J.P. Morgan Chase lost $2 billion from high-risk, derivative trades in only six weeks.

The C.E.O. of J.P. Morgan Chase, Jamie Dimon, said that the bank could suffer an additional $1 billion in losses. In a conference call with analysts on May 10, Dimon said that “egregious errors” were made. However, he refused to concede that the company needed a stronger regulatory framework.

The mark-to-market losses came from the bank’s chief investment offices. This trading unit of the bank was set up to hedge J.P. Morgan’s loan portfolio and to invest excess deposits. The office drew heated controversy in April based on reports that a J.P. Morgan Chase trader in London was making big bets in credit derivatives.

People within the firm have said that top traders for J.P. Morgan, such as Ina Drew, campaigned vigorously to keep this trade going. According to former executives for the company, Drew told traders at the bank’s chief investment office to execute trades that were meant to shield the bank from the turmoil in Europe. She believed that these bets could protect the bank from losses and that they could even earn a tidy profit.

When the credit market took a turbulent turn in April and early May, Drew tried to trim this gigantic bet. However, the instructions came too late and the losses from this trade exceeded the $2 billion mark. J.P. Morgan is now replacing Ina Drew and two other top trading officials.

Other J.P. Morgan Chase traders who are under scrutiny include Bruno Iksil who had made more than $100 million for J.P. Morgan Chase in recent years. Traders have nicknamed him the “London whale,” because the positions he had taken were so large that they distorted credit prices.

Iksil is not the only person to blame for the $2 billion loss, though. According to a writer for the Wall Street Journal, Gregory Zuckerman, Iksil was not a rogue trader. Zuckerman claims the bigger problem involves the bank’s risk management system.

The bank will probably have to hire some professionals to clean up the mess made from this massive bet. The C.E.O. of J.P. Morgan Chase also bears part of the blame, for allowing such a big bet to occur within his own company.

J.P. Morgan Chase (JPM) had earnings of $1.31 per share first quarter 2012, up from $0.90 in the fourth quarter of 2011.

Although both lines had the same amount of people, one line had a fast cashier and a high grocery-to-person ratio (each person had a lot of items), and the other line had a slow cashier and a low grocery-to-person ratio. During the milliseconds that this analysis was taking place I noticed someone approaching rapidly to get into a line and I therefore had to make my decision quickly despite the uncertainty of which line would be faster. I took the slow cashier and low grocery-to-person ratio line, and my competitor was forced into the fast cashier high grocery-to-person ratio line. Unfortunately my competitor was checked out several minutes before me and in situations like these it makes me very happy to know that you can protect yourself from this when stock trading by learning how to use a simple financial instrument known as the option.

What Are Options?

Despite the bad reputation derivatives as a whole have, options are a form of derivative that are based on creating a contract that allows you to either purchase or sell shares at an agreed upon price and within an agreed upon time. If you don’t activate your option, otherwise known as exercising the option, within the agreed upon time then the contract is voided. There are numerous reasons for using options, but they are often created and utilized as a way to protect against loss due to high uncertainty levels.

The way you attain a contract is by paying what is known as a premium up front to whomever is on the other side of the contract as consideration for their taking over the risk of whatever you’re trying to prepare for. If the option isn’t exercised then they get to keep the premium, but if you do exercise it then they have to fulfill their side of the contract, which could result in large losses for them. Nonetheless, they get the time-value advantage of investing the cash you gave them up front for entering into the contract.

How are Options used?

Imagine you’ve discovered a public biopharmaceutical company that you learned was in the final stages of FDA drug approval, and you’ve figured that the upside on their share price if they do get approval is tremendously more than what it’s currently selling for. Over the past several months the share price has been moving upward from a few cents per share to several dollars out of anticipation of FDA approval. You take your hard-earned money and decide to purchase some shares because you would like to make a small fortune on this supposed wonder-drug but you know that if this company doesn’t get approval there will be a large sell-off and the stock price will return to less than a dollar which would be nearly an absolute loss of your investment.

Put Option

To protect yourself in a situation like this you would purchase something known as a Put Option which gives you the right to sell your shares in the company at an agreed upon dollar amount which would help protect your investment if the company didn’t get FDA approval and the shares quickly returned to their initially low market price. As the shares declined in value, your put option contract’s value would sky-rocket, and you would have the right to either sell the contract or exercise it yourself to recoup your losses.

Call Option

Alternatively you could avoid the situation all together by purchasing a Call Option on the shares in the biopharmaceutical company. This type of option contract gives you the right, but not the obligation, to purchase shares in the company at an agreed upon price within a particular time. You just have to purchase the contract and only risk the amount of the premium you give up to buy the contract. If it turns out that the company does get FDA approval, and the shares sky-rocket, then you’re left with a very valuable contract which you can either sell or use to buy the shares in the company at the lower price.

Options are a great way to hedge your bet against the inevitable uncertainty that comes with all investments. Many of us don’t look at them as such but options can be considered a form of insurance against whatever exotic stock trading maneuver you’ve given yourself. There are many tools available for us to capitalize on uncertainty when investing, and hopefully one day there will be enough processing power and information tracking technology available so you won’t make the same mistake as I did in choosing which grocery line to stand in.

Photo by NobMouse

The fact is that we aren’t going to be generating an income once we reach retirement, and you can ask just about any acquaintance over the age of 65 how difficult life becomes after you stop working, especially those who didn’t have an IRA or 401k to work with. Spending time clipping coupons will no longer be a thing of the past – it will circle back around to be at the forefront of surviving into your retirement to stretch every last dollar you manage to save.

If you have grown accustomed to a particular lifestyle for the first 65 years of your life, then it will be tough to change. The CIA World Factbook estimates that the average age of death in the USA for 2011 is 78.37 years. [1] Which gives most of us an average of 13.37 years that we need to have prepared for, but many of us live well beyond that age and it’s much better to be safe than sorry – If we didn’t have hope in the future, then we wouldn’t be investors.

So how much do you need to meet the minimum requirement of having 13.37 years’ worth of funding by the time you’re 65? The answer depends on your situation, and you can plug your current situation into a retirement calculator to get a tailor-made answer just for you, but we’ll use the current after-tax mean family income in the United States, $54,380[2], and the average savings rate as a percentage of disposable income (after-tax income) from 1999 to 2009, 2.87%[3], to generate what the average American needs to save for retirement. This would mean that you save about $1,561 per year, and will have saved a base of $54,635 if you were to save from the age of 30 to a retirement age of 65.

As you can see, based on the 8% average return of the DJIA and S&P 500, stock trading leaves you with the greatest amount, $313,585.38, followed by a savings account, $67,893.32, and the least if you don’t apply any sort of compound interest to your savings, $54,635. If you want to wind up with $0.00 by the time you reach 78.37 years of age, and assuming you continue to invest the proportion of the money you don’t withdraw for personal use in the same way:

The numbers here tell a very interesting story about the average American’s personal savings rate and how it could use a little boost for the sake of our retirement years. Even at the average stock market return, you will still have to cut out $15,000 from your lifestyle per year. Boosting your savings rate by only a few percentage points will yield thousands of dollars in the end and will allow you to harness the powers of compound interest to its fullest.

What is a commodity?

When we hear the term “commodity” many of us think of gold prices, corn prices, pork belly prices, coffee prices, oil prices, and other physical properties that are used as raw materials. Commodities in economics have a much broader meaning that applies to any good or service available that satisfies a want or need, and using this definition to analyze companies will help you develop a great understanding of the competitive advantage of branding – You don’t care who made the plastic wrap that goes around your new pack of gum, or who created the thread that lines the clothes you’re wearing right now. Despite their seeming triviality these companies are a crucial part of the whole of the product making process and without them you wouldn’t have many of these unbranded goods.

Price is the biggest driver in deciding who to purchase a commodity from and therefore creates a highly competitive atmosphere between firms that can only be won by the most efficient and economically savvy player.

How do you identify a commodity firm?

Some characteristics of commodity firms are those that produce goods that you could care less where you’re getting them from as long as the end result is what you expected. Do you care if the plastic that was used to create the media device you’re currently on was produced by Plastic Makers of America , Inc., or American Makers of Plastic, Inc.?

Thin Profit Margins
Go to the public records of the company you’re currently considering and see what its current profit margin is (A great way to figure this percentage out is by taking the average Operating Income, or the average Net Income and dividing it by the average Revenue over some amount of time). Most commodity goods are heavily competed for and rarely generate a good profit margin percentage over, or even close to 10%. Despite it being the largest retailer in the world with $421 billion in revenue, Wal-Mart has a very small 6% profit margin.

They Sell a Commodity Good
The most obvious sign is when the company in question sells something you know for sure is a commodity, such as corn or aluminum. The largest steel producing company in the world is ArcelorMittal and, you guessed it, they produce steel with a low profit margin of 5%.

A Low P/E
Despite the two examples above, Wal-Mart and ArcelorMittal, many commodity good companies have very low price to earnings ratios. Financial analysts will say that this is most likely due to the nature of commodity companies and their operating in highly competitive markets.

Be careful while you navigate the stock picking landscape because you are more likely than not to run into a commodity firm, and they have to be priced at a discount in order for it to be worth the investment due to the level of risk you are purchasing. A low P/E, the production of a commodity, and low profit margins are sure signs that you have come up to a commodity good business and you can skip over them.

Photo credit digitalmoneyworld.

To justly answer this question we have to first figure out the scope of your investment strategy, are you planning on day trading and jumping in and out of stocks on the fly or do you plan on taking a longer approach to investment by purchasing shares in good companies that you can hold for a very long time.

Long-Term Approach

One of the most famous long-term stock investors is Warren Buffett and when asked this question he has responded that the greatest time to sell a stock is never. Of course, Buffett himself has sold his holdings in the past and for various reasons, but some ideas to keep in mind are:

Sell when the market is overvalued.
This is a tough thing to call, but some surefire signs that the entire market is overvalued and is at the peak of a bubble are when the majority of stocks are at their record 52-week highs as well as having a very high price to earnings ratio compared to average.

Sell when there is a better deal out on the market.
If you find a stock that is very undervalued and you believe the company can make a turn-around, but all of your cash is tied up in stocks you already own then it’s a good idea to sell shares in underperforming stocks or stocks that have stagnated for a few years in order to free up cash to fund this new purchase in the promising company.

There are many reasons to sell, but those are two of the most common reasons. Just remember to make sure that you’re selling for reasons which make sense on paper. Don’t sell to buy a stock that everyone else is buying because chances are the stock has already become overvalued or the market is at its peak and everyone is trying to make their way in to make a quick profit. Stick to your principles no matter what your emotions are telling you when deciding to sell a long-term position.

Short-Term Approach

The key to the day trading approach is to not get greedy. You have to keep in mind that you’re in constant competition with many other expert traders who know that greed is what gets you killed in stock trading. In day trading there are also a couple key reasons to sell your positions:

You’ve made a great return for the day.
As I just mentioned, it’s not good practice to let yourself be greedy just for a few more points of return. The key difference between a good trader and a great trader is one knows when to let go and sell a position.

It’s the end of the day and your margin cash needs to be back in your trading account.
Often when you’re a day trader you’ll try to take advantage of leverage by opening a margin account and trading with loaned money. The key with most margin accounts is that in order to not get charged any interest for using the money you have to have the cash back in your account by the end of the day because you get charged for the money you’ve used to buy shares. Speak to your brokerage company to find out more about margin accounts.

You made a wrong decision.
Let’s face it, as human beings we can only take in so much information at a given time to make a sound decision, and when you are part of a complex adaptive system like the stock market it’s tough to stay ahead of any sort of curve because there are people and companies out there who have much better resources than you do. If your stock begins to take a turn for the worst, it’s better to cut your losses early than to let it drop in hopes of a turnaround.

When you’re a day trader you’ll find that much of when to buy and sell depends on the types of securities you trade, because you are dealing with a different market each time and the players who are experts in those markets have adjusted over time to create a particular market environment. It’s good practice to watch how a market trades for a while before you jump in and begin trading with real money. With enough experience and drive you can be the niche leader in any trading environment.

Photo by Ian Muttoo

Price to Earnings Ratio

This is one of the oldest and easiest financial ratios to calculate, all you do is plug in the market price of the stock at any given time and divide it by the company’s annual or quarterly earnings, which you can find in the financial statements of the company. Fortunately, most of the sources found at Stocktrading.net will have the ratio already done for you. In excel it will look like this:

Compound Annual Growth Rate

If you want to measure the average rate that a company is growing at in a particular area over a certain amount of time then the Compound Annual Growth Rate (CAGR) formula is what you will need. This formula will tell you the percentage rate that a company will have to grow at from the first year of analysis in order to get what it has in its final year, and is figured out by dividing the final year by the first year and then exponentiating by one divided by the number of years (You still awake?). In excel it looks like this:

You can find this information by going to the company’s financial statements (The Income Statement, the Balance Sheet, and the Statement of Cash Flows) and plugging in numbers from all the various line items you want to analyze, but keep in mind that the temporal direction will often vary from source to source, some starting, from left to right, in year 5 and going to year 1, or some going from year 1 to year 5 and even some who don’t have all the years!

Future Value

Let’s say you want to project forward by a number of years what a company has been growing at for a previous number of years so you can perform some more advanced financial formulas using the projection. This future value formula can be used with the interest rate you get from the previous CAGR formula to continue compounding forward the particular line item into the future. The future value formula, using the interest rate we got from the previous example (CAGR: 38%), looks like this in excel:

There are many financial ratios that help you to simplify what is actually going on behind the mountains of numbers most of us associate with a public company’s financial statements. Using these formulas gives you a better understanding of the condition that the company is in and will definitely help you become great at stock trading.

Plugging in numbers to the derivative of the area of a circle formula would simply show you how much change happens to the original formula as you progress through a series of inputs, and when you apply this concept to financial derivatives you can see the similarities. For example, if you acquire a derivative contract that allows you the option to purchase shares of stock at a certain price and soon after that the stock’s price increases above the derivative contract price, then the value of your derivative contract would increase by a greater proportion the further the price of the underlying stock increased allowing you the option to either sell the contract to someone so they can execute it, or allowing you the right to execute it yourself and immediately sell the shares at a profit. It is important to note that this simple example doesn’t include other important derivative valuation factors like “time value of money” and the cost of the contract in your final decision to execute it, two crucial aspects that you will need to learn more about before you start trading derivatives.

Although the concept of a derivative can apply to many financial situations there are a few common types that you are most likely to see when your learning takes you deeper into this type of financial instrument:

• Options – This is the type of derivative I described in the previous example that allows you the right to either purchase company stock at a certain price or sell stock at a certain price and the option will often expire if not executed by a certain time.
• Futures – These are often used when trading in commodity markets and due to the effects of supply and demand and the uncertainty of weather as well as other natural factors in these markets for basic goods purchasing a futures contract would allow you the ability to set a purchasing or selling price for a good long in advance. For example, the giant shipping logistics company Federal Express uses an incredible amount of fuel in their day to day business, and especially due to the recent variability of gas prices this company decided that it was better to lock-in prices with futures contracts so they can better budget than get caught off guard in the future if gas prices were to take a sudden and great movement to higher prices. Futures allow Federal Express to lock in a price for gas years before they actually use a single drop of it.
• Swaps – There are several types of swaps but the most common is known as the “Interest Rate Swap” and is a contract based around two parties agreement to exchange interest rate cash flows between a variable rate and fixed rate or vice versa. This is based around the idea that interest rates change, and if you have a financial instrument whose interest payments are based on a fluctuating interest rate that in itself is based on larger economic indicators and you ultimately believe the payments will decrease because of circumstances outside of your control then you can decrease your risk by creating a contract with someone else who believes the opposite and who will pay you fixed rate payments in exchange for your variable rate payments.

There are many ways to trade in derivatives and even if there was some terminology you weren’t sure of in these examples the concept you need to walk away with is that a derivative contract is based on two parties entering into an agreement to perform an exchange of some sort when or if a condition is met by an underlying asset. Our ability to better manipulate, organize, and understand data than in the past will lead to the increased use of derivative contracts. Learning and understanding the more common derivative methods now will allow you to have a competitive advantage over other traders in the future who only then realize how important these instruments are and should be to their entire valuation of a company’s stock. Staying ahead of the curve is a very important part to being a great investor and learning about derivatives is a great step towards your perfect stock trading method.

Photo by mattemagnus

If you are like many investors, then one of the metrics you use to gauge whether or not to purchase a company’s stock is based on taking a glance at the company’s price on a chart and seeing how their price has fluctuated over some past increment of time. There’s a certain rush that comes when you see a chart-based opportunity while performing some stock trading analysis that involves a graph that, for the most part, is at an appreciating 45 degree angle and has been appreciating that way for quite some time. The urge to buy stock in a positively moving company like that seems to make intuitive sense because a price that has been moving upward in the past should continue to do so in the future – Right?

In psychology there is a concept known as the cognitive bias that is used as a way to describe a number of patterns when we as humans fail at using rational judgment. Many of them have fancy names like, “Hyperbolic Discounting,” and “Irrational Exuberance,” but one in particular we need to focus on as stock traders analyzing charts is known as Anchoring. Anchoring is the bias involved when a person goes about analyzing a situation and relies too heavily on one piece of information over the rest of the available information. Of course when this is applied to stock trading many amateur investors make anchoring a compulsive strategy due to a lack of experience and knowledge.

These are snapshots of two different public companies that both show something close to a consistent appreciation in market valuation over the same period of time. Someone who is using anchoring would say that both are good investments and that you should put money in either choice because anchoring has caused them to devalue all other information like the financial statements, their ratios, and other quantitative measures that would help to paint a much better picture of the state either company is in, and holding most of the value that their decision is based on in the initial first piece of information given to them in the charts.

Making financial decisions without knowing that this cognitive bias exists and that we are all especially prone to make intuitive decisions based on it could result in a personal travesty in your brokerage account. For every drop of 50%, you will have to make that difference up by having your investments increase by 100% – Not a very easy task – In other words if you have a $10 stock that drops 50% to $5, you would have to double your $5 investment, a 100% gain, in order to be back at your original $10.

Stock 1 ends up continuing on to increase in value up to today’s date, and we all know the company as Apple. Stock 2 continues into another appreciative cycle and then drops quickly midway through 2011. The lesson to be learned is that even though both companies share similar chart progressions, you cannot limit your analysis to charts alone, and have to know when you are fooling yourself with a cognitive bias.

Stock 1: Apple

Stock 2: Agilent Technologies

1. What are the main reasons people should consider investing?

Investing allows an individual to participate in owning parts of successful businesses or businesses which are on the path to becoming successful; or, conversely, an individual may benefit from identifying businesses which are declining in value and benefit from the decline in ownership value. An individual may also loan money to businesses who have offered an attractive return to gain capital.

There is inherent risk in taking a financial position in ownership or lending. For many people the return or profit from taking the risk may be attractive; the risk may seem prudent or worthwhile. However, there is always risk. There is also risk in not investing.

When someone deposits funds in the bank and receives a one percent rate of interest, there is inflation risk. The asset may be guaranteed against loss by FDIC but the value of the deposit may decline because of inflation. If the inflation rate is four percent per year but the interest rate is one percent per year, the asset is losing value at the rate of three per cent per year. When businesses experience inflation, they pass the increase costs on to their customers.

A good example is gasoline. Oil producers do not sell the product at the price you prefer; when their cost goes up, your cost goes up. If you own shares of an oil producing company, the value of your shares may stay the same or go higher, even in the face of inflation.

Some companies pay dividends. They distribute their profit among their shareholders. If they do well, you do well. It’s nice to be an owner. If they don’t do well, then you don’t do well. Then it’s not nice to be an owner.

The essence of investing is deciding where it is prudent to take risk, which companies will perform well over time and which will not. Could you do better with your money in an alternative, like a certificate of deposit, or is the additional risk worthwhile? You should consider investing if you can tolerate the risk. If you cannot, then you should not. Even Warren Buffet loses money sometimes. But overall, Warren has found that the occasional losses are more than offset by the reward of taking prudent risk.

If you are interested in taking on the responsibility of risk assessment, then you might do as well as Warren. If you are not interested in taking on the responsibility, then you should have professional management available in buying shares of a mutual fund. Your job then is to choose a suitable fund.

2. What are the risk differences between buying stock and day trading?

Buying stock and day trading start out the same. The difference lies in the purpose and length of time that the stock is held. Someone who sees the benefit of accumulating shares of companies at reasonable prices over a longer period of time is investing. Someone who is trading on a stock’s market direction within a very short period of time is speculating or day trading.

The risk differences are substantial. Buying shares over a longer period based on value assessment, allows a reduction of risk through averaging the cost of shares by buying at lower and higher prices. Day traders are more concerned with market direction of the share price. The day trader is hoping to identify trends in buying or selling from which he can benefit.

The value of a company may not be accurately portrayed by the price of its shares. When people who own shares of stock panic, they are willing to sell shares at prices much lower than what they paid and much lower than the real value of the company, even if liquidated. When there is euphoria in the market, people may often pay more than a company is worth. The day trader looks for very short term movements in stock share prices that may be the result of emotion, news, large shareholder decisions, perception of product or service demand or other elements that, for a short time, may influence price.

Since the day trader’s main concern is not a company’s value, the risk is much higher. The day trader sees the stock as a commodity. The short-term perception holds the greatest risk.

3. What’s a good approach for a new investor as he or she gets started in stock trading?

A new investor should gather information. Information has a lot of value for investors. Warren Buffet likes to own the majority of a company’s shares. Why? He can know the most there is to know about the company; as a majority shareholder, he is participating in the company’s operation. He has the most knowledge.

A new investor should become knowledgeable about any company whose shares he or she plans to purchase. The quality of the company, its position in its industry, its sources and amount of profit and risks associated with the particular industry are valuable information. Knowing this information makes an investment prudent.

If a new investor doesn’t have the time or interest to gain the necessary information, he or she should “hire” professionals like mutual fund managers who will do the job. A mutual fund also allows for diversification. An investor who is diversified by owning many companies through a mutual fund does not have as much risk in ownership as the investor who has purchased shares in one or two companies. If the fortunes of the one or two companies go down, the value of the investor’s money can decline more rapidly.

However, as Warren Buffet has found, having thorough knowledge of one or two companies and being right about their future prospects can produce a handsome return. Knowledge offsets risk and can produce reward.

4. What are the advantages to investing in the current market?

There are no particular advantages to investing in the current market versus the past or future market. The risk is always associated with a company’s value, profit and with supply and demand for a company’s shares. In every market there are winners and losers. Risk never disappears.

There are changes in opportunity, however. For the last three years an investor would have done better in Asian stock than in the U.S. market. Some South American stocks have done very well. But markets change and the prospects of companies change. A sobering exercise would be to look at the companies in the Dow Jones Industrial Average thirty or forty years ago and see how many of them are still there or, indeed, how many of them are still operating businesses. An honest assessment of risk and changes in risk is always part of investing in any market, whether past, present or future.

5. How should someone research a potential investment?

Start with the services that provide analysis like Standard and Poor or Morningstar; read about the industry that the company serves; if the company is regional or local, go to the company and take a look for yourself. For larger companies, do you like their product or service? What do others think. Do a little market research. If possible look at the company’s financial records. Public companies are required to file reports with the Securities and Exchange Commission. Look at companies’ annual reports. Look at their credit ratings. Look at their debt. Look at their sales. Notice the trend line. Look at their competitors. Who is growing, who is declining and why. Or let a professional management team at a mutual fund do the job for you.

6. How does one select a broker?

Just like anything else, check with people you trust and see who they deal with and what they like or don’t like. Decide if you want to pay the commissions that a full-service broker charges for providing extra service and advice; is the service and advice worthwhile. Do they have a good track record with people you know. Or, do you want to go solo, do your own research, make your own decisions and merely pay for trade execution. Then a discount broker might work fine. Or choose a mutual fund whose investment objective matches yours.

7. What advice would you give to a new investor?

Never forget that when you invest in stocks you are an owner. It is not like a magic bank account that continuously goes up. There is no guarantee. However, owners have the benefit of being rewarded for their risk. Decide whether or not you want to be an owner.

Personally, I consider owning shares of a company to be one of the greatest opportunities possible. Where else could a regular guy like me own part of a world-class company like Exxon Mobil or Intel and have them do all the work while sharing with me the success that can come from that hard work? I love it.

Diversification

The first strategy, considered by many to be the most important, is diversification. No matter what type of trading you choose, it is always good to diversify when it comes to stock trading. Keeping some funds safe and going for higher risk on others helps to round out your portfolio. The most important thing to remember when it comes to diversification is that you should always be reviewing what you have, and making tweaks along the way in order to help boost your profits.

Fundamental Trading

It is a long term investment, owned with the intention of holding the stocks till there is an appreciable change in the fortunes of the company. The long term protects the stocks from the volatility of the market. The stocks can be held for a period of a few months to several years.

Day Trading

One of the riskiest forms of stock trading, day trading involves buying and selling of financial instruments within the period of a single day transaction window. Multiple positions are changed throughout the day such that all the positions are closed before the markets are shut down. Earlier, the stronghold of large financial institutions and professional investors, day trading is becoming popular with the advent of online trading. The intention of this type of stock trading is to make maximum money by using immediate information about the company and the market.

Scalping

Scalping is a form of stock trading that aims to make quick money from small commissions on hundreds of different trades. It takes advantage of the ask/bid spread and the volume of the trade conducted by a scalper. Since the commission is small, the profit is generally maximized by handling large number of accounts.

Swing Trading

It usually lasts for a day or more but less than the duration of the long term trading. Swing traders do the trading at the peak or bottom of a price swing of a particular stock caused by market volatility.

Momentum Trading

It is another risky form of stock trading. It takes advantage of the extreme volatility and swings of the market. It involves making use of the information from other sources about the mood of the market. Making money in this form of trading is more about getting in and getting out at an opportune moment.

Penny Stock Trading

In penny stock trading, you purchase what you hope will be an up and coming stock. These stocks are priced very low, usually under $10.00 a share. While many of these stocks go nowhere, if you learn how to pick the right one, you could see huge profits.

Shorting Stocks

Shorting stocks is the trading strategy when you benefit from a stock declining in price. The idea is that you sell a stock into the market that you have borrowed, collecting cash from the sale. Then, once the price of the stock has decreased you buy it back for a lower price than what you sold it for, and return the borrowed stock from where you borrowed it making a profit on the difference between what you sold it for, and what you bought it back for later.

Insider Following Trading Systems

This strategy involves researching what others are purchasing to find trends. You look at what major players like large shareholders are purchasing and follow their lead. This strategy can be used with other stock trading strategies to help increase your chances of success. Public companies list their biggest shareholders, and when you see these major shareholders buying and selling, they often have more valuable and pertinent information that hasn’t yet been distilled to the major news sources.

News Trading

News trading is a form of the momentum trading strategy that works if you are a day trader and can move quickly when it comes to trading strategies. You need to keep abreast of what is being reported in the news that might affect stock prices. Real time news releases often give insight to where a stock will go and if you act fast enough, it could pay off.