Investing in Knowledge

It's been some time since I've been learning or reading about investing myself, I may have been gone, but I had not forgotten!

One lifestyle change to becoming wealthier, get more knowledge.
This has proven itself for me, having recently been studying for, and sitting exams for industry specific qualifications, for the job that currently brings me the money, I have just got a new job.

Whilst I can't be sure that that particular knowledge sealed the deal, it certainly helped. I thought that this fact was worthwhile pointing out, to enable you to make money in the stock market, or in real estate, you need to have the money in the first place. A good way to increase that potential cash flow, is to be always learning, increase the knowledge you have.

As an investment strategy it has certainly worked for me.

I hope to get back to blogging some more articles about techniques and my progress in the near future, to increate my knowledge in investing, and thus invest in knowledge.

Share trading school? Good or not?

Hi,

Well, today I'm not here to answer that question. I'm looking into having a go at a trading school. I figure that it would be better to learn how to do things properly whilst also self educating, to speed up progress, and hopefully limit losses from silly mistakes.

The difficulty that I'm having at the moment is picking such a school. A lot of the schools seem to be hyped up, which doesn't make me want to buy a course from them. I mean, if studying such a course would guarantee to make you millions, I think that they'd be oversubscribed, don't you?

So, I need to find something that gives a good understanding in lots of different trading methods, rather than be focussed on one particular trading strategy or theory - I'm ideally looking at a good grounding, as I realise that experience is the best form of knowledge in the market. I want something that has some form of track record, and I'm looking for something that doesn't cost much, or at least if it does, I'm looking at being able to recoup those losses quite quickly.

If there are any such providers out there, please drop me a comment!

Increase your odds of winning - Money Management

Hello again,

Here's me learning about stock market investing, and thinking I'd really like to find that failsafe strategy for making bucket-loads of cash, with no real risk. Sounds familiar? Well, whilst that's not likely to happen, there are facets of investing that are not really to do with the market itself, that allow you to stack the odds in your favour. What are they? I'm not going to tell you that, otherwise you'll make money. Only kidding.

When you lose money, if you set a limit on your losses, a point at which you get out, and take the loss, like a man (if you're a man) So, let's say that you set a stop loss limit at 5% of your investment.

finally, another way of looking at the market instead, is to set up rules so that when you make say 50% on a share, you sell. Yes, you're foregoing the possibility that you might gain another 50%, but you have 50%, and can get out, and back into another trade? You'd probably use this method if you're not too familiar with technical analysis, otherwise I'd imagine that you'd look for patterns.

Now, there's the upside. It's nice to be able to protect earnings from becoming losses, but if the market is a rampant bull, then better to let that bull run free, and make tons more cash, right? Well, you can do that, but what happens when that stock goes from $10 to $50, and then back to $11? Yes, you've made a dollar, but in effect have lost $49 for each share. So, in comes the profit protection stop loss, which again, you could set to being 5% of the highest price, upon which you cut your losses and take the profit.

So, you get 100 shares at $10 a share, and they go down significantly, when they reach your 5% stop loss point, you sell, which means losing only $0.50 for the share, whereas somebody who doesn't have such a strategy will lose a lot more.

So, if you assumed that the share market at any point in time will go either up, or down, you'd have a 50/50 chance of picking the right direction. In that instance you would make 50% of the increase in prices for the 50% that you get in the right direction, and lose 5% in the 50% that you pick the wrong direction. If you look at those figures you can see that in such a 50/50 market you can't lose more than you make.

Good, isn't it?

More on options - Why they might actually be a good thing.

Hi,

Yet again, I'm writing about options. I truly believe that there are worth looking at further, since there seems to be good reasons to believe you could make good returns in this area.

Writing covered calls seems particularly promising. There are different approaches to this investing strategy.

- Writing In-the-money calls; This is where the share price is already above the strike price, so increases the chances of an option being exercised. It seems like a strange thing to do, but if you think about it, you buy stock at a price slightly higher than the strike price, then the premium, or fee is paid, which reduces what you effectively paid. The fact that the option is already in the money means that it's likely to be bought, and thus give you a chance to receive the maximum return for that option. You must note that this strategy reduces the potential on returns from the stock price moving, but clearly reduces the risk.

-Writing Out-of-the-money calls; This is where the share price is below the strike price. This strategy clearly gives potential for the different in price between when the stock was bought, and the strike price where it could be sold, to be maximised. The downside to this is predicting that that situation will occur.

-Writing On-the-money calls; This is where the share price is at (or very close to) the strike price. This sort of combines the two above strategies. You haven't got as great a potential as out-of-the-money calls for earning from stock price increase, but it's better than in-the-money calls. The risk for this strategy is less than out-of-the-money calls, but but slightly more than in-the-money calls. This could certainly be a good place to start with covered calls, to learn, then perhaps look into the other alternatives.

All things software has moved!

All things software has now moved to a different blog location.

Find it here

I hope you continue to enjoy the information that it provides.

Martin.

Ordinary options - risky or not?

I have recently been reading about a little of the basics of options trading.

Okay, so an option is basically one of the following:

- A contract between a buyer and a seller where the seller promises to sell stock at a particular date, for a particular price, known as the strike price. This is a call option.

- A contract between a buyer and a seller where the seller promises to buy the stock at a particular date, for a particular price, known as the strike price. This is a put option.

Okay, now we have that bit out of the way. So why bother? The real reason could be leverage. You put down some money for the option, at the time you buy, and then when the stock goes up for a call option to a price above the level of the strike price, you can buy stock at a discount. That sounds great doesn't it? Damned right it does. Here's the deal though, can you reliably predict that the price will move in a certain direction? That's pretty tough isn't it? But there is more! Can you also predict the minimum price that a stock will reach, reliably, and repeatably? Then there's the premium that you would pay, as the buyer, can you further predict that the stock price is going to move in the right direction, to a price that is the premium above your stock price, reliably and repeatably? And here lies the problem. I know I wouldn't be comfortable with attempting that great feat. Obviously you can see that the leverage, and big rewards are possible, and with that comes the much higher risk.

The put option is the same, but the market moves in the opposite direction, and you would instead be betting on a bearish market.

You need a strong stomach to participate in that market, for sure. Interesting to see how it all stacks up though, isn't it?

Even more on EMT, and how it applies to different strategies

Hello,

I've getting a handle on how EMT effects investing strategies now. At first I thought of it as a largely irrelevant model that really didn't make any difference to anything at all.

I noticed over time, and talking to people that they corrected me when I said something along the lines of "Investor emotions undervaluing stock prices", and said that really it's that the market has already factored in the issue or event that has taken place. I thought that that was only a bit like the cup is half full, or the cup is half empty. An identical viewpoint with a different explanation. So why would you care, if the intent is the same? It seems that you should, depending upon how you invest.

So, let me try to explain. Let's imagine that you're going to sell or buy options, all shorter term fluctuations in price cannot be gleaned from a company's financial records. Yes, some of the information will be in there, it's a good company with a great future, but there simply is not enough information to be sure where the market would be when the option expires, for example. So here we have an investment strategy that relies more on investor emotion, or EMT to try to predict where a stock will be. It's good to know the fundamentals of the company, because you may see that it's a really bad company to invest in traditional stocks with, for example. However, even that doesn't mean that you won't make money from it, it just means that you might be able to predict the direction in which the price will trend.

So, in that case, what's the alternative? Instead, it's probably better to work thinking in terms on EMT, and looking for price patterns and trends in the prices. Given the cyclic nature of stocks, it seems that you're statistically more likely to pick the correct price than looking at the fundamentals, and hoping.

Then, on the other side of the fence, there's a value investor, someone who looks for undervalued stock. That statement by itself indicates that this breed of investor is at odds with the whole EMT idea. You can't have an undervalued stock, since the price reflects the true value of the stock. Yes, I could rephrase the first statement to make it compatible with EMT, but it indicates where the investor is coming from. He's probably going to be aware of the current stock price, to see if it represents good, value, but probably isn't really interested in recent patterns and trends, since that concept is at odds with his approach.

This information may well be obvious to some readers, but I thought that I'd point it out, since the penny finally dropped, and I can now see how the land lies. I hope this helps readers understand a little more as I now feel that I do.