesn’t have to exercise them right away. Lets fast forward the clock ahead a few years, and the company’s shares now trade at $1.50. He has the option to purchase the shares at $0.50 and sell if he wants into the open market – making himself $100 000 in profit. Of course, if the price never gets above $0.50, then his options are worthless. Options can also expire, so in theory, its in the CEO’s interest to move the share price higher.
Experienced traders can also trade options, and often will protect their investment by buying what are called covered calls. Simply put, if the share price moves higher, the calls are deemed worthless, however, the stock that the trader purchased has moved up in value. If the trade goes the other way, its the covered call that makes money.
Short selling is simply the act of borrowing shares at one price, and buying them back at another price, ideally lower.
There are what we term day traders. These active traders will buy and sell stocks in the same day. They look for stocks that are volatile, which provides the best trading opportunities for the day trader. They sit in front off their computer and watch the markets, looking for the best chart set up before taking a position. Most day traders will look at the 2 minute charts, which suggests that they wont be in a specific position for long. Unless you have a lot of time, experience and tolerance for risk, day trading wont be for you.
Research is a key ingredient to any trader. While books are important to learning further about the market, trading is the best way to learn. There are companies out there that will teach you to trade if you shy away from having a stock broker take care of that for you. One business is Invest tools. This company has a website that allows you to trade with a portfolio to learn the basics of the stock market; they have online tutorials as well as phone tutorials that will help you learn about the market. These companies do exact a fee for the service, but it can be very helpful in learning more about the above terms as well as the many other terms associated with the stock market. These companies also give you a taste for trading without having to invest and lose many before you are really ready to take on the market. The website actually allows you to trade stocks with a fake portfolio so you can see what knowledge you are gaining.
Trading stocks can be a great way to create a healthy portfolio if you have the knowledge. Gaining the knowledge is the first step to learning how to trade on the open market. Following the above tips can help you obtain that independence you seek.