What Is Active Trading?

Stock trading is a way many look at becoming financially independent, especially from the jobs they dislike. There are many stocks to trade out there, but knowing the right ones is difficult. There are terms such as bear and bull. These terms talk about the type of market. Then there are terms related to stock options, short sells, and sell stops. When you are looking to invest it is very important to understand the stock market before you begin to trade. Below is a look at the terms mentioned along with different research materials available to help you trade stocks.

You'll read in the news everyday about stock options. These financial instruments are usually best left to experienced traders who don't mind taking more risk. A stock option allows the owner to purchase shares of a stock at a specific price point. Company executives will typically be compensated for their work by being issued stock options. For example, if a CEO receives 100 000 options, he may be able to buy them as soon as the share price moves above say, $0.50. He doesn't have to exercise them right away. Lets fast forward the clock ahead a few years, and the company's shares now trade at $1.50. He has the option to purchase the shares at $0.50 and sell if he wants into the open market - making himself $100 000 in profit. Of course, if the price never gets above $0.50, then his options are worthless.

Options can also expire, so in theory, its in the CEO's interest to move the share price higher. Experienced traders can also trade options, and often will protect their investment by buying what are called covered calls. Simply put, if the share price moves higher, the calls are deemed worthless, however, the stock that the trader purchased has moved up in value. If the trade goes the other way, its the covered call that makes money. Short selling is simply the act of borrowing shares at one price, and buying them back at another price, ideally lower.

Day trading - although it gets a lot of press, and appears to be an easy way of making money, sadly, its anything but that. Day trading involves a trader who scans the market, looking for opportunities to either go long, or short, with the expectation of remaining in the trade for no longer than the close of the trading day. This trading style is perfect for someone who has time during the day to spend the majority of the trading day scanning the markets, looking for that one trade they will make. A stock could be bought and sold within a matter of minutes. The risk of course is in taking a position, only to find that you get called away, and missing the sell signal. Its not surprising that the majority of day traders end up losing a lot of money. Those that do make money, usually do quite well for themselves.

While there are many books out there that say they can teach you how to trade, there is no substitute for experience. The problem is, its a very expensive way to learn. The key is in keeping a stop loss, regardless of the methodology you decide to follow. Successful day traders, swing traders and even value investors use a stop loss to help minimize the amount of downside risk they are exposed to. A stop loss is a set price at which you will automatically exit your position. Its up to the investor to decide if its at a specific percentage of the trade value, a percentage off the share price, or a certain level that is deemed to be support / resistance. Other options for the beginner trader is to use online services that will teach you how to trade in a simulated market environment. This allows you to gauge not only how good of a trader you are, but also how well you deal with risk.

Trading stocks can be a great way to create a healthy portfolio if you have the knowledge. Gaining the knowledge is the first step to learning how to trade on the open market. Following the above tips can help you obtain that independence you seek.

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