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Debt Consolidation and Wealth Creation can be done Simultaneously

2009-10-20T01:12:00Z

Debt consolidation helps you to reduce your debt load. And if you take out a debt consolidation loan, it will allow you to deal with only one creditor. Debt consolidation and wealth creation are paradoxical. While debt consolidation will require you to make payments to someone else, wealth creation will require that you save for your financial well being.

But if you are in debt how will you concentrate on wealth creation? It is simple. If you have some extra cash at your disposal, keep aside few dollars each month and when you have accumulated enough to make an investment, invest the cash. One of the difficulties debtors face is they don’t have the extra cash to create wealth. In case you don’t have that extra cash to convert your debt into wealth, don’t be disappointed. It is not the end of the world.

The best thing to do under such circumstances is to do away with your debts as fast as you can. Take out a debt consolidation loan. Pay off all your creditors.

Thereafter deal with only one creditor. Once you are done with the debts, the amount you made use of each month to pay off your debts can be used for wealth creation. This is possible because you will have less number of financial obligations to address.

There are few aspects that you need to take into account if you are opting for a debt consolidation loan. You can take out a secured debt consolidation loan when you use collateral. If you are taking out an unsecured debt consolidation loan, you don’t have to use security. However, if you are using your house as security and if you fall behind on payments, you may have to abandon the house as the lenders will foreclose on the property.

In case of unsecured debt consolidation loan, you have to pay higher interest rate which is used as security by creditors since you are not using any collateral. And if you have a bad credit rating, the interest rate you will be entitled to will be higher than what an individual with good credit rating will be required to pay.

So, the faster you can do way with your debts, the better. By doing so you will be able to concentrate on wealth creation.

Futures Trading as a Wealth Creation Strategy

2009-08-10T04:42:00Z

Investing in Futures Trading

Futures trading can be an appealing wealth creation strategy. It is an investment where investors try to take a profit on the volatility of futures contracts. These are contracts that are agreed upon by producers of a commodity with a dealer which involves the promise of delivering a the agreed volume of a certain commodity at a specified period in the future. The commodities that such futures contracts trade can include grains,lumber, livestock, coffee and even concentrated orange juices. Let's not forget precious metals such as gold, silver and platinum also can be traded in the futures market.

Leverage

What gives futures trading attractiveness is the high level of leverage that it offers.Investors can invest just as little as ten percent of a futures contract's value. You control a far greater value than your payment suggests. This type of trade is called a leveraged trade.

Futures contracts usually have fixed amounts of the commodity that they are trading. A future contract for wheat, usually holds a value worth 5,000 bushels. Trading the contract would be a transaction based on the dollar value of the5,000 bushels.

Although futures contracts only require a fairly modest investment (usually a margin of ten percent of contract value), investors should still seek advice and education before taking or buying a futures contract.

As a beginning trader you should first establish that you can afford to trade such a contract. Contracts traders should consider if they have enough margin to cover the contract as well as what it takes to trade and deal a large move in price. If the price moves against you you have to have the capital to cover the loss!

Risk and Reward

It is also important that beginner traders try to establish a system of risk and reward when trading for a particular commodity. There are many factors that may affect the position of the trader in different futures contracts since they can involve a variety of commodities. Traders should have a good idea on how to handle their position in order to make money in futures trading. A good way to do this is to establish a stop loss feature on traded futures. This simply means that the investors establish a certain price range wherein the contracts may stop trading in order to preserve profits from the trade or to minimize the possible losses.

Diversify

It is true for all types of wealth creation that diversification can protect your total capital growth.One areas strength can compensate you for a loss in another's weakness.

Futures Contract traders should also consider diversifying their trading from a mix of commodities instead of only one. If you have the capital to invest in trading three futures contracts, it would be cleverer to have the contracts involved in a variety of commodities. This spread reduces the risk on a price decrease (or increase) providing a more or less stable position when one suffers a decrease (increase) in price value.

Risk Tolerance

When beginning, traders should discuss their risk level and tolerance with their broker to establish a relaxed environment for trading. Five or ten percent is often a number discussed in trading forums on futures contracts.

Remember, as a leveraged article you can lose a large amount if the price moves against you.

You should only ever invest the amount you are willing to lose and still feel at ease!

Experienced traders are also another good source for advice on risk management and you need to learn and apply different strategies for different instruments.

Term of the Day for June 30, 2009: forward price

Free E-Book on E-minis

2009-08-06T02:20:00Z

This has just been released by Planet Wealth and is a great resource. I encourage anyone thinking of getting into E-minis to get this before you spend a dollar on any program out there!

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Grab your copy now before they withdraw the offer!

Futures Contracts Trading

2009-08-03T04:02:00Z

What is Futures Trading

The name says it all – Futures Trading is a punt on the future direction of value in various commodities. This is a little different to the usual stock market trading although plenty of speculators hope for a certain future value in their shares if they are to make any money. The trading is based around the concept of a Futures Contract.Do get confused about this kind of trading. With futures trading, you don't actually possess anything. The concept is that you guess what the future may hold for the prices of commodities that you will be trading. In plain language, you are speculating about what the prices of such goods will be in the future.

What is a Futures Contract?

It is a legally binding agreement, therefore contract, to buy or sell a commodity for a set price at a previously agreed time in the future.
If you buy a futures contract, you promise to pay the price of the asset at a stated time.

If you sell a futures contract, you are promising to transfer the asset to the buyer of the future at a agreed upon price at a stated time. Every futures contract has the following elements:

• A Buyer.
• A Seller.
• A fixed expiry date in the future.
• A price agreed upon, between the buyer and the seller, at the time of trade.

A Little History

The history of the Futures Contracts lies in the desire of producers of real goods to have some sort of guarantee for the price when they finally deliver the goods. So if you were a wheat farmer you would strike up an agreed price for your crop, maybe even before you have planted it, upon it's delivery next year. The contract buyer knows that he is going to get the wheat at that time at the agreed price and he removes the uncertainty from his supply chain.

Let's say you were a bread maker and you wanted a secure supply at a controlled price this type of contract would be very comforting. It could in fact give you a competitive edge against other bread makers if the price of grain increases by the time of the contracts maturity.

The futures contract that the farmer and baker agreed to would not merely be stored away. The contract may change hands as the seasons roll by. Depending on the situation the wheat farmer and his intended buyer may even trade these contracts to other third parties. There are occasions when the buyer of the futures contract may have a reason to change his position and not want to take the future delivery of the wheat. He would then search for some other buyer and offer the futures contract at a certain price. Sometimes the farmer would decide not to deliver on the wheat contract and would then pass on the promise to deliver to another capable farmer.

The transfer and trade of these contracts became known as futures trading.Soon people found that trading the contracts became a good way to make wealth. Within a short time there were people who began to buy and sell the futures contract without ever expecting to take the delivery of the commodity involved. All they wanted was to profit from the price changes. These people were called speculators. They try to profit by buying the futures contracts low and selling them high or selling them high and buying them back low. Today the concept of a Futures Contract extends to a broader range of commodities from gold to financials like bonds or currency.

So Where does it all happen?

The known cities where this kind of futures trading occurs includes the following.

1.New York Mercantile
2.Chicago Board of Trade
3.New York Cotton Exchange
4.Chicago Mercantile Exchange

Trading in the traditional or Standard Futures Contract requires a fair amount of capital and certain level of understanding of the particular commodity you might be following.

Today we have a new form of Futures Contract called the E-minis. These run off the S&P 500 and require considerably less capital and operate on a slight different mechanism. More on this later. As for the futures markets, here are some of the most popular that are being traded these days.

Futures Market Commodities

1. Financial Commodities This includes Currencies, Treasury bonds and Interest Rates, Individual Stocks and Stock Market Indexes

Currencies

Commonly know as the FOREX : foreign exchange. This involves the buying and selling whatever currency a trader wishes to gamble on.You would study the countries that are based on the given currency and make a decision about the direction of it's value. If you believe that you can profit from it's movement then you trade that currency. The well understood currencies that are being traded on include the British Pound, Japanese Yen and the US Dollar.

Interest Rate.

The centre of this variety of contract changes not only with interest rates but also with bonds and other kinds of financial exchanges.

2. Agriculture.Foods and Fibres, meats, wood.

A massive range of products included here from orange juice to lumber. If the farmer feels that the weather favours a good crop across the country this year he may lock in high price now from fear of prices falling from oversupply.A manufacturer of food products may do the same but in fear of a price rise if the crop is looking to be thin and therefore a price rise over the future months is likely.

3. Energy Futures.Crude oil, Gasoline, Natural gas, Heating oil, Electricity, Propane, Coal

As you can imagine the threat of global warming has made this area a very volatile market with a great deal interest in it's future. It is basically what makes the modern world function and is therefore a very strong trading area.

4. Metals.Copper, Gold, Silver, Platinum, Palladium, Aluminium.

With the huge expansion of the Chinese economy over the last few decades the demand for raw materials has sky rocketed. Metals are essential components to the construction of cities and China's massive plans for expansion have triggered mining booms in several countries. The subsequent down turn in demand over the last year has created a great interest in Gold and so we have seen huge trading in the metals futures.

Only the beginning..

This has been a brief introduction to the Futures Contract and we will continue our discussion in a future post.

Like all areas of trade I encourage you to seek good education before spending any money on this strategy for wealth creation.

Go to Planet Wealth now and check out their e-book offer!

Term of the Day for June 30, 2009: forward price

http://sharewealtheducation.com/2009/03/31/options-trading-tips-for-beginners.aspxl

An Introduction To Futures Trading

2009-07-24T11:12:00Z

Futures Trading Basics

Futures trading is just another valuable wealth creation strategy for people to invest in. Like any form of investment success will only appear if investors get to know the market and the mechanism of trading. Without knowledge in futures trading, it would be difficult for investors to make money out of their capital. They would actually be setting themselves up for loss.

For a solid start, investors should know what futures contracts trading is all about.

Definition: A type of trade wherein a commodity is being traded on a market. The contract notes a precise type of commodity sold and bought at a precise price and deliverable from a precise time in the future.

Its A Deal

Trading in futures is all about a transaction between two parties. The first is a producer of a commodity while the other is the buyer. The producer promises the buyer delivery in the future. Let's say nine months from now. The buyer, wishing to have a quality supply in the future, would demonstrate his interest by accepting the offer.

A contract between the two is written. A specified quantity of the commodity, that will be deliverable in nine months time, is agreed upon.

That, briefly, is what futures contract trading is about.

I Want Out of the Deal

For some of you, it might still be a bit complicated to comprehend. However, the value of futures trading lies in the understanding between the commodity producer and the commodity buyer.

Occasionally over the period of the contract before the time of delivery, the contract may change hands.Why might the buyer change his mind? Well, he may have other opportunities to create a little cash.

Futures contract trading started with grains, such as wheat. Trading eventually came to include other primary products like lumber, crude oil and coffee. Today metals such as silver, platinum and gold have their own futures market.

Futures Exchange

The futures exchange operates much like a normal stock exchange only it is the commodities that are being traded instead of stocks. The futures exchange attempts to standardise the futures contracts being traded in order to allow faster and more convenient liquidity at the contract's end or expiry date.

The trading floor usually only allows members to trade. If you are not a member you have to go through brokers or partners who are members so as to trade.

Get Education First

Futures Trading is like any other form of investment, there are advantages and disadvantages. A wise investor takes the first lesson and learns about the ins and outs of futures trading. Then you can invest the cash needed to take the opportunities that it may provide.

A good place to start is with my friends at Planet Wealth. They offer thorough explanations and will save you a lot of expensive mistakes!

http://sharewealtheducation.com/2009/03/31/options-trading-tips-for-beginners.aspxl

Options Trading: Call and Put Options

2009-05-25T16:00:00Z

An option contract is an agreement where the owner has the right to buy or sell a security or particular price on a fixed date in the future. It is called an option because the owner of the contract is not committed to carry out the obligation of the contract if he or she feels that it is not to there advantage.

Options contracts come in two forms: call options and put options.

Call Options

In simple terms, call options give the owner the right to buy the underlying asset in the contract. Again, it is not an obligation.

For example, Helen and Terry agreed on a call options contract wherein Helen will buy from Terry, 1000 shares (equivalent to one option) of Company YZ at $20 (strike price) which will expire on the last Thursday of April. The current price of the share is $20.

At the expiry date (also called maturity date), the share price of Company YZ remains at $25. Helen can then exercise her right to buy the share for $20 and thus, yielding $5. Meanwhile, if the share price goes down to $22, Helen can still earn $2 by simply exercising her rights as stated in the contract. In whichever way, any amount higher than the strike price at the end of the contract will become the profit of the owner. But before it can happen, the owner who decides to pursue his right has to have his money ready to pay for the amount.

However, if the share price goes down below $20, say $18, on the maturity date, it will be too expensive for Helen so she can just ignore the contract since she is not obliged to carry it out. She will only lose the amount she paid for the contract called the Option Premium. Terry, on the other hand will keep the asset and the premium, which in a sense, is his profit.

Put Options

In put options, the buyer has the right to sell an asset to the writer (the seller). Just like the call asset, it is bounded by a contract which states that the underlying asset will be sold at a particular price and a particular date. But the similarity ends there. In put options, the writer has to buy the underlying asset at the strike price if the buyer exercises this option.

Let us continue with Helen and Terry. Helen bought call options from Terry. But she could also buy put options from Terry. If Helen buys put options, it means that she buys the right to sell Company YZ's shares at $20 on April 1. If the price of shares goes down below $20 on the expiry date, Helen can exercise her right and can still sell it at $20, thus making a profit.

Buying put option allows investors to earn when price of shares drops at the end of the contract.

Profit potentials are unlimited for the buyers of put options, especially if the market begins to sell off. On the other hand, risks are limited if the market goes against them.

Important note:

In reality, trading of options or transactions does not happen between two persons. Buying or selling can happen without knowing the identity of the other party.

Options are only sold in 1000 share lots. So if the share price is $20, you will have to pay $20,000 for each option contract plus the Option Premium.

Understanding Options Trading

2009-05-09T01:24:00Z

Your Own Business

For individuals who are after owning their own business and saying goodbye to the j-o-b, running a business online is one alternative. Trading stock online is now a very easy activity with the massive improvement of telecommunications and particularly more powerful laptops.

One of the most spoken of trading strategies today is options trading. The potentials returns are unlimited in one sense but also the losses can be significant if you rush into trading without sufficient training.
Most experts recommend this type of trading only to those people who have sufficient risk capital as it carries with it substantial risks. The trade itself requires skills and thinking unique only to people who could handle extreme risks.

Options Trading Simplified

An option is a type of security. It is a binding contract, that is monitored by and through strict terms and conditions. In brief, options are contracts that owners could buy or sell at a certain price prior to or on a specific date. An option is typically an added price tag to a certain stock because it is a reservation for the purchase or sale of that stock.

To put it very simply.

Imagine you are looking to buy a new car and you get the list down to 3 likely candidates. You would like time to review the individual cars so your offer each owner $50 to hold the cars until you make a decision. This deposit gives then good cause to be patient with you since they now know you are very interested. They also know that if you decide against their car they have not lost anything in fact they will have your $50!

You on the other hand are only risking $100, since the car you choose will have already had a discount of the $50 deposit.
A great way to do business when the car is worth several thousand dollars. It saves you buying the car and then finding out it is a dud!

This type of trading identifies to an investor other traders determined to trade a certain stock at a higher or lower price within a specified time frame. The trader is then able to appoint the high or low price. Changes can thus be made in the prices especially when the market proves to be unstable. Higher prices can be assigned when the market is seen to be doing well.

In Australia the single option covers multiples of about a thousand of underlying shares whereas in the United States, one option refers to about a hundred shares. Since the trading is supposed to be done within a short time period, there are higher chances of collecting large returns. Likewise, as when the market is unstable, the very nature of this trading opens up great chances of larger losses.

Explaining the Nature of Trading

Options can either be traded in groups of similar stocks or as a single stock. The catch being that trading of single stocks is able to actually create higher risks of volatility. A single company may be pursued by a variety of factors due to it's location or some arbitrary event (like a flood). Trading in groups, the volatility is removed since falls in one area will be balanced by rise in another. In the end, the group itself ends up being rewarded.

It is not enough to guess the status of a market when you invest your money. You need to also understand the the rules of trading. You need tools to help you out in determining the existing market trends. You have to be equipped with a solid set of guidelines to protect your investment. Even this is not enough to in all circumstances - you also have tobe willing to act decisevely when your rules dictate. This is where mindset becomes an issue!

Conclusion

Options trading has the potential to produce large income from relatively small investments. However, it can also go very wrong and money will disappear rapidly.
I highly recommend that you seek knowledge first and speak to experienced traders before you go anywhere near a broker!

Planet Wealth is such a group of experienced traders and I would suggest that the small sum needed to acquire their trading guides is a wise investment.

So Why The Share Market?

2009-05-07T06:55:00Z

Wealth creation is more than just getting a job and working for 45 years and hoping that in that time you manage to save some money, build a little equity in your home or develop growth in your superannuation.

These can supply you with some long term income but there are risks with them as much as any financial activity. Consider the losses that have been experienced by workers in the last year in the super funds. Some funds have seen losses of up to 50% or more and those retirees relying on their Super for income are feeling the squeeze. Property is not so bad since there is reasonably clear cycle. You can usually get out when the cycle favours you but if you need cash in a hurry then sometimes you have to sell on the back of a downturn.

As for cash in the bank, great when interest rates were 15% (remember the 1980's?) but a disaster if they are 3%!

This is why many Australians have turned to the share market as a means to take control of their financial future.

But don't the super funds trade in the share market?

Well yes, but they clearly are not the experts that we have been led to believe!

Most of what they are doing you could learn to do yourself and get involved in the management of your money more actively.

To do this though requires education!

Education

Now when I say education I am not referring to the picture you may have in your mind of a school teacher standing in front of 32 pupils and telling you what to do!(Not many modern classrooms run like that these days anyway!)
What I am talking about here is self-improvement, skill development, understanding, knowing where to go and what to do if....

You would not go out and jump in a 20 tonne truck and expect to drive around town without an incident, now would you?
You would find a reputable driving school with properly equiped vehicles and well trained, licenced instructors.

The same goes for investing. You need to learn the language, terminology and the techniques that lead to successful trading.

“Where do you get that?” I hear you ask.

Well first off here! I will share with you some basic information and strategies to raise your share trading knowledge. I make no claim to be an expert, but I will share with you what I have picked up over the last few years and also point you in the right direction when more in depth knowledge is required.

Homework

Now, before I finish for today let me leave you with a few tasks to take on board.

First thing get yourself a workbook – this can be a simple exercise book or loose leaf file to keep notes in and record questions you may have from time to time. You could of course use a word document to do the same thing but you won't always have access to computer.

Writing something down involves more of your senses and improves learning. Buy some coloured pens and highlighters too – use colour to outline important ideas and points of interest. I often set up a colour key – yellow highlighter is for one topic (eg options)and green for another (puts), green pen for new terms and definitions, red pen for actions that need to be taken!

Next I would encourage you to go to the ASX website and join their site. This is free and will give you access to charts and data that is freely available about different companies. It will also start exposing you to some of the terminology that is common in this wealth creation strategy.

Once you are logged in I would ask you to find out all you can about BHP.
Do a search on the site and find out what the companies full name is and what sort of business it is in. This may seem like a simple thing but it is the first step in understanding the more complex relationships between companies and the market as a whole.
Also find the chart for BHP and set yourself up a watch list!

Until next time.

Have a great day

John

Trading Mindset Psychology

2009-04-29T16:00:00Z

Psychology?

There is a psychology behind trading. It is about the perceptions change that you go through once you are actively in the markets trading. While you are trading on a demo account it seems easy, but once you start handling your first live trade, indecisiveness will close in. Understanding the trading psychology and how you will have different responses in each situation will help you get on to trading with the right mindset. This is crucial if you are to protect your capital when risk management is needed.

Trading Psychology.

Trading psychology is the predominant reason why traders lose. It has been widely discussed in ebooks and workshops that it has been a convenient excuse for losing.

What is trading psychology?

Trading psychology is an attitude or a reaction that a trader responds with based on existing personality traits. These personality traits may not be even related to trading or to market, but they surface from trading. If for example, under stress you usually just rush ahead without weighing up all your options then that is what you will do when the trades get tight.

Your Personality and Emotions

Common emotions brought about by your personality traits are fear and greed.
Fear can have a big effect on trading opportunities. Trades may not be made because of fear or they may be closed prematurely before they reach or have a chance to profit. Meanwhile, greed will cause you to make trades which are too risky or too large while trying to accumulate profits.

Other emotions you may have to check are failure and discipline. Failure is perfectly normal but we should not let this get us down. Failure is expected and should make us wiser the next time around. While, discipline is about sticking to your proven plans and never deviating from them.

Are you ready for battle?

The reason many traders lose it is because they are not psychologically prepared for the battle of trade. There are traders that are not prepared to accept financial risk for something of which they have no control over the outcome.
When inexperienced traders experience consecutive losses, methods becomes replaced with a feeling of despair.
Traders may have the feeling that it is impossible to do anything right, in this situation trading psychology is more crucial or critical that the trading method.

Trading is 90 percent psychology and 10 percent methodology. Even with a proven trading method, if the trader lacks control over their emotions, it will be difficult for them to implement their trading method.

How to combat a troubled trading mindset?

You would have to make a trading plan and stick to it. This plan aims to have an honest assessment and understanding of the trader’s action. You also need to define your trading methodology. You would have to master your emotions in order to seize the gains of the trades you made.

Self- confidence is an important attribute. If you lack confidence then it will show in your deals. Without confidence, you are not likely to trust and follow your prepared plans. Successful trading relies on prompt decision making without excessive emotion.
However, since money is involved people cannot remove their emotions from their decision making process. You also need to be disciplined with your decision making and focus on the right areas.

How will you react to the market?

What the market does is not important, the market may lose or may profit today, but what is important is how you react to the market.
A healthy trading mindset will be the difference between long term profitibility and long term loss.

Why Trade Options?

2009-03-31T07:27:00Z

Understanding the rise a fall of of stocks is much easier than the intricacies of options trading and so people tend to avoid options as an investment vehicle. However, options have several benefits as a part of your share market strategies.

Leverage

Buying a call option gives the investor a good option position that is similar to a stock position.

For example, if an investor was to buy 5000 stocks selling at $10 per share, he would have to pay $50,000. But if he would choose to purchase five $1 calls (each contract representing 1000 lots or shares), he will only have to pay $5000 (5 contracts X 1000 shares/contract X $1 market price). The investor would then have his saved cash to spend or invest at his or her discretion.
The process is really just that simple but, the investor would have to know which call to buy to have a good option position, similar to stock positions. So, if you are looking for a good investment without risking large sums of money at the outset, option trading is the better choice.

Limited Risk

Investment in stock is often said to be for risk takers. The risk is worthwhile if it automatically yields a profit. In options trading, however, you can have unlimited profit potential and at the same time have limited risk. This is because options trading only gives you the right to buy or sell the underlying stock, and not the obligation. Meaning, if the price is not right at the end of the contract, you can just ignore and let the contract expire. If, however, you can profit from the change in shares prices, you can take your right and pursue the contract.

For example, you buy a certain call option for $50 (strike price) that will end on the last Thursday of April. On the expiry date, shares you bought are trading at $65. Now such a healthy profit would earn $15 per share and you would have every right (and common sense) to call on the contract.

What if at the expiry date the stock is lower than the strike

Let us pretend that the shares you have bought went down to $45 or even $40 at the end of the contract.

Do you have to pursue the contract? No!

You just have to let the contract expire and you risk no further loss.

What have you lost then?

The option premium you paid the seller. No more.

Unlimited Profit Potential

A certain call option you have bought is now trading at $80 per share. You can exercise your right to buy it for the strike price of $60 and earn $20 minus the Option Premium you have paid.

The price of shares can go sometimes go higher than that. And if you have carefully studied the market and identified a likely strong trend, you can get the best profit without breaking your bank.

Footnote: if at any time you are planning to pursue the contract and buy the shares, you have to pay the full amount. So at the expiry date, make sure that you have you the cash to pay straight away.

Protection

In comparison to other kinds of trades options trading can give better protection to its participants. Large losses are typically uncommon in this trade type since traders only lose what they have invested. These investments are just minimal because they are limited only to the price of the option. It should be noted that typical options are just 10% of the value of the asset.

Traders could also benefit from protective puts. This is a type of options strategy that allows for purchasing the same number of puts and stocks such that the stocks are protected from loss of value. Also, a trader who needs to buy an option in the future at a certain price can do so. It is a sort of insurance policy for the trader who currently has investments on long stock positions, especially during the times when the market is extremely volatile.

The biggest protection you can have is share wealth education and that is the point of this Blog!

Options Trading Terminology

2009-03-20T02:28:00Z

Every enterprise is built around it's own special insider vocabulary. Scientists used to use the Latin language as well as Greek to classify animals and every student of biology knows homo Sapiens as modern man. The Catholic Church used Latin for centuries to keep the mystery of the faith strong. Well the financial markets are not much different and they have developed their own terminology over the years as well. In this post I wish to introduce you to the terminology in Options Trading. If you are to succeed in using the share market as part of your wealth creation strategy then understanding the language is essential.

There are dozens of terms that are used in this field, beginners have to understand first the most important and commonly used words to make any headway.

Option – is the right of the buyer to either buy or sell the underlying asset at a fixed price and a fixed date. At the end of the contract, the owner can exercise to either buy or sell the option at the strike price. The owner has the right to pursue the contract but he or she is not obligated to do so.

Call option – gives the owner the right to buy the underlying asset.

Put Option – gives the owner the right to sell the underlying asset.

Exercise – is the action where the owner can choose to buy (if call option) or sell (if put option) the underlying asset or, to ignore the contract. If the owner chooses to pursue the contract, he must send an exercise notice to the seller.

Expiration – is the date where the contract ends. After the expiration and the owner does not exercise his or her rights, the contract is terminated.

In-the-money – is an option with an intrinsic value. The call option is in-the-money if the underlying asset is higher than the strike price. The put option is in-the-money if the underlying asset is lower than the strike price.

Out-of-the-money – is an option with no intrinsic value. The call option is out-of-the-money if the trading price is lower than the strike price. The put option is out-of-the-money if the trading price is higher than the strike price.

Offsetting – is an act by which the owner of the option exercises his right to buy or sell the underlying asset before the end of the contract. This is done if the owner feels that the profitability of the stock has reached its peak within the date of the contract.

(Option seller) Writer – is the seller of the underlying asset or the option.

Option buyer – is the person who acquires the rights to convey the option.

Strike Price – is the price at which the underlying stock must be sold or purchased if the contract is exercised. The strike price is clearly outlined in the contract. For the buyer of the option to make a profit, the strike price must be lower than the current trading price of the stock. For example, if the contract states that the strike price of a certain stock is $30 and the current trading price at the end of the contract is $40, the buyer can exercise his or her rights to pursue the contract, thus earning $10 per unit of stock.

Option Premium – The Insurance Company insures our car, and we pay a premium. They insure our house, and we pay a premium. They insure our life, and we pay a premium.So it is with the Option Premium it is the amount of the contract which must be paid by the buyer to the writer (Insurer, the seller).

The amount of the option premium is determined by several factors:

the type of the option (call or put)
the strike price of the current option
the volatility of the stock
the time remaining until expiration
the price of the underlying asset to date.

Taking into account these factors,
the total amount of the option premium = the number of option contracts x (contract multiplier) x share cost

So if you are buying 1 option contract (equivalent to 1000 share lots) at $4.5 per share, you must pay a total amount of $4500 as the option premium

1 option contract x 1000 shares x $4.5 per share = $4500

Term of the Day for June 30, 2009: forward price

How to Strengthen your Trading Mindset

2009-03-14T04:19:00Z

To be able to succeed at trading, you must be fully aware of how to strengthen your trading mindset.

Here are some common tips on how to strengthen your trading mindset.

TAKE RESPONSIBILITY

Always take full responsibility for your trading decisions. Successful traders make up their own minds, whereas many investors simply follow the crowd. The final decision rests upon you and not with anybody else, although you should always be open to good advice from other experts. Also look out for free education wherever you can get it!

REGULATE YOUR TRADING

Avoid the pitfalls of over-trading ie - trading too often and trading too many shares.

If you are trading too often, remind yourself that there's really no good reason to trade all the time, over-trading creates stress, produces high commissions but sometimes often leads to high losses.

This is so because market direction does not last forever and history has shown various examples of the law of gravity in the trading market - the tree grew up and the apple fell on Mr Newton!

A TRADING PLAN

Instead of grabbing every stock that comes along, make sure each trade set-up meets the criteria of your trading plan, don’t be too smart or too selfish.

To prevent trading too many shares, use a risk calculator to determine the appropriate position size before you click the enter button. It relieves stress to know that the amount at risk for each position you hold is safely proportioned to the size of your entire account, this is asset management at work.

Do you have a trading plan?

TAKE IT EASY

Always go easy on yourself. There's a tendency for traders who take responsibility for their actions to be tough on themselves.
The best traders make mistakes so don't slam yourself too hard or too often. When you do make mistakes learn from them quickly and then let it go. Avoid yelling at yourself, as self inflicted psychological damage is tough to overcome, so it's best to avoid it entirely.

Set yourself some relax and recovery time for each day!

THINK LIKE A WINNER

Always think like a winner. Thinking like a winner turns you into a winner, since the direction of your thoughts has an interesting way of showing up in your life. Thoughts are like muscles, the ones you exercise the most will grow to become the strongest. Work on the thoughts you want to develop and focus on them regularly, since it has the tendency to become action, action become habits, and habits determine results.

Think of success and you are much more likely to be on your way to success.

JUST LAUGH!

Take every effort to relax.
The best traders know how to laugh at themselves,even if trading is serious business. Making money and earning it on trading should be fun and enjoyable.

So know how to strengthen your trading mindset and be on your way to success.

Attitude and your Trading Mindset

2009-03-14T03:46:00Z

BUSINESS OWNER

Traders own their business and set its direction and as leaders they must know how to run their business which is essential to their success.
Have you come to trading with a business like mind?

Attitude and your trading mindset can spell your success or failure.

LOSER OR WINNER?

Statistically speaking most traders lose money.
The trading mindset challenge is how to face up to the challenge of making it among the 10% who make it in trading.
One way is to understand the basics of leadership and see how you are applying them to your own trading business.

WHY ARE YOU TRADING?

First, you must know why you are in the trading business, why were you attracted you to it, what was your motivation and will you be seriously focusing your undivided attention to making it succeed? Most say that it is money. They are here for the big bucks!
Some say excitement and challenge. They get a huge rush when they win (and lose)!

Imagine what you will feel if you get all you want out of your trading business.

ATTITUDE

Setting your own trading mindset will help you get along the way, especially when your attitude comes into the picture.
How disciplined are you, how do you tend to react to certain conditions and circumstances, how focused are you towards reaching your goals, do you give up easily, etc.?

ENERGY AND TIME

Managing your energy and time is one sure way to establish a habit and creating a discipline that you hope to use in shaping the path of your trading business. One good principle to follow is the 80/20 rule, where 20% of your efforts get 80% of your desired results.

You can let yourself be distracted or you can focus your energy on the efforts that get you the results. If you allow yourself to get distracted, you are very busy, however you do not produce the result that you want in the time frame that you want.

Don't confuse busy-ness with productivity!

PERCEPTION

Perception is also another useful tool in establishing the right attitude for your trading mindset.
You will face challenges and difficulties throughout your trading business, but this is just a normal fact of trading.

How do you deal with these setbacks?

THE COST OF DOING BUSINESS VS LOSS

If you consider your losses as being the cost of doing business and an overhead for your business, then it is easier to accept the fact and move on. A loss is a way for you to learn and avoid it from occurring another time.

It is important to realize that it is about your perception and how you view it.

Winning and losing are not an option, they are a fact of life that one has to deal with and how you perceive them will make you reshape your path towards your trading mindset.

FEAR

Fear has a way of making one reluctant about a certain decision, but take advantage of the fear in making calculated risks and having other options if one trading decision does not work to your advantage.

Own your trading business, make your decisions work for you and not let others do it for you.

Trading is a stiff competitive market and a hard truth to it is that if you are to be a winner, there definitely has to be losers, otherwise it cannot be considered a market.

STAND UP AND BE COUNTED

Many of us put more value in other peoples opinions than our own.
If something goes wrong it sure is nice to have someone else to blame, as long as it is not us.
We do not have to take responsibility for our results, if we follow others. We can blame the advice, the markets or anything else, but the sign of true leadership and the ideal trading mindset is that you should not fear mistakes.

One of the signs of great leaders is not that they do not make mistakes. It is that they handle the consequences and move on.
Remember that the most important thing to establishing that trading mindset is not only to make decisions, but also how to live with the consequences and how to take things in your stride.

Your attitude and trading mindset, if done for the right reasons will definitely spell out your advantage over others.

It All Begins With Mindset

2009-03-03T03:15:00Z

A basic introduction to trading mindset

Many people talk about the wonders of trading and how it can be best approached, but knowing how to establish and identify your entry and exit signals (an entry signal determines the point at which the investor wishes to commit his or her resources, the exit signal is when you need to get out) can mean a lot to setting the right path to trading, therefore, a basic introduction to trading must be in order.

The primary goal to trading is for profit, since the goal is to sell for a profit. But do take note that trading is like gambling, where you cannot determine or tell what exact market forces are at play.

Self determination is another key to your trading success. No one will tell you what to do next, you have to plan for yourself, especially since there are no hard and fast rules.

Other people may tell you what to do, and they could be right for a time, but do try to consider that the point is that the market fluctuates, and trading is about watching the market, analyzing it, and acting on your own. What would be ideal is to have the support of an experienced trader. This trader would need to teach you or indicate when you should act.

Understand and manage your opportunities and risks.

The share market is basically a huge market place of thousands of people acting independently and in collaboration.
All those people grabbing opportunities mean that the really good ones go away.
The random opportunity that most likely pops up in a trader’s life is a crisis in supply. Something has interrupted the normal flow of supply and demand, dramatically raising the price and this is a temporary chance.

Others will also be jumping on opportunities the same as you do. Wisely judge the risk and make your move.

Scamming is a career for some, so always be wary of people offering cutthroat deals or tempting offers. Thoroughly read the conditions of a contract and just be aware of every possible fine print on documents before signing.

Gambling to win means not letting the house make the rules. The difference between luck and success lies in the amount of risk managed. Sometimes you could get lucky and at other times not, so risk analysis and management lie at the heart of any method that can be termed reliable.

Setbacks happen and this is a risk in trading, where there are casualties and losses. Play at the stakes and risk levels you can afford, don’t lay down all your cards and have nothing left to pick up on. Make every effort to know the market. This will help a lot in determining how you could establish the ins and outs of the market you are in.

Every trader needs to know his territory.

Trading is a world of compound interest, challenges and opportunities. One can invest in buying and selling more items in a single item market, you can pick up when you feel there is a slack on one item or you can diversify into other types of items.

The nature of the market is purposeful chaos. This is so because the market is the total of all the actions of thousands of people, therefore it cannot be trusted. It will change on you in a moment, void plans, erase profits, render prior knowledge obsolete or even render you broke if you don’t play the game right. Patterns change, so don’t just rely on it totally. As the previous point indicates, one day it could be favorable for you, but that can change the next day, even the next hour or so.

So this is a basic introduction to a trading mindset and this can help you be on your way to more profitable gains and calculated risks.
For more thoughts on mindset and keeping a positive mindset vist Successful Mindpower.