Options Trading

There is a way to make money with the stock market without actually buying or selling shares of stock. Investors can buy and sell option contracts: an option to buy a predetermined amount of shares of a certain stock at the current market price but at a later date. That might be a little bit confusing.

Let's say you think the price of a stock is going to go up but you don't want to invest a lot of money and wait to see. Instead you can purchase an options contract for maybe X shares of a stock for a premium of $Y that lasts for Z months. Then anytime over the next Z months you can execute the contract and buy those X shares at the price when the contract was initiated. If you decide not to execute the contract, you don't have to; you only lose the original premium cost of the contract.

Options are a good, low risk way to play the stock market.

Stock Analysis

There are two basic methods investors use to predict price changes in the stock market: Technical and Fundamental Analysis. Technical analysts use price history while fundamental analysts use financial data and news. Every investor uses their own combination of technical and fundamental analysis. There are even those who rely solely on one or the other. It's up to you to decide which information is the most valuable.

Technical Analysis
If you've done any research at all for your investments, then you've seen at least a basic price graph of a stock. Most sites will let you view the price graph over a different time periods to give you a better idea where the stock is headed. When in this basic view, it is important to look at the price history from each of these perspectives. A stock may be increasing in value for the day or week, but is suffering from a price decline that has been consistent over the past month and year. It will be up to you to decide if the short-term increase is the start of a long-term boom or just a fleeting spike. Other mathematical graphing tools such as bollinger bands, linear regressions lines, and moving averages can be used to give you a long term-perspective on short-term events. These methods can also sometime be refereed to as quantitative analysis.

Fundamental Analysis
If whatever animal hotdogs are made from suffer from a disease that wipes half of them out, what do you think might happen to the stock price of company that makes hotdog buns? If the government plans to introduce a new tariff that will tax imports on cars, what will happen to the stock price of a chinese car manufacturer that relies on exports to the U.S. for 75% of its revenue? If the CEO of a major corporation gest caught in some rediculous scandal, what might happen to the price of their stock, or the prices of the stocks of companies which relied on their success? Fundamental analysis takes into consideration changes in economies, markets, industries and individual companies.

Short Selling

So far I have only told you ways to profit from the value of a stock increasing, buying low and selling high. Now I am going to introduce a way of making money when the value of a stock is falling, called short selling.

If you execute a short sale of 100 shares of Google (Nasdaq: GOOG), you effectively borrow 100 shares from your broker with the promise to return the shares at a later date with interest on the current value of the stock. You then immediately sell those 100 shares. Then once the stock has dropped in value you can repurchase the 100 shares from the market and return them to your broker with the interest you owe. It is important to note here that when repurchasing the shares from the market, you have to specify "Buy to Cover" in the order type.

You make profit according the original price of the stock(P1) minus the current price of the stock(P2) minus the interest rate(i) times the length of time you borrowed the shares(t) times the original price of the shares all times the number of shares you borrowed(S#).

S#(P1 - P2 - itP1)

So if you short sold 100 shares of Google at $600/share at an interest rate of 4%/year and repurchased the shares 6 months later at $500 you would profit:

100($600 - $500 - .04 x .5 x $600) = $8,800

Considering this required an investment of only $1,200 in interest, you would have made 633% on your money, because if you will remember, you only borrowed the initial shares.

Be careful though because if you predict the market wrong you can lose a lot of money. If we describe that situation again but swap the initial and ending price, we can see how potentially devastating a short sale can be.

100($500 - $600 - .04 x .5 x $500) = -$11,000

Ouch.

Good luck profiting from failing businesses.

Basic Trading

When you are purchasing you stock, you'll notice there are a few options. At first it may seem confusing but it is actually very simple.

The first option is whether you would like to place a "Day Order" or a "Good Until Cancelled". It's exactly what it sounds like. A "Day Order" will be automatically cancelled if it is not settled on the day it is made, while a 'Good Until Cancelled" will remain open until it is settled.

This might leave you asking why a trade wouldn't be settled immediately. The answer leads into our next trading option: "Market" or "Limit" order. A "Market" order will execute immediately at the current market price of a stock, which may be higher or lower than you were quoted mere seconds earlier when you put in the order. A "Limit" order on the other hand allows you to set the price at which you are willing to buy or sell a stock, protecting yourself against fluctuations.

These options can be mixed and matched to offer you a great degree of flexibility when trading your stocks. Remember that while you are sitting at your computer, there is an actual broker at the New York Stock Exchange (NYSE) who executes your order. Stock prices are fluctuating constantly in real time and your ticker may not be exactly up to the minute.

Trade carefully folks!

Let it begin!

Thanks everyone for participating in this event. You've got $100,000 to invest however you choose. You can check this blog any time for links and information. You can also find me around campus to ask any questions you might have or suggest topics for discussion.

Good luck!