The Market

When you choose to dive into the world of forex investing, you may find the market to be a bit different than you are used to.  Unlike stocks, where you have central trading locations called stock exchanges, forex trading is done mainly through electronic trading networks or by phone.  The largest market for currencies is called the “Interbank Market”, and is dominated by large financial institutions and multi-national corporations.  In contrast to buying stocks, where the market has defined trading hours, forex markets are open 24 hours a day.

Order Types

When trading foreign currencies, you have many options on what type of trade order you want to initiate.  Beyond just buy and sell, these order types allow you exercise some control over your trades and manage risk in a very volatile environment.  If you just want to buy or sell at the current market price, that is known as a Market Order.  If you would rather trade a specific price, that would be a Limit Order.  If you want to prevent catastrophic loses, you may want to initiate a Stop-Loss Order at a specific price level.  If you believe the market is going to go up or down and want to enter the market then, a Limit Entry Order is for you.  If you believe the market is going to continue in the same direction as it is currently, you might want to issue a Stop Entry Order.  The beauty of Forex investing comes in when you combine these order types and use things like OCO orders to work a strategy.  OCO Orders, or one-cancels-the-other orders, allow you to set up multiple orders and cancel one of the other is executed.  GTC, or good-til-cancelled, orders are often used in conjunction with OCO orders since these orders stay in the market until they are filled or cancelled.

Types of Trades

As in buying stocks, you have long and short trade positions.  If you are long, you are attempting the profit from an increase in the price of the currency, essentially implementing a buy-low, sell-high strategy.  If you are short, you think the price will decrease, and are attempting to sell-high.

Trading Strategies

Forex investing comes with its own unique trading strategies, where the serious forex investor might use a combination of these strategies to hedge against the inherent market risk while realizing a solid profit.  As with other markets, you have strategies based around Technical Analysis where analyzing charts and trends helps the investor predict the ebbs and flows of the market.  In contrast, Fundamental Analysis studies the macro-economic indicators that are the basis for the underlying value of the currency.  Trend trading attempts to ride waves or movements in the price of a currency.  Swing Trading deals with trading according to short to medium term trends.  Range trading attempts to find the upper and lower bounds of a currency, using a combination of analytical models, in order to trade the currency inside of the range.  News Trading bases trades on news headlines and media reports.  Scalping strategies deal with making very small gains on very short term trades, taking advantage of minute fluctuations in the market.  Day trading is similar, except the trade periods can last longer, minutes or hours.  A strategy which attempts to profit in the fluctuations of interest rates is called Carry Trading.  A style of trading that involves buying and holding a currency for a longer period of time is called Position Trading.

Training

As you can see Forex Investing goes much deeper than just exchanging one currency for another, and is a whole different animal than buying stocks or bonds.  It is vital that the investor fully understand the world of currency trading before risking even moderate sums of money in the market.  It is advisable that the novice Forex investor take a course on forex investing or at least become familiar with some of the trading strategies via an online product like Forex Rebellion. Time, practice, and patience are essential for success with Forex Investments.

But how does one identify a good stock to buy?

Value Investing

Before so many alternative investment methods took the stage, the core principle preached to the masses was invest for value.  That is the principle that Warren Buffet used to amass his fortune, and it is one that you should apply to your portfolio before any other.  Value investing simply means to look for stocks that are performing better than their peers in key areas, such as earnings and sales, but is trading lower than the value of the company and its assets.  Essentially, you want to trade shares of stock that are undervalued, meaning the stock price is lower than what the company fundamentals suggest it should be.  You are buying stocks at bargain prices, and reaping the gains as the market begins to recognize their true worth.

Is the Company Healthy?

Even if the stock looks like a good buy, you still need to go over the company fundamentals to make sure its healthy.  The companies public financial documents, press releases, and other data help you formulate a picture of the companies health.  The price-to-earnings ratio is a key indicator as to the value of the stock, and whether the company is trading high or low compared to what it is bringing in.  The industry the company serves, it’s current market position, and the general prospect of the products it sells are also import factors to consider.  Many people trade shares without understanding the data behind them to their detriment.

How is it Positioned?

Also important are more esoteric factors like how the company is positioned in the marketplace and how strong its brand is at the moment.  Does the company occupy a niche that is serves better than anyone else?  Is it well-established?  How hard is it for another company to enter the market?  Are they putting any money into research and development?  If you were buying a business, you would certainly consider these questions.  Why should it be any different when buying stocks?

Who’s Investing in it?

This one is a bit more difficult to discover but it is vital none-the-less.  You can find a great stock that meets all of the points we have already covered, and it take years before it makes you any real money.  Why?  Because other people aren’t buying it also.  You may have discovered a gem before many other people did, that’s great!  But you eventually want people to discover it so they can drive the price up, making you money.  How can you trade shares of stock for profit if no one is trading that stock but you?  That is a bit of an over-simplification, but you get the point.  Check to see if mutual funds or pension plans are starting to buy that stock.  Look for write ups in newsletters or market analysts beginning to highlight its value.  This is tricky because you don’t want to buy too early, but you also don’t want to buy too late.  You want to ride the wave as it’s building not as it’s about to crest or before you are sure it will actually turn into a wave.

Online Brokerages

The obvious first software tool you need in your arsenal is a mechanism to make trades.  Fortunately, the internet has democratized trading to such as degree that the vast majority of trades are initiated online through a variety of high-quality brokerage houses, some of which have no brick-and-mortor presence.  The ones that opporate solely online have much lower overhead, and therefore pass along the savings to your in the form of lower transaction fees.

The top 3 I recommend would be:

• ScotTrade
• TD Ameritrade
• eTrade

Trading Simulations

Any investor who has spent any time at the school of hard knocks knows that a strong trading simulation platform is worth its weight in gold.  Fortunately, most don’t require any cash, much less gold (though some simulate trading it).  These simulators give you a certain amount of “virtual” cash with which to place simulated trades using slightly delayed stock quotes.  This allows you to test new strategies without losing real money.  Simulations aren’t just for the novice either; seasoned investors know the power of executing one trading strategy while testing how another might play out.

Some trading simulators to check out are:

• Scottrade Elite
• TD Ameritrade Strategy Desk
• Yahoo! Finance Portfolios
• Gannalyst

Charting and Trends

You will not get far with investing if you don’t begin to look at charts and trends.  This is the math and science of investing.  They allow you to see how stocks do over time, where their highs and lows are, and where they might be headed.  Any gooding charting software will let you analyse the data from multiple angles, and compare it to other stocks or market segments.  While there are literally hundreds of charting tools for buying stocks and bonds, here are a few that offer excellent data at a very low price (that price being free).

• StockCharts.com
• QuoteTracker.com
• The Market Toolbox

Specialized and Targeted

It is likely that when you begin to get a grasp on the world of investing, you will find there are some investment vehicles that best suit your personality or that you find are more aligned with your investing goals.  Once you’ve decided to focus on a specific investment type, you may find that many of the software packages on this page are too generic or include too much information for other markets that you aren’t interested in.  In that case, you might opt for a more specialized or target investment tool that takes into account the unique aspect of your chosen market.  Here are some to look into.

• Penny Stock Prophet
• Forex AutoPilot

Most Popular

The following software packages represent some of best stock trading software available at an affordable price.  They are popular because they work.  Buying stocks is a complicated and time-consuming endeavor, but these programs allow for manipulation of complex portfolios, while providing data and automation to give you the best chance at making money.

Some full-featured stock trading software packages are:

• TradeStation
• WizeTrade
• Wave59
• AmiBroker

Final Thoughts

My recommendation would be to select one of the programs from each category that you feel is the best stock trading software for your goals.  Start with the free ones if at all possible.  You are going to need tools if you are going to make money in a market dominated by professionals and corporations with deep pockets so don’t underestimate the value software plays in your investment strategy.  But I must also issue a word of caution: software cannot make up for not understanding your market.  If you haven’t studied the fundamentals of your chosen investment vehicle and its corresponding market, software tools will only help you lose money quicker.  So study up, chose wisely, and as always, good luck on your journey to wealth and financial security.

Going Long, Getting Short, and Squaring Up

As in most financial markets, certain terms are used to indicate market positioning.  A long position refers to having bought a currency pair.  A short position means you have sold a currency pair, meaning you’ve sold the base currency and bought the counter-currency.  When you long, you expect prices to rise.  When short, you expect the inverse.   When neither long or short, you are referred to as being square or flat.  If you have an open position and you intend to close it, that is called squaring up.

Rollovers

Because you are trading currency, that currency will draw interest, or accrue interest in the case of a short position. Thus, if you carry over an open position from one value date to another, you are rolling over your position and will be affected by the interest rate differential, the difference between the interest rates of the two currencies you are trading.  Rollover periods vary depending on holidays or weekends, but generally you are looking at a one-to-two day rollover.  If your just beginning to learn currency trading, it would be helpful for you to stop here and make sure you understand value dates and rollovers before moving on.

Trading in the Currency Market

There are two primary ways of executing a trade in the currency market: live trades and orders.  A live trade is executed immediately, often with the click of a mouse.  This can be a bit risky if you enter the wrong amount because there is no turning back once a trade is submitted, however the up side is that you can react to moves in the market as they occur and potentially profit from those fluctuations.  On the other side, you have orders, meaning you are requesting a broker take an action at which time the market meets your conditions.  A take-profit order requests that your position be closed at a specified level, essentially locking in your gains.  Limit orders simply trigger a trade at more favorable levels that currently exist in the market.  Stop-Loss orders do essentially that, stop you from losing your shirt by closing out a failing position.  A Trailing stop-loss order is a stop-loss order that you set a fixed number of pips from your entry rate, allowing you to neutralize losing positions quickly, but let a positive position carry on.  One-Cancels-The-Other orders is a stop-loss order paired with a take profit order.  When one triggers, the other cancels, offering a great risk-management tool when trading currency.  Lastly, contingent orders are simply a combination of several order types strategically formed to cover all your goals and manage your risks.

Where to go from here

If you truly wish to learn currency trading, your best bet is to locate a Forex broker and begin to read over their policies and training documents.  Trading currencies is not like buying stocks; it is much more dynamic and returns can be realized quickly.  But be sure that trading currency is speculating at its core, so be careful to step in the waters slowly and gain experience in the market before risking large sums.

Mutual Funds

The first type of fund we will discuss are Mutual Funds.  These are by far the most common type of fund traded these days, and they form the bulk of most people’s 401Ks.  A mutual fund is essentially a collection of securities purchased with a pool of investor money, with those securities chosen because of some strategy for growth defined by the fund manager.  So what benefit does a mutual fund provide as opposed to buying stocks individually, you might ask.  Simply, they spread the risk around.  Instead of buying one hot stock in the tech sector, you might hold a fund which itself holds scores of positions in various tech companies.  You also get the benefit of a professional fund manager, who undoubtadly is able to react to news affecting those stocks much quicker that you yourself can.  While you may not have the dramatic growth of a rocketing IPO, you also tend to avoid the crashes that come more often.  The mutual fund investor is usually looking to do two things: simplify and diversify.

ETFs (Exchange-Traded Funds)

Exchange-Traded Funds, or ETFs as they are commonly called, are a special type of fund created to mirror the major market indexes, such as the S&P 500 for the Dow Jones Industrial Index.  The idea here is that these funds would hold the same stocks as are in their corresponding index, making it easy to keep up with broad movements in the market and offering diversity over larger sectors of the market.  Some differences between ETFs and Mutual Funds are that there isn’t a minimum investment as there is with a mutual fund.  Also, you will always pay a commission on an exchange-traded fund, whereas you will only pay a commission on a mutual fund if it carries a “load”.  Another key difference is that while you cannot buy and sell options in a mutual fund, you can in an ETF.  For more on options, look here.  An ETF has several attractive features that some investors love such as lower capital gains taxes, generally low fees, and the ability to buy and sell them throughout the day.

Hedge Funds

A lot of media attention has been given to Hedge Funds lately, primarily due to their role in the financial crisis, but still many investors aren’t sure what they are or why one might invest in them.  A Hedge Fund is essentially a private partnership that operates with very little regulation from the SEC (which you can bet will be changing in the near future) which invests in a large number of varying assets applying unique and varied investment strategies in order to hedge against risk and in doing so increase the return to levels above normal investments, such as mutual funds.  To break it down further, Hedge Fund managers try to reduce risk and increase return by leveraging low risk investments against high return investments, or vice versa.  Generally, Hedge Funds require a long-term investment, maybe two years or more.  And they use aggressive investments strategies in order to reduce risk and increase return, which itself is risky.  They are an option for the investor looking to beat average markets return rates, but they should not be considered with without much research and vetting.

REITs (Real Estate Investment Trusts)

REITs are a little bit different.  We’re not buying stocks here.  In fact, they aren’t even technically a fund.  Real Estate Investment Trusts, or REITs, are actually corporations that hold properties or real estate related assets.  A REIT could hold hotels, shopping malls, office buildings, undeveloped land, or even commercial mortgages.    REITs are obligated to distribute 90% of the income from property holding to shareholders in the form of dividends on an annual basis.  The main advantages of REITs are that they invest in revenue-generating properties or paper instead of corporations making them and ideal option for those looking for an alternative to the stock market, and that they diversify an individual’s investment over a large number of properties thereby blunting some of the risk of real estate holdings.

If you are looking for something other than simply buying stocks or holding cash in a C.D., one of these funds may be just what you need.

So what are futures?

Simply, a future is a contract, referred to as a futures contract, and is held similar to a stock or a bond. But where a stock and bond represent equity and debt respectively, a futures contract sets the terms or conditions for delivery of financial instruments or commodities at a specified time in the future.

What is the difference between Options and Futures?

It is easy to confuse futures with options. Both are contracts, and both reference a specific asset being traded. But where a futures contract gives the buyer the obligation to purchase a specific asset, an options contract gives the buyer the option or the right to purchase that asset. Similarly, a futures contract obligates the seller to sell an asset at a specified future date, unless the position has been closed prior to the date of expiration. Another difference between futures and options is the cost of entry. An investor can enter into a futures contract with no cost upfront aside for brokerage commission, whereas an options position requires the payment of a premium. Think of it like this: no cost upfront for futures but you are obligated to buy or sell; a premium payed upfront for options but you have the option to buy or sell. The premium gets you out of the obligation. One other point is that futures are generally sold in larger positions than options.

What are some details about Futures?

Before trading futures, you need to understand some of the fundamentals. Futures contracts expire, meaning they cease to exist unlike buying stocks or bonds, so you are forced to make a decision: sell the contract to someone else and take your profit or loss or take delivery of the product represented by the contract. Also, futures contracts have daily price limits, meaning that they can only go so high or so low in a given day, due to the natural volatility of this type of security. Lastly, most brokers require that any investor trading in futures have a certain amount of money in their brokerage account, usually around $5,000. Again, this is due to the risk of trading futures contracts.

Are there any terms I need to know?

The futures market has it’s own language. Going Long means you believe the price of the underlying asset is going to rise, and therefore are investing in futures contracts on that asset. Being short means you believe that the price of the underlying asset it going to go down, and so you shorting futures contracts on the asset. Speculators are traders who are trying to make money due to the fluctuation of prices, but never intend to take delivery of the asset itself. Hedging is a technique used to manage risk, where you set up a trade that protects you if the market goes either way. Most of these topics require a post all to them selves so it would benefit you to do some additional research before tackling the futures market. Buying stocks and bonds is one thing; buying or selling futures and options is a whole other dimension of investing.

What is an Option?

At its core, a stock option is a contract between a buyer and a seller which gives the buyer the right to buy (call) or sell (put) an asset (usually a stock) on a set date in the future at an agreed price.  An option buyer has the RIGHT to buy, but not the obligation.  An option seller has the OBLIGATION to sell.  So what does the seller get?  In return for granting the option, the seller collects a payment (called a premium) from the buyer.

Types of Options

There are two types of options: calls and puts.  A call option gives the buyer the right to buy the asset under the terms of the contract.  If the call is excercised, the seller MUST sell to the buyer at the agreed upon price.  A put option gives the buyer the right to sell the asset under the contract terms.  If the put is excercised, the seller of the contract MUST buy the asset from the buyer at the agreed upon price.  But either way, the buyer has the choice of whether to excercise the option to buy or sell, or simply let the option expire.

Basic Stock Option Trades

In American-Style stock options, there are four basic trades which form the bulk of option transactions.  In the U.S., one option contract usually represent 100 shares of the underlying security.

Long Call

When an investor buys a call option on a stock expecting that the stocks price will INCREASE, this is known as a long call.  If the stock price upon the date of expiration of the option contract is above the strike price by more than the premium paid for the contract, then the investor will make a profit.  If the price doesn’t go up that much, he would just let the option expire and only be out the money he paid for the contract.  An investor may buy an option for the security instead of the security itself because he could buy more options than shares, and thus have a higher potential gain.

Long Put

An investor who believes a stock will DECREASE, might buy the right to sell the stock at a fixed price.  If the price at expiration is below the strike price by more than the premium paid for the contract, then the trader will profit.  If not, he only loses the premium.

Short Call

If an investor believes a stock will DECREASE, he might choose to sell (or write) a call.  If the stock price decreases, the investor will profit by the amount of the premium paid by the investor who bought the call.  If it increases over the strike price, he will be obligated to sell to the call buyer if the buyer exercises their right to call.

Short Put

On the other hand, if the investor believes the stock price might INCREASE, he might sell a put.  This means that if a stock goes down below the strike price, he would be obligated to buy the stock from the put buyer if he exercises his option.  But if the stock price is above the strike price when the contract expires, the investor will make a profit in the amount of the premium.

Summary

Understanding stock options isn’t a subject that can be fully covered in a short post like this one.  But, like buying stocks, once you grasp the basics mentioned here, you will have enough knowledge to start to investigate some of the option strategies which make the risk and reward much more interesting.

52-Week High

The 52-week high tells you the highest price a particular stock has sold for in the last 52 weeks.  You might want to look at this to determine where the stock is now in relation to where it was.  If it is at its all time high right now, think twice about sending a buy order.

52-Week Low

In contrast, the 52-week low gives you the lowest price that stock has sold for in the last 52 week period.  You may use this information to determine if the stock is bargain - or if it is tanking.

Name and Symbol

This one is obvious, but important.  The name of the company will be listed along with its ticker symbol.  That symbol will be your code to get information about the stock from numerous sources.  You’ll find it listed in the financial section of your newspaper.  You’ll use it when speaking with your broker.  You’ll type it into your favorite search engine to get last night’s close.  The stock’s symbol is your key.  Memorize it.

Dividend

A dividend is a payment made to owners of a stock.  Not all stocks pay dividends, so this is an important column to pay attention to.  The amount listed is the annual dividend as if you owned one share of that stock.

Volume

The volume number indicates how many shares of the stock in question were traded that day.  If this is your first time to look at a stocks table, the volume will not be very useful to you.  But over time, you will want to watch the volume to determine if the stock is tracking in higher or lower volumes than normal.  If, for instance, it is trading more heavily than normal, that may indicate concern among shareholders or an exciting announcement that may boost the companies profits.

Yield

The yield is simply the dividend divided by the stock price.  It is a percentage and calculated as if you were to buy stock that day.  This is of great importance to income investors.

P/E

The P/E value is an important one.  It is the ration between the stock price and the earnings of the company.  You would use this ratio to determine if the stock is a good value.  In a stock table, the P refers to Price or the cost of a single share of stock, while the E stands for Earnings or the companies reported earnings for the last four quarters.

Day last

Day last is simply the price at which the stock ended the day.  Additionally, there may be high or low values for the day in some publications.

Net Change

The difference between how the stock ended today versus how it ended yesterday is the net change.  You will use this to determine if it went up or down in the last trading session.

There may be other information listed along with these numbers, especially if you are viewing stock tables on the internet.

Stock tables are a vital tool to aid in your overall strategy for buying stocks.  It would benefit you to sit down with your morning newspaper or favorite finance website and go over the terms in this post while looking at the current days stock tables.

With all of the media focused on the economy at the moment, it seems impossible not to feel some concern about our investments.  And while concern in some areas might be simply an overreaction, concern with your stock portfolio isn’t.  Just a few months ago, we were debating the virtues of a Roth IRA or how to properly execute a 401K Rollover.  Today, where stock investments are held is the least of our worries.  We are in a very real period of adjustment in the markets globally, and many companies are seeing their stock prices plummet.  Some would argue that we are merely seeing a correction on paper, which will eventually bounce back to previous levels when the markets stabilize.  Though it may be that stock prices will recover, what is your money doing for you in the mean time?  The answer: nothing good.

The period of time from the high value of your portfolio last year to the same value at which point the market does correct itself - that is a period of time when your money is not working for you.  It is not growing your net worth.  It is not paying you dividends (like it was).  It is not safe.  In fact, it is at massive risk.  Therefore, it is prudent that we take this moment, when our passions are engaged, to discover what we can learn from this massive market correction.

Lesson #1:  Stocks are not a replacement for Savings Accounts

When your money is invested in the stock market, it is still “in play” so to speak.  It is at the mercy of the market and the world economy.  If your money is in a FDIC insured bank, it is at least guaranteed safe up to the amount it is insured for, backed by the full faith and credit of the federal government.  Now you may say that faith in the federal government isn’t so great right now, and I wouldn’t disagree.  But the bottom line is that it would take the failure of the central U.S. government to risk your money in the bank, and if it happened that the federal government failed - your savings may be just one of many worries at the time.  Bottom line - if you may need that money to survive, don’t risk it in the stock market.  That’s what savings accounts are for.

Lesson #2:  Nothing lasts forever - Have an exit strategy

Remember the boom in the 90’s?  How ’bout the bust in the early years of this decade?  Everything ebbs and flows, runs in seasons - especially the stock market.  If there is a time of prosperity and recovery, there will inevitably be a period of loss and constriction.  After the losses at the turn of the century, heavily weighted in tech stocks, many investors returned to the market, buying stocks in force, scooping up “good deals” and driving the market back up.  And while there were some good deals, and many of us benefited in our 401Ks from the upsurge in value, it was inevitable that we would see another downturn sooner or later.  And it happened to be sooner than most thought.  Risky moves by investment banks and hedge funds, the real estate bubble bursting, and massive government expenditures on defense, created an unstable environment in all sectors.  Bottom Line:  If your going to get in the stock market, make sure you have a clear strategy for getting out when the time comes.

Lesson #3:  You should never have 100% of your investments in Stocks

You’ve heard it before - diversify, diversify, diversify.  Well, the problem is that many people diversify within just one investment type.  For instance, they may buy a good mix of tech, blue chip, pharmaceutical, and retail stocks.  That’s great - but they’re still all in STOCKS!  They may be protected from downturns in a sector of the economy.  But they aren’t protected if confidence in the economy itself is shaken.  Bottom Line:  Keep a good mix of stocks, bonds, commodities, metals, real estate holdings, etc.  Don’t put all of your eggs in any one basket.