Insurance and Credit

What is Online Stock Trading?

You can use the internet for online stock trading. You need not call up your broker for giving instructions on stock trading, and do all this while being at home or in the office. You would of course need a computer, an efficient service provider for your internet connection and a good online broker through whom you route your trades. This will allow you to make the trades through your online stock trading account as per your own judgment and with paying just a little commission.

What an online broker do for you?

The internet has spawned a lot of online brokers who would be happy to get your business and take care of your funds for the stock trades. Most of these brokers would only be eager to give you all the information you need before you enlist with them for their services.

Check on the minimum requirement of funds before you can start the online stock trading. Make sure of the fees and commissions that you may have to incur for such trades and that you will not be charged if you leave your account dormant for some time. Every time you make a trade, factor in these fees and commissions so that you are sure of your expenses before you count the profit. See that the online stock trading broker’s site is also able to give you their outlook on the market and help you out with suggestions for profitable trading.

Opening an account

Most online brokers will allow you to open an account with them online, subject to your sending them the necessary paperwork before your account is activated. You need to open an account with the stock exchanges, so that the stocks can be posted to your account electronically. He may also require you to pay certain enrolment and other fees before you can start online stock trading. Your bank account may also need to be linked up to your online stock trading account so that funds can be transferred easily while you carry out the online stock trading.

Most online brokers require that you deposit funds with them to start the trading activity. Initially, it’s possible that you may only be allowed to trade in the underlying stocks. Trading options on futures, forex, may require additional registration documents and procedures as this is considered to be very high-risk trading. Also, if you intend to trade on margin, there may be separate documentation and funding requirements for this. Check all this with your broker.

Online stock trading can be risky

The online stock trading that you do requires that you proceed with the same caution and care as you would in other trading activities. This is more so, because you are completely on your own and the action of buying and selling is immediate. Monitoring your portfolio at all times is a must, and you may find your online stock trading broker helpful in this, as most of these sites have tools that allows their software to give you a real time picture of your portfolio at all times. Their software would also have the ability to track and analyze the movement of any stock that catches your attention, so that you have all the information before you indulge in the online stock trading of that particular stock.

What is option trading?

You want to enter the stock market but would like to limit the investment that you would have to make. Then you need to try option trading. It could give you a much bigger bang for your buck. Option trading commits you to paying a premium in return for a right to buy or sell a specified amount of shares within a specified time period.

In option trading with stock for example, an option gives you the right to purchase or sell a fixed number of shares, determined by the option contract specification, within a specified time period and at a specified price. Hence, as an option buyer, you either execute that trade within the specified time period or forfeit the premium you paid, or else you sell the option itself for either a profit or loss depending on what has happened in the intervening period. Option trading expirations for a given option series are generally spaced one month apart, and the termination date is generally the third Saturday of the month or any other day decided by the Stock Exchanges. Once that date has expired, all rights of the trader cease and he cannot use the option to buy or sell that particular underlying stock.

Concepts

Option trading is quite dissimilar to stock trading. Before you decide to enter this field of trading options, you must understand the concepts and terminology, because the jargon alone can be very disconcerting to a new comer. The profit and loss concepts, as well as the various factors that contribute to the price of the option, are completely different to that of the underlying security. Option trading also provides you with vastly more opportunities to profit than does the simply purchase or sale of the underlying instrument. If you know what you are doing, it is actually safer to trade the options than the underlying stock.

In option trading there is no binding that you have to honor the commitments made, but the premium that you pay to retain these rights to exercise your option could be forfeited. The payment of the premium enables you to lock in the price of the stock for the time period agreed to, and if you find that during this time the value of the stock has appreciated, you are free to make the balance payment and take delivery of the stocks. Conversely if the value goes down and you feel that it is not worthwhile buying the agreed stocks you could cancel the option and forget about the premium payment that you made. This could be construed as a loss, but would be much less than the loss you would have made if you had purchased the agreed stock at the start of the period at the price that was prevailing at the time.

The stock price may drop or just remain lower the exercise price, the buyer of call option cannot use at all, but can also sell the option and in that way exit the position at a loss or breakeven. Instead, he can hold onto it with the hope that there will be rise in the option of the market value, by depending upon factors such as volatility, expiry time and much more.

Usually, the options of leverage can control a bulk amount of the original stock for relatively small capital expenditure compared with buying or selling the underlying tool. This makes options more attractive because there exists higher profits on investment than just trading the original instrument. There are also far more trading opportunities with lower risks that can be known only when you know what you are doing?

Terminology

Blocks of 100 shares are considered for option trading.

Call option: The option giving the right to buy the underlying instrument at the strike price.

Put option: The option giving the right to sell the underlying instrument at the strike price

Strike price: This is the price of the stocks for agreed on when the option trading contract is made.

You are considered to be “in the money” if your strike price is less than the existing price at the time of the option and you put in a call option, or you put in a put option and the strike price is lower than the existing price.

Out of the money: When the strike price is above the existing price of the stock and you exercise a call option, and when the strike price is below the existing price of the stock and you exercise a put option.

Day trading defined

The practice of buying and selling stocks, stock options and currencies within the same trading day so that there is no outstanding left at the end of the day is referred to as day trading. This practice was originally followed by investment firm employees who were specialists in investment. But with the electronic way of trading having made its entry into the market, day trading is now practiced by many people who are at the most casual traders.

Day trading can be risky

Stock market professionals have found that day trading is an avenue to make money. So whether you are doing the day trading as a regular trader or just looking to increase the money you have, day trading followed correctly and carefully has proved that it can help you to increase your money stash. There are a lot of risks in day trading and you can lose money as fast as you can make it, but taking these risks and making the correct decisions can help you to make more profit from day trading.

Tips to follow while day trading

The basic secret to making money from the stock market is not an earthshaking one. You purchase a financial instrument when prices are low and sell when prices go up (or, you sell short when prices are higher and buy the instrument back when prices move lower). This seems quite simple, but it is making the correct judgment and deciding the right time to buy and sell that is the hallmark of a successful day trader.

The internet is another source of information. Nowadays there are also TV channels dedicated solely to the stock market and viewing these can always keep you up to date. Do not overload yourself with information and limit yourself to reading, surfing the internet or viewing the channels that you are comfortable with. Limit your day trading activities to just a few shares that you think are the best for you and concentrate on learning all you can about them. Also see that you are always well aware of the stock market in general and the movements of the shares of some of the larger blue chip companies.

Select only those stocks that constantly show substantial movement, i.e. volatility, because it is only such stocks that can make a profit for you via conventional day trading. If they lack movement remove them from your list of stocks in which you will trade daily (yes, you CAN make money from inert stocks via options, but that is beyond the scope of our discussion here). Learn to make a quick but accurate analysis of the movement of the stocks that you are interested in, so that you can take early decisions and gain from this action. This is best done through becoming excellent at technical Analysis – the art of predicting stock price movements from price charts. Remember that a small movement everyday may mean just a percent or two, but when added up throughout the year could make a huge sum. So you may have to base your day trading activities on just a few percentage points.

Keep your emotions always in check. A very good profit van also be followed by a loss and you need to keep your perspective and constantly see that you are ahead of the game, and not allow emotions to cloud your judgment.

Conclusion

Day trading can make you a fortune if you persist with some sensible trading. Keep your knowledge about the stocks you deal in up to date, have a limited portfolio which is easy to manage, the analysis of the price changes and decisions to buy and sell are correctly made and you keep your feelings well under control.