Money Games Information

Trading on the stock market is much more than buying a stock, selling the stock and making an big profit. In fact, that scenario is not a very common one. Trading can be quite lucrative, but you need the proper tools in order to do it, do it well and show a profit. If you enter the market unprepared, you will be someone’s lunch, no doubt about it. The smart trader identifies these potential pitfalls early in the game and sets about correcting them before laying down the first dollar. This list will give you the answers to some of the fundamental problems that many new traders (and some old hats too) often make.

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Lack of Understanding of the Market

The stock market is not as simple as buying and selling stocks. There is a lot that goes into it and you need to understand the various facets of the market. The first thing that you need to do is educate yourself. Do you want to trade stocks? Forex? Mutual bonds? Do your homework and learn about each type of investment opportunity and see which one works for you and which interests you the most. If you decide to go with day trading, get all the information that you can and learn the stock market backwards and forwards. When you understand the market, its emotions, know a bearish market from a bullish one, and other intricacies, you will be well on your way to smart trading.

Lack of Discipline

When you have an understanding of the stock market it may be tempting to rush in headlong into trading. This, though, can get you into trouble. You may sell too soon or over sell and that will undermine your efforts, leading to losses. You took the time to learn the market, now slow down and discipline yourself to use your knowledge. Be patient and think before you hit that sell button. A lack of discipline can get you into a world of trouble, especially if your risk capital is very limited.

Lack of Research

Research your stocks before you invest. There are several sites that can help you with this. Market Watch is a great resource. Choose some stocks that interest you and do the research on them and the companies behind them. If you research the stocks that interest you, you can find ones that have a better possibility of making you a nice profit.

Lack of Money Management

This is one of the biggest problems that investors face. If you are going to trade on the stock market, you need to use risk capital. Risk capital is money that you can afford to lose. Even when you use risk capital, it is important that you still know how to effectively manage the rest of your money. Pay your bills on time and watch your spending closely. If you become careless with your money, you may find that your risk capital becomes very needed funds. In the event of a loss, you could fall into dire straits.

Lack of Confidence

Many new investors don’t have the confidence to aggressively trade in the stock market. This lack of confidence results in losses and missed opportunities. If you have done your homework and educated yourself as well as researched various stocks, there is no reason that you can’t trade with confidence. Stop second guessing yourself and get out there and trade.

If you can address these five problems, you will find that you are trading more effectively. You may even begin seeing the profits rolling in.

Buying protective puts can be very useful in the stock market. Whenever the markets start to get volatile many traders will use this strategy as a way to protect them from any downward movement their stock could have. How can they do this you ask. It is actually really simple.

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To understand how a protective put works you should first be able to understand what a put option is. When you buy a put what you are actually doing is buying the right to sell a stock at a given price by a given day.

For example if you buy the $40 DEC put for stock XYZ you can sell XYZ for $40 by the 3rd Friday of December. This is true even if XYZ is trading far below $40 by then.

Now how can you apply this to protect you from the downside? Say you own a stock. It is currently trading at $72. The market has been volatile lately and you are afraid that your stock is going to go lower.

What you could do is buy the $70 put options for your stock. This cost you about $1. Now if the stock goes down to say $63 it is not so bad. Because you bought the $70 put you have the option to sell your $63 stock for $70. You would take just a small loss of $2+$1=$3, as opposed to $9.

The disadvantage to buying protective puts is you spend money to do it. If your stock went up then you lost that $1. It really served no purpose. Your put just expired worthless. Some traders see it as buying insurance, just in case. If they need it then that’s great, if they don’t oh well.

Others will try to offset the cost of buying the put by selling a call. This is the opposite of a put. When you buy a call you buy the right to buy a stock. If you sold the $75 call for $1 that would have covered the cost of the put. The only problem with this is that you would limit your profit. If you sold the $75 call for $1 and the stock went to $80 you would have to sell it at $75.

In the end it all depends on you. The protective put can help protect you from losses for a small fee. It can be quite useful during times of uncertainty.

What is a Put Option?

A put option is a contractual agreement between the buyer and the seller of the option that gives the right, but not the obligation, for the put holder to force the seller of the put to purchase the underlying security at the strike price on the options expiration date. The buyer of a put option believes that the stock may move lower and therefore, decides to purchase the insurance to protect the downside risk and thereby locks in a sales price if the stock moves lower. See the option risk profile of a put online to understand the risks and rewards.

Puts may also be used for speculative purposes; if you short a put without it being a part of a larger strategy, this is called a "naked" put. The seller of a naked put is taking a bet that the stock will move higher and that the premium that was received will expire worthless.

You can generally say that the price of a put option moves lower as the stock moves higher and visa versa. The risk of buying a put option is merely the amount of money that was paid for the option. However, a put writer, or seller, has unlimited risk. The writer will be responsible for purchasing the stock at a predefined price no matter how low the stock goes.

A put option consists of two components; time premium and intrinsic value (strike price - current price). As the option gets closer to expiration, the time premium will rapidly disappear and the option holder will be left with the intrinsic value. It is generally safe to say that this accelerated decay in time value begins 1 month prior to expiration.

See You At the Top,

Kunal Vakil is the co-founder of mysmp.com (My Stock Market Power) which provides free trading articles to investors.

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