Profit / Loss Chart

This is a basic profit/loss chart.  There is a corresponding chart for any trade that can be made on the market.  The basic idea is that anywhere that the blue line is above $0 there is profit to be made in selling the position.  Correspondingly when the blue line is below $0 you will take a loss to sell the position.  In this case any selling price for the position outside of the $23 to $27 range nets the investor a profit.  This however does not include any costs incurred in actually performing the trade such as brokerage fees.

Some trades especially multiple leg options trades can be difficult to analyze but with the help of a simple profit/loss chart the position becomes much easier to understand.  I suggest looking at some basic profit/loss chart profiles when trying to understand different strategies for investing.

Sorry for the delayed post but it has been a busy couple of weeks.

CoffieGuy

Mutual Funds

Mutual funds are probably the single most important traded commodity on the stock market.  Mutual funds are nothing more than a selection of stocks, bonds, futures, currency, or pretty much anything else openly traded that are contained within a trust that is managed by an oversight organization.  Shares of the fund are then sold just like any other stock to anyone who wishes to purchase them.  Due to the way that the fund is managed they tend to follow more closely the growth or decay of the section of the market that they are diversified into.  This allows for a much more predictable future than purchasing an individual stock and lends itself to a more secure investment.

The largest advantage to purchasing shares of a mutual fund is that the fund by it's very nature is already diversified into hundreds or even thousands of different companies, bonds, or whatever else the fund purchases.  This means that it is possible to have an extremely diversified portfolio with only a couple of different funds.  This and the inherent safety of a fund are the main reasons that your 401K typically only allows the purchase of mutual funds.

Even though mutual funds are already diversified it is still a good idea to invest in several mutual funds.  I like to choose three or four funds to put my money into.  I think it is a good idea to have at least one fund from each of three categories low risk low yield, medium risk medium yield, and high risk high yield.  The percentage of your investment that is placed in to each fund will be determined primarily by the length of time that you have until you need the money (typically retirement).  It is best to have a larger percentage in high risk when you are young and shift that money into a lower risk as you grow older and closer to retirement.

I personally like Vanguard funds and they have a fund to meet most any investment requirement.  Since I am young I tend to have more of my money in real-estate funds and overseas funds as they tend to have a higher yield but also a higher risk.  I will go more in depth into risk and yield in a later post about those topics.

Thats all for now

CoffieGuy

What is an Option?

First off, don't be put off by options.  There is a slew of comments floating around out there like "my uncle lost everything" or "those things are so dangerous".  While it is possible that you could make a bad trade options are an extremely powerful tool that when used properly can really strengthen your portfolio.

Lets get some basics out of the way.  What is an option?  In laymen terms buying an option is akin to renting a stock for a period of time.  Think of renting a house.  For a monthly premium you can live in a house but at the end of the lease you never really owned anything.  It is the same way with buying options.  You can buy an option and take advantage of any movement of the underlying stock either up, down, or steady but at the maturation date you never really owned the stock.  There are two basic types of options Call and Put.  Though there are many strategies for using them the basic idea is that a call option allows the owner to buy stock from the stock owner at the option's strike price and a put option allows the owner of the option to sell the stock at the option's strike price.  What this means is that if you buy a call option ant the price of the stock increases greater than the strike price you can exercise the option to make money and if you buy a put option and the price of the stock decreases below the strike price, you make money.  The first thing to remember about options is that you must exercise them before the expiration date.

Next question: so how do I use these options to benefit myself and my portfolio?  Wow, what a question.  This question will take some time to answer in full and I must apologize now for this post is going to be long, but I plan to make it as concise and understandable as possible.

Basically, by renting a stock for a fraction of the cost of buying a stock you can take advantage of the same profits as owning the stock thus earning a significantly greater percentage of your initial investment.  For instance, if person A owns stock XYZ at a current price of $1 and sells a call option on that stock at a strike price of $1 to person B for $.10 and in a week the price of the stock goes to $1.50.  Person B can now exercise the option and buy the stock from person A for the strike price of $1 and immediately sell the stock for $1.50 making $.50.  Subtracting the initial cost of the option person B made a net profit of $.40 from an initial investment of $.10 thus 400% return on investment.  This is contrasted against purchasing the stock outright for $1 and increases to $1.50 netting $.50 in profits on an initial investment of $1 thus a return on investment of 50%.

An other popular way to use options is to complement the use of stocks themselves.  For instance if a person owns some stock that person can sell a call option on that stock instantly making money equivalent to the selling price of the option.  If the stock increases in price the owner makes money from the increase in the stock price up to the strike price and the selling price of the option.  If the price of the stock decreases the owner does not loose money until the stock decreases more than the value of the option, in other words, hedging.  Put options can be used in the same way to hedge against loss by buying a put option at a strike price lower than the current stock price so that if the stock decreases in value you can sell your stock at the strike price of the put option.  In layman terms call options hedge against small decreases and put options hedge against large decreases but don't hedge against small decreases.

CoffieGuy

What is a Stock?

Dictionary.com defines a Stock as "the shares of a particular company or corporation".  This leads to the obvious question what is a share.  The same defines a share as "the full or proper portion or part allotted or belonging to or contributed or owned by an individual or group".

So what does all of this mean to you?  Basically it means that if you own a stock, you own a portion of a company equal to the number of shares you own divided by the total number of shares that the company is currently divided into.  These shares have value (which you already know if you have bought any).  This value fluctuates on a minute by minute basis.  You may already know all of this but what you may not fully understand is that even though the value of the stock for a given company fluctuates, the portion of the company that is represented by the share does not.  What I mean by this is say you have an apple and one day you go to the market and that apple sells for $1, you can think of yourself as having $1 worth of apples.  If however you go to the same market the next day and apples have doubled in price to $2 you could say that you now have $2 worth of apples and that you made a a dollar but the total number of apples you own stayed the same.

The next most important thing to know about stocks is what gives them value.  You may think that it is the underlying company and how much they make a year or how much capital they have but this would only be a partial truth.  The value of a stock is directly tied to what people are willing to pay for it.  This is where the economics get interesting.  All sorts of factors are now at play including supply/demand, investor confidence, total trend of the market, and all sorts of other things.  The most important thing to take from all of this is that there is always a Bid and an Asking price for any stock and the two prices are always separated by some margin.  So this is how it works, person A wants to buy a stock at a price of X and places a bid for the stocks that he/she wants at that price.  Now person B who currently owns those stocks gets to decide if he/she is willing to sell them for that price and the price person B is willing to sell them for most typically is the asking price.

Another interesting point to make about stocks is that most often they define the total value of a company.  This means that the value of the company is no longer defined by there production or there capital but rather by the share price multiplied by the market cap (total number of shares being traded).

I hope this information is helpful at beginning your understanding of the stock market I appreciate any feedback you are willing to give me to help me make this blog better.

Also I am taking requests for new topics just email them to coffieguy@gmail.com with the subject line Stock Market Request.

Thank You and have a wonderful day
CoffieGuy

Intro

Intro, Hooray!

Am I ever excited that I finally decided to put all of my stock market knowledge in one place.  This blog will be a collection of knowledge that I have gained over the years trading on the stock market.  I am planning it to be a guide to the new trader as well as a reference for myself as well as any other veteran traders out there.

I would also like to say that I will not be telling you what stocks are hot, nor will I be giving you trading advice but rather I hope to give you a basic understanding about the inner workings of the market and how to navigate the seemingly endless supply of information.

Please stay tuned for future updates as I plan to discuss a different topic in each future post.

CoffieGuy

P.S. I don't currently have a plan for scheduled updates just when I have time.  I do however hope to make at least one post a week.