When I started equity investing, I would always come in 100 percent or all-in in one particular stock. Now, given that the particular stock grows, then my investment will surely end up with a high return. But in some instances I had to cut my losses painfully, just so to prevent further eating up my capital.

The old adage tells us not to put all your eggs in one basket. In other words, there is a need to diversify your portfolio. Several factors come in:

1. The aggressiveness of your portfolio or the absence of it must reflect your age. The younger you are, the riskier your portfolio may be.
2. Your risk tolerance will also apply. Whether you can stomach daily paper losses or you are satisfied with small returns offering low risks.

Following the most recent bull run many people wanted to invest their hard-earned money with hopes of getting big-time with the investment profits they will earn. Apparently, with the recent down turn in markets coupled with increasing inflation rates and weakening dollar, many of these recent investors got burned.

One of the dangers of investing, especially in equities, is thinking about return or past performance. Remember that in investing, past performance is not an indicator of future returns. Although history has a tendency to repeat itself, bad returns may even be worse than past bad years, while good returns may just be a small percentage of past good runs.

Annualizing monthly returns also contribute to this danger as a month’s good performance can be hard to duplicate given the delicate conditions of the market. We cannot expect that month-in and month-out, the same assumptions and behavior will prevail. Thus we have months of panic selling and months of buying euphoria.

Another danger of investing is lack of proper knowledge in financial markets and investment instruments. Investors must do their homework and immerse themselves with the proper knowledge when participating in such dynamic markets.

Timing the bottom or the peak of runs is another danger that confronts new investors. Waiting for the bottom before coming in or waiting for the peak before unloading provides opportunity costs that will be hard to recover.

Lastly, it is so easy to enter positions by buying shares. But even before an investor should buy, he should very well plan his exit strategies, whether at a loss or with a gain. Stop loss figures must be established in the same way as target prices.

Following the most recent bull run many people wanted to invest their hard-earned money with hopes of getting big-time with the investment profits they will earn. Apparently, with the recent down turn in markets coupled with increasing inflation rates and weakening dollar, many of these recent investors got burned.

One of the dangers of investing, especially in equities, is thinking about return or past performance. Remember that in investing, past performance is not an indicator of future returns. Although history has a tendency to repeat itself, bad returns may even be worse than past bad years, while good returns may just be a small percentage of past good runs.

Annualizing monthly returns also contribute to this danger as a month’s good performance can be hard to duplicate given the delicate conditions of the market. We cannot expect that month-in and month-out, the same assumptions and behavior will prevail. Thus we have months of panic selling and months of buying euphoria.

Another danger of investing is lack of proper knowledge in financial markets and investment instruments. Investors must do their homework and immerse themselves with the proper knowledge when participating in such dynamic markets.

Timing the bottom or the peak of runs is another danger that confronts new investors. Waiting for the bottom before coming in or waiting for the peak before unloading provides opportunity costs that will be hard to recover.

Lastly, it is so easy to enter positions by buying shares. But even before an investor should buy, he should very well plan his exit strategies, whether at a loss or with a gain. Stop loss figures must be established in the same way as target prices.

Following the most recent bull run many people wanted to invest their hard-earned money with hopes of getting big-time with the investment profits they will earn. Apparently, with the recent down turn in markets coupled with increasing inflation rates and weakening dollar, many of these recent investors got burned.

One of the dangers of investing, especially in equities, is thinking about return or past performance. Remember that in investing, past performance is not an indicator of future returns. Although history has a tendency to repeat itself, bad returns may even be worse than past bad years, while good returns may just be a small percentage of past good runs.

Annualizing monthly returns also contribute to this danger as a month’s good performance can be hard to duplicate given the delicate conditions of the market. We cannot expect that month-in and month-out, the same assumptions and behavior will prevail. Thus we have months of panic selling and months of buying euphoria.

Another danger of investing is lack of proper knowledge in financial markets and investment instruments. Investors must do their homework and immerse themselves with the proper knowledge when participating in such dynamic markets.

Timing the bottom or the peak of runs is another danger that confronts new investors. Waiting for the bottom before coming in or waiting for the peak before unloading provides opportunity costs that will be hard to recover.

Lastly, it is so easy to enter positions by buying shares. But even before an investor should buy, he should very well plan his exit strategies, whether at a loss or with a gain. Stop loss figures must be established in the same way as target prices.

Stock market investment is very lucrative. That is why most people suppose that they will get more money from stock market investment. It is very common nowadays that people jump in a stock market without any prior knowledge of a stock market working. They hear about profits gaining and assume that they will get same results. One of my friend was very eager about investing money in stocks. He had not any information about stock market and was blindly ready to invest more money than his income. He didn’t hear me and invested his bucks. Ultimately, he lost all his invested bucks.

If you want good returns from a stock market, you should understand how a market works. Please don’t go in deep you will be confused. Get knowledge until you become confident. Know the various terms which are used daily in a stock market. Read various book, magazine, newspapers, etc.

Know your budget. Never borrow money for investing in stocks. Because a stock market is fluctuate. You cannot say firmly about return on investment.
Don’t expect high. Be realistic. It will gradually help you to be more advance investor.

In brief, be familiar first with stock market. Then, invest a very little amount to gain experience. This attitude will make you a long term investor investor which is always recommended by experts.

Investing in stocks is risky since there are many uncertainties associated with the ability of a business to generate profits. Hence there is no control on the returns but an investor has control over managing her/his risks.

Portfolio diversification is a straightforward way to reduce exposure to business specific risks. It simply means that one should not keep all his egg in one basket. Invest in a diversified  set of stocks spanning different businesses. Equity risk does not add up as you spread the capital over a larger number of stocks.

Another way to handle risks associated with buying too high or too low at a given point in time is to spread ones investments across time. Never invest lump sum in the stock market. Spread your investments over a period of time. This is normally referred to as steady investment

One should maintain an investment diary. It should have details of investments, their maturity date, dividend date, photocopy of the application form, and others. If you don’t know how much you earned from particular investment, or when it will mature, it could lead to complications.

Be clear about goals. Financial experts say, one of the main reasons why people lose out of the opportunities to earn better returns is that they are not always clear about the difference between savings and investment.

Have realistic expectations. Hoping for the best is good. However, it doesn’t mean you choose any stocks. Many people believe they can pocket 100 returns from the stock market every year. They get into the market with this hope and the moment of market down, they get scared and pull out the money.

Get good advice. There are dubious characters among advisors. Nevertheless, you can keep away them if you do your homework properly. Make sure you get good reference and always go to a qualified professional. Don’t just go for the one who charges the lowest fee.

Getting good advice, staying clear about goals, having realistic expectations and maintaining investment diary can be useful you to be satisfied about your investments.

An option is a contract between a buyer and a seller. The option is connected to something, such as a listed stock, an exchange index, futures contracts, or real estate. For simplicity, this article will discuss only options connected to listed stocks.

Just to be complete, note that there are two basic types of options, the American and European. An American (or American-style) option is an option contract that can be exercised at any time between the date of purchase and the expiration date. Most exchange-traded options are American-Style. All stock options are American style. A European (or European-style) option is an option contract that can only be exercised on the expiration date. Futures contracts (i.e., options on commodities; see the article elsewhere in this FAQ) are generally European-style options.

Every stock option is designated by:

• Name of the associated stock
• Strike price
• Expiration date
• The premium paid for the option, plus brokers commission.

The two most popular types of options are Calls and Puts. We’ll cover calls first. In a nutshell, owning a call gives you the right (but not the obligation) to purchase a stock at the strike price any time before the option expires. An option is worthless and useless after it expires.

People also sell options without having owned them before. This is called “writing” options and explains (somewhat) the source of options, since neither the company (behind the stock that’s behind the option) nor the options exchange issues options. If you have written a call (you are short a call), you have the obligation to sell shares at the strike price any time before the expiration date if you get called.

Example: The Wall Street Journal might list an IBM Oct 90 Call at $2.00. Translation: this is a call option. The company associated with it is IBM. (See also the price of IBM stock on the NYSE.) The strike price is 90. In other words, if you own this option, you can buy IBM at US$90.00, even if it is then trading on the NYSE at $100.00. If you want to buy the option, it will cost you $2.00 (times the number of shares) plus brokers commissions. If you want to sell the option (either because you bought it earlier, or would like to write the option), you will get $2.00 (times the number of shares) less commissions. The option in this example expires on the Saturday following the third Friday of October in the year it was purchased.

In general, options are written on blocks of 100s of shares. So when you buy “1″ IBM Oct 90 Call at $2.00 you actually are buying a contract to buy 100 shares of IBM at $90 per share ($9,000) on or before the expiration date in October. So you have to multiply the price of the option by 100 in nearly all cases. You will pay $200 plus commission to buy this call.

If you wish to exercise your option you call your broker and say you want to exercise your option. Your broker will make the necessary requests so that a person who wrote a call option will sell you 100 shares of IBM for $9,000 plus commission. What actually happens is the Chicago Board Options Exchange matches to a broker, and the broker assigns to a specific account.

If you instead wish to sell (sell=write) that call option, you instruct your broker that you wish to write 1 Call IBM Oct 90s, and the very next day your account will be credited with $200 less commission. If IBM does not reach $90 before the call expires, you (the option writer) get to keep that $200 (less commission). If the stock does reach above $90, you will probably be “called.” If you are called you must deliver the stock. Your broker will sell IBM stock for $9000 (and charge commission). If you owned the stock, that’s OK; your shares will simply be sold. If you did not own the stock your broker will buy the stock at market price and immediately sell it at $9000. You pay commissions each way.

If you write a Call option and own the stock that’s called “Covered Call Writing.” If you don’t own the stock it’s called “Naked Call Writing.” It is quite risky to write naked calls, since the price of the stock could zoom up and you would have to buy it at the market price. In fact, some firms will disallow naked calls altogether for some or all customers. That is, they may require a certain level of experience (or a big pile of cash).

When the strike price of a call is above the current market price of the associated stock, the call is “out of the money,” and when the strike price of a call is below the current market price of the associated stock, the call is “in the money.” Note that not all options are available at all prices: certain out-of-the-money options might not be able to be bought or sold.

The other common option is the PUT. Puts are almost the mirror-image of calls. Owning a put gives you the right (but not the obligation) to sell a stock at the strike price any time before the option expires. If you have written a put (you are short a put), you have the obligation to buy shares at the strike price any time before the expiration date if you get get assigned. A put is “in the money” when the strike price is above the current market price of the stock, and “out of the money” when the strike price is below the current market price. Then there are covered puts, which means you are short the stock at the same time as you write the put; also see the FAQ article on covered puts. Covered puts are a simple means of locking in profits on the covered security, although there are also some tax implications for this hedging move. Check with a qualified expert.

How do people trade these things? Options traders rarely exercise the option and buy (or sell) the underlying security. Instead, they buy back the option (if they originally wrote a put) or sell the option (if the originally bought a call). This saves commissions and all that. For example, you would buy a Feb 70 call today for $7 and, hopefully, sell it tommorow for $8, rather than actually calling the option (giving you the right to buy stock), buying the underlying stock, then turning around and selling the stock again. Paying commissions on those two stock trades gets expensive.

Although options offically expire on the Saturday immediately following the third Friday of the expiration month, for most mortals, that means the option expires the third Friday, since your friendly neighborhood broker or internet trading company won’t talk to you on Saturday. The broker-broker settlements are done effective Saturday. Another way to look at the one day difference is this: unlike shares of stock which have a 3-day settlement interval, options settle the next day. In order to settle on the expiration date (Saturday), you have to exercise or trade the option by Friday. While most trades consider only weekdays as business days, the Saturday following the third Friday is a business day for expiring options.

The expiration of options contributes to the once-per-quarter “triple-witching day,” the day on which three derivative instruments all expire on the same day. Stock index futures, stock index options and options on individual stocks all expire on this day, and because of this, trading volume is usually especially high on the stock exchanges that day. In 1987, the expiration of key index contracts was changed from the close of trading on that day to the open of trading on that day, which helped reduce the volatility of the markets somewhat by giving specialists more time to match orders.

You will frequently hear about both volume and open interest in reference to options (really any derivative contract). Volume is quite simply the number of contracts traded on a given day. The open interest is slightly more complicated. The open interest figure for a given option is the number of contracts outstanding at a given time. The open interest increases (you might say that an open interest is created) when trader A opens a new position by buying an option from trader B who did not previously hold a position in that option (B wrote the option, or in the lingo, was “short” the option). When trader A closes out the position by selling the option, the open interest either remain the same or go down. If A sells to someone who did not have a position before, or was already long, the open interest does not change. If A sells to someone who had a short position, the open interest decreases by one.

For anyone who is curious, the financial theoreticians have defined the following relationship for the price of puts and calls. The Put-Call parity theorem says:
P = C - S + E + D
where
P = price of put
C = price of call
S = stock price
E = present value of exercise price
D = present value of dividends
The ordinary investor will occasionally see a violation of put-call parity. This is not an instant buying opportunity, it’s a reason to check your quotes for timeliness, because at least one of them is out of date.

Many investors are up to date on the ins and outs of trading stocks daily. However, a less common vehicle of investing on leverage is trading options.  Here are some of the basic terms of option trading that will make you look like an expert at that next mixer party or sophisticated dinner gathering.  First, what is an ‘option’?  Options basically give the owner a contract to the rights (not the obligation) to buy or sell an asset at a given price and time.  The ’strike price’ is that specific price at which the owner can either buy or sell the option at.  The next two terms, ‘call’ and ‘put’ are dependent on whether you are trying to sell (think the price will go up) or buy (think the price will go down) the certain asset.  ‘Calls’ give the owner the right to buy the asset at a certain price and ‘Puts’ give the owner the right to sell the asset at a certain price.  If the owner decides to sell/buy, it is often referred to as ‘exercising’ the option.

A mutual fund is pool of money from various investors that is actively managed in the ultimate goal of creating wealth and benefiting shareholders.  While many people associate mutual funds with stock, in actuality, mutual funds can consist of stocks, bonds or even cash.  So what are the benefits of mutual funds?  Why wouldn’t I as an individual investor just go out and buy the stock or bond on my own?
First, the average individual investor does not have the purchasing power to mimic mutual funds.  Most mutual funds consist of tens to hundreds of stock or bond positions.  It would be extremely difficult (and cost inefficient) for a single person to attempt to buy positions in that quantity.  Also, buying pooling together money collectively, this allows the group of investors to be able to afford an asset manager.  The asset manager is in charge of controlling the mutual fund and making decisions in the best interest of the shareholders.
The second advantage of mutual funds is the diversification that it offers investors.  The term diversification is thrown around a lot in the investment world and it is an important concept.  There is an inherent risk associated with each specific position.  However, by spreading the risk across a hundred positions, you are drastically mitigating your risk.  Even if one company were to go bankrupt, you would still have ninety nine other positions holding ninety nine percent of the funds value to offset and minimize any losses.
Mutual fund asset managers are professional investors whose sole responsibility is to make the fund the most profitable it can be under its guidelines.  The average investor does not have the time, training or experience to make the daily decisions that asset managers encounter.  Traditionally, asset managers are proven performers within their company and have shown a track record of success.
Another advantage of mutual funds is the liquidity that they possess.  While most stocks trade while the market is open, mutual funds usually trade once a day.  However, for those that need to sell their positions and cash out, this can be done fairly quickly compared to Certificates of Deposit (CDs) certain bonds (municipal/government).  Mutual funds can be traded once a day at their daily Net Asset Value (NAV) and are lauded by many for the liquidity that they encompass.
Mutual funds are one of many different investment vehicles.  However, mutual funds are the proven choice for many investors because of its ability to mitigate risk, its professional guidance and its liquidity.  When properly researched and understood, mutual funds can be a great asset to any investor’s portfolio.