Category: How to Start Trading – Beginners

  • How Options Trading Make Money?

    How Options Trading Make Money?

    How To Trade Options And Make The Best Returns?
    Options trading strategies include the whole range from simple trades to extremely complex. No matter simple or complex, they’re based on two fundamental option types: calls and puts.

    By Guy Avtalyon

    There are unlimited ways to learn how to trade options and make money. How to find the best options trading strategy is also very important. You have to choose and find the right time to use your options trading strategy. That will result in huge profit potential for the traders. If you never learn you’ll be stuck in the question of how to trade options and miss a chance to make the best returns.

    You may ask why trade options instead of direct assets?

    Trading options have some advantages that could benefit you more than direct assets. Before we explain to you how to trade options, we want to tell you where you can do that. 

    In the US CBOE or the Chicago Board of Options Exchange is the largest exchange for trading options, actually, it is the largest in the world. Its offer is in the range from single stocks, ETFs to indexes. 

    In Europe, the situation is a bit more complex since we have a specific type of option. More about this READ HERE
    Recently, the market maker demanded from regulators to bring the new rules about derivatives trades. But if you want to trade options CME Group or Intercontinental Exchange can be the right places.

    Anyway, whichever you choose you’ll have to create the proper options strategy, one or more. You can choose from a very simple buy or sell strategy to extremely complex that require many simultaneous option positions.

    How to trade options for income?

    Traders frequently enter the trading options with limited or lack of understanding of options trading strategies. It is quite hard to explain why because they can learn how to trade options and find plenty of strategies that could limit the risk of trading and, at the same time, give the best returns. 

    That requires a little effort but gives an opportunity to take advantage. Traders who know how to trade options can enjoy the power of options trading. And they are very powerful. Having that in mind, we are giving you the shortened version of how to trade options along with the most powerful strategies you can use to generate the best returns. These strategies will teach you how to trade options and direct you on the right path.

    Basic strategies to learn how to trade options

    Options trading strategies appear in the range from simple, for example, one-legged strategies to fascinating multi-legged that seem like they are coming from the other planet but from one more advanced than ours. Simple or complex doesn’t matter. All of them are based on primary option types: calls and puts. 

    When we say “simple” that doesn’t mean there are no risks involved but that simple strategies are a good starting point to understand how to trade options. Also, they are able to give good returns. 

    So let’s start with what traders call one-legged strategies.

    The long call

    This is a strategy when you buy a call option. In other words, you go long. This strategy means that you are betting that the underlying stock price will go up, higher than the strike price by expiry date. 

    For example, the stock you want to trade is at $40 per share and the call is accessible for $2. The expiration date will come in 6 months. As you know, you have to buy 100 shares at least which is a standard option contract, so your contract is for that amount of shares. That will cost you $200.

    $2 premium x 100 = $200

    Here are three possible scenarios with your long call option.

    The key variables in our imaginary case are:

    The strike price is $45
    Initial price in the example is $2
    Current underlying price is $40

    If the underlying price is lower than the strike price at expiration, your option will expire worthlessly. The result of your long call trade will be the loss. That loss is equal to the amount of money you paid for 100 shares, in our case study it is $200 which is the initial cost. The option’s total profit or loss depends on the underlying price. For example, if the underlying price is, let’s say, $42 why should you exercise the option? That would allow you to buy the underlying asset at, for example, at $45 which is more expensive than you buy it on the market.

    But here is the good news. In the long call trade, the loss will be always limited, you cannot lose more than your initial cost was. Even in case the underlying price drop to zero. You’ll lose the $200, the amount you paid for the call option.

    The second possible scenario is when the underlying price is equal to the strike price. That is a very rare case but still. In such a case there is no reason to exercise your option. You could simply buy it on the market since the price is the same. You’ll end up the same as in the first case scenario. Your loss will be equal to the initial cost.

    But what if the underlying price is higher than the strike price?

    Actually, you are buying the long call option for this scenario. That is the best possible case. When the underlying price is higher than the strike price that meant the option is in the money and you have to exercise it.

    For example, the underlying price rose to $50. As you already know, the options give you the right to buy the underlying asset at the strike price, in our example, it is $45. What can you do? Immediately sell it at the underlying price, meaning you have to exercise the option. That will bring you a cash flow of $5 per share, and as you have 100 shares which means $500 for that option contract.

    To calculate the profit from the trade you have to subtract the amount you initially paid.

    ($5 – $2) x 100 = $300

    That is your profit from one long call trade.

    The long put

    It is similar to the long call, but in this options trade, you’re betting on a stock’s decline because you don’t want it to rise. You are buying a put option, wagering the stock will fall under the strike price by expiration.
    For example, the stock trades at $40 per share, a long put option at $40 strike is available at a $4. The date expires in 6 months, for example.

    This long put will cost you $400 for 100 shares and you bought 10 contracts.

    $4 x 100 = $400

    The long put value is the biggest when the stock is worth $0 per share. That leads us to conclude, and we’ll be right, the stock’s maximal price is the strike price multiplied by 100 shares and multiplied by the number of contracts. 

    In our example, it is $4.000.

    $4 x 100 x 10 = $4.000

    When the stock increases, you can sell the put and save part of the premium, if there’s some time to expiration. The greatest downside is a total loss of the premium or $400 in this example.

    A long put is a way to bet on a stock’s drop if you can allow the possible loss of the whole premium. If the stock drops notably, you’ll earn significantly more if you own puts than you would by short-selling the stock. The other advantage is that you can use a long put to limit potential losses. In the case of short selling, you could take an incredible risk because the stock price could continue to rise. The stock has no expiration.

    How to trade options – The short put

    The short put is the inverse of the long put. The trader is selling a put, or in other words, going short. This strategy is best to use when you assume the stock will stay the same, meaning it will be flat or increase till the expiration. That will mean the put expires worthless and the put seller will take the whole premium. A short put is similar to a long call, but there are some differences. It is, so-to-say, a modest bet that the stock will rise so the payoff is modest too.

    If you use this strategy in the best case you can expect the maximum return same as the premium but you’ll as the seller will receive that upfront. The premium will be paid as a whole if the stock price increases above the strike price or stays the same. If the stock goes below the strike price at expiration, the seller will have great losses because such will be forced to buy the stock at the strike price.

    This strategy is useful for…

    But this strategy is suitable for traders who want to generate income by selling the premium to other traders. Particularly to traders who are betting the stock will drop. Put sellers want to sell the premium, that’s all that matters.

    Traders very often use short puts to reach a better buy price on a very expensive stock. They simply sell puts at a strike price, where they would like to buy the stock. For example, with the stock at $40, a trader will sell a put with a $30 strike price for $3.

    If the stock drops below the strike price at expiration, the trader is assigned the stock and the premium will offset the buying price. The trader pays a $27 per share, or the $50 strike price lessen for the $3 premium that he/she already got. 

    But if the stock continues above the strike at expiration, the put seller will hold the cash. So such can decide to try the strategy again.

    Is trading options a good idea?

    Yes, of course, and cheaper than trading stocks. Well, it’s obvious why trading stocks is interesting. It’s somehow simple to understand and definitely there is money that traders can make. But some other financial instruments can produce the benefits that stocks do not.
    Options trading, especially, has many advantages. Trading options is a very good idea and I’ll explain why even if it is more complex than stock trading and traders have to learn so much about it.
    First of all, in trading options, traders can make meaningful profits without having a large sum of money. So, it is perfect for beginners that want to start trading with a little money. Also, it is very profitable for those with large budgets. This potential to make a big profit with a little money comes from the leverage. The leverage is what provides your capital with much more trading power.

    A real-life example

    For example, you have $500 to invest and you want to invest it in Company ABC stock. Its stock is currently trading at $10, but you expect it to rise. If you buy this stock using your $500, then you could buy 50 shares of that stock. If you were right and the stock really rose to, for example, $15 you will make a profit of $5 per share which is $250 for the total. That’s a 25% return on your initial investment.
    Let’s see what will happen if you chose to buy call options on that stock.

    Alternatively, you could choose to buy call options on the same stock, giving you the right to purchase the stock. If call options with a strike price of $10 were trading at $1.00 each, you could buy 500 options with your budget of $500. That will give you a chance to buy 500 shares if the stock rise. So, let’s say the stock rises to $15, and you might exercise your option and buy 500 shares. If you sell them quickly your profit will be $2,500.
    Deduct your initial investment of $500 used to buy options. So, you’ll pocket $2.000. So the return of your capital invested is 200%.
    This is a simple example but tells more about trading options than everything.

    There are numerous profitable strategies for options trading. Traders-Paradise introduces you just four of the many strategies and ways how to trade options.  Of course, we will continue writing about all strategies we know or find from other traders.
    As we already said, there are countless ways to learn how to trade options and we are willing to present them. 

    Stay tuned, we are here for you. 

  • Beginner Investment Portfolio- How Should It Look Like?

    Beginner Investment Portfolio- How Should It Look Like?

    Beginner Investment Portfolio
    These tips are kind of a guide to new investors for building a good stock portfolio. Selecting stocks needs analysis, time, and the ability to estimate different parameters for the stock, industry, and overall market.

    By Guy Avtalyon

    We are going to show you how a beginner investment portfolio should look like. Of course, if you think the stock market is getting crazy, you couldn’t be more right. DJIA is going up, going down, S&P 500 Index also. The graphs are looking like ECG of some very vulnerable hearts. Maybe you don’t believe it, but this is the right time to enter the stock market. A stock market is truly a wealth-building tool. Moreover, entering the stock market is easier than ever. But, as you are new in this field, you would like to know what to buy or, in other words, how a beginner investment portfolio should look like.

    There are so many ways to invest the money and can pick the level of risk you’re willing to take. So, it is obvious the first thing you have to decide – the level of risk you can tolerate.

    High-risk investments mean greater chances for high rewards. Wait, that also means bigger chances for losses. As a beginner investor, you should avoid high-risk investments if you don’t want your capital to throw through the window. Later, when you become more experienced and earn more cash, you’ll understand how to handle the risk, for now, here are some tips of how a beginner investment portfolio should look like

    We know that a lot of beginners think of investing as attempting to get a short-term gain in the stock market. But if you want to build wealth, you have to think about long-term investing. 

    Beginner investment portfolio in 2020

    ETFs

    The world of the stock market and investing can be confused for beginners. There are individual stocks, mutual funds, bonds, mutual funds, etc.

    Our first suggestion for you is some low-cost ETF. But there is a question: is it worth it? You’ll need time to build an individual stock portfolio.

    Exchange-traded funds (ETFs) can be an excellent investment way for small investors. You can trade these funds like stocks. They can give you to expand the diversity of your portfolio and to do that without spending too much time on it. 

    Here is how an ETF works. A fund provider holds the underlying assets. Such creates a fund to follow the performance of underlying assets. At some point, such a provider decides to sell shares in that fund to other investors. As a shareholder, you’ll own a part of an ETF, but you will not own the underlying assets in the fund. 

    ETF tracks a stock index. So, as a shareholder of the ETF, you’ll get dividends, which you can reinvest, for the stocks included to the index.

    ETFs are a passive approach to investing. Brokers will not charge you trading costs for ETFs. It is zero. Just make an automatic investment each week or month, it’s up to you.

    Include the gold

    Due to the coronavirus pandemic, the global economy is suffering. In the first quarter, only five main asset classes posted gains. Among them, apart from the US dollar and yen which are currencies, the list includes gold. Gold always was a great way to protect the portfolio and historically it was known as a safe-haven investment. It is the same nowadays. You can add some gold into your portfolio while you are waiting to come into stocks because today they can be too volatile for beginner investors. So, you should grow the exposure to gold. Gold works great when the dollar is flat-to-down. Also, gold can be a great hedge against inflation.

    Moreover, it performs best when investors are worried about low growth on other assets. Basically, if we take a look at its historical performances, we’ll notice that gold played best and rose fastest when other economic measures were falling quickly. We have such a situation today.

    We have negative interest rates, bond yields are almost zero, so gold could be a very good opportunity to hold it. Add it as very good protection to your portfolios.

    A beginner investment portfolio should include mutual funds

    Mutual funds are still amazingly popular. Especially target-date mutual funds in retirement plans, so add them in your beginner investment portfolio. Mutual funds are basically a basket of investments. When you buy a share in some mutual fund you are actually investing in all holdings included to the fund with just one step. 

    A target-date mutual fund usually is a mix of stocks and bonds. 

    How to invest in target-date mutual funds? 

    For example, you plan to retire in 20 years and everything you have to do is to pick the fund with 2045 in the name. But you have to know, so don’t be surprised, the fund you choose will hold stocks essentially. How is that possible? Your retirement is far away, and stocks have higher returns in the long run, higher than any other asset. As time goes by, the fund manager will shift part of your investment toward bonds because they are less risky. You wouldn’t like to take too much risk while you are approaching the date of your retirement.

    Add Index funds to the beginner investment portfolio

    If you don’t want to employ a manager to create and manage your beginner investment portfolio, index funds are a good choice for you since they track a market index. What is the market index? It is a collection of different investments that represent a part of the market. For example the S&P 500 Index. It is a market index that covers the stocks of about 500 biggest companies in the US. So, an S&P 500 index fund will reflect the performance of the S&P 500, by purchasing the stocks in that index.

    Index funds represent another passive approach to invest just like ETFs. They carry lower fees charged based on the sum you have invested. The advantage of these funds is that some brokerages offer a range of index funds without an established minimum. So you can start investing in some index fund at $100 or less.

    Help to create the portfolio

    For example a robo-advisor. Let’s assume you would like to invest but you’re not the DIY type. Well, we have some good news for you. You have a lot of robo-advisors out there. They will handle your investment by using very complex algorithms. But don’t be worried. It will cost you less than a human advisor, usually, it will be from 0.25% to 0.50% of your account per year. Also, robo-advisers will let you open an account without the minimum required.

    Robo-advisors are an excellent way for beginners to get started investing. Look, you are a beginner and you don’t have good knowledge about investing yet. So, robo-advisors will do all that hard work for you and you’ll need a little money for them. All you have to do is to check your portfolio from time to time. So to say, it’s your money invested. Also, they will give you a chance to learn more about investing since they’ll provide you tools and educational material.

    Investment apps are also extremely helpful. You can easily find some aimed at beginners.

    Traders-Paradise recommends

    For example, M1 Finance is excellent if you want to build a free portfolio for long-term investments. This app offers commission-free investing, automated deposit, buying fractional shares, and has many other features like free maintenance of a portfolio, diversified portfolio, etc.

    Fidelity is another great app that offers full service at zero trade prices. It allows you to invest for free, a variety of ETFs that it offers can help you to build a well-balanced portfolio, stocks, or options trades and all for free.

    TD Ameritrade offers free options trading. If you want to become a trader rather than an investor, it’s a really good pick for you. We already wrote about this app but we would like to point again how excellent it is. For example, its platform “Thinkorswim” is one of the best. It will not charge you a commission for trading stocks, options or ETFs.

    After deeper investigation, you might choose to invest in the companies that offer the chance for growth. Just keep in mind, your portfolio has to be diversified. Never expect that each stock can generate great returns. That is the reason for diversification. It appears especially when we are talking about a beginner investment portfolio. But that doesn’t mean you’ll need a large collection of investments. You’ll need just a few stocks but they have to run together in your favor.

    Today’s volatile stock market offers discounts on great stocks. So, this is a great time to start investing and create your beginner investment portfolio that will generate you amazing gains in the future. 

  • Risk Management Strategy For Buying Stocks

    Risk Management Strategy For Buying Stocks

    Risk Management Strategy For Buying Stocks
    Risk management is the most important thing that you can learn if you want to trade stocks. That will provide you with staying in the game.

    By Guy Avtalyon

    A risk management strategy for buying stocks means you have a plan. It seems a bit fishy to suggest that you can simply search for  “high yield” and “low risk” and find trading opportunities that will beat the odds in the stock market for sure and do it with minimum risk. If it is so simple, why do we have losing trades? How is it possible that no one is doing that?  What forces you to choose low yield stock with high risk? Must we really be a genius to be able to find a risk management strategy for buying stocks?

    To be honest, smart trading or investing isn’t that simple. In other words, buying stocks requires a risk management strategy among other things. 

    Risk management for some unknown reasons is low placed on the list of the priorities for the majority of stock traders. Every single trader would rather seek the best indicator than to create a risk management strategy for buying stocks. There is no reason to put this very important issue so low. It is the opposite. 

    A risk management strategy for buying stocks has to be on the top of a stock trader’s priorities. Without knowledge about risk management, no one can be a profitable trader. As a trader, you must understand how to manage your risk, how to size your position, how to set the orders accurately. 

    Of course, only if you want to be a profitable trader. In case you don’t stop reading this. For those who want, here is a risk management strategy for buying stocks. Actually, several suggestions. 

    What is a risk management strategy for buying stocks?

    A risk management strategy for buying stocks helps to lower losses. If you have a risk management strategy or you improve it, you’ll avoid most of the problems that can arise and cause you to lose money.

    One of the tips is, determine where you will set your stop loss and take profit order but before you enter the position. At the same moment when you find a good entry point, you have to decide where you’d set these important levels: stop loss and take profit points.

    When you have recognized the right price levels for your orders, you have to measure the risk/reward ratio. If it doesn’t match your goals, stay away from the trade. Never try to stretch your take profit order or squeeze your stop loss to reach a higher risk/reward ratio. Keep in mind that the reward is always potential, it isn’t 100%-sure. What you can control for sure is a risk. 

    Yes, we know very well some beginners in stock trading who do this thing totally opposite. They think it is possible to randomly find a risk/reward ratio and then adjust stop loss and take profit orders to reach the desirable ratio. Well, it is possible but what really you’ll get is a losing trade.

    Can a trader who has made solid profits waste it all in one bad trade?

    Yes, it is particularly true if you don’t have a proper risk management strategy for buying stocks. 

    Failed traders enter a trade without having any idea of break-even stops or what does it mean at all. Somewhere and somehow they picked that phrase and wanted to implement. Please, avoid it. First of all, if you move the stop loss to the level of your entry wanting to create a trade without losses you are entering one of the most dangerous trades. Moreover, such a trade will often end up as unprofitable. Yes, you have to protect your position but this tactic is going to put you into various problems. It is particularly true if you base your trades on technical analysis. How is that possible? Your entry point is very often evident for other traders too. So many of them will have the same or similar entry point. And what can happen? Well, the elite traders will eat you. 

    For example, you enter a short trade when support breaks, and the stop loss point is above the support level. But you move your stop loss to a break-even point in order to protect your trade. What happened? The price goes back into support and takes out your stop loss. Support held but you miss profits. Yes, support validated your trading idea but your risk or, in this case, stop loss management fired you out. You moved too soon. That’s a possible danger which amateurs almost never notice. One bad trade and you lost all your money.

    Set stop-loss points more effectively

    You can do this by using technical analysis, but fundamental analysis can help in timing. For example, you are holding a stock ahead of earnings and drama grows. But you may want to sell before expectations become too high. Use the moving average. For experienced traders, it is maybe the most popular method to set stop loss and take profit points. It’s easy to calculate. Main averages are 5-days, 9-days, 20-days, 50-days, 100-days, and 200-days moving averages. Just apply them to your chart and check how the stock price reacted to them previously, both as support or as a resistance level.

    Also, you can set stop-loss or take-profit levels on support or resistance trend lines. Just connect the prior highs or lows that befell above-average volume. The point is to find the levels at which the stock price responded to the trend lines and on volume. For more volatile stocks use a long-term moving average. This will minimize the possibility of an unimportant price move to execute your stop-loss order before it’s time. 

    Also, you have to adjust moving averages to your target price. For long targets use longer averages. In this way, you’ll reduce the number of generated signals. This will reduce the noise too. If the stock price is changing too much it is the sign of high volatility, set a stop loss adjusted to the market’s volatility. The great help is to know when some major event may occur. For example, earnings reports can be a good time to be in or out of the trade because the volatility can arise.

    Pay attention to extremely low P/E stocks as a risk management strategy for buying stocks

    Don’t think that playing the stock market is easy. Beating it is more difficult. All you need is to find a stock that is trading at fantastic bargain levels. Well, how to find such opportunities?

    One way is to use the P/E ratio. Calculate it by dividing the share price by the number of earnings per share. If the stock is making a high-profit but its share price is low, the stock is undervalued. Beginners may think it is a good opportunity but if they never calculate the P/E ratio they could increase their risk.

    A trick of finding low-priced stocks

    For example, the stock made $4 per share of profit last year. But this stock is still cheap, its share price is $8 and the P/E ratio is, for example, 4. The average P/E ratio for the industry is, let’s say, 16. And you may think this stock should be trading at least over 4 times higher based on this ratio. But remember, that is just one single ratio. 

    This stock doesn’t have such a low P/E ratio without the reason. For example, the earnings are unsteady and the company may have problems paying a debt. So, the stock can be cheap if you look at the P/E ratio as a sole metric but traders noticed an increased risk and volatile stock. That affected its share price and the stock is trading at a lower price with the possible high risk involved.

    So, you’ll need to analyze other earning ratios or numbers. For example, compare the company’s share price to its cash flow per share. Find the industry average.  Only than you’ll if the stock is fairly valued. One note more, if the company boasts a low P/E ratio, be cautious. There is an added risk.  

    Traders-Paradise wants to show you how to do smart trading. A risk management strategy for buying stocks is one of the most important parts of trading. As far as you learn this, the more successful your trades will be. 

  • How to Value a Company And Find The Best To Invest?

    How to Value a Company And Find The Best To Invest?

    How to Value a Company?
    For investors, company valuation is a crucial part of determining the potential return on investment. Start by looking at the value of the company’s assets. 

    One of the most confusing questions for all beginners in the market is how to value a company. The worth of the companies is important for every investor. And the question of how to value a company has a sense for any investor, entrepreneur, employee,  and for any size company. Thus, you have to find the best way to determine the worth of the company. Do you need to ask to see the company’s books or you can value a company based on the existing customers or news? How much time will it take to learn how to value a company? When you notice some interesting companies where to go first? Yes, you can ask in many ways how to value a company.

    The first comes first.

    For every investor, the value of a company is a crucial part of determining the potential returns on investment. Every investor should know if the company is fair valued, undervalued, or overvalued because it has a great impact on a company’s stock or stock options. 

    For example,  a higher valuation might indicate the options will grow in value.

    So, if you want to know how to value a company, be prepared to take into consideration a lot of the company’s attributes. This includes revenue and profitability growth, stage of growth, operating experience, technology, commodity, business plans. Yes, but the list isn’t full without market sentiment, growth rate, overall economic circumstances, etc.
    To understand how to value a company in a simple way, you can take a few factors into account. 

    What metrics to use to value the companies?

    Here is how to value a company and basic metrics you can use for that. You can use the P/B ratio and P/E ratio. These two metrics are important when you want to evaluate the company’s stock. These basic metrics you can apply to almost all types of companies. But it is important to know the other and often unique factors that can affect the process of how to value a company.

    One of the variables in the valuation of a company’s health is debt. But a company’s debt is not continually easy to measure or define. So this metric can make the company’s value difficult to value.

    When you want to value a company or stock, it is smart to use the market approach that includes a comparative analysis of precedent transactions and the discounted cash flow which is a form of intrinsic valuation since it is a detailed approach, and also uses an income approach.

    How to value a company’s stock?

    There are several methods that may give you insight into the value of companies’ stocks. 

    They are the market approach, the cost approach, and the income approach. The cost approach means that a buyer will buy a share of stock for no more than a stock of equal value. The market approach is based on the belief that in free markets, supply and demand will push the price of a stock to a point where the number of buyers and sellers match. The income approach defines value as the net current value of a company’s future free cash flows.

    Market value as a method on how to value a company

    The market value is simple. It represents the shares trade for but tells us nothing about stock’s intrinsic value. Thus, we have to know the stock’s true worth. This is a key part of value investing.
    The stock value is shown in stock price. The P/E ratio is helpful to understand this value. To calculate the P/E ratio just divide the price of a stock by its earnings per share

    When the P/E ratio is high it is a signal for higher earnings for investors. This ratio is helpful to use if you want to know how to value a company. The P/E ratio shows the company’s possible future growth rate. But you should be careful when using the P/E ratio to compare similar companies in the same sector.
    Investors connect value to stocks with P/E ratios. If the average P/E ratio is, for example, 20 – 23 times any P/E ratio above 23 times earnings is classified as a company that investors keep in high 

    Investors and traders use the P/B ratio to compare the book value of a stock to stock’s market value. To calculate the P/B ratio use the most recent book value per share and divide the current closing price of a stock by it. If the P/B ratio is low you can be sure the company is undervalued. This metric is very useful if you want to have accurate data on the intrinsic value of the company.

    But be aware, there are several P/E ratios and numerous variations, thus you have to know which one is in play. For more about this READ HERE

    Cost approach or book value

    Book value is the amount of all of a company’s tangible assets (for example equipment) after you deduct depreciation. So, when we are talking about the company’s “net capital value” it means the book value, estimated by the company’s book of net tangible assets over its book of liabilities. To calculate the book value you have to divide the net capital value by the number of outstanding shares. The result is a per-share value. The book value never takes into account the brand, keep that in mind.

    Income as a method on how to value a company

    Use the capitalized cash flow to calculate a company’s worth when future income is expected to stay the same as it was in the past. But if you expect the income is going to vary, use the discounted cash flow method.

    Calculations are simple, divide the result from capitalized cash flow or discounted cash flow by the number of shares outstanding and the figure you get is the price per share.

    Bottom line

    By understanding how to value a company you’ll be able to understand the essence of making investment decisions. No matter if you want to sell, or buy, or hold the shares of stock in some company. Warren Buffett, for example, uses a discounted cash-flow analysis.
    Sometimes, the company valuation is held as the market capitalization. So, to know the value of the company you have to multiply all shares outstanding by the price per share. For instance, a company’s price per share is $10 and the number of outstanding shares is 4 million. If we multiply the price per share by the number of shares outstanding we will find this company is 40 million worth.

    To be honest, it isn’t too hard to value the public company. But when it comes to private companies it can be a bit harder. You can be faced with a lack of information. For example startups. They don’t have a financial track record and you have to value these companies based on the expectation of future growth. To value an early-stage company can be a great challenge. 

    Before you invest in any company, you’ll need to determine its value. This is important because you need to know if it is worth your time and money. Think about the company’s value as its selling price. Maybe it is the simplest way.

  • The Stock Price Pattern How To Identify It

    The Stock Price Pattern How To Identify It

    The Stock Price Pattern How To Identify It
    The price pattern is a visual illustration of market psychology. It shows when traders are inspired and move, when they are taking a breath and when they are willing to move further.

    The stock price pattern represents a form of price movement that is recognized by a set of trendlines and curves. Changes between rising and falling trends are usually shown by price patterns. The stock price pattern is important for technical analysis because it shows the current movement but also enables traders to predict future changes. For example, if the stock price pattern shows a change in trend direction, it is a reversal pattern. But if the pattern shows a continuation that means the trend proceeds in a direction following a shortstop.

    To explain this a bit clearer, for example, you are driving your car and the traffic is heavy, and you have to drive and stop, and drive and stop. Every time when you see the brake lights in the car in front of you, you know that you have to slow down. Otherwise, you’ll crash into the other car. The unknown fact is will the car in front of you continue to move in the same direction, pull aside or stop after that slowdown. 

    The same is with the stock price pattern. 

    When you notice a stock price pattern beginning to develop on a chart that is the sign the stock is going to slow down or consolidate. At that moment you have to slow down too and estimate what may happen. Also, at that very moment, you cannot know if the stock price will breakout and continue to move in your direction or it will change direction.

    Every trader must understand how important the stock pattern is. It is a really valuable tool that you need in your trader tool kit. Recognizing and understanding patterns isn’t easy but once you learn how to do that, you’ll be able to uncover the future price action with high probability.

    Characteristics of the stock price pattern

    So, we all understand that the price pattern is an evident picture of market psychology. It shows when traders are motivated and move, when they are taking a pause and when they are ready to move further. For some image in the stock chart to be a pattern, some conditions must be fulfilled. 

    Every single pattern is composed of four parts. Firstly, the pattern has to show an old trend. This means the trend of the stock price when it started to form the pattern. Also, the pattern must show the consolidation area. The consolidation area represents the zone where the trend is channeling or undefined. It is the area defined by set support and resistance levels. Further, the pattern must unveil the breakout point. That is the level where the stock price breaks the consolidation area. And, also as a part of an image on the chart to confirm it is a pattern, you must clearly see the new trend. The new trend represents the trend of the stock price when it starts coming out of the consolidation area. That’s how you can know that the stock price creates a pattern.

    What types of stock price patterns do we have?

    Chart patterns are an essential aspect of technical analysis. You’ll need to understand them. Stock price patterns are classified into two main categories: continuation patterns and reversal patterns.

    Continuation pattern unveils you the new trend has the same direction as the old trend was going. 

    The reversal pattern shows you the new trend is in reverse directions and starts to move in the opposite direction from the old trend direction. And that is the main difference between them. – the direction in which the new trend is moving.

    Both types of patterns have the characteristics we mentioned above.

    Trendlines

    Stock price patterns are recognized using a series of lines and curves, as we said. But how to guess trendlines and draw them? It is important to locate zones of support and resistance.
    To draw trendlines just connect by straight lines the dots of highs or lows, meaning descending peaks or ascending troughs. When the stock prices have higher highs or higher lows we are speaking about an up trendline. The opposite occurs when we notice a down trendline. That means the stock price has lower highs and lower lows.

    The body of the candle bar will show where the bulk of price activity happened. So, it is a better point where to draw the trendline.

    To draw a trendline you can use closing prices instead of highs or lows. And it is maybe better because the closing prices express the traders’ decision to hold a position. But be careful, the trendline drawn with only two points may not be quite valid. Always try to find three or more points.

    Uptrend happens where the price is making higher highs and higher lows. Up trendline connects at least two of the lows and registers support level below the price.

    The downtrend is the point where the price is making lower highs and lower lows. Down trendline combines at least two of the highs and shows a resistance level above the price.

    Consolidation happens where the price is swinging between an upper and lower span, which are shown as parallel and horizontal trendlines.

    Continuation stock price pattern

    A price pattern that signifies a brief break of a current trend is a continuation pattern. It is just a break, a short time for traders to take a breath when an uptrend occurs or to relax during the downtrend. The first is in connection to the bulls, and second to the bears.

    While a stock price pattern is developing, we can’t know if the trend will continue or reverse. So, we have to take attention to the trendlines and realize if the price breaks above or below the continuation area. It is always better to suppose a trend will continue until it is verified that it has reversed. Keep in mind, if the pattern needs more time to develop and you see the large price movement inside the pattern, it is a stronger sign the price will significantly break below or above the continuation zone.

    But if the price remains on its trend, it is a continuation pattern. Continuation patterns can be pennants, flags, wedges, triangles.

    Pennants are created by using two converging trendlines.
    Flags can be drawn with two parallel trendlines.
    Wedges are created with two converging trendlines, but both have to be angled either up or down.
    Cup and handles, which is a bullish continuation pattern. When having this pattern, you can be sure an upward trend has stopped for a short but will proceed after the pattern is confirmed.

    Triangles are the most popular chart patterns in technical analysis and they occur more frequently than the other patterns since they can last from a few weeks to several months. There are three most typical types of triangles: symmetrical triangles, ascending triangles, and descending triangles.

    Reversal pattern

    It indicates a change in the current trend. This pattern indicates the period where the bulls or the bears have run out of money. This means the trend will pause and then continue in the same direction.

    For example, an uptrend backed by enthusiasm from the bulls will pause. That means the influence of both the bulls and bears, so the result is a change in trend to the downside. The reversal that happens at market tops is a distribution pattern. That means more sold than bought assets. Opposite, a reversal that happens at market bottoms is an accumulation pattern, which means there are more bought than sold assets. 

    When the stock price reverses later, we are talking about the reversal pattern. Reversal patterns can be head ad and shoulders, double tops or bottoms, gaps.

    Bottom line

    You can identify the stock price pattern when the price makes a pause which indicates the zone of consolidation. Trendlines help in recognizing the price pattern that can develop in forms of flags, pennants, and double tops. The volume will decline during the pattern’s development, and increase when the price breaks out of the pattern. To have the better trading experience you can learn more in the Two Fold Formula book but first, try it with our preferred trading platform and check it.

  • How to Create a Trading Plan

    How to Create a Trading Plan

    How to Create a Trading Plan
    A trading plan is a set of rules and guidelines that define your trading performance, financial goals,  rules, risk management and criteria for entry and exit positions.

    Why is it so important to know how to create a trading plan? Because if you know how to create a trading plan, you’ll know on which market to trade, how to cut your losses, when to take profits and find other opportunities for investing. But first, we have to understand what a trading plan is.

    A trading plan is…

    It is a full decision-making tool that helps you determine what, when, and how to trade. Every trader has an individual trading plan suited only for her/his style, goals, risks tolerance, capital available, motivation for trading, the market you want to trade. 

    A trading plan is a methodical tool that helps traders to identify and trade securities. If you want to have a successful trading plan you have to take into consideration a number of variables such as time, risk and goals. A trading plan gives you control of how you will find and execute trades, the conditions you will buy and sell assets. Moreover, it determines how large a position you will take, how to manage it. Also, your trading plan will determine what assets you can trade, as well as when to trade or when not to.

    But there is also one important step more. Never invest before you make your trading plan because your capital might be at risk. A trading plan will guide your decision-making process.

    To know how to create a trading plan you must understand it is different from a trading strategy. Trading strategy means you know how and when to enter and exit the trade.

    The benefits of knowing how to create a trading plan

    Since the trading plan defines the reasons why you are making a trade, when and how you are making a trade, it is an outline of all your trades. If you follow your trading plan, you’ll be able to minimize errors and losses.

    Okay, creating a trading plan isn’t the most exciting thing you can do in your lives, and maybe that’s the reason why so many traders think about it as an irrelevant thing. How to think about the trading plan while some sexy things jump every second? News, charts, trend lines, hot stocks are more exciting, right? Wrong!

    Without a trading plan, you cannot use all these sexy tools, you have to couple them with your plan to produce reliable results.

    What do you think now, do you need to know how to create a trading plan?

    Frankly, the trading plan is not necessary to make a trade. You can trade without a plan. But, if you want to hit the road of successful traders, you will need it. We are pretty sure you don’t want a hold-and-pray strategy because it isn’t a strategy at all. It is a sure way to lose everything you have. Maybe it’s better to go to a casino where there will be more chances to win something. Remember, trading isn’t gambling. 

    And without a trading plan, you’re gambling. The truth is that you may have some winning trades from time to time, but your progress will be questionable. Your losses will be bigger than gains, think about this and do smart trading. Learn how to create a trading plan, so create it.

    How to create a trading plan?

    Follow the old saying: If you fail to plan, you plan to fail. Every trader should follow this expression as it is written in stone. While trading you have only two choices: to follow a trading plan and have a chance to win or trade without a plan and lose with almost 100% possibility.

    So, let’s create a trading plan and see what you have to take into consideration while doing that. Here are some hints.

    First, set your goals. 

    What do you want to get from the trade? Please, be realistic about your expectations toward profits. This will come with a bit more experience. Experienced traders, for example, expect the potential profit triples the risk.

    Can you see how much you have to be focused on risk? So, you must focus on risk. Your trading plan has to mirror your risk tolerance level. You have to determine how much risk you are willing to take. How much of your portfolio are you willing to risk on one trade? And you have to do that for every single trade. The regular risk range is from 1% to 5%, but usually, it is 2%. If your account is small you can take a bit more risk to get a bigger position. But if you lose a predetermined amount at any period in the day, you get out and stay out. Take a break, and then attack another day, when things are going your way.

    Do your research before you enter the trade. 

    Explore the big winners, take a look at the stock charts and find possible spurs to the value of a stock. Be careful while doing this. Your research has to be accurate as it can help you discover if the stock is going to perform in your direction. You can’t be sure 100%, but it will be easier for you to know that you did everything possible to avoid losses.

    Importance of entry and exit in a trading plan

    Every serious trader plans entries and exits. This means you must have a plan on when you enter the trade and where you exit. For that purpose, we are recommending our tool. 

    You must give equal importance to the exit of a trade if you want to make a profit.
    Set a stop-loss, to secure your pull out if things aren’t going in your direction. But you really have to get out at that point. Do you know your profit target? Get out when your profit target is met, don’t be greedy. 

    Take a pen and write down your plan

    Exactly. It is the best way to show how responsible you are toward your capital invested. It is your hard-earned money, you don’t want to fool around with that. Put your trading plan in a visible place, stick it to your computer, for example. Yes, we are recommending your trading plan has to stare at you all the time while you are trading.

    When you exit your trade, review it afterward. You will need to study how the trade went. If something was right or wrong you will be able to repeat or avoid it. So, take notes and keep them in your trading log.

    What do you have to determine else?

    Your stock trading plan should include additional factors to ensure it is completed.

    First is liquidity

    Liquidity can be a problem. When trade stocks this can be a serious element that needs to be considered because you can find a lot of stocks with very low liquidity. This doesn’t mean you should trade only large-cap stocks. You wouldn’t like to limit your opportunities.
    Just filter out the stocks without enough turnover to get in and out of the market quickly. For example, you can trade stocks that have an average daily turnover of 10 or 15 times the size of the position you want to take. Don’t avoid small stocks because they can provide you to trade wider.

    Second is volatility

    Your trading plan should take into account the volatility of the stocks. Some stocks are more volatile some less but, generally speaking, the stocks are volatile. This should befall your trading rules as part of a trading plan. So, adjust your trend filter for the volatility of the stocks. You may have a lot of benefits using that. Your trading plan should be adjusted for what you will do if stocks go bankrupt or are taken over at a premium. You have to position yourself if it happens and you have to do so in advance to protect your overall portfolio.

    Bottom line

    A trading plan should consist of all these factors mentioned above. The stock liquidity, volatility, risks, goals. Consider them when writing it. But even if you do this and more, there is no guarantee that your trades will make you money. As we said numerous times, the stock market is a zero-sum game. It is a system of winning and losing. You have to be prepared for that. One day can be extremely successful but the others could be a total disaster. There is no profit without risk and you can’t always win without an occasional loss. Remember, if you lose a battle, you may win the war. Don’t expect every trade to be a success and every stock in your portfolio to be a winner. Let your profits rise and lower your losses. That’s the way to win this game. 

    We hope you have a better picture of how to create a trading plan now.

  • What Is Options Trading Examples

    What Is Options Trading Examples

    What Is Options Trading?
    In options trading, the underlying asset can be stocks, commodities, futures, index, currencies. The option of stock gives the right to buy or sell the stock at a definite price and specified date. 

    By Guy Avtalyon

    Before we explain deeper: what is options trading, we need to understand why we should trade options at all. If you think it something fancy, you couldn’t be more wrong. Actually, the origin of options trading came from ancient times. For example, Ancient Greeks were speculating on the price of olives before harvest and traded according to that. When someone asks you: what is options trading and argues that it belongs to modern stock brokerages just tell such one about trading olives. 

    From the first day of trade existence, people were trying to guess the price of food or some item they wanted to buy. 

    What is options trading?

    We have a simple example to answer the question: “ What is options trading.”

    Let’s say we want to buy a stock at $10.000. But the broker tells us that we can buy that stock at $20 and the time is limited so we have to make our decision in a short time frame but we don’t know “ what is options trading.” This broker’s offer means that we have to pay $20 now and get a right to buy the stock after one month. Well, our right, in this case, obligates the seller to sell us that stock at $10.000 even if the price increases in value after one month. This $200 will stay in the broker’s account forever. We will never get it back. But we got the right to buy the stock at the price we are willing to pay. 

    How does options trading work?

    We understand there is a chance that the stock price will increase much over $10.200, we want to pay our broker an extra $200 to provide us the right to buy the stock at $10.000. Moreover, we saved the rest of our $10.000 so we can keep it or invest in something else while waiting for the end of the period.

    Okay, the end is here, the one-month period is over so what is the next? Well, we have the right to buy that stock at $10.000 and we noticed the price is much over that amount. Of course, we will buy it at the agreed price. But what to do if the price is below the guessed price? Remember, we have the RIGHT to BUY not OBLIGATION. So, we can buy or not depending on the stock price. 

    This is a very simple explanation on the question: What is options trading, but this is the essence. 

    The options are derivatives. That means their prices are derived from something else, frequently from stocks. The price of an option is connected to the price of the underlying stock. Options trading is possible with the stocks, bonds market, and ETFs, and the like.

    What are the advantages of options trading?

    Some investors are avoiding options because they believe they are hard to understand. Yes, they can be if your broker has a lack of knowledge about them. Of course, you can have less than need knowledge about options trading. But the truth is, it isn’t hard to learn because this kind of trading provides a lot of advantages. Keep in mind that options are a powerful tool so use them with the necessary diligence to avoid major problems.

    Sometimes, we think that characteristics like “critical” or “unsafe” are unfairly connected to the options. But when you have all the information about options you’ll be able to make a proper decision.

    Cost less

    One of the most important advantages of options trading is it will cost you less. Let’s see how it is possible.

    Yes, we know that some people will claim that buying options are riskier than holding stocks. But we want to show you how to use options and reduce risk. Hopefully, you will understand that all depend on how you will use them.

    First of all, we don’t need as much financial assurance as equities require. Further, options are relatively immune to the possible effects of gap openings. But the most important, options are the most dependable form a hedge. Are they safer than stocks though? Yes! 

    Lower risk

    Let’s say this way. When we are trading stocks, we have to set a stop-loss order to protect our position. We are the one who has to determine the price at which we are not willing to lose more. And here is the problem. Stops are designed to be executed when stocks trade at or below the limit we set. So, what if we place a stop-loss order at, for example, $36 for the stock we bought at $40. We don’t want to lose more than 10% on that stock. Our stop-loss order will become a market order and our stock will be sold when the price reaches $36 or less. This is how this order will work during the trading day but what can happen over the night? 

    How to use options as a hedge?

    Here is where the problems arise. Let’s say we closed stock at $38. Almost immediately after the opening bell, the next morning, due to the bad morning news about the company, our stock fell under $15. So that will be the price we’ll get for our stock. We’ll be locked in a great loss. The stop-loss order did nothing for us. If we bought the options as protection instead, we wouldn’t have such a great loss since the options never shut down after the closing bell. We would have insurance 24/7. 

    Can you understand how the options are a more dependable form of hedging?

    And as an additional choice to buying the stock, we could employ the stock replacement strategy. This means we would buy an in-the-money call instead of buying the stock. We have a lot of possibilities with options trading since the options mimic almost 85% of a stock’s performance. The benefit is that they cost 25% of the price of the stock. For example, if we bought an option at $25 instead of a stock at $100, our loss will be limited on that amount, not on the stock price. 

    Do options have higher returns?

    We don’t need to be a great mathematician (well, some of us are, that’s true) to understand that if we pay less and take the same profit, we have higher returns. That is exactly what options trading provides us. 

    Let’s analyze this part and compare the returns in both cases.

    For example, we bought a stock for, let’s say $100. You bought an option of that stock at $25. This stock has a delta of 70, so the option’s price will change 70% of the stock’s price movement. (This is a made-up example, please keep that in mind.)
    So, the stock price goes up for $10, and our position on this stock will give us 10% of the return. You bought an option and your position will give you 70% of the stock change (delta is 70, remember?) which is $7. 

    Do you understand?

    We paid the same stock $100, you paid $25.
    Our return on that stock is 10% which is $10; your gain on investment of $25 is $7 which is a 28% return on investment. Who made a better job?

    Of course, when the trade goes against you, options can impose heavy losses. There is a chance to lose your entire investment.

    Benefits of options trading

    Options trading can be a great addition to your existing investing strategy. They will give you leverage in your investing. You will have cheaper exposure to the stocks, increasing profits and losses when the stock price changes. One of the benefits is that options can reduce the risk in the overall portfolio. For example, a protective put trade. That is when you combine purchasing a put option to sell stock at a specified price. That will provide you the upside when the stock price rises but also, that will protect you from losses when the stock price drops. Also, you can earn by selling the options. You will receive the money even if the stock isn’t exercised. That is compensation for giving someone else the right to buy your stock but that one never did it. You’ll keep the money anyway.

    Bottom line

    Options offer more investment options. They are highly adjustable vehicles. You can use options for positions synthetics. But it is for advanced traders.
    But there are some extreme risks to options. Firstly, options can expire worthlessly. That will be a complete loss of whatever you paid for the options. Further, options are highly volatile. Many brokerages will offer options trading, but with some added requirements before they will let you trade options. 

    Also, speaking about options strategies, they will work well when you make many trades simultaneously. You have to know that options markets aren’t constantly liquid as the stock market. The simultaneous trades don’t always go ideally. So, your strategy may not work the way you expected. Many online brokerages will give you access to options trading with low commission costs. So, we all can use this powerful tool. But, take some time to learn how to use options accurately. It is still new for individual investors. 

    We’re doing smart trading.

  • Trading After And Before Regular Hours

    Trading After And Before Regular Hours

    Trading After And Before Regular Hours
    Traders can trade stocks during weekday mornings and evenings. Trading on weekends is not allowed. But you can benefit from differences in time zones on international exchanges.

    By Guy Avtalyon

    Trading after and before regular hours is possible. Okay, we all know that the stock market operates through regular trading hours and that is something even new traders know. But what they don’t know is that is possible trading after regular hours, meaning before and after. That is the so-called pre-market and post-market session. 

    Let’s take the US stock market as an example. The US stock market is open between 9:30 AM and 4 PM from Monday to Friday. Those are regular trading hours. Trading after and before regular hours means you have a chance to trade between 4 PM and 9:30 AM which is called the pre-market session and between 4 PM and 8 PM which is known as post-market session.

    Over the regular trading hours, the billions of shares are traded, while trading after and before regular hours involves just a small part of it. So, it is possible to trade both before and after the bell but what result would you have? That’s something we need to discuss. 

    Let’s make clear what is pre-market and to define what is the post-market session. But there is also something you, as a new trader, has to know.

    Stock market hours are not the same all over the world

    The markets are not all open at the same time. Here are the hours of the major stock markets around the world.

    USA
    The NYSE and the NASDAQ are open from 9:30 AM to 4 PM EST (Eastern Standard Time). Both markets are not open when the main federal holidays are.
    Canada
    The Toronto Stock Exchange is open from 9:30 AM to 4 PM EST also. It isn’t open for 10 holidays per year.
    Japan
    The Tokyo Stock Exchange is open from 9 AM to 11:30 AM and from 12:30 to 3 PM JST. The Tokyo Stock Exchange is not open for 22 holidays per year.
    Hong Kong
    The Hong Kong Stock Exchange is open from 9:30 AM to 12 PM and from 1 to 4 PM HKT which is UTC+08:00 all year round. It is not open for 15 holidays per year.
    China
    The Shanghai Stock Exchange and Shenzhen Stock Exchange are open from 9:30 AM to 11:30 AM and from 1 PM to 3 PM CST ( UTC+08:00). Both are not open for 15 holidays per year.
    India
    The Bombay Stock Exchange is open from 9:15 AM to 3:30 PM IST (UTC+05:30). It is not open for 15 holidays per year.
    United Kingdom
    The London Stock Exchange Group is open from 8:15 AM to 4:30 PM GMT. It is not open for 8 holidays per year.
    Europe
    The SIX Swiss Exchange is open from 8:30 AM to 5:30 PM CET. It is not open for 12 holidays per year.
    Euronext, Amsterdam, is open from 9 AM to 5:40 PM CET. It is not open for 6 holidays per year.

    Pre-market is…

    What is Pre-Market?

    Pre-market trading is a trading activity that happens before the regular market session. It usually happens between 8:00 AM and 9:30 AM EST. Traders and investors might gather very important data from the pre-market sessions while waiting for the regular sessions. No matter how volume and liquidity are limited during pre-markets. The bid-ask spread is almost the same. So, they are able to estimate the strength and direction of the market thanks to this data.

    You can find a lot of retail brokers that offer pre-market trading but with limited types of orders. On the other hand, only several brokers with direct access will provide the possibility to trade in the pre-market sessions. You have to know you would not find a lot of activity so early in the morning but you can find the quotes for most of the stocks. There are some stocks you can trade in the pre-market. For example, APPLE is getting trades at 4:00 AM EST.

    But the stock market is very thin before opening hours so you may not have many beneficial tradings early in the morning. Actually, it is possible to take additional risks.

    Since the bid-ask spreads are large some slippage may occur. 

    So, never place a trade too early. The majority of pre-market traders enter the market at 8 AM EST. It is understandable because that is the time when the volume picks up at once over the board. The most interesting are the stocks. The morning news is already published and prices may indicate gaps based on them. This can be very tricky for the stock traders. Well, pre-market trading is tricky for stock traders in general.

    How is that? Stocks can look strong at the pre-market session, but they can reverse direction when the market starts regular working hours. So, if you are not an experienced trader, you should analyze trading in the pre-market first.

    Advantages of pre-market trading

    You can get an early view of the news reports. But remember, the amount of volume is limited. So, you may have a false understanding of weakness or strength and you may fall when the real volume comes into play. Anyway, if you want to trade at pre-market you can complete your trades with limit orders over electronic networks only. Market makers have to wait for the opening bell to execute orders.

    Trading stocks after-hours is…

    It happens after the regular stock market hours are over.  Why would anyone want to trade in the post-market trading session?

    Well, the companies report earnings before the market opens or after the market closes. That’s strategy. The companies rather avoid reporting earnings during the regular market hours because they want to avoid unwilling changes in stock price caused by investors’ and traders’ reactions. For example, some companies announced their quarterly report during the regular hours but the results weren’t as good as expected. What is possible to happen? Well, investors and traders would like to sell that company’s stock and the price could easily and sharp drop making losses. 

    The truth is that the value of the stock will move no matter if the market is open or not. But, investors are seeking that very moment to access the market – the moment when the price is changing. That’s why the after-hours sessions are important. They are waiting for the companies to announce earnings reports and trade based on fresh news. Traders will not wait for the market opening bell. They will respond to the announcements and make a trade before the opening bell causes a stock fair value. If they don’t do so, they might be too late for profitable and smart trading. 

    Advantages of after-hours trading

    After-hours trading carries a lot of risks but also has possible benefits. Traders can trade based on really fresh news. That means they can act quickly and benefit from attractive prices. Also, it is convenient, also. Some investors don’t like trading at the on-peak time. Trading after-hours grants them this opportunity.
    Further, there is a wider bid-ask spread since the smaller number of traders. After-hours sessions are mostly made up of experienced traders. Also, there is higher volatility since the volume is lower. But we know, the higher the risk the greater reward is.
    The truth is that after-hours trading allows traders the possibility of great gains.

    There is no investing or trading without the risks involved. But if you choose trading after and before regular hours you will be faced with several very important risks.

    Firstly, you will not be in a position to see or trade based on quotes. Some companies will allow you to see quotes only from the trading system the company uses for after-hours trading. 

    Also, there is a lack of liquidity.

    Further, less trading activity could cause a wider bid-ask spread. That may cause more difficulty to execute your trade or to get a more favorable price as you could get during regular market hours. The additional risk is price volatility since the stocks have limited trading activity. Also, the stock prices can rise during the trading out of the regular hours but they could drop immediately when the bell opens the market.

    Despite all these disadvantages, trading in the pre-market and after-hours trading sessions could be a great place to start. Just keep in mind that there are additional risks.

  • CAGR – What Is It And Why You Should Know

    CAGR – What Is It And Why You Should Know

    CAGR Compound Annual Growth Rate
    Just like any other metric, CAGR is helpful but is more valuable as part of a larger analysis. Investors would need to look further.

    When new investors ask what is CAGR they have in mind some complicated formulas and Excel. Well, yes it is but it isn’t so complicated and Traders-Paradise will explain all about CAGR. 

    As first, if you want to build wealth, you have to hold an investment that provides you compounding. That could double your investment. 

    CAGR reveals how much your investment increased over time. It represents the average returns you have earned after some period. That period must be longer than one year. But here we come to the main point of compounding. If you count that only one stock could provide you a steady rate of return every year, forget it. The rate is changing. You will need to add more investments to your portfolio. And when you do that you would like to know how big is the profit you earned for your investments as a whole. Especially if you reinvest. Let’s say you invested in some company and your plan is to reinvest your gains over 5 years. Compound Annual Growth Rate will show you how much return earned you for each year during the holding period. Remember, you have to reinvest your gains every year. 

    CAGR is one of the most accurate methods to calculate returns for your investments, for each separately and for the whole portfolio. Basically, it is the best way to calculate returns for everything that can grow or drop in value.

    You will find that investment advisors like to use this word CAGR when they want to promote their offers. But we would like you to understand what Compound Annual Growth Rate really means and what represents.

    Compound Annual Growth Rate explained 

    CAGR or compound annual growth rate stands for the growth rate that your initial investment will need to grow to an established level over a given period of time. It is similar to compound interest.

    Your investment portfolio will have different rates of return over different times. Let’s say you might have huge gains one year, but the next year wasn’t so good, you made some losses.

    CAGR enables you to calculate returns of your whole portfolio over several years. That period can be 3, 5, 10 years and you can easily figure out how your investments have performed over that given period. That can help you to compare your investments to others.

    CAGR is a mathematical formula

    For example, you invested $10.000 at the beginning of 2018. By the end of that year, your investment grew to $20.000, a 100% return. But the next year you lost 40% and you end up with $12.000.

    So, how to calculate the return for these two years? If you try that by using annual return you will not have an accurate result. It will show you the average annual return of 30% on your investments (100%  gain and 40% loss). Which is a misleading number, because you have ended up with $12.000 and not $16.900.
    The average annual return doesn’t work and you’ll need to calculate the CAGR. So let’s do it.

    We have to divide the ending value of the investment by the beginning value of the investment for a given period, in our case, it is 2 years.

    Raise this result to the power of 1 divided by the number of years we are doing calculations for, which is actually square root in our case.

    And finally, we have to subtract 1 from the last result and multiply the result with 100 to get a percentage.

    ((ending value /beginning value) ^ (1/2) – 1) x 100

    That’s it.

    Compound Annual Growth Rate, in this case, is 9.54%

    Over the 2-years period, your investment grew from $10,000.00 to $12,000.00, and its overall return is 9.54%.

    CAGR actually provides a more precise view of your annual return. Our investment started at $10,000.00 and ended with $12,000.00. In the first year, it grew 100%, in the second we lost 40%. But despite this fluctuation, our investment shows a positive return through its lifetime.

    Why use the Compound Annual Growth Rate calculation?

    It is a helpful tool to compare different investments over a similar investment range. One of the most important advantages of using CAGR is that it, as a difference from the average annualized rate of return, doesn’t let the influence of percentage changes over the investment’s life. 

    Our example shows that the investment produced a 100% return in the first year, boosting the value from $10,.000 to $20.000. When you reinvested (our potential scenario) the whole capital you lose 40% and the value of investment fell. But it generated a positive return over the lifetime of two years.  

    Also, you can use this calculation as help to determine what type of annual returns you maybe need to reach your investing goals. For example, take some imaginary sum into the account and calculate is it good for your goals like retirement or buying a house, for instance.

    Disadvantages

    The disadvantage of CAGR is that it expects growth to be constant and may produce results different from the real situation when it comes to high volatile investment. Investors use this calculation for periods of 3 to 7 years. Over the longer periods, CAGR could lose some sub-trends, simply it can hide them. 

    CAGR doesn’t consider investment risk and volatility. It will always show a smooth yield. So, you may think you have a stable growth rate even when the value of your investment is varying a lot.

    So, remember this, the volatility and investment risk, are essential to examine when making investment decisions. But CAGR will tell you nothing about them. It does not estimate the non-performance associated circumstances in the change of value.

    Bottom line

    CAGR or compound annual growth rate is a helpful tool for measuring the growth over various periods. Imagine it as a jump from your beginning investment value to the ending value while you reinvest all the capital all the time.

    Using it you’re able to evaluate different investment options. But it will not tell you the whole truth. Analyze investment options by comparing their CAGRs from the same periods’, compare the one investment’s annual return to some other investment’s annual return. To evaluate the relative investment risk you will need a different measure.

    CAGR neglects the cash flows or volatility. But in combination with other metrics, it can give you a good view of investments or portfolio.

Traders-Paradise