All you want to know but never asked about the stocks and options markets.

domingo, 31 de agosto de 2014

Psychology and Emotions in Trading I

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Investment in financial markets is a psychologically frustrating activity. We can have all the logic on our part and in the end the market can make a move against all odds (and worse, when nobody expect it). We must get used to generate a high tolerance for failure against losses and not build castles in the air when we are in a winning position.

In general, the more frequent our trades, we will face more against our own psychology. For those who do intraday trading (many fast trades that must be closed at the end of the day) or swing trading (transactions in a short period, usually from one day to a couple of weeks), it is absolutely essential to follow the famous three "M" of Alexander Elder: "Money, Mind, Method".

sábado, 30 de agosto de 2014

Different types of stocks

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When a company decides to issue shares, the owners must decide what kind of stocks and in what quantities. The decision determines how profits are distributed to shareholders. The two types are preferred and common shares, but the decision goes beyond deciding the type of shares. Owners can choose to issue different classes of shares within these two types.

jueves, 28 de agosto de 2014

Stock Market Indices

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A stock index corresponds to a compound statistical record, usually a number, which tries to reflect changes in the value or average returns of the component stocks. Generally, shares in the index have common characteristics such as belonging to the same stock exchange, have a similar market capitalization or belong to the same industry. The stock indices are usually used as a reference point to different portfolios such as mutual funds.

The purpose of stock indices is to reflect the evolution over time of the prices of securities listed on a stock exchange. In short these instruments try to reflect the performance of all companies listed on the stock taken together like a single unit values.

Like shares, stock indices are traded on major stock markets.

What is an option?

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An option is a contract between two parties whereby one party acquires the right but not the obligation, to buy or sell a specified amount of an asset to the counterparty at a set price and at a future time. There are two basic types of options: 

  • Call option contract
  • Put option contract
There are four basic strategies when buying and selling options, which are:

Buying a call option (long call)

This strategy gives the buyer the right to buy the underlying asset at the strike price on or before the expiration date of the option. This right is granted by the payment of a premium. The maximum loss is limited to the premium and it has an unlimited potential profit.


Buying a put option (long put)

This strategy gives the buyer the right to sell the underlying asset at the strike price on or before the expiration date of the option. This right is granted by the payment of a premium. The maximum loss is limited to the premium and it has an unlimited potential profit.


Sale of a call option (short call)

This transaction is also known as writing a call option. It obligates the seller or writer to sell the underlying asset at the strike price on or before the due date, in exchange for payment of a premium. This strategy has limited profit (the premium) and a unlimited loss potential.

Sale of a put option (short put)

This transaction is also known as writing a put option. It obligates the seller or writer tobuy the underlying asset at the strike price on or before the due date, in exchange for payment of a premium. This strategy has limited profit (the premium) and a unlimited loss potential.


Option premium 

The premium is the price that the option buyer pays the seller of the contract (writer) to acquire the right to buy (call option) or sell (put option) the underlying asset in the future at the strike price. 

The option buyer pays the premium and the seller collects the premium, due to the difference of obligations and rights. The buyer has the right but not the obligation, to buy or sell, and the seller is obligated to buy or sell at fixed price, whether or not beneficial to him.


Call option Sell option
Option buyer Right to buy Right to sell
Option seller Obligation to sell Obligation to buy