Trading Library

Shares are the most commonly traded commodity in the stock market, but there are alternatives that you can buy which can give you less risk and bigger chances for profit. If you are confident that a company's share price will take off, consider buying call options. As the share price increases, the call's value will follow suit, providing the opportunity for unlimited profits. The most you can lose if the price falls or stays steady, is the premium you paid. Here are the advantages that you can get when riding a rising share price when trading options.

Options Provide Leverage

Futures, like options and warrants, are derivatives. Derivatives get their value from an underlying security or asset. However, unlike options, futures are contracts that give you the right as well as the obligation to exercise that right by a specified time period.

One of the factors that you need to consider is the price. The success of your strategy depends mostly on the movement of share prices in the stock market, so you need to decided where the share price headed. It can rise, fall or just remain steady. Once you have determined where the share prices will go, you can now narrow down the number of strategies that you can use.

Where is the market headed?

Apart from the direction of the stock market, traders also have to consider volatility. There is a limited time to the movement of the market whether, its going to rise, fall or remain in a price range . Volatility is about the fluctuation of share prices in the market that will greatly affect your profitability whether you take or write a call. If you buy an option because you think that the stock market will take off, the chances of the expected movement before the expiry date will fall if the stock becomes less volatile.

The third factor that options trader need to consider is time. Unlike shares, they have an expiry date that traders are bound to. In options trading, the movement that you are looking for, whether its a rise or fall, must take place by the expiry date. After the expiry date, the option is worthless. So its no just about the movement and fluctuation of price, you also have to think about the time frame.

Options Time Frame

Options provides traders more opportunities in comparison to share trading. Unlike in a futures contract, traders don't have an obligation to buy and sell, and can let the expiry date pass by without doing anything. An options trader can take or write calls, take or write puts, trade a combination of the previous two, do any of the previous steps with the purchase or sale of the underlying shares. With all of this how do you choose the right strategy to make profits out of options trading.

Takers and writers

When share trading, legal ownership of your share allotment must also change hands. Along with the title to the shares, the seller gets paid and the buyer gets the product in an exchange called a settlement.

In the Australian Securities Exchange (ASX), settlement is facilitated by a computer system called CHESS or Clearing House Electronic Subregister System. CHESS is operated by the ASX Settlement and Transfer Corporation (ASTC). CHESS registers the share title or ownership electronically.

In a nutshell, CFD is an arrangement in a futures contract wherein the difference is settled through cash payments. The difference is determined by the underlying share, index or commodity. The two main advantages of trading CFD is leverage and its ability to go ''short''.

Futures is a popular day trading contract. It enables traders to buy a certain quantity of an asset for a predetermined price date and price. However, unlike in options, the traders are obligated to buy and sell. Futures traders have to follow the terms and conditions of a contract.

Although there is no universally accepted definition of penny stocks, that does not stop people from trying to pin it down. When stocks are referred to as "pennies," this usually means stocks that have a low price and the company has low market capitalisation.

One of the requirements when becoming a trader is keeping yourself up to date. Financial news releases are reported everyday. Apart from reported profits, forecasts by so called gurus and interviews by CEO provide information about the company that you may be investing or trading on. It is known that whatever happens in the news are mere confirmation of what's already in the market, but what about new releases?

A currency exchange traded fund tracks exchange rate movements, as opposed to index movements. It tracks the performance of the Australian dollar against a foreign currency, for example, against the US dollar.

What is an exchange rate? It is the price of one currency in terms of another. The AUD-USD for example. This exchange rate can be expressed in two ways: the equivalent of one US dollar in Australian dollars, and the equivalent of one Australian dollar in US dollars.