Feb 25, 2011

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Handbook of Finance

Helping with the Handbook of Finance

While many people classify trading and investing as one, they couldn’t be more wrong these days. There is a big difference between trading and investing. Let’s break it down and focus on what the differences exactly are.

* Trading is buying with the intent to sell or selling (shorting) with the intend to buy back at a lower price.
* Investing is buying with the intent to hold in order to build wealth.
These are NOT mutually exclusive and can be complimentary. A goal for any trader will be to actively use technical and fundamental analysis combined with the proper risk management for both trading and investing.
For most, trading will become one of the most challenging experiences of their lives. To contrary belief, it can be extremely rewarding. However…Before traders can reap the many benefits, they must first become aware of, and then deal with the trading misconceptions which can lead to failure. Listed below are a few:
1) Knowledge of the Markets
— It’s YOU vs. the Markets, other traders and institutions, and every other participant involved.
2) Denial of the Difficulty of Trading
— Trading is far more difficult than we think it is.
— In the beginning stages, we are typically not as qualified as we think we are.
3) Unrealistic expectations about short term financial returns
—Realistically, What do embryo beginning traders typically earn?

Market Misconceptions:

The learning curve is measured in a few weeks. Truth is everyone absorbs information differently let alone learning how to implement the information one has digested. Although a friend catches on inside of a week, it may take several weeks for another individual to educate himself at the same level. Question to ask oneself…How long does it take to start consistently making money? Another misconception may be…A couple of hundred dollars should be enough to get rolling. Question to ask oneself…How much money do I need to not only start trading but notice a difference in my trading account. And lastly…Behavioral control issues. Always keep in mind, you are your own worst enemy…Discipline, Discipline, Discipline.
Remember, many of the people you intend to trade against are professionals. Compared to most novices, they have the following A) More time than most, B) More capital than most, C) Larger risk tolerance, D) History and experience and E) Extensive knowledge of the markets.

Analyzing Financial Markets:

Technical Analysis: It has been around as long as there have been organized and controlled markets.It has started to become fine tuned and widely accepted in the early 1970′s-1980′s after the computer made it much easier for display purposes.
Fundamental Analysis: This was the most common form of breaking down a company inside and out and became widely accepted on Wall Street up until the late 1970′s when more in depth researching started to become more popular.
Quantitative Analysis: This form of due diligence caught fire as a more advanced form of technical analysis for folks that wanted a more calculated approach from a statistics standpoint. It applies advanced mathematics, including standard deviation, stochastic’s, relative strength to financial markets.
Psychological Factors Analysis: This concept started to gain some momentum in the early 1980′s and started growing with increased interest in trading in the 1990′s. With strong efforts to understand the attitude and behavior of successful traders all summed up by the saying, “Proper Trading is Proper Thinking.”

Price Battle:

Many people find it helpful to think of price as the battle between buyers and sellers. People with different opinions, information, investment horizons, expectations and experience all meet in a marketplace where they are either looking to buy (demand) stock or they are looking to sell (supply) stock ( or other tradable instruments).
* Price is where supply meets demand.
* If there is more supply than demand, prices drop to find more demand at the lower price levels (sellers/short sellers win).
* If there is more demand than supply, prices rise to find more supply at higher levels (buyers win).
* Volume is the “casualty count“.
Price: Greed vs. Fear:
* In many ways, this metaphor is an over simplification because many times when prices rise, so does demand (Greed).
* When prices drop demand sometimes decreases because people stop buying and begin to wait for prices to level off (Fear).
Price and the Float:
* Float is the total number of shares available for sale at any given timeframe.
* For price to rise, some people must accumulate “the float” and hold on for higher prices.
* With fewer shares now available, it takes less buying and holding to drive prices to the next level.
Volume:
The Three most important words in trading are volume, volume and volume. Volume is a record or library of price information. Volume illustrates conviction–or lack of conviction –at a given price relative to a prior or future price. Volume also can be an important clue that indicates near-term reversals.
Price analysis without volume is essentially meaningless. Volume clues without price movement are often very significant. This may indicate institutional accumulation. Large volume with significant price movement often indicates the end of the move.

We here at the StockRunway hope that this educational guide on understanding the financial markets make your trading or investing clearer. Good Luck on all future endeavors.

The Editorial Staff @ StockRunway
 
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