Stock Trading Investing Information

The most common picture that comes to mind when people hear about stock trading is the one we see in movies where men in suits basically shout and wrestle each other in some huge New York building to bicker about money. Although to some extent, there is some truth to this image, trading in the stock market is actually a more complex concept that helps many people earn money and keep businesses alive.

The concept of trading fundamentally consists of the buying and selling of stocks among individuals or companies through brokers. Through buying a share of stock or a share of ownership in a particular company, an individual can then benefit and earn money from however the company they invested on may fair in the market.

There are two basic methods in which the stock market operates - on the exchange floor where buying and selling is done more traditionally and electronically where technology takes on the exchange game.

Trading On The Exchange Floor

The trading that occurs on the more traditional exchange floor of the New York Stock Exchange (NYSE) is basically what most of us have become accustomed to from seeing it in the movies and on television. Basically, the NYSE consists of many brokers who negotiate the deals for individuals to be able to trade stocks.

As chaotic as the stock exchange floor may seem, there is actually a common pattern that occurs among most simple trades. First, an order to buy a certain number of stocks would be negotiated through a broker. After this, the broker's order department would forward this arrangement to their floor clerk on the exchange.

The floor clerk would then inform the company's floor traders in order to find other traders that are willing to sell the equal number of stocks from the company that is offered to be bought. After the two parties agree on a price and close the deal, the message would be forwarded back up the line, and the broker would then inform the interested buyer on the final price.

Negotiations may take a few minutes or even longer, depending on the performance of the stocks as well as the market. For more complex trades and larger orders of stocks however, there may be a more complicated process but the principles basically remain the same.

Trading Electronically

A growing trend these days however, is trading stocks electronically, which is done through advanced computerized systems. Unlike the NYSE that generally operates through the manpower of brokers, its counterpart, the National Association of Securities Dealers Automated Quotations (NASDAQ), trades stocks completely through electronic means.

These electronic markets forgo with human stockbrokers and instead make use of advanced computer networks to match buyers and sellers. And through this method, transactions are usually faster and more efficient.

Through electronic trading, investors get many benefits such as being able to get faster confirmations, as well as facilitating control by having online investing readily available through the Internet. However, brokers basically still handle the trades, as investors do not have direct access to the electronic markets.

The process that takes place in both methods however, is usually hidden from investors. Typically, if you are an investor, a call from your broker and regular reports on your stock investments would be provided for you, but you will not really get to see what is happening behind the scenes.

Through the investments that individuals make, many businesses are kept afloat and running. And in exchange for this, investors get a fair share of earnings. Stock trading may be a complex process, but at the end of the day, many people basically benefit from all of it. As a result, the whole concept becomes simple.

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Labels: basics, method, stock trading, stock trading investing

Market psychology experts weigh in on what's feeding the selling frenzy on Wall Street and when to look for investors' moods to change.

Searching for a way to describe the current stock market meltdown? Call it the "Panic of 2008."

In the past century, the world has seen countless financial crises, economic downturns, and market crashes. But the last major event to be called a 'panic' was the Panic of 1907.

If ever it were appropriate to revive the term "panic," this is the time. The day-after-day declines in the stock market are unprecedented.

The S&P 500, the broad U.S. stock index, has lost 22% of its value in six trading sessions, from Oct. 2 to Oct. 9. Brian Gendreau of ING Investment Management points out that the Dow Jones industrial average, founded in the late 19th century, until this month had never seen six consecutive daily declines of 1% or more.

Forget Normal

Normally even falling stock markets take a break from time to time, as the vultures swoop in to pick up stocks at bargain prices.

But now, the market's psychology is anything but normal.

Every time the stock market rallies-as it did on the morning of Oct. 9-"there are tons of sellers everywhere," says Dave Rovelli, managing director of equity trading at Canaccord Adams.

"People just want out"

Panic in financial markets - just as in everyday life - is explained by the fight-or-flight instinct. "That makes people overreact," says Avanidhar Subrahmanyam, a professor and expert on market psychology at the UCLA Anderson School of Management.

Not only are stock traders running scared, so are financial institutions. "You've got panics not only among individual investors but panic in the industry itself," says John Merrill, chief investment officer at Tanglewood Capital Management.

Dysfunction in the credit markets means financial firms lack the confidence to transact business with each other.

Irrational Despair?

A panic is a "situation in which people do things that contradict rationality," says Paolo Pasquariello, a professor at the University of Michigan's Ross School of Business.

But by that definition, is this really a panic? "It's difficult to say people are selling because they are panicking," Pasquariello says. Selling now isn't necessarily irrational, he says.

There are plenty of good reasons to move from riskier to safer investments at a time when the financial system has stopped working and a serious economic slowdown looks imminent to many economists.

By contrast, Subrahmanyam is more convinced the markets are behaving irrationally. It's not as if we've had a nuclear war and "real" assets were destroyed, he says. Rather, problems are in the financial sector, not the "real" activity in the rest of the economy.

"The real, nonfinancial base of the economy is still fairly strong," he says - far stronger than during, for example, the Great Depression.

Bargain Basement

"Financial panics don't last forever," says ING's Gendreau. Eventually investors will realize that many assets are trading at deep discounts. "Either we're going to go into a Great Depression, or some of these assets are trading at very attractive prices," he says.

Many market participants believe the wave of stock selling is being pushed by hedge funds and other institutions that must sell assets to raise cash. Often these assets-from stocks in solid companies to municipal bonds-are being sold without regard to their inherent value.

But, before jumping back in the market, "You wait for the forced selling to run its course," Merrill says.

So when might this downward spiral end?

Because of our flight-or-flight instincts, Subrahmanyam says, "things are very quick to crash." But "the recovery takes much longer."

You First

"The market ultimately reaches a bottom," says Georgetown University finance professor Reena Aggarwal. However, "no one wants to be the first to move. The markets behave in a herd mentality."

Pasquariello worries governments may simply blame market troubles on panic and irrationality - "on people being crazy."

That gives them the excuse to step in and try to restore market confidence in artificial ways-such as the its recent ban on the short-selling of financial stocks, which he opposed. The real reasons for the financial crisis will "take a long time to fix," Pasquariello warns.

By its nature, a crisis is a time of uncertainty. It could be months before we know whether markets are crashing because of irrational fear or because of real economic problems. And that's scary.

Steverman is a reporter for BusinessWeek's Investing channel.

Labels: crash 2008, financial crisis, stock market, stock trading investing

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Labels: hot trends, internet marketing, online trends 2009, stock trading investing

In trading, it is quite common for the terms options and futures to be used interchangeably. Although these two contracts have a lot of similarities when it comes to principles, they are actually two very different things and therefore interchanging them when conducting trades in the market can be a very lethal mistake for anyone.

Let us learn the differences between these two contracts in order to prevent making the wrong decisions in buying and selling rights for stocks or commodities. Through this, we may just be able to prevent risks and maximize chances for profit.

What Is An Options Contract?

An option is basically the right to buy or sell a specific amount of stock, currency, or whatever commodity offered in the market. This contract basically allows an individual to enjoy, but to necessarily become obligated, to exercise these rights. This contract can only be valid for a specific period of time, and commodities traded can only be bought and sold at a certain fixed price.

What Is A Futures Contract?

On the other hand, a future is a transferable contract that requires the delivery of a certain stock, currency or whatever commodity traded. Like an option, the delivery of the trade is done through a fixed price stated in the contract and within a time frame, so one should not go beyond the expiry date.

However, it is very important to take note that a holder is obligated to exercise the conditions of the contract unlike in options where the holder can have the liberty of deciding.

The Differences Between Options And Futures

Aside from the fundamental difference between the two contracts on rights and obligations, there are also other differences that include commissions, the size of underlying stocks or commodities traded and how gains are realized.

In a futures contract, an investor has the liberty to sign into the contract without paying upfront. However, an investor cannot take hold of an options position without paying a premium to the contract holder. The option premium therefore serves as payment for the privilege to not become obligated to purchase the underlying commodities in cases wherein there are unfavorable shifts in prices.

Another major difference between options and futures is also the size of the underlying positions that can be traded. Usually, futures contracts would include much larger sizes for the underlying positions as compared to that included in options contracts. Because of this, the obligations included in futures make it riskier for a contract holder to trade due to the possibility of losing so much.

Lastly, the two contracts differ with how gains are received by parties involved. For options contracts, gains can be attained in three methods. Either the holder exercises the option, purchases an opposite option, or waits until the expiration date arrives to be able to collect the difference between the price for asset and the strike price, so he or she could get profits. However, profits for futures contracts can only be realized by either taking an opposition position or through the instant change in the value of positions at the end of each trading day.

Knowing about the differences between an options contract and a futures contract can help broaden your knowledge in stock trading, and this can surely prevent you from making the wrong decisions if ever you decide in joining this particular arena.

Remember to never trade without doing your research and fully understanding what contracts you are dealing with. If you just take the extra step to acquaint yourself, then you just might be able to spare losing so much money.

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Labels: options and futures trading, stock options trading, stock trading, stock trading investing