Understanding the Importance of

A is a small share that represents a partial ownership of a company. Stocks are issued by companies in order to raise capitals and are bought by in order to acquire a portion of the company. Even a small share of the company will give the investors the right to have a say in how the company is run. Although they gain a portion of the company͛s profits, investors do not carry an obligation to the company in cases of defaults or lawsuits.

Stocks are issued by companies to raise capital. A cash injection is needed for either property acquisition or company expansion. Every stock is limited to a particular number of shares. The growth potential and perceived health of the company influences the market adjustment of the of the stocks.

Investors buy stocks with the belief that the company will grow continuously to raise the value of their shares. Acquiring stocks from a new company is considered to be more risky than buying shares from a well-established company but the potential gain is much greater. People who invested in Microsoft shares gained a lot of profit due to the exponential rise of the company.

Only those companies which are listed on public exchanges like the New York (NYSE) or the National Association of Securities Dealers Automated Quotation System () are capable of stock trading. The shares from the companies listed on public exchanges can be bought and sold on the open market. Buying a partial ownership in smaller companies that are not listed on a stock exchange is also possible but that is a very different type of investment.

An individual hires a broker to make transactions for him. A broker takes specific orders from the investor regarding the buying or the selling of stocks. These orders may include some specific instructions to trade at a price that the market will bear or at a price that the investor will prefer. The broker then tries to execute the investor͛s orders by searching for either a buyer or a seller. The broker receives a commission on the sale.

Stocks have a lot of advantages over savings investments because they represent ownerships in a particular company. This gives the investor a certain right to participate in making decisions for the company. Some important company matters require voting and one stock is equivalent to a single vote. Partial company ownership also allows the stockholders to benefit from the company͛s profits which are distributed in the form of . These may be issued one or twice a year at the discretion of the company directors.

A prospering company causes the value of the stocks and the profits to increase while a suffering company causes the value of the stocks and the profits to decrease. Stocks, when compared with savings investments, both carry a higher risk of losing money and a higher potential of earning money. A good knowledge of the different stock markets and the various investment strategies can help investors to minimize their losses.

Stock market

³´ is a term used to describe the physical location where the buying and selling of stocks take place as well as the overall activity of the market within a particular country. The correct term to be used in pertaining to the physical location for trading stocks is ³stock exchange.´ Every country may have a couple of different stock exchanges that are usually traded on only one exchange although a lot of large corporations may be listed in several different locations.

The ubiquity of stock exchanges makes it possible to buy or sell stocks throughout the world. The only restriction to stock exchanges is time. Different exchanges may have differing opening hours based on their local times. The major stock exchanges in the world are the of Japan, the Bombay Stock Exchange of India, the of United Kingdom, the of Germany, the SWX Swiss Exchange of Switzerland, the Shanghai Stock Exchange of China, and the , the NASDAQ, and the AMEX of United States.

The economic health of a country is closely followed by stock markets. Bull markets occur when a particular nation experiences high economic production, low unemployment level, and low inflation rates. Bear markets, on the other hand, follow the down trends in the economy. Such indicators of economic downfall are increased unemployment and inflation. These causes the fall of stock prices.

Supply and demand, which are determined to a large extend by investor psychology, also influence the fluctuations in the prices of stocks. A rise in stocks may cause a lot of investors to jump into the bandwagon which later drives the price even faster. A falling price, on the other hand, can drive the same effect called term fluctuations. After such runs, stock prices tend to normalize.

Aside from the stock exchange, other popular markets that offer many investment opportunities include the Foreign Exchange Market (FOREX), the Futures Market, and the Options Market. The FOREX is the biggest investment market in the world, in terms of trades and values. The traders in a FOREX buy one currency against another and profit from small changes in the value. Most FOREX trades are entered and exited in a 24-hour span so traders have to keep a close watch on the market in order to make profitable trades.

The futures market is a market of contracts where goods are bought and sold at specified prices and times. The desire of most buyers and sellers to lock in the prices of their goods for a future delivery despite the market conditions resulted to the existence of the futures market. The market conditions can make the actual futures contract to fluctuate considerably in value. Most of the investors in the futures market are mainly interested in the profit that can be realized in trading contracts and not in the actual goods.

Another alternative market is the options market. The options market is quite similar to the futures market because it also features a contract that gives the right, and not the obligation, to trade a stock at a certain price before the specified date. These can be traded on their own or purchased as an insurance against price fluctuations within a specified time frame. The FOREX, the futures market, and the options market are all quite risky markets that require a considerable knowledge and experience to prevent any substantial loss. These also require a very close attention to the different market movements. As compared to the three, stocks are considered to be less risky because the movements of the market are usually gradual and although short term investment strategies are possible, a lot of people view stocks as term investments.

A bull market & a bear market

There are two ways to describe the general conditions of the stock market: it can be a bull market or a bear market. A bear market indicates the continuous downward movement of the stock market. Conversely, a bull market indicates the constant upward movement of the stock market. A particular stock that seems to be increasing in value is described to be bullish while a stock that seems to be decreasing in value is described to be bearish.

The bull and bear terms do not refer to the short term fluctuations in the stock market. A bear market is the stock market wherein the prices of the key stocks have fallen by 20% or more over a period of at least two months. Prices, even during a bear market, may temporarily increase. Bull markets, being the opposite of bear markets, indicate a rise in the prices of the key stocks over a certain period of time.

The economical state of a country is usually reflected through the stock market conditions. The stock market of an economy with reasonable interest rates and low unemployment rates is considered to be bullish since it is doing just well. Bear markets, on the other hand, usually occur during a slowdown in an economy. The investors tend to lose their confidence and the companies begin to lay off their workers. An exaggerated bear market will eventually lead to a crash that is brought on by panic selling while an exaggerated bull market will actually result to a market bubble that is brought on by investor over-enthusiasm.

Even if most money can be made during bull markets, bear markets also present a lot of financial opportunities. Investors use their knowledge of the characteristics of each type of market as an investment strategy. It is expected that a bullish market will generate a huge number of investors who wish to buy some stocks. Because a bullish market could also mean that the economy is doing well, there will be a lot of people interested in buying stocks since they have the extra money to spend. This kind of situation will cause an increase in the prices of the stocks because there will be a shortage in the supply of stocks. During bear markets, it is expected that a lot of investors will have the desire to unload their stocks and put their money in fixed-return instruments like bonds due to the continuous decrease in the prices of the stocks. Supply tends to exceed demand as money is withdrawn from the stock market. This causes the prices of the stocks to lower even further.

It is easier to make money during bull markets. In a bull market, all dips are temporary and they are going to be corrected any time soon. Since the upward rising of the prices cannot go on forever, the investors need to sell their stocks when the market reaches its peak.

Bear markets are considered to be opportunities of picking up stocks at bargain prices. Approaching the end of a bear market will offer the greatest chance to generate some profit. Since the prices will most likely fall before they recover, the investors have to be prepared for some short-term loss. One investment strategy used during bear markets is short selling. It involves the selling of the stocks that they do not own in the anticipation of further decrease in prices. This strategy gives the investors a chance to buy the stocks for a price that is lower than their previous selling price.

During bear markets, fixed-return investments such as CAs and bonds can also be used to generate income. Defensive stocks, which include government-owned utilities that provide necessities despite the current economic state, are also safe to buy even during bear markets.

A Comparison of Stocks and Mutual Funds

Mutual funds are diverse stock holdings which are managed on behalf of the investors who buy into the fund. Mutual funds allow investors to take advantage of a diversified portfolio without the need of investing a large sum of money.

A diversified portfolio carries the advantage of offering protection against the rapid market losses of any particular stock. If stocks lose their value, the effect will be less if they belong to a portfolio that is spread across twenty stocks than if they belong to a portfolio that is consist of a single stock.

Diversification is always a good idea in making investments. The problem for small investors is that usually don¶t have enough funds to buy a variety of stocks. Despite their limited funds, small investors benefit from diversification through mutual funds.

Mutual funds, aside from stocks, can be consisted of a variety of holdings that include bonds and money market instruments. Mutual funds are actually the companies and the investors are really the company share buyers. The shares in a mutual fund are either directly bought from the fund itself or indirectly bought from the brokers who represent the fund. Selling them back to the fund is a way of redeeming shares.

There are some funds which are managed by investment professionals who decide on which securities to include in the fund. Non-managed funds are also available. Indexes, such as the Dow Jones Industrial Average, usually serve as the bases for the funds. The funds, which simply duplicate the holdings of the index where they are based on, rise by a percentage that is the same as that of the chosen index. Non-managed funds often perform well and they sometimes perform even better than managed funds.

Mutual funds also carry some downsides. Aside from paying some fees no matter what the performance of the funds is, individual investors also have no say in which securities have to be included in the funds or not. In addition to this, the actual value of a mutual fund share is not as precise as that of the stocks on the stock market.

For small investors, a mutual fund is still considered to be a better choice than either stocks or bonds because they offer the diversity that provides cushion against unpredictable stock market movements. They also provide a greater return than bonds. Mutual funds can also lose value especially in the short term. Short-term investors are better off with bonds that offer a set .

The three main types of mutual funds are money market funds, bond funds, and stock funds. The type that offers the lowest risk, money market funds consist solely of high quality investments like those which are issued by the US government and blue chip corporations. Although they rarely lose money, money market funds also pay a low rate of return.

The aim of bond funds to produce higher yields than money market funds caused them to carry a correspondingly higher risk. The risks that are associated with bonds, such as company bankruptcy and falling interest rates, are also applicable to bond funds.

The types of funds that carry both the greatest potential for profitable investment and the greatest risk for losses are stock funds. The risk in stock funds is mostly for short-term mutual fund holders because stocks have traditionally outperformed other investment instruments in the long run.

There are different types of stock funds including µgrowth funds¶ that attempt to maximize capital gain and µincome funds¶ that concentrate on stocks that pay regular dividends. Those with limited funds or investment experiences are recommended to invest on mutual funds. When choosing the right fund, investors have to consider how much risk they are willing to take against their expected investment returns.

Basic Information about Pink Sheets Stocks

Pink Sheets is an electronic quotation system for many Over-the-Counter (OTC) securities. The name of the system was derived from the color of the paper where the quotes were originally printed on. Nowadays, Pink Sheets publishes quotations on the Internet. Most of the listings on Pink Sheets are penny stocks.

Securities that are less than $5 in value are called penny stocks. Most of the companies listed in the Pink Sheets are those that cannot meet the requirements of other exchanges like NYSE and NASDAQ. Since the Pink Sheets has no requirements, companies opt for this kind of system in order to trade penny stocks. Companies with no financial histories can also be listed on the Pink Sheets.

Although the Pink Sheets is not a registered stock exchange, it can list companies that will otherwise be unable to raise capital through stock offerings. It is not regulated by the Securities and Exchange Commission (SEC). The Pink Sheets is only accessible by brokers who are licensed by the National Association of Security Dealers (NASD). The brokers are required to follow the regulations set by the NASD while the companies are required to follow the Federal and State security laws.

The stocks listed in the Pink Sheets carry more risks than the stocks which are listed on regulated exchanges like AMEX. A lack of financial data usually indicates that a company may be on the effort of preventing bankruptcy or on the attempt of staying afloat. Some companies just use the Pink Sheets as an intermediate to raise capital while still in the process of becoming listed on regular exchanges.

In order to get listed in the Pink Sheets, companies need to hire broker dealers that will quote the stocks. The only requirement is that the broker has to be a member of the National Association of Securities Dealers (NASD). Once they are listed, the companies remain in the Pink Sheets list as long as the stocks are quoted. It is also possible for a stock that no longer exists to stay quoted in the Pink Sheets.

The low cost is the main advantage of buying Pink Sheets securities. Investors who wish to get in on a new company from the beginning are able to pick up stocks for literally pennies. In the event that the company does well and grows, the small initial investment will then pay large dividends.

The main advantage of buying Pink Sheets securities is their low cost. Investors who hope to get in on a new company right at the beginning can pick up stock for literally pennies. In the event that the company does well and grows the small initial investment will pay large dividends.

There is also a very real risk that the company will simply vanish. It will just leave the valueless stock issues behind so investors who are interested in penny stocks listed on the Pink Sheets should be prepared to lose all. Because of that reason, Pink Sheets investments have to represent only a small portion of an overall investment portfolio.

The lack of liquidity in the Pink Sheets listings is another risk that investors need to deal with. Because the volume is generally low and the search for stock buyers is actually difficult in Pink Sheets, a lot of sellers tend to settle for even lower prices just to unload their shares.

Comprehending the Stock Market through (Part One)

The art and science of examining stock chart data and predicting future stock market movements is called technical analysis. This style of analysis is used by investors who are often concerned about the nature and the value of the companies where they trade their stocks in. The holdings are usually short-term since the investors drop the stocks once they reach their projected profit.

The belief that stock prices move in predictable patterns is the basis for technical analysis. The factors that influence the movement of the price are supposedly reflected in the stock market with great efficiency. These factors include company performance, economic status, and natural disasters. The efficiency, when coupled with historical trends, produces movements that can be analyzed and applied to the future movements of the stock market.

Because the fundamental information about the potential growth of a company is not taken into account, technical analysis is not intended for long-term investments. Trades are entered and exited at precise times so technical analysts need to spend a lot of time watching the movements of the stock market. Investors can take advantage of both upswings and downswings in price by going either long or short. In the event that the market doesn¶t move as expected, the losses can be limited by stop-loss orders.

Hundreds of stock patterns have been developed over time. Most of these patterns rely on the basic concepts of ³support´ and ³resistance.´ The level where downward prices are expected to rise from is called the support while the level where the upward prices are expected to reach before falling again is called the resistance. Once they hit the support or the resistance levels, the prices tend to bounce.

Charts

Technical analysis is heavily reliant on charts for tracking market movements. The most commonly used of these charts are the bar charts. Bar charts contain vertical bars that represent a particular time period. The top part shows the highest price for the period while the bottom part shows the lowest price. There are two small bars in the chart. The small bar in the right indicates the opening price while the small bar in the left indicates the closing price. A large price spread is indicated by long bars. The of the side bars shows if a price increased or decreased and it also shows the spread between the opening and closing prices.

Candlestick charts are variations on the bar charts. Solid bodies are used by these charts in order to indicate the variation between the opening and closing prices. The lines or shadows that extend above and below the body show the highest and lowest prices. When it comes to the color of the candlestick bodies, black or red represents a closing price that is lower than the previous period while white or green represents a closing price that is higher. The various shapes formed by the candlesticks also describe certain movements in the stock market. A bullish stock, which opened near its low and closed near its high, is represented by a green body with short shadows while a bearish stock, which opened near its high and closed near its low, is represented by a red body with short shadows. There are over twenty different patterns that can be formed by candlesticks

Comprehending the Stock Market through Technical Analysis (Part Two): Indicators and Patterns

An untrained eye, when glancing at stock market charts, will only see random movements from one day to the next. For trained analysts, these movements are patterns that they can use to predict the future movements of the stock prices. There are over a hundred different indicators and patterns that can be applied to technical analysis. There is no such thing as a single reliable indicator but investors can be quite successful when it comes to predicting price movements.

Patterns

The Cup and Handle is one of the most popular patterns in stock market price movements. The cup represents the movement of the prices that starts relatively high then dips quite low and comes back up. The prices level out for a period before making a breakout. This period, which indicates a sudden rise in price, is represented by the handle. Buying on the handle usually generates good profits.

The bearish pattern that indicates the substantial fall of prices after a dip and a rise is called Head and Shoulders. This pattern starts with a peak called the first shoulder that is followed by a dip and a higher peak called the head. It is followed again by a dip and a rise that is now called the second shoulder.

Indicators

Moving Average The moving average is the most popular stock price movement indicator. It shows the average price over a period of time. The most common averages used in this indicator are 20, 30, 50, 100, and 200 days. For a 30-day moving average, the closing prices for each of the 30 days are added before they are divided by 30. Longer time spans are considered to be less affected by the daily fluctuation of prices. A moving average is plotted as a line on a graph of price changes. Prices that fall below the moving average have a tendency to keep on falling while those that rise above the moving average have a tendency to keep on rising.

Relative Strength Index The index (RSI) is an indicator that uses a comparison between the number of days a stock finishes up and the number of days it finishes down. It is calculated for a certain time span that is usually between 9 and 15 days. The calculation of the RSI starts off by dividing the average number of up days by the average number of down days. The quotient is then added to one and their sum is divided by one hundred. The result is then subtracted from 100 because the RSI is expressed in a number that is between the 0 and 100. An overbought stock that is due for a fall in price can have an RSI of 70 or above. An RSI that is below 30 indicates a stock that may be oversold. RSI numbers are not absolute and they can vary depending on whether the market is bearish or bullish. An RSI that is charted over long periods of time has the tendency to show less extreme movements. A look at the historical charts over a period of a year or so is one way of comprehending how a stock price moves in relation to its RSI.

Money Flow Index While the RSI is calculated by following stock prices, the (MFI) is determined by taking into account the number of traded shares and the prices of the stocks. Like the RSI, the MFI range is from 0 to 100. An MFI of 70 indicates selling while an MFI of 30 indicates buying. When charted over longer periods of time, the MFI can be a more accurate indicator.

Bollinger Bands Bollinger bands are indicators that are plotted as a group of three lines. The upper and lower lines of the Bollinger bands are plotted according to the of the market. A volatile market is represented by a wide space between the lines. The lines come closer together as the volatility lessens. The simple moving average between the two outer lines is represented by the middle line. A movement of prices closer to the lower band is a strong indication that the stock is oversold and that the price will increase soon. As prices rise to the higher line, the stock becomes more overbought that its prices will begin to fall. Investors use Bollinger bands to confirm the credibility of other indicators. Skilled technical analysts will always use a couple of indicators before making a decision of whether to trade a particular stock or not.

Getting Started on the Stock Market

Stocks can be bought and sold by anybody who has money. Knowing the basics will help people understand how stock trading works despite the process¶s own specialized vocabulary. People who have knowledge about stock trading are the ones who are most likely to be successful in the investment industry.

Most stock trading activities are done through an intermediary called a broker. Brokers, who take and execute orders from the investors, can also offer investment advices and analyses to their clients. Such brokers are called full-service brokers and they charge a relatively high commission. The types of brokers that do not offer investment advices to their clients are called discount brokers. Investors who wish to save more money usually hire discount brokers because they charge less commission.

Online trading and broker-assisted trading are two of the most commonly offered services by brokers. There are some brokers who use an Interactive Voice Response System for placing orders via telephones and a Wireless Trading System for making orders via web-enabled cellular phones or other handheld devices.

There are some brokers who use their own proprietary software for placing online orders while some give their website passwords for accessing order departments. Brokers allow their clients to track the stock market movements by offering a variety of charting options. The analysis software provided by brokers may be included in their services either for free or for an extra fee.

Types of Orders

The orders made when buying or selling stocks can be classified into different types. An instruction to buy or sell a stock at the current market price is called a ³market order.´ This order is usually executed near the quoted price at the time of the order was made. There may be a difference between the actual transaction and the quote if there is some inactive trading of stocks or rapid fluctuation of prices.

An expectation of stock price movements that leads to the interest of buying or selling stocks at a certain price above or below the current price initiates the placing of either a ³stop order´ or a ³limit order.´ A stop order instructs the broker to trade at a certain stock price, while a limit order instructs the broker to trade at a specified stock price or something better.

Stop orders, which help in limiting losses and protecting profits, become effective when the market hits the . Because the stocks are traded at market price after they become active, brokers who are given stop orders are allowed to trade above or below the stop price. Limit orders, on the other hand, may not be placed at all even if the market reaches the limit price. The fast movement of the market may not provide enough time to execute the order before the price falls out of the limit price range.

For example, an investor buys a share of Bell Canada Enterprises (BCE) at $50 and put in a stop order of $45. If the BCE stock price falls to $45, the stop order will become effective and the stock will become available at market price. Conversely, if an investor buys BCE for $60 and put in a limit sell, then his stocks will be sold at a profit only when the price rises to that level. The investor can also buy BCE with a limit buy order for $45 to allow him to possibly buy the stock at a price that is less than the current market price. If the price doesn¶t fall to the limit buy price, however, the investor cannot buy that stock.

All orders can be placed as either ³good µtil canceled´ (GTC) or ³day order.´ A GTC order will remain in effect until it is canceled but a day order will remain in effect only until the end of the current trading day. Stocks are commonly traded in multiples of 100 that are called ³round lots.´ Trading other amounts of stocks, which is called an ³odd lot,´ is also possible. Trading software can handle either type of orders but odd lot orders are considered to be more difficult to fill than round lot orders.

How Stocks Are Priced

Many people are still confused about the pricing of stocks and the movements of prices when they read through the list of stock prices in the newspapers. There is a wide variety of stock prices and there are many people who kept on wondering why some well-known companies are being traded for relatively low prices while some lesser known companies are being traded for excessively high prices.

Stock prices, to a certain extent, are determined by the confidence of an investor that is based on either a real or a perceived performance. The financial status of companies are reported on a quarterly basis when their cash flow, sales, and earnings are disclosed. The worth of a company is based on its financial status but it can be overrode or undermined by the of the investors.

Rumors spreading in the stock market usually affects the fate of the stocks. For example, an ongoing rumor stating that a particular company is planning to make a strategic move will cause investors to come flocking just to buy stocks from that company. The principle of supply and demand applies in the stock market. A sudden upsurge in the interest of investors will cause the stock prices to rise while a fear among investors will cause the prices to plummet. The worth and the performance of a company are still considered to be the biggest factors in the determination of stock prices.

Stock prices can be found in the daily market summaries of newspapers or online sources. They provide information about the current prices and market movements around the clock. Stock brokers also provide quotes which can be accessed either via the Internet or via a telephone.

A stock quote table, which can be found in a newspaper or an Internet website, contains useful information that can help investors to make their decisions regarding the buying or selling of stocks. Reading a stock table requires a necessary skill for anyone who is interested in the activities of the stock market.

Latest Change 52 Weeks

symbol net % time high low volume high low price BCE 31.150 -0.480 -1.52 16:57 31.750 31.110 3,643,000 33.000 27.150 BGM 17.060 -0.280 -1.61 15:54 17.300 17.040 207,400 26.850 17.110 IBM 79.820 -0.290 -0.36 16:01 80.680 79.560 4,999,200 99.100 71.850 MSFT 24.670 -0.310 -1.24 16:00 25.050 24.670 73,696,700 27.940 23.820

The first column of the stock quote table contains a 3 or 4-character long ticker symbol that indicates the name of the company. For example, BCE stands for Bell Canada Enterprises while MSFT stands for Microsoft. The list of ticker symbols can be searched through the Internet.

The latest price indicates the current price at the time the table was published. The latest price in the tables found in newspapers describe the closing price for the day. The prices in the Internet, however, are updated every few minutes.

Change is the difference between the previous day closing price and the current stock quote. High indicates the highest price while Low indicates the lowest price of the stocks sold as of the last trading day. Volume describes the number of shares that have been traded for the day. The 52-week High and Low shows the highest and lowest prices in the previous year.

Some tables contain additional columns to make room for other information such as the Bid Price, which is the price a buyer is willing to pay; the Ask Price, which is the price a seller is willing to sell; the Price/Earnings Ratio, which is the stock price divided by the ; the Market Cap, which is the outstanding shares multiplied by the current market price; and the Dividends Per Share, which is the current annual that the company pays.

The Definition of Penny Stocks

Low-priced stocks of small companies that usually carry a value of less than $5 are called penny stocks. These type of stocks are traded on the Over-the-Counter-Bulletin-Board (OTCBB) and the Pink Sheets. Both of the mentioned trading venues do not have the same kind of minimum requirements of exchanges as those which are set by the Securities and Exchange Commission for the NASDAQ or the NYSE. Penny stocks are issued by those companies that are either starting businesses or approaching bankruptcy. A new issue of stocks is one way of injecting quick capital that can be used to save the business.

Lack of standards, lack of stability, and decrease of prices are some of the factors that cause penny stocks to be one of the riskiest investments around. Although successful companies experience a great payoff, a vast majority of penny stocks often end in bankruptcy. Here are some of the reasons why penny stocks are considered to be risky:

Lack of information about the company Most companies have very little reportable history and those which are listed in the Pink Sheets or in the OTCBB aren¶t required to issue financial statements.

Low liquidity Finding potential buyers is difficult because penny stocks are infrequently traded. In order to interest an investor to buy the stock, the price of the penny stocks need to be lowered substantially.

Potential fraud. Penny stocks, as a result of their unregulated nature, are often sold by con artists through spam emails or off-shore brokers.

Not all penny stocks are issued to gain money by fraud or to deal with bankruptcy. There are some penny stocks which are used to represent hard-working businesses that are struggling to meet the necessary requirements to get listed on NYSE of NASDAQ. Investing in such companies offers real growth potential because investors have the opportunity to get in at the ground floor and ride all the way to the top. Finding companies with this growth potential is difficult. A lot of research is needed to get this information. Unless they willingly take the time to personally investigate a company, investors could be victimized by fraud. Nowadays, there are some companies that offer ³inside information´ about which companies sell penny stocks. Investors always have to be extra careful since there are other companies which only serve as fronts for pushing particular stocks on unsuspecting investors.

The two ways to play the penny stocks are to do research and to play craps. Since the stocks come with low costs, investors will not lose vast amounts of money in case the company goes under. Penny stocks are also considered to be interesting additions to any portfolio. It must be stressed, however, that only a small portion of any portfolio should consist of penny stocks because the odds are that most penny stocks will end up in a total loss.

Investors who are interested in buying penny stocks need to find a broker that will place orders for them. Although a lot of brokers will not cover penny stocks due to the difficulty in tracking them, there are some online brokers who specialize in penny stocks. Regulations require brokers to receive a written confirmation from their clients concerning the transactions. Brokers are also required to provide their clients with a document that outlines the risks of speculating with penny stocks.

The current market price of the stock and the compensation amount of the firm has to be disclosed by the broker. They also have to provide their clients with monthly statements that detail the market value of each penny stock in the account.

The Differences between Stocks and Bonds

Investors buy stocks to acquire a partial ownership in a particular company and buy bonds to make a loan to corporations or governments. While stockholders benefit from the company profits, the bondholders receive returns. A fixed rated return is a percentage of the bond¶s original offering price. The return is called a ³coupon rate.´ The principal amount of bonds is returned during the maturity date. Because they can be issued for any period of time, there are some bonds which take about 30 years to mature.

The risk of not being paid back with the principal amount is always carried by bonds. Although companies with higher credit worthiness are more likely to be safe investments, their coupon rates will be lower than those companies with lower credit ratings. Firms such as Standard and Poor and Moody¶s Investor Service provide such credit ratings that range from a high AAA to a low D.

The safest type of bonds is the US Government bonds. Blue chip corporations, which are companies with established performance records for over several decades, are also considered to be safe bond investments. Although smaller corporations carry greater risks of defaulting bonds, bondholders of smaller corporations are considered to be preferential creditors because they will be compensated before stockholders in case the business goes bankrupt.

Bonds, just like stocks, can be bought and sold on the open market. The fluctuation of their values is based on the level of interest rates in the general economy. For example, an investor who holds a $1000 bond that pays 5% per year in interest is capable of selling the bond at a price that is higher than the face value as long as the interest rates are below 5%. If the interest rates rise above 5%, the bond can still be sold but it is usually at a price that is less than the face value. Because the potential buyers are capable of getting a higher interest rate than what the bond pays, the seller has to sell at a lower cost in order to offset the difference of the bond.

Most bonds are traded in the Over-the-Counter (OTC) Market that is composed of banks and security firms. Corporate bonds which are listed on stock exchanges may be bought through stock brokers. New bond issues are usually sold in $5000 increments while initial bond issues are quoted in $100 increments. A bond listed at 96 indicates a selling of $96 per $100 face value.

Stocks or Bonds

The risks and the potentials have to be weighed when deciding to invest either in stocks or bonds. Stocks carry a greater potential to increase in value but they also hold a greater vulnerability to market fluctuations. Investment grade bonds, which are rated BBB or better, carry slightly lower risks but offer relatively low yields.

A lot of investors agree that bonds offer greater security and return for short-term situations but when a time span over ten years is considered, the situation changes. The stock market has consistently outperformed bond investments by a large factor since companies tend to increase in value and any short-term fluctuations in the stock market are smoothed out over time.

Because they provide a stable investment that helps cushion against stock market fluctuations, bonds still have their place in most investor portfolios. A mixture of investments that includes stocks from different industries, bonds from various corporations, and other fixed-income investments is one strategic way of providing maximum growth while securing investment funds for the future.

The Different Types of Stock Indexes

The statistical average of a particular stock exchange or sector is called a stock index. Indexes are composed of stocks that are either parts of the same exchange, the same industry or the same companies. The most indexes in the United States are the Dow Jones Industrial Average, the NYSE Composite index, and the S&P 500 Composite Stock Price Index. Stock indexes are used to give an overall perspective of the economic health of a certain industry or stock exchange.

There are different ways to calculate the indexes of stocks. Price weighted index, which is based solely on the price of stocks, does not take into consideration the importance of any particular stock or the size of any company. The index that takes into account the size of the companies is called market value weighted. The fact that the price shifts of small companies have less influence than those of larger companies is considered in this type of index. Another type of index, which is based on the number of shares rather than the total value, is called the market-share weighted index.

Indexes, aside from giving overall grades to particular economies, can also be used as investment instruments. Mutual funds which are based on indexes are called passively managed mutual funds. Managed funds are shown to be consistently outperformed by these kinds of funds. A mutual fund that is based on an index simply duplicated the holdings where the index is based on. So if there is a 1% rise in Dow Jones, the fund based on Dow Jones also experiences a 1% rise. This causes a lower cost advantage for transactions and researches because the savings can be passed on to the participating investor.

The Big Indexes

One of the best-known indexes in the United States is the Dow Jones Industrial Average. It follows the stock movements of 30 of the most influential companies in the country that includes General Electric (GE), Coca Cola, and General Motors. Because it gives more influence to more expensive stocks, it is considered to be a price-weighted average index. A lot of analysts say that price-weighting doesn¶t really give an accurate picture of the different stock market movements and that the 30 companies are not enough to form an accurate assessment. The S&P 500 Index, on the other hand, is based on 500 US corporations that are carefully chosen to represent a broad slice of the country¶s economic activity. Although it is only second to the Dow Jones, it is felt to be an accurate predictor of the state and condition of the US economy. The most influential index outside of the United States is the FTSE 100 Index which is based on the 100 largest companies listed on the London Stock Exchange. Beside from being one of the largest indexes in Europe, it also serves as an indicator of the British economy. The other important non-US indexes are France¶s CAC 40 and Japan¶s Nikkei 225.

The Different Types of Stock Trading

The stock market serves as a reliable indicator the actual value of the companies that issue stocks. Stock values are based on verifiable financial data such as growth, assets, and sales figures. The stock market is considered to be a good choice for long term investments since this reliability that well-run companies should continue to grow and provide dividends for their stockholders.

Short-term investors are also given opportunities in the stock market. Market skittishness, even without a financial basis, can cause the rapid fluctuation of prices. Investor psychology, on the other hand, can also cause the prices of the stocks to either fall or rise.

The suspicions of investors about a company¶s value increase can be ignited by news reports, economic conditions, and rumors. When the price of a stock either rise or fall, some investors will quickly jump on the bandwagon to cause an even faster price acceleration. Eventually though, the market will correct itself. Savvy short-term investors who watch the market closely see these kinds of situations as great opportunities for profitable trading.

Short-term trading is divided into 3 categories: y Position Trading y y

Position Trading

The longest term trading style among the three is position trading. Compared with the other styles, the stocks in position trading can be held for a relatively longer period of time. Position traders are expected to hold on to their stocks for anywhere from 5 days to 6 months because they watch out for the fundamental changes in the value of the stocks. Position trading doesn¶t require a great deal of time since the time needed to study the stock market can be as little as 30 minutes a day and it can be done after regular work hours. A quick examination of daily reports is enough to plan trading strategies. This type of trading is ideal for those who invest in the stock market for the purpose of supplementing their income.

Swing Trading

Swing traders, when compared with position traders, hold their stocks for a shorter period of time that generally lasts only for about one to five days. In looking for stock market changes, the swing trader is more driven by the emotion rather than the fundamental value. This type of trading requires more time in researching stocks and conceptualizing strategies because the swing traders need to identify the trends in order to pick out the best trading opportunities. They tend to rely on daily and intra-day charts to plot the movements of the stocks. This type of trading usually generates a greater payback. Day Traders

Day trading is considered to be the riskiest way to play the stock market. This may be true for slightly uneducated traders but not for well experienced ones. Day trading involves the buying and selling of stocks in very short periods of time. It generally takes less than a day but it can be as short as a few minutes. Day traders need to stay rational and analytical to survive this type of trading. They create plots of when to get in and out of a position by relying mostly on the information that can influence the movement of the stock prices. Day trading has to be a full-time profession since it requires paying a close attention to the different market conditions.

The Different Types of Trading Strategies

Barrel shooting and trading strategies are the two basic ways of stock market trading. Stock trading strategies are used by investors to determine the stocks to buy and the time to sell. It also helps them protect their investments. Trading strategies outperform barrel shooting by a large . The different types of trading strategies, which count to over a hundred, are tried and trued methods that have worked well over many years. Before exploring new strategies, beginners in the world of investments are advised to investigate some of the basic trading strategies first.

Hedging

The way of protecting an investment through the reduction of the risks that are involved in holding a particular stock is called hedging. Buying a put option that allows the selling of the stock at a particular price within a certain period of time can offset the risk of a decrease in the stock prices. There will be an increase in the value of the put option once the price of the stock falls. The most expensive hedging strategy is to buy put options against individual stocks. People with broad portfolios will do better if they buy a put option on the stock market itself because it will protect them against general market declines. Selling financial futures such as the S&P 500 futures is another way of hedging against market declines.

Dogs of the Dow

Dogs of the Dow, which gained popularity during the 90s, is a strategy that involves buying of best- value stocks in the Dow Industrial Average. These are ten stocks with the lowest P/E ratios and the highest dividend yields. This strategy presents the idea that the ten lowest companies on the Dow have the most potential for growth over the coming year. The companies listed on the Dow Index are those which offer a reliable investment performance. Pigs of the Dow is a new twist on the Dogs of the Dow. In this strategy, five of the worst stocks on the Dow are selected by looking at the price decline percentage from the previous year. Like in the Dogs of the Dow, the idea in Pigs of the Dow is that the worst five stocks are going to rebound more than the others.

Buying on Margin

The strategy of buying stocks using borrowed money, which is usually from the broker, is called buying on margin. Because they receive more stocks despite the low initial investment, the investors are given much more return by margin buying than by full payments. In the event that the stock loses its value, the losses in margin buying will also be correspondingly greater. In order to limit the losses in case of market reversal, investors should have stop-loss orders when they buy on margin. The margin amount has to be limited to about 10% of the total account value. Dollar Cost and Value Averaging

The strategy that involves the investment of fixed dollar amounts on a regular basis is called . One example of this is the monthly buying of shares from a mutual fund. A drop in the price of the fund will cause the investors to receive more shares for their money but a raise in the price will cause the fixed amount to buy fewer shares. Value averaging, which is an alternative to dollar cost averaging, involves the decision of the investors to set a regular value that they wish to invest on. For example, the investors decide to invest $100 per month in a particular mutual fund. If the price of the fund increases, the investors also put in a higher dollar amount in that fund but if the price of the fund decreases, they spend less money. This will average out their investments to the original $100 per month. Value averaging, as a percentage return on the money invested, outperforms dollar cost averaging most of the time. When used as a part of broader trading strategies, value averaging can actually help in securing the growth of investment funds.

The Meaning of the Different Stock Trading Signals

Skilled investors sometimes base their decisions by reading the different signals that are given off by clearly defined market conditions. Some signals may indicate a favorable time to buy stocks while some may indicate a favorable time to sell. Because the value of particular companies can be watched daily, long-term investors do not consider signals to be that crucial. Day-traders, however, consider these signals to be very important because they have to act quickly in order to keep up with the stock market movements.

Full-time investors have the chance and the time to watch the stock market movements for some signals. Signals can be automated and integrated into trading software that allows the investors to choose which signals to be alerted about. These signals automatically appear on the screen. A lot of services charge hundreds of dollars every year for a complete package of software signal subscriptions. Aside from the trading software, the package also offers an access to up-to-the-minute charts for the latest information about the stock market.

A subscription to services that publish signals on either a daily or an hourly basis is one of the best options for investors who cannot watch the market movements closely. Market analysts are employed by these services to follow the indicators in order to arrive at a particular signal. The systems of these services are now completely automated. The signals are now being generated by software that examines the different market conditions. When relying on a third-party signal provider, investors will do better if they know how the signals are being generated. A large number of market indicators can actually cause a contradiction among the different indicators. There are even some indicators that send out conflicting signals depending on the time frame.

The accuracy of indicators is also reliant on the market conditions. An upswing in the market will cause trend indicators to send out buy signals but it will cause long-term oscillator indicators to send out sell signals because it will view the market as being overbought. Trend indicators are most accurate during trend conditions and oscillators are most accurate during transitions. The two types of indicators are almost always in variance with each other.

One way of overcoming these problems is to find a signal generator that uses at least three market indicators for verification purposes. Because they are verified by three different indicators, the signals are considered to be strong and accurate. Looking at signals from different time frames is also important. Upswings may be short-term corrections and they may result to a downward movement afterwards. A broad view of the different market conditions allows the investors to see the variations more clearly.

Signals, depending on the type of service subscribed to, can be delivered via emails, viewed on websites, or integrated into trading software. The latter causes the appearance of screen pop-ups for the particular signals being watched out for. These signals may be delivered either on a daily basis or a monthly basis. Some companies offer expensive services that charge up to several hundreds of dollars for every month. The more expensive services are obviously intended for professional traders and investors.

Individual investors need to weight the value of the different signal services. Although they can be great time savers, these services can also encourage laziness when it comes to market analysis. Aside from having the necessary tools which are needed to judge signal system effectiveness, knowledgeable traders also have the ability to make calculations so that they can stay on the top of their games.

The Truth about Stock Splits

The prospect that a certain stock may split to give the stockholders twice as many shares as they had before is one of the most alluring myths that surround the stock market. Although investors have more stocks after a split, the value of each share they receive is actually reduced. A company that decides to split its stocks will issue one new share for every single outstanding and will cut the value of each share in half. Even if the shares of the stockholders actually double, the total value of the stocks are still the same as before.

The reason why companies do stock splits can be explained by investor psychology. A stock with an excessively high price-per-share will cause the investors to feel that it is out of their reach. To make the shares more affordable to smaller investors, the company will opt for a in order to reduce the price of the stocks. Small investors can actually buy a smaller number of pre-split shares for the same price but they sometimes opt to buy split shares due to the appeal of buying stocks for much lower prices.

There are a lot of ratios used in splitting stocks but the most commonly used are 2-for-1, 3-for-2, and 3-for-1. The reduction of the number of outstanding shares that will cause the stockholders to have fewer shares than before is called reverse splitting. Reverse stock splits are less common than stock splits. There are several reasons why companies do reverse stock splits. These may be due to an attempt to stave off possible de-listment on the stock exchange, an effort to push out minority stockholders from the company, an attempt to shed off possible consideration as a poor investment, or an effort to push through ideas of going private.

Advantages

A low price per share can result to greater liquidity since stocks with lower prices are easier to sell. This is true especially for the stocks which are priced in hundreds of dollars because small investors consider them to be out of their budget. The high bid/ask spread, which is the difference between the buying and selling prices, can also put off bigger investors.

A stock split is considered to be an indicator of a bullish market, which is a market condition wherein the prices of the stocks and the profits of the companies both increase. Even if there is a short-term around a stock that splits, the market tends to normalize after a short period of time. The possibility that the investors will expect the company to perform much better is one downside of stock splits. If the expectations are not met, the investors will tend to lose their confidence which will then cause a drop in the share prices.

The bottom line is that stock splits do not have any effects on the worth or the performance of a company. Although it may be nice for the investors to own more shares, they also have to face the fact that the value of their shares still remains the same.

Types of Stock Brokers

Stock brokers handle most of the buying and selling activities on the stock market. An average investor will hire the services of a broker to handle his trades. A broad range of brokerage services is available nowadays. Full-service brokers can give advice about which stocks to buy or which stocks to sell. They often have full research facilities that they use to analyze market trends and to predict market movements.

The services provided by full-service brokers do not come in cheap since they charge the highest commission rates in the industry. Hiring a full-service broker is optional and it depends on the number of trades level of confidence, and the knowledge of stock markets of the investors.

Some investors, with the hopes of saving on commission fees, hire discount brokers instead. Although these types of brokers ask for much lower commissions, they don¶t offer advice or analysis like full- service brokers. Discount brokers are ideal for those investors who like to make their own trading decisions. Some investors use both types of brokers for strategic purposes.

Some brokers offer better rates by operating exclusively online. There are even some full-service and discount brokers who offer discounts for orders which are placed online. Online brokerage is considered to be the least expensive way of trading stocks.

Investors need to open an account. Every broker sets his own requirements for the maintenance of an account balance. This is usually between $500 to $1000. Before choosing a broker, investors have to look at the fine print first in order to know more about he involved fees because some brokers charge annual maintenance fees. There are even some brokers who charge fees every time the account balance falls below the minimum.

There are two basic types of brokerage accounts: a cash account and a margin account. In a cash account, an investor has to pay the full amount of the stock price that he wants to buy. In a margin account, however, an investor is given the chance to buy the stock ³on margin´ which means that the brokerage will carry some of the cost of the stock. The amount of the margin, which varies from broker to broker, has to be protected by the value of the client¶s portfolio. Adding more funds or selling some stocks are the only two options of the investor in case his portfolio falls below the specified amount. The investors, through the margin accounts, are allowed to buy more stocks with less cash thereby realizing greater gains and losses. Inexperienced traders are not recommended to opt for margin accounts since they are a lot riskier than cash accounts.

Choosing a particular broker has to be based on the specific needs of the investor. If an investor wishes to receive advice about which stocks to buy or to sell and yet he is uncomfortable with making trades on the Internet, then he is suggested to hire a full-service broker. On the other hand, technology savvy investors with enough confidence and knowledge to make their own trading decisions are better off with discount brokers.

After deciding on which type of broker to hire, investors are advised to compare a few competitors in order to find out the significant differences in the costs. When choosing a broker, investors also have to consider the number of trades to be made, the amount of cash to be deposited, the type of margin accounts to be used, or the kind of services to be rendered.

Fundamental Analysis Part One

Fundamental analysis is one of the most useful tools that investors use when making decisions about which stocks they¶re going to buy. It is a process of examining key ratios that show the current worth of a stock and the recent performance of a company.

Fundamental analysis is used to determine the amount of money a company can make and the kind of earnings an investor can expect. Future earnings may be subject to interpretation but good earning histories create confidence among investors. The stock prices may increase and the dividends may pay out.

Stock market analysts determine whether a company is meeting its expected growth by examining the earnings that are reported by the company on a regular basis. If the company doesn¶t meet its expected growth, the prices of its stocks usually experience a downturn.

There are a lot of tools that are used to determine the earnings and the value of a company on the stock market. Most of these tools rely on the financial statements released by the company. Details about the value of a company which include competitive advantages and ownership ratios between the management and the outside investors can be revealed through further fundamental analyses.

Financial Statements

Public traded companies are required to publish regular financial statements. These statements are available either in printed forms or in online pages. These statements include an income investment, a balance sheet, an auditor¶s report, and a cash flow statement. They also include a description of the planned activities and expected revenues for the coming year.

Auditor¶s Report

One of the most important sections found in financial statements is the auditor¶s report. The auditor, who is an independent Certified Public Accountant (CPA), is the one who examines the financial activities of the company in order to determine whether the financial statement is an accurate description of the earnings or not. A financial report is considered worthless without an independent auditor¶s report because it might contain some misleading or inaccurate information. Although it is not a guarantee of accuracy, an auditor¶s report provides credibility to the financial statement.

Balance Sheet

The balance sheet, which is another important section in financial statements, serves a ³snapshot´ of the company¶s financial condition at a single point in time. It shows the relationship between the assets such as cash, property, and equipment; the liabilities such as debt; and the equities such as retained earnings and stocks.

Income Statement

The section in financial statements that shows the information regarding the company¶s net income, revenue, and earnings per share over a certain period of time is called the income statement. The top line of the income statement shows the amount of income that is generated by sales, underneath which the costs incurred in doing business are deducted. The bottom line shows the company¶s net income or loss and the company¶s income per share. Cash Flow

The cash flow statement shares some similarities with the income statement because both sections provide a picture of a company¶s performance over time. Unlike the income statement, the cash flow statement doesn¶t use accounting procedures like depreciation. It simply indicates how a company handles its income and its expenses. The cash flow statement shows the incoming and outgoing cash from the sales, the investments, and the financing of a company. It is used as a good indicator of how the management runs the company and how the company handles the creditors. It also shows from where a company receives its growth capital.

Fundamental Analysis Part Two ² Tools

Even if the raw data provided by financial statements contain some useful information, the value of a stock will be easier to understand if a variety of tools is applied to the financial data.

Earnings per Share

The overall earning is not, in itself, a useful indicator of the worth of a company¶s stocks. Low earnings that are coupled with low outstanding shares can actually be more valuable than high earnings that are coupled with high outstanding shares. The earnings per share is considered to be a much more useful information than the earnings itself. Earnings per share (EPS) is calculated by dividing the net earnings by the outstanding shares. Although it is useful for comparing two companies, the earnings per share is not the deciding factor to be used when it comes to choosing stocks.

Price to Earning Ratio

The financial tool that shows the relationship between stocks prices and company earnings is called the price to earning ratio (P/E). It is calculated by dividing the price per share by the earnings per share. The P/E shows just how much the investors are willing to pay for a particular company¶s earnings. There are various ways to read P/E¶s. A high P/E can indicate either the company¶s overpricing or the investors¶ expectation that the company will continue to grow and generate profits. A low P/E, on the other hand, can indicate either the wariness of investors toward a company or the overlooking of that company. Further analysis is needed to determine the true value of a particular stock.

Price to Sales Ratio

There are other tools that investors can use to judge the worth of a company that has no earnings. The lack of earnings doesn¶t necessarily indicate that a company is a bad investment. It could mean that a company is still new and it is still starting to generate business. The price to sales ratio (P/S) is a useful tool that is used to judge the worth of new companies. P/S is calculated by dividing the market cap, which is the stock price multiplied by the outstanding shares, by the total revenues. An alternate method to this is to divide the company¶s current share price by its sales per share. P/S indicates the value that the market places on the sales. A lower P/S indicates a better value. Price to Book Ratio

Due to the potential for future revenue, the value of a growing company is always more than the book value. The book value can be determined by subtracting the liabilities from the assets. The value that the market places on the book value of the company is called the price to book ratio (P/B). It is calculated by dividing the current price per share by the book value per share. A company with a low P/B has a good value and it is often sought after by long term investors who see its potential.

Dividend There are some investors who look for stocks that can maximize the dividend income. One tool that is used to determine the percentage return that a company pays in the form of dividends is the . The dividend yield can be calculated by dividing the annual dividend per share by the price per share of the stocks. Older and well-established companies not only pay a higher percentage but they also possess a more consistent dividend history than younger companies.

Understanding the Different Stock Options

The contracts to buy or to sell a stock at a particular price before a particular time in the future are called stock options. Although the buyers of these options have the right to buy stocks at the specified price, they are not obligated to exercise their options. Sellers of the options, on the other hand, carry the obligation of selling underlying stocks if the buyers wish to exercise it.

³Call option´ is the term used to describe a contract to buy. Call option buyers hope for a rise in the prices of underlying stocks so that they can be allowed to pay less than the market value. Call option sellers, on the other hand, either expect no changes in the prices of stocks or accept partial loss of profits made from selling the call options.

An investor buys a call option on IBM with a $50 ³strike price,´ which is the price the stock can be bought, and the current price of IBM stocks in $40 and the cost of call is $5. If the stock prices rise above the combined amount of the strike price and the cost of call, the buyer can exercise a right to buy and make profit by reselling the stocks on the open market. The seller will also gain from the price increase of $55 from $40 and the sold call at $5. A price that will remain below $55 will not allow the call to be exercised. It will also cause the seller to profit by $5 per share and buyer to lose $5 per share.

Options are traded on specific stocks. The name of the stock, the strike price, the expiration date, and the premium are all detailed. Because an option cannot be exercised after the expiration, it will be considered worthless.

Options, aside from being actively traded, have their own values. An example of an option to buy Microsoft will be something like this: MSFT Jan06 22.50 Call at $2.00. This indicates that an option to buy one share of Microsoft at $22.50 before the third Friday of January 2006 can be bought for $2.00. The expiration of options is usually on the third Friday of the specified month. They are usually traded in lots of 100. Buying this particular option will require an investor to pay $200, excluding brokerage fees.

A ³put option´ is an option to sell a stock. The holder in this type of option is given the right, but not the obligation, to sell a particular stock at a certain price within a certain period of time. In this situation, the buyer expects an eventual fall in the stock prices but he refuses an outright sale in case of price rebounds. The seller in this option is willing to acquire the stocks at a low price since he feels that the price is stable. For example, an investor buys a put option on Microsoft with a $35 strike price while the current price of Microsoft is $40 and the cost of the put is %5. If the price falls below the combined amount of the strike price and the put cost, the buyer can exercise his right to sell at a price higher than the market price. The seller will then buy the stock at the price that is higher than the market price. The losses are offset by the $5 gained by selling the put. The put will not be exercised if the price remains above $30. This will cause the seller to profit by $5 per share and the buyer to lose $5 per share.

Stock options, which can be used to protect against loss, can also be used as investment opportunities. They are commonly used as parts of trading strategies that combine the purchase of stocks with the purchase of options.

Stocks and call options can be bought and put options can be sold in a bull market. In a bull market, an investor is allowed to take full advantage of the rising stock prices. Aside from experiencing an increase in the value of bought stocks, the investors can also buy stocks at lower prices via the call options. If the market dips and the put option buyers exercise it, the investors can pick up additional stocks at low prices. If the buyers don¶t exercise the option, the investors can still make money from the sale of the option.

In a bear market, however, investors can sell stocks, sell calls, and buy put options to limit their losses and generate their profits. A mixture of puts and calls are used by unstable markets in order to maximize their profit potential. Options are traded on Futures and Options Exchanges. In the US, there are 6 of such exchanges that include the American Stock Exchange (AMEX) and the Chicago Board Options Exchange (CBOE). The main options exchanges in Europe are the Euronext.liffe. and Eurex. o possess a more consistent dividend history than younger companies.