The stock market serves as a reliable indicator the actual value of the companies that issue stocks. Stock values are based on verifiable financial data such as growth, assets, and sales figures. The stock market is considered to be a good choice for long term investments since this reliability that well-run companies should continue to grow and provide dividends for their stockholders.
Short-term investors are also given opportunities in the stock market. Market skittishness, even without a financial basis, can cause the rapid fluctuation of prices. Investor psychology, on the other hand, can also cause the prices of the stocks to either fall or rise.
The suspicions of investors about a company’s value increase can be ignited by news reports, economic conditions, and rumors. When the price of a stock either rise or fall, some investors will quickly jump on the bandwagon to cause an even faster price acceleration. Eventually though, the market will correct itself. Savvy short-term investors who watch the market closely see these kinds of situations as great opportunities for profitable trading.
Short-term trading is divided into 3 categories:
Position Trading
Swing Trading
Day Trading
Position Trading
The longest term trading style among the three is position trading. Compared with the other styles, the stocks in position trading can be held for a relatively longer period of time. Position traders are expected to hold on to their stocks for anywhere from 5 days to 6 months because they watch out for the fundamental changes in the value of the stocks. Position trading doesn’t require a great deal of time since the time needed to study the stock market can be as little as 30 minutes a day and it can be done after regular work hours. A quick examination of daily reports is enough to plan trading strategies. This type of trading is ideal for those who invest in the stock market for the purpose of supplementing their income.
Swing Trading
Swing traders, when compared with position traders, hold their stocks for a shorter period of time that generally lasts only for about one to five days. In looking for stock market changes, the swing trader is more driven by the emotion rather than the fundamental value. This type of trading requires more time in researching stocks and conceptualizing strategies because the swing traders need to identify the trends in order to pick out the best trading opportunities. They tend to rely on daily and intra-day charts to plot the movements of the stocks. This type of trading usually generates a greater payback.
Day Traders
Day trading is considered to be the riskiest way to play the stock market. This may be true for slightly uneducated traders but not for well experienced ones. Day trading involves the buying and selling of stocks in very short periods of time. It generally takes less than a day but it can be as short as a few minutes. Day traders need to stay rational and analytical to survive this type of trading. They create plots of when to get in and out of a position by relying mostly on the information that can influence the movement of the stock prices. Day trading has to be a full-time profession since it requires paying a close attention to the different market conditions.
Showing posts with label Stocks and Bonds. Show all posts
Showing posts with label Stocks and Bonds. Show all posts
Wednesday, 5 October 2011
The Differences between Stocks and Bonds
Investors buy stocks to acquire a partial ownership in a particular company and buy bonds to make a loan to corporations or governments. While stockholders benefit from the company profits, the bondholders receive returns.
A fixed rated return is a percentage of the bond’s original offering price. The return is called a “coupon rate.” The principal amount of bonds is returned during the maturity date.
The risk of not being paid back with the principal amount is always carried by bonds. Although companies with higher credit worthiness are more likely to be safe investments, their coupon rates will be lower than those companies with lower credit ratings.
The safest type of bonds is the US Government bonds. Blue chip corporations, which are companies with established performance records for over several decades, are also considered to be safe bond investments.
Bonds, just like stocks, can be bought and sold on the open market. The fluctuation of their values is based on the level of interest rates in the general economy. For example, an investor who holds a $1000 bond that pays 5% per year in interest is capable of selling the bond at a price that is higher than the face value as long as the interest rates are below 5%. If the interest rates rise above 5%, the bond can still be sold but it is usually at a price that is less than the face value.
New bond issues are usually sold in $5000 increments while initial bond issues are quoted in $100 increments. A bond listed at 96 indicates a selling of $96 per $100 face value.
The risks and the potentials have to be weighed when deciding to invest either in stocks or bonds. Stocks carry a greater potential to increase in value but they also hold a greater vulnerability to market fluctuations. Investment grade bonds, which are rated BBB or better, carry slightly lower risks but offer relatively low yields.
Because they provide a stable investment that helps cushion against stock market fluctuations, bonds still have their place in most investor portfolios. A mixture of investments that includes stocks from different industries, bonds from various corporations, and other fixed-income investments is one strategic way of providing maximum growth while securing investment funds for the future.
A fixed rated return is a percentage of the bond’s original offering price. The return is called a “coupon rate.” The principal amount of bonds is returned during the maturity date.
The risk of not being paid back with the principal amount is always carried by bonds. Although companies with higher credit worthiness are more likely to be safe investments, their coupon rates will be lower than those companies with lower credit ratings.
The safest type of bonds is the US Government bonds. Blue chip corporations, which are companies with established performance records for over several decades, are also considered to be safe bond investments.
Bonds, just like stocks, can be bought and sold on the open market. The fluctuation of their values is based on the level of interest rates in the general economy. For example, an investor who holds a $1000 bond that pays 5% per year in interest is capable of selling the bond at a price that is higher than the face value as long as the interest rates are below 5%. If the interest rates rise above 5%, the bond can still be sold but it is usually at a price that is less than the face value.
New bond issues are usually sold in $5000 increments while initial bond issues are quoted in $100 increments. A bond listed at 96 indicates a selling of $96 per $100 face value.
The risks and the potentials have to be weighed when deciding to invest either in stocks or bonds. Stocks carry a greater potential to increase in value but they also hold a greater vulnerability to market fluctuations. Investment grade bonds, which are rated BBB or better, carry slightly lower risks but offer relatively low yields.
Because they provide a stable investment that helps cushion against stock market fluctuations, bonds still have their place in most investor portfolios. A mixture of investments that includes stocks from different industries, bonds from various corporations, and other fixed-income investments is one strategic way of providing maximum growth while securing investment funds for the future.
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