Becoming a better trader by using a stock trading journal spreadsheet

By Trade Analyzer

What is a stock trading spreadsheet?
A stock trading spreadsheet is a tool that helps traders keep track of their performance. The goal is to determine which trading strategies have been successful in the past, and which have not, and why. Many stock trading spreadsheets are based on widely-used programs like Excel and are customizable for different kinds of products, such as stocks, options, futures, Forex, ETFs and equities. Stock trading spreadsheets allow users to keep abreast of market trends, plan and track trades, print data reports and make use of financial reference tools. Performance data can be used to identify stock patterns, trader “errors” and trader “strengths.”

What does it do?
Stock trading spreadsheet programs can backtest trading strategies to show whether or not they’re likely to produce a profit. Traders can avoid making a costly guess; they can move forward based on data rather than hope. For example, if a trader believes that a stock or group of stocks will perform a certain way under certain market conditions, he can test his guess to see if it’s performed that way in the past before he commits his money. Some stock trading spreadsheet programs also calculate the odds of a trader making or losing money at any given time based on factors such as the amount of money invested, the risks assumed, and the number of trades, among others. Some programs provide trading flags to alert traders to risk or opportunity. Others offer analysis based on data entered. Spreadsheet programs may also help traders stick to their chosen strategies when they’re tempted to trade on emotion, especially if the data shows that trading on emotion didn’t work out in the past.

What are the advantages?
The main benefit of a stock trading spreadsheet program is that it tells traders how well, or how poorly, they’re doing in the stock market. It may keep some traders from throwing good money after bad, or inspire them to study the market more before committing their money to trades. The program may prompt traders to think about why they’re making trades, and to base those decisions based on facts rather than feelings. The standard disclaimer, “past performance is not an indicator of future results” still holds true, but a stock trading spreadsheet program may force some inexperienced traders to analyze risk and the odds of success before plunging into the market.

Download MyTradeAnalyzer's free trial and try the stock trading spreadsheet risk-free today.

Stock trading: Test your trading prowess with this stock trading game

This game demonstrates the basics of what actually happens in the stock market every day. Share prices rise and fall as traders buy and sell stock. By selecting how many shares to buy or sell, you can either increase or decrease your profits.

You start out with a $2,000 account and can quickly increase or decrease its value by making quick decisions about which direction prices will move next. Just press on buy when you want to buy, and sell when you want to sell. The arrows position on the scale determine how much you buy or sell.

* Tip: You have to buy shares first before having something to sell. Buy when you think the price is low and will rise, and sell when you think the price is too high and will fall. I made $87,000+ without turning the sound off before getting bored. Too bad its fake money.

* Tip 2: Trades on the simulation do not include commission or fees, therefore they are not an accurate representation of the reality that transactions costs add up and eat away at capital gains and losses.

Add Some Fun To Your Blog!

Guide to dividend payments

Diagram: How corporations allocate dividends

Image attribution: Urbanrenewal; CC BY-SA 3.0

Shareholder dividends are a form of monetary distribution most commonly paid to owners of business stock and mutual funds. The dividends for company stock are made from corporate earnings and income earned from mutual funds. In the case of mutual funds, how the dividend is treated depends on the type of investments made by the fund. For example, bond funds are sometimes exempt to state tax because they invest in tax free bonds. In the case of corporations, the issuance or increase of a dividend sometimes leads to an increase in stock trading activity.

Corporate dividends are issued by boards of directors, and increases or decreases to dividend amounts are typically announced via quarterly reports. To qualify for a dividend payment the shareholder has to own the shares by a specific date. This date is called the record date. In addition to owning the shares by the record date, the shareholder must hold the shares until the ex-dividend date, the day of dividend distribution.

When dividend payments are made, they are either deposited directly into a Federal Deposit Insurance Corporation (FDIC) insured account such as a money market account or a FDIC defined non-insured investment sweep account. As an alternative to having funds deposited into a sweep account, dividends can be reinvested into the issuing corporation via a Dividend Reinvestment Plan or DRIP. Dividends may also be paid into retirement accounts and life insurance polices that hold shares in either stocks or mutual funds.

Qualified dividends

Qualified dividends are paid to investors at a lower tax rate and generally dividends issued by U.S. Corporations. Moreover, qualified dividends are taxed at a maximum rate of 15 percent per the Internal Revenue Service (IRS). Income earners in the lowest tax bracket pay less than 15 percent according to the brokerage firm Fidelity Investments. Qualified dividends earnings are are reported on a Form 1099-Div that is typically sent to taxpayers in January of each year and use for tax filing purposes on IRS Schedule-D.

Ordinary dividends

The IRS describes ordinary dividends as payments made from the earnings of corporations that do not qualify for the net capital gains tax rate. One such qualification is the holding period of shares. For example, when shares are not held by investors for a certain amount of time they are paid as ordinary dividends. According to Fairmark, mutual funds that are owned for 60 days or less don't qualify for lower tax rates. Since ordinary dividends are not subject to a maximum of 15 percent tax, they are taxed at the regular income tax rate.

Special dividends

Special dividends are usually one time, larger than average dividends paid to shareholders when corporations have extra earnings. In the case of public companies, these dividends are reported to the Securities and Exchange Commission (SEC) using a Form 8-K. It is important to note that share prices can drop proportionate to the size of the dividend on the ex-dividend date. For example, if Company A has a share price of $100 and issues a $10 special dividend per share on January 26, then the share price opens for trading at $90 on that ex dividend date, it is most likely due to the special dividend according to the Motley Fool.

Why stock dilution is relevant to investors

Image attribution: FreeDigitalPhotos.net; standard royalty free license

Corporate stock dilution is a result that occurs when new shares of company stock are issued. More specifically, when new corporate shares are issued the price of total shares decline to equal the total value of shares before new shares were issued. For example, suppose ABC Company has 100,000 common shares valued at $10.00 per share. If ABC Company issues 100,000 more shares, the value of total shares will remain the same, but the price will drop to $5.00 per share in order for this to happen.

Stock dilution in terms of shareholder wealth can be measured by calculating the earnings per share and diluted earnings per share. Earnings per share is calculated by dividing total earnings after dividends are paid by the total number of shares outstanding. Diluted earnings per share is essentially calculated in the same way, but when convertible securities are added, the EPS goes down. Furthermore, earnings per share measures the amount of a company's earnings that are available for each share, whereas diluted earnings per share measures the value of shares if outstanding stock options and convertible securities are converted into shares. In the case of convertible securities such as debentures, a company may be trying to raise new capital to finance business projects according to the Securities and Exchange Commission.

Forward stock splits are an additional cause of stock dilution. In the case of forward stock splits, the existing amount of shares are split into more shares. For example, in a 2:1 stock split, two shares replace an existing old share. According to a study performed by economics faculty at the University of Indonesia, a noted affect of forward stock splits is an increase in share trading volume prior to the stock split. Even though the mathematical affect of stock splits on actual worth at the time of the split is naught, the announcement of the stock split itself may affect market psychology. For example, the stock split and stock dilution may be seen as a good thing thereby increasing share activity. 

Market psychology surrounding corporate finance is dynamic, but a reason stock splits may be seen as a positive indicator is strong financial growth according to StreetInsider. Moreover, a company's stock price and price per share relative to earnings may rise too high in the wake of strong revenue and earnings growth making it difficult to maximize capital investment. In such case, stock dilution can be financially positive because it reflects growth and allows the business to obtain capital investment that may have otherwise been left out due to high share prices. Thus, in the case of a successful corporation, even if the price of shares go down after new shares are issued, they can rise again in successive stock trading after being diluted; this is quite possibly a "bifurcated" aim of lowering the price per share.  

Another reason market psychology can be affected by stock dilution is the affect on corporate financial statistics. To illustrate, suppose a company has an overly inflated stock price and P/E ratio; if the company issues new stock, the price to earnings ratio is affected. Furthermore, since the PE ratio is used as a gauge of corporate performance, an increase in shares outstanding leads to an increase in P/E  if it is followed by a share price rise. In such case, the company may subsequently appear to have improved investor confidence because the P/E ratio becomes inflated by a rise in stock price following the dilution. 

How candlestick analysis of stock prices works

Anatomy of a stock chart candlestick

Image attribution: Ticmarc, Public Domain

Candlestick charting is a kind of financial analysis used in what is known as technical analysis. Technical analysis of financial securities interprets charted or graphed price movements, patterns and trends of a financial product to help improve the results of financial activities such as stock trading. In candlestick analysis the candlestick chart or graph is the tool for  analysis, but the analysis of that chart is what provides financial utility. Moreover, as a form of technical analysis, candlestick charting reflects financial influences such as market psychology via product price patterns instead of the evaluating the product itself.

In the book 'Trading Applications of Japanese Candlestick Charting' by Gary Wagner and Bradley Matheny, the origins of candlestick charting are said to date back to the seventeenth century creation of an honorary samurai and futures trader named Sokyu Homma. According to Wagner and Matheny, Homma's candlestick patterns indicated commodity price direction when a series of three candlesticks in either an upward or downward pattern occur as 'gaps' in the opposite direction.

Patterns like those developed by Sokyu Homma are determined using candlestick charting through evaluation of key variables in a financial product's price including its opening price, highest price, lowest price and closing price. These price movements are represented as a pattern or series of chronological units such as a single day, with each unit graphed as a single rectangle or line known as a candlestick.

The appearance of candlesticks and wicks provide a lot of information about a financial product's price patterns for the period of time it is measuring. Essential aspects of the candlesticks are their color, length and the length of the 'wicks' or lines at the top and bottom of the candlestick's body. These candlesticks can vary in length and position on a candlestick chart depending on how the price of a particular price such as company price per share moves in a given time period. The top and bottom of the candlestick's body symbolize the opening and closing prices, and the top and bottom of the wicks represent the highest and lowest values reached during a trading period.

When a candlestick is black or red, a product's price has closed lower than its price when it opened at the beginning of trading. If the product's price closes higher than the opening price, the body of the candle is green or white. Long candlesticks and wicks represent a larger range of price movement than shorter candlesticks where the bottom wicks indicate the lowest price of the trading period and the top wick show the highest price. Sometimes no candlestick body is formed at all and this is called a 'doji'. Also per Wagner and Bradley, a Doji represents a trading period in which the opening price and closing price were very similar.

Once the appearance and location of a candlestick is understood, it is then interpreted for price evaluation and forecasting purposes. This is done by analyzing the form of the candles and their relationship to other candlesticks on the chart. For example, a series of black candlesticks each positioned lower than the next indicates a negative price trend such as a 'bearish hook reversal' and may mean confidence in a stock or commodity has been lost. Furthermore, if the majority of candlesticks on a chart are black with a visible downward trend, this can indicate a long term trend such as a market correction. A market correction is when a price moves lower to correct overly optimistic speculation regarding a specific product's value.

There are several candlestick chart patterns which a chartist is ideally familiar with. These patterns also have names such as 'spinning top', and 'marubozu' which help the chartist quickly interpret their meaning based on previous interpretations of the candlestick pattern. To illustrate, according to Minyanville Media Inc, an Emmy Award Winning business information provider, a 'spinning top' can serve as an indicator a price reversal is about to take place. Candlestick charting analysis, like most financial analysis in general is not definitive proof of where a financial product's price is heading. However, candlestick charts can serve as indicators of market indecisiveness, conviction and momentum; all of which in and of themselves influence the price of financial products.

The best and worst weekdays to buy and sell stocks

Image attribution: Stuart Miles, standard royalty free license

In historical research it has been demonstrated that some days of the week have indeed been better than others for buying and selling shares. However, since finance and economics is generally not a pure science, conditions for verifying such a pattern are limited to scenarios that are not necessarily perpetually accurate or realistic representations of broader market conditions.

Days of the week to buy and sell shares change with the prevailing market and share related conditions, but don't necessarily fail to demonstrate some indication as to which day of the week is better to buy or sell shares. The best day of the week to buy shares and the worst day of the week to sell shares conforms more to the logic of the time and the place than any pre-established long-term pattern.

The 'Day of the week effect'

Trends and patterns present themselves in the stock market all the time; this much is documented. For example, in the Journal of Economics and Finance, Volume 25, number 2, 2001, it was empirically demonstrated that the days of the week do not have the same volatility in price movement and also do not provide the same levels of daily returns as evident in statistical research on the S&P 500 Stock Index between 1973-1997.

According to this particular study, the days of the week with the best returns was Wednesday, and the day of lowest return was Monday with Fridays having the highest volatility. Such being the case, it would appear as though some time during Monday would be the best day to buy shares, and at some point on Wednesdays would be the best day to sell shares.  

Pattern changes over time

The findings in the aforementioned study may be convincing, but they aren't absolutely conclusive. This is because the time periods in which the measurements were made are finite within a longer market timeline. For example, in the book 'Stock Market Rules' it is claimed the market tended to drop on Mondays and rise on Fridays for a period of 37 years between 1953 and 1989. Also according to the book, this Monday decline pattern changed in the 1990s essentially providing a counter claim to any definitive long-term day of the week effect.

Trends are different across markets

A problem with quasi-scientific research is variance within the shares studies themselves. In other words, because the conditions are different across studies it is difficult to prove any universal accuracy of finding no matter how statistically valid any single study is. To demonstrate this principle, it is helpful to look at another 'day of the week effect' research study by Yelis Yalcin of the Gazi University Department of Econometrics and Eray M. Yucil of the Turkish Central Bank. The findings from this study show the best days of the week to buy and sell shares varies across multiple emerging markets indicating no one good day to buy shares or bad day to sell shares across multiple markets.

Individual financial products vary

Many studies make use of averages to verify hypotheses about particular events or subjects. In the case of days of the week for buying and selling shares this tends to exclude the individual price movements of shares. Such being the case for some shares Monday may be the best day to buy shares and the worst day to sell shares, but at a different time, or in the same market with different shares this may not be the case. This is because the underlying financial conditions of a company or financial instrument which the shares represent can vary and influence price independently of market movement. This tendency is measured by a statistic called the Beta coefficient.  

In summary, if investors or traders can act on shorter term patterns in which recognizable share price movements do occur, then there may indeed be a best day of the week to buy and a worse day of the week to sell shares in that context. The bottom line however, is that any pattern, trend or market condition can change with a multiplicity of market, economic and share specific variables that are not easily nor accurately accounted for or measured using empirical research techniques.

Possible Reasons For January's Stock Market Rally

Image attribution: Jannoon028. Standard royalty free license

A compounding of auspicious financial events quite possibly contributed to January's large stock market rally. Factors include central bank activity, market psychology, high frequency stock trading and the January effect.

Complete article link: http://www.helium.com/items/2287464-january-stock-market-rally

How technical analysis of stock prices works

Image attribution: StocksDocs. CC BY S.A.-3.0

Technical analysis in stock trading refers to the evaluation of stock price changes over time. These changes are measured and plotted using formulas, charts and graphs and assessed in terms of patterns, and strength of stock price movement. A number of basic technical tools, and techniques are used to help technical analysts or chartists assess if specific indicators have occurred.

After a technical indicator has occurred, a confirmation of that indicator may follow using another technical analysis metric. Technical analysis is not an exact science, and generally shouldn't be considered as always being reliable. Rather basic technical analysis is sometimes used in stock trading to assist in substantiating or validating other methods of stock analysis.

• Moving averages

Moving averages are measured in days, usually up to 200. When longer-term moving averages have been moved through by stock prices, it sometimes indicates a significant price movement. Sometimes stock price support and resistance are formed near moving averages, and when these price levels are significantly broken it can mean a possible price momentum trend. In other words, moving averages are at times used as pivot points where a stock may have a pattern of rebounding upward or downward.  

• Candlestick charting

Candlestick charting is a form of technical analysis that began in East Asia. In this type of analysis price movements are represented by black or white candlesticks with lines at the top and bottom. Sometimes colors such as green or red replace the black and white in candlesticks. The color, length and positioning of these candles are placed on a chart and scaled in terms of time and stock price . The technical analysis of these charts will then interpret the candles based on past patterns of similar candle positioning.

• Oscillators

Oscillators are used to determine upper and lower limits of price movements. Examples of oscillators are the Relative Strength Index (RSI), and the Rate of Change (ROC) indicators. These basic stock technical analysis tools plot values on a scale between 0-100 using mathematical formulas. When certain value levels are reached, the oscillators are sometimes thought to show an increased probability of a price being close to a high or low.

• Trading levels

Trading levels constitute the amount of stock trading that takes place during a specific period of time and is another widely used basic aspect of technical analysis in stock trading. Trading levels are measured using volume and when it ncreases it can mean a growing momentum in the movement of a trend may be occurring or about to occur. Volume can also indicate overall market participation. For example, during holidays, volume can be quite low due to the absence of investing activity on those days in holiday when the stock market is open.

• Line graphs

Line graphs are also used in basic technical analysis of the stock market. When stock prices are plotted onto line graphs over time, the movement of that price can be analyzed for patterns in a similar way to candlestick charting. For example, a stock price line graph may create a pattern called 'head and shoulders', which literally takes the shape of a left and right shoulder with a head in the middle. If patterns like this become evident, stock prices sometimes follow similar movements to previous occurrences when a similar pattern was observed in that or other financial securities' line graphs.

Stock Options Trading: The Long Strangle Doesn't Lie

Another exotic sounding name for a financial instrument about nothing guaranteed. These types of financial tools challenge the mind to think in dynamic ways, but are more like working for a fee than investing. In other words, to implement the long-strangle stock option, traders are charged a fee to purchase two stock options making it more like paying to play with a sophisticated financial toy. It might make one look like they're clever, but if the money is not flowing, who cares about that. Bottom line is if it costs money, and does not guarantee payment, there is room for either party to win or lose. Moreover, a strong market sense can help leverage the power of stock options, but recognizing if one has that sense or not is a good idea. 

To clarify further, the long-strangle is a trading method and not an investment strategy. The technique involves the purchase of a long-call and long-put per the Options Industry Council (OIC). Don't be fooled by the elaborate language, it's financial jargon for the option to purchase at a discount while simultaneously having the option to sell at a little less of a discount. Figuratively speaking, it's not really comparing pears to grapes to say if someone buys 10 apples on discount but sells 9, their net worth will rise if apples increase in value and a lower  pre-arranged price was negotiated. So why not just buy 10 apples? Better yet, why not grow them?

The long-strangle insures the purchase of stock shares on discount through the long-put which is the instrument that sells on discount. In other words, the call option gives the purchaser the right to buy shares at a price lower than the future market price if the price rises and the put option gives the purchaser the right to sell shares at a higher price than a future market price if shares decline in value. In both cases the options might cost a little less than actually buying the shares directly if the contract fee doesn't offset that discount. If only the call option had been purchased there is no downside protection. In this sense, the put option is like a partial refund if the apples go bad before eating or selling them. Sounds complicated doesn't it. If it is too confusing to invest without knowing exactly what is going on, consider that a red flag.

Why is it called a long-strangle? TD Ameritrade's “Think or Swim” says it's because the stock option  strangle takes advantage of both sides of the position i.e. up or down price movements. So it is like strangling the price from both sides but applying a little less pressure on the upside because you think that's the direction it's going to go. It's also an intellectual stranglehold on common sense for the 13 reasons described by Ex-Options trader Stephen Whitney who came clean on his losses. Learn from Mr. Whitney's mistakes, you don't necessarily need to think very hard to swim, you just have to know how. In other words, if making money is more about understanding how to do it instead of knowing when more is better than less, then stock options trading tactics such as the long-strangle might not necessarily be such a good technique to be using.

Options Trading: Collar Strategy Overview

The 'collar' is one of several types of stock options techniques, and is a relatively conservative way to insure investment  gains in corporate shares, and in some cases, a way to multiply dividend profit. The option involves three simultaneous transactions per the Options Industry Council. This  stock option strategy in effect locks in capital gains, for a time, without having to sell shares.  For example, if a shareholder has experienced an increase of .20 cents per share on 100 shares and believes the price of Coca-Cola shares could fall, writing a 'call option' against those 100 shares  pays for the premium of buying the protective put option which increases in value when the share price falls.

In order to fully grasp this stock option strategy it is necessary to understand the component parts of the collar strategy i.e. the long-put and call option. A put option is a bet that increases in value as share prices fall. These transactions can either be 'written' or 'bought'. The writer of a put option buys shares on margin or owns underlying shares, then charges a fee or premium to the buyer. Each stock option is 100 shares and gives the buyer of the option to sell shares at a pre-determined price. If the price per share falls, the buyer of the put option can sell for a profit at the expense of the option writer.

A call option is the inverse of a put option and allows the option holder to buy shares at pre-determined amount. For example, Mr. A buys 10 call options to buy ABC Corporation at $1.00 per share for a cost of .10 cents per share. This means the premium will be 1000 x .10 cents= $100. In order to make a profit above unrealized gains for a call option alone, the price per share must increase more than .10 cents per share. When purchased, a call option is a form of leveraging to higher level than might be possible than buying on margin. However in a collar, the call is leveraged by the underlying shares owned by the seller and the premium is used to purchase the put.

The Options Industry Council states collar options are good for protecting 'unrealized gains'. In other words, if the share price falls, the collar option covers the cost of that fall while allowing the shareholder to continue holding the underlying shares. It's a slightly bullish strategy and can also be used to claim dividends without risk according to  Michael Thomsett of Minyanville. In both cases the strike price of the options and the cost of the collar premiums is going to be an important factor in determining whether or not the options is a profitable technique to use.

To be profitable and work, the premium from writing the call option should be close to the premium for buying the put option. Additionally, the strike price for both options should be equidistant from the out-of-the-money price which should be the same for both options. For example, if Mr. A writes a call option for ABC Corporation and purchases a 'long-put' option, the out of the money price is ideally $1.00 per share for both option contracts. Moreover, the option cost is also ideally the same; for example, .10 cents per share.

Overview of Small-Cap Stocks

Small Capitalization Stocks are stocks that contribute to no more than $1 billion dollars of a company's equity. The value of a company's capitalization is commonly calculated by multiplying the number of a company's outstanding shares by it's share price or average share price. There are also micro-capitalization stocks that have even lower amounts of equity capitalization, but this article will focus on Small cap stocks. A few of the general features of small cap companies are as follows:

• Smaller share prices on market exchanges
• Subject to higher risk from larger competitors
• Greater growth potential
• Potential stock price volatility

Benefits and risks

Each capitalization class of stocks have certain advantages and disadvantages associated with them. Some tend to be higher risk whereas others tend to be lower risk. These benefits and risk also vary depending on the economic sector in which stock trading occurs. An overview of the benefits and risks associated with small cap stocks is provided below:

• Benefits of Investing in Small Cap Stocks:

 Small cap stocks are cheaper to buy than mid cap and large cap stocks. What's more, small cap stocks under $5.00 per share are not as well studied by financial analysts. This can be an advantage as a company may be undervalued due to this media deficit. Also, since these stocks represent smaller companies, there is more potential for earnings to grow at a larger percent than a well established company with strong market positioning. Since these companies are smaller, they may also be acquisition targets for larger companies which is often good for a stock price.

• Risks

Since small cap stocks are cheaper to buy, one can buy more of them. What's more at a lower cost per share, any decline in value is a proportionally greater percentage loss of invested capital than with a higher priced stock. For example, if person A owns 100 shares of Berkshire Hathaway Class A shares and Person B owns 1000 shares of Little Cap's Are Us Corp. and Person A's shares cost $100K per share and Person B's shares cost $10 per share, person B is going to experience a far greater investment loss if his or her shares decline $1 than if Person A's shares decline $1.

Risk avoidance techniques

The risks associated with Small Cap stocks can be mitigated through investment strategies or trading tactics. In an investment strategy an investor may choose to diversify one's small cap investments by purchasing several small cap companies across several industries and/or purchasing a large cap competitor in the same industry. This reduces the risk of investment loss should one company go belly up in competition.

In terms of trading, long positions can be hedged with short positions and short positions can be hedged with put options. While risk mitigation reduces the potential for loss it may also inhibit potential gains. A few of the risk mitigation methods one may utilize when investing in small cap stocks are as follows:

• Diversify across multiple industries
• Select only small cap companies with proved financial strength
• Purchase mutual funds that specialize in small cap companies
• Avoid small caps altogether

Tips for investing in small cap stocks

Investing in Small Capitalization stocks is generally for investors and traders with at least some taste for risk. For this reason it is important to utilize a well thought out entry and possibly exit strategy. Below are some techniques to stabilizing an investment strategy:

Stop loss orders:

By not allowing stocks to decline by more than 10% investors are in effect risking no more than 10% of their capital per investment.

Emotional control:

Emotional investing is shunned by some professional investors. Emotions can cause one to sell a stock that is about to rocket or buy a stock that is about to tank. Using logic and exercising fiscal discipline helps one manage money unemotionally and can reduce risks associated with emotional investing.

Research:

Due diligence is a hallmark of fundamental stock analysis. If it's done right, it can probably reduce risk if accompanied by good decision making.

As with most investments, risk is always a factor that can only be minimized but not always eliminated. Many investors have experienced loss at one time or another. Even large brokerage firms, high powered investors and sophisticated investment computing algorithms are not completely immune to unexpected events in the World and economic markets. Nevertheless, investment in small capitalization stocks can be profitable and the potential for profitability may increase by utilizing the information in this article.

Understanding Stock Dilution

Stock dilution refers to loss of common share value caused by an increase in the number of units of a company's equity ownership. As more stock become available to shareholders and potential shareholders, each share of ownership holds a smaller piece of the company via dilution. Dilution occurs because the total amount of available wealth becomes distributed over a wider number of shares. Just as whiskey becomes less concentrated when water is added, so too does wealth when ownership is added.

Stock dilution can be measured in several ways. One such measure of stock dilution is diluted earnings per share that is calculated by dividing profit by all shares that are classified as, and could be classified as common shares. Another method of measuring stock dilution is by dividing the total market capitalization after a new stock offering by total outstanding shares. Market capitalization is the total number of shares outstanding multiplied by the number of shares.

Method 1: Diluted Earnings Per Share (DEPS)
DEPS= Gross Profit / Common shares + potential common shares
Ex. $10,000 / 1000 + 100 convertible shares
=$ 10,000/ 1,100 = $9.09

• Dilution via share conversion causes a .91 cent adjustment in share value.



Method 2: Capitalized value per share (CVPS)
CVPS= Total common stock x price per share + new capital/ Total Shares
= Market capitalization + New Capital/ Total shares
Ex. 1,000 x $10.00 + $1000 / 1100
= $11,000 / 1,100 =$10.00

• Calculation does not lead to diluted value using exact same numbers as method 1.

It is evident from the above two methods, new shares can be framed to demonstrate dilution or no dilution depending on whether profit or capital is used in the formula. For investors, the better of the two methods of calculation would be method one because it is profit that is distributed to shareholders not investment capital.

The advantage of increasing the number of shareholders is an increase in capital available to a company. For example, suppose ABC Company seeks to initiate a new project that is estimated to yield 10% return on Investment. To raise the capital to embark on the project ABC company issues 100 new shares. The company now has more potential to earn via increased capital meaning a portion of present value is exchanged for potential value.

The disadvantages of stock dilution occur in the short-term when investors perceive an immediate loss. In other words not only is their wealth diluted, but their risk of ownership increases because there is no guarantee the company's new project will lead to an increase in profit margin under the increased ownership. Should the project yield a greater return than the current earnings per share, then the diluted earnings per share would be higher than the earnings per share before dilution and with pre-project profit margins.

Sources:

1. http://bit.ly/adMdy4 (Massachusetts Institute of Technology)
2. http://bit.ly/bva95I  (Investopedia)

How to choose what to invest in

Choosing what to invest in or how to best get involved with stock trading is ideally less like window shopping and more like an investigation if you want to base your choices on information rather than feelings. Some people still do choose what to invest in by what they feel is a good investment. However, at best, that is an intuitive approach to investing, and there are several other ways to go about choosing what to invest in that might be more worth while.

Fundamental analysis

Fundamental analysis studies the financial profile of a company in detail. This can be as in depth and comprehensive as one makes it. For example, one may simply look at a company's earnings per share for the past five quarters and choose what to invest in based on that. Others may be more thorough and study the company's revenue trend, profit margin, asset management, and so forth. What fundamental analysis doesn't reveal however, is the future.

Market performance

To glean how an investment will perform in the future requires a certain amount of informed foresight. For example, if it's the autumn, you can induce some birds will fly south for the winter. Financially, if it's a business that follows a business cycle and the high end of that cycle has passed, revenue's might decline. Businesses are not as predictable as bird's flight patterns however, so choosing what to invest in also involves looking at another aspect of the market.

Supply and demand

Businesses might not be worth investing in at all. If the demand for businesses services is lower than a commodity for example, then maybe commodities are a better investment. To know that an investor would look at any number of factors that can influence both the availability and need for a certain product such as corn. For example, when corn based ethanol became a legislated fuel additive, it affected the price of corn. However, if large amounts of  farmers were to switch to another form of feed for their livestock in the future, that could affect the price of corn as well.

Economic factors

Knowing how to choose what to invest in also involves understanding a little more about economics. Economics is like a barometer for markets of all kinds. For example, if an economy is in a long term secular trend what does this suggest for the market? It could mean business cycles will be suppressed despite demand, or it could mean prices won't rise much for businesses causing less profit if their costs do increase. The economy is made up of a lot of components such as employment, monetary policy, trade balance and so forth. Each economic component can affect how well an investment will perform.

Technical analysis

Technical analysis is the chartists way of choosing what to invest in. Chartists look at the price movement of a company's or product's price movement over time and draw conclusions based on patterns of probability. Technical analysis helps some investors choose what to invest in because they believe the patterns they see confirm a higher probability of a price movement. Although technical analysis is used more for short-term trading, investors may also use it to assess medium and longer term price patterns.

Brokerage Firm Reviews: TD Ameritrade

TD Ameritrade, formerly Ameritrade, is a discount broker ranked among the top 20 by several assessments including JD Power and Associates, Barron's and Consumer Reports magazine among others. The company provides brokerage and banking services that suit self-guided investing and financial planning. For examples, individuals seeking to invest personal assets in corporate stocks can do so by stock trading through a TD Ameritrade brokerage account.

During the recession of 2008-2009, TD Ameritrade remained profitable despite massive declines in stock market share values. TD Ameritrade seems to be in the business for the long term after having acquired a subsidiary of Toronto Dominion Bank in and the acquisition of 'Thinkorswim' brokerage firm in 2009.(3) TD Ameritrade is a publicly owned company with the ticker symbol (AMTD).

• Brokerage rankings

TD Ameritrade is considered one of the better discount brokers ranking top 10 and even top 5 in several reviews. Brokerage rankings themselves are ranked by another organization called consumersearch.com,(4) which considered the brokerage firm reviews of Smartmoney.com, Barron's, ConsumerReports.org to be among the best. Having said that, TD Amritrade was ranked 5 of 16 by SmartMoney.com's 2009 rankings, and top 3 in the 2010 rankings for the same.(4) TD Ameritrade received an  11 of 25 by Barron's/WSJ, both owned by Dow Jones Corporation, 7 of 17 by Consumer Reports Magazine, and 4 of 14 by a 2009 JD Power and Associates classification.

• Advantages of TD Ameritrade

Among the advantages of TD Ameritrade are it's a fairly secure, stable and functional brokerage firm that supports individual asset management. It has multiple trading abilities such as stock options and bond trading, in addition to analytical tools that enable investors and traders to evaluate investment or trading decisions. Moreover, TD Ameritrade provides most of the services one would expect from a discount broker. Several account options are available through TD Ameritrade including IRA, Joint ownership, individual, education savings and business accounts.

• Disadvantages of TD Ameritrade

Despite high rankings and several advantages TD Ameritrade does have its shortcomings. For traders or investors without a strong financial profile, margin accounts and options trading may be limited. The customer service is courteous and helpful in so far as a discount broker can be, but for those seeking advice or who don't wish to execute their own trades, fees can go up. According toptenreviews.com, TD Ameritrade does not have a trading simulator, nor does it allow trading of International stocks.(2)

• Services and website

The services and website platform offered by TD Ameritrade is for the most part functional and effective. The investing tools, educational content, and customer service are well integrated allowing linked accounts, telephone and internet access for a more optimum account management. Additionally, TD Ameritrade offers effective Automated Clearing House (ACH) transfers at no cost, and offers several free analysis tools in addition to settings such as limit orders, trade triggers, and expedited trading.

The minimum balance for opening a TD Ameritrade account is generally between $1000-$2000 depending on the account according to TD Ameritrade, and account holders may write checks against an account and have the option of holding funds in an FDIC insured money market account as well as having investments protected by the Securities Investor Protection Corporation. (1)

Sources: 

1. http://bit.ly/10CKxk (TD Ameritrade)
2. http://bit.ly/5lZD7(Top Ten reviews)
3. http://bit.ly/9qIFMw (TD Ameritrade Facts)
4. http://bit.ly/a58HjY (Consumersearch.com)

Technical Analysis of Sensex using Oscillators and Elliott Wave Theory

SENSEX is a shortened term given to the 'Bombay Stock Exchange Sensitive 30 Index'. The index is a broad based, weighted average composition of the share price of 30 large capitalization companies within the exchange. This index is considered one of the Bombay Stock Exchange's key metrics of market performance and has been in existence since 1986.

Since exchange indexes measure performance of stock baskets, analyzing SENSEX using technical methods can assist with trading tactics and strategy. Two such technical measures are oscillators and the Elliot wave theory. The remainder of this article will discuss how these two methods of technical analysis can be applied to SENSEX.

Oscillator technical analysis

Simply put, oscillators measure buying and selling opportunities at the high and low ends of market pricing. Several oscillators exist including 1) the Stochastic Oscillator, 2) Percentage Price Oscillator and 3) the Money Flow Index (investopedia.com), however other commonly used and referred to oscillators also exist. Each oscillator indicates different values based on varying underlying conditions for which a security price may be more apt to move in a certain direction.

To illustrate the above point, the Money Flow Index (MFI) measures volume of capital moving into a security. When the MFI value moves higher, it means the increase in capital inflow is rising, however, if the value is too high, it means the capital inflow has been taking place for a while and a price trend reversal may occur.

Elliot Wave Theory analysis

The essential basics of Elliot Wave Theory is that it makes use of 1) stock price movement graphical 'waves' and 2) impulsive or corrective trend analysis of those waves. What this means is that when the zigzag pattern of stock price movements on a graph are illustrated, a pre-determined wave theory i.e. Elliot Wave Theory is applied to the patterns.

These patterns are simply two consecutive patterns of zig zag waves of 5 then 3 movements or 3 then 5 movements. Specifically, if the price trend moves downward with 1 down movement followed by an up then down movement, and is subsequently followed by the same pattern in the other direction, i.e. up, then the Elliot Wave principle applies. After the down or up sequence, the Elliot Wave Theory indicates the probability of the trend continuing as previously is higher than had the trend not existed.

Applying oscillator and Elliot Wave Theory to Sensex

The next step in applying both oscillators and the Elliot Wave Principle involves obtaining the price chart for the SENSEX for a given period of time. These charts can be obtained from financial websites and the Bombay Stock Exchange website itself. Once a chart and price history values are obtained, the oscillators for the preferred point of time can be calculated and the Elliot Wave patterns can be looked for. Some financial websites search for wave patterns and/or calculate oscillators for the investor, trader or analyst to save them time in identifying, calculating and applying the oscillator formulas and wave trends.

Should the need to calculate the oscillators arise, the individual oscillator formula should be acquired then utilized for the correct value. Similarly, for the Elliot Wave theory, the wave patterns should be manually looked for and identified individually rather than via a technical analysis software or financial website feature. Several financial websites and/or technical analysis websites exist that either provide or specialize in technical analysis tool and software.

1. http://www.stockta.com
2. http://www.stockcharts.com
3. http://www.investorprofit.com
4. http://finance.yahoo.com
5. http://www.google.com/finance

Summary

The SENSEX is a metric that indicates performance of companies within the Bombay Stock Exchange. This index is similar to the Dow Jones Industrial Average in the U.S. however is comprised of 30 large Indian corporations weighted in the index by their equity capitalization values.

In studying the SENSEX, both oscillators and the Elliot Wave Theory can be applied for the purpose of technical trend analysis. Both these indicators are used to forecast future price movements either up or down based on previous trends in securities pricing.

To apply oscillator tools and the Elliot Wave Theory to the SENSEX involves obtaining a time period for which price trends can be illustrated and searching for and/or calculating the oscillator values at the time of interest and/or the wave pattern positioning for the same.

If the oscillator value is above a certain point, it may be a downward trend could occur and if the Elliot Wave pattern sequence is evident, the possibility of the security's market price following this pattern either up or down is forecasted.

Neither oscillators or the Elliot Wave Theory are absolute indicators meaning there is room for error and the technical analysis is not 100 percent accurate. Rather, oscillators and waves can be used to estimate price trends and movements based on pre-derived mathematical and/or statistical relationships and patterns.

Sources:

1. http://www.bseindia.com/about/abindices/bse30.asp
2. http://www.bloomberg.com/apps/quote?ticker=SENSEX:IND
3. http://www.investopedia.com/terms/o/oscillator.asp
4. http://www.elliottwave.com/introduction/wave_theory.aspx

How to achieve financial independence through leveraging

Leveraging is the financial practice of utilizing borrowed money to increase positions held in financial products. For example, if an investor has $1000.00 of capital to invest, and leverages at 10%, then $1,100.00 is made available to that investor. The percentage at which an investor borrows based on underlying capital is called margin and is granted at varying percents by lenders, financial institutions and brokers. Leveraging can be used in a number of ways and to purchase an array of financial products.

The act of leveraging itself is not a guarantee money management success as using leveraging to invest can involve financial risk. However, when used prudently and efficiently, leveraging has the potential to increase net gains and thus net worth that is necessary for financial independence. In light of the financial possibilities leveraging make possible, this article will discuss how to leverage, and methods of leveraging in addition to providing tips and techniques that may be helpful when leveraging.

How to leverage

In order to make use of leveraging one must have either access to a large amount of capital or borrowed funds. Generally, an existing capital base must be present to obtain leverage at reasonable rates, otherwise unsecured loans may be obtained at higher rates. Leveraging funds can be obtained from banks, angel investors, mortgage lenders, credit cards, business loans and/or grants. In other words, wherever there is a source of capital that is not one's own, leveraging may be possible.

The criteria each lender has for providing leveraging funds varies. For example, banks may not consider investment loans but may consider business loans based on credit history, rating, business plan(s), business success etc. whereas a mortgage broker may consider existing capital and income in addition to the previous criteria. Investment brokers and/or private lenders may consider different factors when deciding to provide leverage capital.

To leverage one must decide what to leverage. In other words, after leveraging credit or margin has been acquired, a product, business or service is invested in using leveraged funds. For example, to leverage via stock trading, one may have margin with which additional stocks can be purchased.

In options trading, leverage is often used to obtain a multiple of one's actual capacity to invest allowing the investor to assume a large stake in the stock option. Leveraging is also used in commodities trading and foreign exchange trading. Mortgages and business loans are also examples of leveraging as more money is borrowed than the buyer is able to provide in order to purchase a home or operate a business.

Methods of leveraging

There are several ways to leverage and these methods are determined in part by where the leveraging comes from. For example, if leveraging is obtained for a mortgage, the criteria, capital requirements and interest rates are often pre-determined. With riskier leveraging such as in foreign exchange and commodities investing, leveraged capital can be lost far easier as the underlying asset can be more volatile leading to greater losses. The following is a list of sources for obtaining leveraged capital.

• Private lenders ex-angel investors, and venture capitalists *Mortgage brokers ex-home equity line of credit (HELOC) *Commercial banks ex-Business loans, equipment loans *Credit cards ex-Private and business credit cards *Lines of credit ex-bank overdraft protection *Investment brokers
ex-FOREX platforms, commodities exchange *Other loans ex-unsecured loans, title loans

Leveraging tips and techniques

When leveraging risk management is important because leveraged money is borrowed money. As with all investing, fiscal responsibility is helpful in optimizing financial decision making for the better and in developing the goal of financial freedom. The following tips may be helpful when leveraging.

• Due diligence: Whether it be a property, stocks or another type of investment vehicle, researching how the leveraged capital is to be used can help with assessing the amount of risk involved.

• Percent of capital leveraged: When leveraging with risk investments, using a smaller percentage of leveraged capital conserves capital if a margin call is required on investments that decline in value.

• Interest rate and fees: The lower the interest rate and fees associated with leveraging the better. Obtaining a lower leveraging cost helps maximize profits.

• Strategy: Developing a sound and proven leveraging strategy can also minimize risk and help facilitate profit as well as reduce the amount of time it takes to reach financial independence.

• Qualification: Knowing what it takes to qualify for and maximizing available leveraged capital is key in leveraging investments. Maintaining and growing capital base, good credit, and income are all useful in various decisions by lenders who offer leveraging.

• Time: Allow some time for leveraged investments to perform. Financial independence doesn't necessarily happen overnight, thus time is a crucial element in utilizing leveraged funds.

Summary

Obtaining financial independence through leveraging is a method used by many individuals and businesses. Leveraging is also used to increase net worth and grow profits and businesses. Without leveraging, financing investment goals may not be possible and consequently, the practice of leveraging is an important element in financial planning for higher capital gains and/or profit growth. This article has illustrated how leveraging works as well as explaining different methods of leveraging and leveraging techniques.

Leveraging, if obtained and used correctly can lead to financial independence, and is thus a tool for obtaining financial independence. It is not necessarily easy to obtain and make good use of leveraged capital and the return on leveraged investments is not guaranteed, however the financial possibilities of leveraging are considerable. Moreover, by being aware of how leveraging works, where to obtain leveraging and how to best use leveraged capital one may increase their chance of obtaining financial independence.

Source: http://www.investopedia.com/terms/l/leverage.asp

What is the Moving Average Bounce Trading System

The moving average bounce trading system is a pattern in stock price movement similar to a ball bouncing off a moving floor. For example, just like the average height of a female may be 5' 8" a stock price also acquires an average over time. During a typical trading day, the price of the stock may move above or below this average stock price.

The moving average bounce trading system is a system of analyzing financial instruments based on a bouncing pattern produced by a stock price's movement around its moving average. Specifically, the pattern starts by moving away from the moving average, then back toward it and then away again, hence the 'bounce' term.

Why the moving average bounce is meaningful to day traders

The moving average bounce indicates that a stock price or other financial instrument may have reached a new price floor because the bounce is technically the second divergence away from the moving average line. This means the chances of the price moving below the moving average may be lower and a trader hopes this is the case.

Spotting a Moving Average Bounce

Stock price graphs and software applications often chart the course of historical stock price movement and also perform statistical calculations used in analyzing stock price movement. One such calculation is the moving average and can be viewed on stock charts and graphs in the form of a line visibly overlayed on the stock price line. This enables the day trader to compare the stock price to the moving average and spot the bounce.

Timing a moving average bounce

Moving average bounces can occur anytime in a financial instruments trading cycle. In day trading, a moving average bounce is used in a short-term period meaning the period in which the bounce occurs can be minutes. Nevertheless, the actual moving average that is used can be a long term moving average but this is not absolutely necessary and depends on the technique and patterns used in stock trading.

Calculating the moving average

If one has no choice but to calculate a moving average manually the equation is fairly simple. Select a time period such as 30, 60, or 90 days and take three time periods for each of those days. Find the price of the stock for each time period, add them and then divide them by 3 to get an average daily price. Then do this for each of the 30, 60 or 90 days, add them and divide that number by the number of days. The moving average will then have been calculated for the 90th day. In mathematical steps, an example calculation proceeds as follows:

1. Morning price + Midday price + Afternoon price/3
2. Repeat for desired number of days Ex. 30 days
3. Add each days average price and divide by 30

There are several ways to calculate a moving average, and the method one chooses depends on the accuracy one desires and/or the software one uses. Three methods of moving average are simple moving average, 'typical price' moving average and the exponential moving average. The above example uses the typical price method and is an average using a number of averages while the simple average method is just an average.

The exponential moving average gives greater importance to recent prices and is thus a 'weighted' moving average. The formula for this moving average incorporates an exponent with each new days moving average for such weighting purposes and is calculated as follows:
Exponential Moving Average=Stock Close price * Exponent) + (prior days moving average or exponential moving average * (1-Exponent) Where the exponent is calculated by dividing 2 by the number of days in the moving average +1.

The exponent is the key to calculating the moving average using this method and it is calculated by dividing the number 2 by the number of days in the moving average calculation + 1. This must be done for each of the days as in the typical price moving average method above. However, the first day in the calculation which is actually the second day because a previous day must exist for the equation to work properly, will have a larger exponent than the most recent days allowing it to be mathematically weighted.

Conclusion

The moving average bounce is what day traders call a 'technical indicator' meaning it is used in the technical analysis of a financial instrument's price movement. The purpose of the moving average bounce is to signal a possible buying or entry point for the trader. The confidence given to this technique is due to the fact that the bounce is the second rather than the first movement away from the moving average line indicating a possible price floor and predictable movement in the price of the stock.

The actual movement of the stock price may or may not move the direction the trader intends through using the moving average bounce system. However, the bounce system also gives the trader more reason to think the stock price will move in the direction (s)he wishes. Moving average bounces can be observed using technical analysis software, various stock price charts and/or calculated manually. The moving average bounce system may also be used along side one or more other technical indicators.

Sources:

1. http://daytrading.about.com/od/tradingsystems/ss/MovingAverageBo.htm
2. http://www.swing-trade-stocks.com/moving-averages.html
3. http://tinyurl.com/2c9qsl
4. http://www.pandacash.com/technical-analysis/moving-average/exponential.htm
5. http://stockcharts.com/school/doku.php?id=chart_school:technical_indicators:commodity_channel_index_cci

Stock Option Collar Strategy: How to Delay Paying the Taxman

Using the collar strategy to avoid paying capital gains taxes can be an effective strategy depending on the time horizon of the stock options, the particular stock options chosen and the performance of the underlying stock. In other words, so long as the investor holds onto the appropriate long position, and 'collars' by writing call options and purchasing put options with expiration after the end of the fiscal year, the strategy could postpone paying of income taxes to a subsequent year.

To illustrate further, since the collar strategy can yield profit on the difference between the cost of the put option and the call premium, the possible exercising of the options is of importance. Even if the expiration date is past the end of tax year, the put option could be exercise before then potentially leading to taxable income. Moreover, a positive difference incurred from an early closing of a call option and exercising of the put may yield taxable income.

To effectively employ a collar, a few important steps can be considered.1)) Hold a long position that is estimated to remain flat or decline significantly in share price 2) ensure the company is also tradable through stock options and 3) study the options available in terms of price, premium and expiration date. All being well, the selection of the collar strategy will be both financial fruitful and a tax deferral technique.

An example of collar options strategy to avoid paying taxes is as follows. Investor Y owns 1000 shares of ABC corporation currently priced at $86.00/share. ABC corporation is currently priced above the purchase price paid by the investor. To avoid selling and paying capital gains taxes, investor Y writes 10 call options for ABC corporation with a strike price of $95.00 and purchases 10 put options for the same company with a strike price of $75.00.

If the price of ABC rises, the underlying stock value will yield a non-taxable gain if it is not sold before the end of the tax year. However, the premium of the call option will be lost if the stock price rises above the strike price in addition to the costs of the put option. The difference between the underlying stock gain and the cost of the options will therefore determine any profit or loss. In the case of a capital loss, this amount may be deductible from taxable income if the options are exercised before the end of the tax year.

Should the price of the underlying stock remain flat or decline below the purchase price of the underlying stock, and the put option's strike price, the premium from the call option plus the gain from the difference of the put option's strike price minus the current price after costs can serve as a tax hedge against holding onto the underlying position to postpone capital gains tax.

Stock trading: Limit orders explained

A limit order is simply a buy or sell price that is pre-determined by the buyer or seller of financial securities. For example, investor Y wants to buy company ABC corporation at a price of $59.30/Share however the current market price is $65.00 per share. A limit order is a choice to only buy or sell at a set price i.e. $59.30 for a buy and $67.00 for a sell. Beware however, market orders can take priority over limit orders potentially causing a limit order to go unexecuted even though a limit price is reached.

There are several types of limit orders including but not limited to buy limits, and sell stop limits. These types of orders prearrange purchase prices and sell prices for securities. This article will illustrate the types of limit orders, dynamics behind placing limit orders and discuss the possible benefits of limit orders to an investment strategy.

Types of limit orders

Several types of limit orders exist depending on the goals of the broker and/or investor. Additionally, other functions such as the "all or nothing", and "fill or kill" options can be used to avoid only partial execution of limit orders.

• Buy Limit order: Sets maximum price a purchase will take place
• Sell Stop Limit order: Sets minimum price a price may fall before selling
• Trailing Stop $: A moving stop loss that is proportionate to dollar difference from a moving market price
• Trailing stop %: A moving stop loss that is proportionate to percentage price difference from a moving market price

How to place a limit order

To place a limit order an investor, trader or speculator must do so through a brokerage account that deals specifically with the type of securities being bought or sold. For example, if investor Y wants to buy stock options through the Tokyo stock exchange using limit orders the brokerage institution must be equipped to do this.

The funds available must be present and the number of shares and corporation name are entered into the brokerage account ordering system. The option to buy at a limit is one of several types of order features including market orders, and the time period with witch the order remains valid.

If an investor or broker is dealing with options, limit orders can also be used. The investor or broker can place a limit order to either buy or sell options at a specific price. The prices vary based on the current market price of a security and the exercise price of the option among other factors. Typically, market orders and standard limit orders are less complicated.

When using online trading platforms the limit order option should appear near the order type field in the transaction page of the online brokerage account. Depending on which brokerage is used, the number of shares purchased, frequency of trading, cost of purchase etc. different brokerage firms will charge different fees for the transactions.

Limit order strategies

• Limit loss: By placing sell stop limit order loss on devaluation of a security can be held within a certain price range or percentage. This can assist the investor conform orders to risk tolerance and overall investment strategy.

• Tax hedge: Using the above example, on Monday, December 31 investor Y decides he can lower his tax bracket by selling 100 shares of ABC corporation at a limit price of $55.00. Since his purchase is below his purchase price his decision to sell at a set price before the end of the year will enable to recapture some of his capital loss through tax savings.

• Target price acquisition: Through a limit order a buy price can be established to trigger the purchase of security once a price reaches the limit price. This can assist in meeting price purchase goals.

• Limit order options trades: Using limit orders in option trading can help maximize gain and/or minimize loss. Since options are leveraged investments the use of limit orders can may be helpful.

• Limit Timing: Timing a limit order may lead to a successful or unsuccessful execution of the order. For example if a price limit of $50.00 is placed with a buy order with an expiration of one day and the day's price range never falls below $52.00, this order will go unexecuted and expire. Thus, placing a long enough time period and/or close enough price to the market price may facilitate a more successful execution of the limit buy order.

Summary

Limit orders are a stock buying method that assist the broker and/or investor in achieving a desired price range whether it be to buy, sell or trade options. The limit order is a feature of securities trading that fixes pre-determined buy and sell prices so as to achieve several functions. Some of those functions are listed below:

• Automates the buy and sell process
• Facilitates timely trading
• Enables price selection
• Helps lower losses
• Allows the broker and/or investor more time to perform other tasks

Several strategies can be enhanced through the use of limit orders specifically limit loss, tax hedge, target price acquisition, options trading limits and limit timing. Developing these strategies involves becoming familiar with the types of limit trades, their purposes, how well they execute and their implications on other investment options. Not all limit orders execute and a large limit order may only partially execute depending on the number of shares requested and the extent of time the security stays in a specific price range. In such instances additional commands can be used such as the 'all or nothing" option.

The execution of a limit order requires the stock, security or stock option to meet the trigger point for the limit order to execute. This point is usually the price or lower if a buy order and the selling price of a stop loss for a stop loss limit. There are several advantages to using limit orders that may help improve an investment strategy, market timing and price selection however the risk with limit orders is that money tied up waiting for a limit order to execute may stand the chance of being better invested elsewhere.

Investing: Determining Your Risk Tolerance

Investment risk tolerance is a measure used by investors and financial planners in investment planning. The risk tolerance scale is also a useful risk management tool and ranges from low to high with the lower end of risk tolerant investors choosing financial instruments such as insured bank accounts or financial instruments and/or guaranteed investments such as certificates of deposits, bonds and money market accounts.

These basic types of risk are also comprised of more in depth risks that once elaborated upon sometimes change the actual risk level of some financial instruments that may usually be classified as low or high risk. This article will discuss the types of risk tolerance, risk types and provide tips on determining individual risk tolerance.

How to determine risk tolerance

To find an ideal risk level involves assessing and combining 1) financial goals, 2) personal perspective, and 3) life decision history with the realities of the financial markets such as percentage price losses, market volatility, personal comfort and amount invested. A simple way of looking at risk tolerance involves identifying how much general risk one likes to take financially in terms of a low to high scale.

The following link provides an example of a basic risk tolerance scale. This scale does not illustrate the types of investment associated with each type of risk, however additional graphics do, this risk/investment pyramid being one example. The difference between the scale and the pyramid is that the pyramid includes investments associated with each level of risk. However, what the pyramid does not illustrate is the finer details within each risk group and investment choice.

Investments are not always as black or white; or right or wrong as some risk illustrations seem to imply. This is because there are different types of risk within each risk category. For example, of the lowest risk level, which bonds are the safest? or which companies providing certificates of deposit are most financially solvent?

What may seem to be low risk, might actually be quite a high risk if the financial institution(s) issuing the investment instrument are doing so with a low credit rating or precarious business financials. This is why it is important to look beyond the simple risk diagrams often used in determining risk tolerance.

Types of risk and individual investment choices

As we have seen, there are essentially between three and five types of risk that may include very high, high, medium and low. To identify which one is most comfortable think back to times when such risk was occurring in life. For example, one might think about questions such as how it felt, what was the response to it, was it easy to stay emotionally balanced during the risk and what happened next.

Once one has an idea of what kind of risk one feels comfortable with, the next step can involve applying those thoughts and feelings to one's finances. Would it feel the same to have such risk levels in one's financial investments and what level of risk would be right both in terms of financial needs and goals. To further illustrate the types of risk one may be exposed to it can be helpful to understand which investment circumstances are affiliated with each type of risk.

• Financial market risk

Each financial market has a different level of risk per se. For example, the bond market tends to be more predictable and provide more stable outcomes than stock trading, but has less potential for gain. Furthermore, the Foreign Exchange market can be thought of to have high risk as the chance of losing money in this market can be high just as the chance for making money can be great. Choosing which financial markets to invest is a way to invest with risk in mind.

• Price volatility

When investing in the stock market, prices can be volatile within double digits percentages either up or down within as little time as a few hours. This can mean an investment could lose as much as 20% or more if an adverse event, sudden unfavorable economic news or weak market conditions strike one's investment. Being prepared both financially and mentally for such risk is a key part of risk comfort. If one would rather not expose oneself to such risk there are other ways to invest and avoid such risk.

• Investment choice

The choice of one's investments is also a way to identify and invest with risk in mind. Bank insured and guaranteed investments are among the safer of investments, followed by treasury bonds, conservative mutual funds, blue chip stocks, growth stocks, and futures trading in that order. One may wish to try a little in each to determine what one feels most comfortable with before deciding which risk level is right.

Tips for determining risk level

• Market simulations may help one get the feel for which type of investing one is comfortable with. Such programs do not involve real cash are thus risk free, but help one identify potential risks and pitfalls within that financial market.

• Invest Conservatively at first to see how it really feels, to make and lose real money. The first hand experience shows what is really involved both financially and mentally.

• Personal history of decision making is a clue to one's risk preference. In life many decisions and choices are made, if such choices were often risky or less risky, this may be a good indicator of what type of investment risk one will prefer.

• Study and research investment choices and financial markets to garner a more exacting level of risk. Each market and investment has a life of its own and may not always be a good predictor of other similar investments.

Investment risk is something one may intuitively know beforehand or have to think about before investing. If one has to think about it a lot, this may imply one is naturally cautious regarding investments. However, caution alone may not determine risk preference. The above illustrations and tips can assist with such identification of risk levels, how to deal with those risk levels and which investments are more likely to yield each risk level.