Chapter 5 Trading Fundamentals

Futures

A term used to designate all contracts covering the purchase and sale of financial instruments or physical commodities for future delivery on a commodity futures exchange.

Short Term Traders

A trader who is short the market is of the opinion that the price of the security or securities will go down, and has more sold than bought positions

do's and don'ts of position and swing trading

1. Don't hold onto Igloo Ice Cream because you bought it asa swing trade and ignored your sell stop. Then, after it fell like a rock, you were too embarrassed to sell at a big loss, so you designated it at a "core holding," or "investment" 2. Do hold your Swing trade

'Blue-Chip Stock'

A blue-chip stock is the stock of a large, wel- established and financially sound that company has operated for A blue-chip stock many years. typically has a market capitalization in the billions, is generally the market leader or among the top three companies in its sector, and is more often than not a household name.

Commodities brokers

A commodity broker is a firm or individual who executes orders to buy or sell commodity contracts on behalf of clients and charges them a commission

Bond

A debt instrument issued by such entities as corporations, governments or their agencies with the purpose of raising capital by borrowing.

Index

A grouping of shares that gives a measure of price movement, used to gauge the overall health of the market.

Index Fund

A passively managed portfolio of securities that tries to mirror the performance of a nominated market index, eg. an equity index fund may be designed to track the S&P/ASX 200. Trading decisions of such funds are generally automatic and infrequent so expenses tend to be lower than those of actively managed funds.

Commodity

A physical item, such as food, metals, and grains that can be traded.

Specialists and Market Markers

Adjust the price of their stocks each morning according to the orders waiting to be filled

Industry Categories

Aerospace industry Agriculture (see also Agribusiness) Fishing industry Timber industry Tobacco industry Chemical industry Pharmaceutical industry Computer industry Software industry Construction industry Defense industry Arms industry Education industry Energy industry Electrical power industry Petroleum industry Entertainment industry Financial services industry Insurance industry Food industry Fruit production Health care industry Hospitality industry Information industry Manufacturing Automotive industry Pulp and paper industry Steel industry Shipbuilding industry Mass media Broadcasting Film industry Internet Music industry News media Publishing Telecommunications industry Transport industry Water industry

Momentum Trade

Also known as scalping trades- Stock will be bought and sold (or the reverse) within seconds or minutes, to hours

exchange-traded fund (ETF)

An exchange-traded fund (ETF) that tracks other ETFs rather than stocks, bonds or derivatives. ETFs of ETFs track the performance of other ETFs, which may have direct exposure to the underlying securities they track.

investors

An investor is a person that allocates capital with the expectation of a future financial return.[1] Types of investments include: equity, debt securities, real estate, currency, commodity, token, derivatives such as put and call options, futures, forwards, etc. This definition makes no distinction between those in the primary and secondary markets. That is, someone who provides a business with capital and someone who buys a stock are both investors. An investor who owns a stock is a shareholder.

Index Option

An option whose underlying security is an index.

Technical Analysis

Analysis of a security which looks at the technicals-the charting patterns and technical indicators-to form an opinion about historical and future price trends Analysis is the alternate method of researching stock. It is the study of time, price, and sentiment. The tool used most often by technical analysis is a chart. Charts show a stock's price history, and with practice, we can see everything we need know about a particular equity in a matter of seconds.

Fundamental Analysis

Analysis of a security which takes into consideration balance sheet analysis, profit and loss fundamentals, management, the nature of business and other such items Analysis relies on economic supply-demand information in the overall picture, and a company's financial health in the smaller picture. It includes such statistics as a stock's annual growth rate, five-year, one-year, and quarterly earning records, and P/E ratios Investors who rely on fundamental are more interested n a stock's performance year to year than they are in market behavior. They don't care that the Dow Jones plunges one day and soars the next. They are satisfied with steady conservative growth, and the end goal...retirement, their kids college fund, a nice nest egg, or a condo in Florida.

Fundamental analysis tip from Investor's Business Daily (IBD)

Called the Smart Select Composite Rating, its displayed in the first column next to each stok listed and represents a composite rating of the company's fundamentals. You can also use the rating to compare stoks's fundamental strength, one to another. Rating range from 1 to 99, with 99 rated the highest.

Stock Market Sectors

Capital Goods Basic Materials Non cyclical consumer goods Cyclical consumer goods Energy Conglomerates Capital Goods Services Technology Utilities Transportation Financial Healthcare

Commodities Traders

Commodity trading is an exciting and sophisticated type of investment. While this type of trading has many similarities to stock trading, the biggest difference is the asset that is traded. Commodity trading focuses on purchasing and trading commodities like gold rather than company shares as in stock trading.

Index Arbitrage

Exploiting the difference between a derivatives market and its physical market equivalent by selling one instrument and buying the other, such as buying the shares that comprise an index and selling futures contracts to an equal dollar value. Often called Program Trading.

Keys to remember when choosing to Trade a Stock

First choose an industry Technology, Utilities, Transportation, Financial, Healthcare, Services, Basic Materials, Capital Goods, Conglomerates, Energy, Cyclical Consumer Goods, Non Cyclical Consumer Goods, Second choose an industry groups that are in an uptrend, or breaking into an uptrend, on the daily and weekly charts. Third, narrow my focus to a few of the most promising component stocks in that group. From the best of those, I glance at their current IBD Composite Ratings and usually buy the final choice if the ranking is 70, or better. *If the market gets a case of the hiccups, as long as the stock doesn't hit my sell stop, I relax knowing my stock has good fundamentals, along with a STRONG TECHNICAL outlook.

The Power of Opinions

For instance, you sold your position you were holding in Halliburton (HAL). The oil service stock had waffled for days and you wanted to fee up the cash. Over the weekend, however talk of war between Middle Eastern countries simmered and gathered steam. Now it's Monday morning, and rumors bubble that irate governments are readying attack planes to hit the oil rich nations. Fears of oil shortages mushroom, and by the time the market opens, HAL is rocketing. In little more than forty-eight hours, fueled by world events, the prevailing opinions of stocks like HAL reversed from apathy to enthusiasm. While the oil service company's fundamental data did not change over the weekend, the perception regarding its share value changed. Emotions and opinions change the value of a stock. "The market has no limits"

What are the benefits of having two trading accounts

Having Two trading accounts is what seasoned traders do, which one for day trading and the other for swing/position trades (The usual criterion is that the stock is held as long as the stock in an uptrend) (or downtrend if short) on a daily chart Example: Just as shopping malls have anchor stores-- large, well known department stores that ensure the mall's success--so you may decide to have anchor stocks or two in your account that you hold for a nice profitable ride

TRADING WITH THE CLOCK FOR PROFITS

Im central time so everything starts an an hour earlier 9:30 A.M.: Equities market 9:45 A.M. to 10:10 A.M.: First reversal period 11:20 A.M.: Beginning of lunchtime lethargy 1:30 P.M.: Lunchtime lethargy begins clear-some stocks start to edge up for the afternoon session 2:30 P.M.: Stocks break out (or down) in a more definitive manner 3:00 P.M.: Treasury bonds stop trading; market breathes a sigh of relief, pos- sible shift in direction 3:20 P.M.: Active traders begin to close out positions for the day 3:30 P.M.: Mild reversal possible 3:55 P.M.: Additional reversals possible as more positions closed 4:00 P.M.: Equities market closes

The perks of Indicators

Indicators generate buy and sell signals through crossovers or divergence. Crossovers are the most popular technique whereby the price moves through a moving average or when two moving averages crossover. Divergence occurs when the direction of a price trend and the direction of an indicator are moving in opposite directions, which tends to suggest that the direction of the price trend is weakening. Indicators can be extremely helpful in identifying momentum, trends, volatility, and other aspects of a security. But, it's important to note that indicators work best when combined with other forms of technical analysis to maximize the odds of success.

indicators

Indicators represent a statistical approach to technical analysis as opposed to a subjective approach. By looking at money flow, trends, volatility, and momentum, they provide a secondary measure to actual price movements and help traders confirm the quality of chart patterns or form their own buy or sell signals.

Examples of SPDR ETFs

Investors SPDRs to realize broad diversification to specific portions of the market. For example, the SPDR S&P Dividend ETF is an investment vehicle that seeks to provide investment results that track the total return performance High Yield Dividend Aristocrats Index. This means that the SPDR S&P Dividend ETF indexes dividend-paying that are a part of the S&P 500. The ETF is made up of a total of 109 companies and tracks performance through its NAV, which is communicated as a price per share. However, this is not the only SPDR investor can use to realize a diversified investment in the S&P 500. Using another real- world example, investors can invest in SPDR S&P Regional Banking ETF, which is an investment vehicle that reflects the performance of companies S&P 500 that conduct business as regional banks or thrifts. Specifically, the ETF seeks to provide results that match to the return of the S&P Regional Banks Select Industry Index. The ETF is comprised of 102 companies in the S&P and derives its value with its NAV, disseminated as a price per share.

annual growth rate, five year, one-year, and quarterly earnings records, and P/E ratios

Investors rely fundamentals are more interested in a stocks performance year to year than they are in market behavior. They don't care that the Dow Jones plunges one and soars the next day. They are satisfied with steady

The SmartSelect Composite Rating

It's displayed in the first column next to each stock listed and represents a composite rating of the company's fundamentals. You can use the rating to compare stocks fundamental strength, one to another. Rating from 1 to 99, With 99 rated the highest.

The Bottom Line of Indices

It's good to know what's going on in the many diverse segments of the U.S. and international markets. If you're going to pick just one index or market to talk about, you can't go wrong with the S&P 500, which offers a good indication of the movements in the U.S. market in general. By watching indices and keeping track of their movements over time, you can get a good handle on the investing public's general attitude toward companies of all different sizes and from varying industries.

Investors Business Daily (IBD) Stock Tables

It's just stock tables in an electronic format. The (IBD) has an subscription where you receive the latest stocks to watch via newsletter. It seems pretty legit.

Name two types of indicators

Leading Indicators. Leading indicators precede price movements and try to predict the future. These indicators are most helpful during periods of sideways or non-trending price movements since they can help identify breakouts or breakdowns. Lagging Indicators. Lagging indicators follow price movements and act as a confirmation tool. These indicators are most useful during trending periods where they can be used to confirm that a trend is still in placing or if it's weakening.

Tell me about Fundamental Analysis

Many commodities brokers and traders especially those who trade agricultural futures, including corn, sugar, and pork bellies rely on fundamentals such as the weather and global shortages. An event as predictable as the arrival of winter can dictate the balance of supply and demand and so ultimately, the price. Example: winter=cold weather=more natural gas=higher demand. Result? Energy services prices usually rise in autumn months, just before winter arrives and demand increases

Types of Commodities

Metals (including gold, silver, platinum and copper) Energy (including crude oil, heating oil, natural gas and gasoline) Livestock and Meat (including lean hogs, pork bellies, live cattle and feeder cattle) Agricultural (including corn, soybeans, wheat, rice, cocoa, coffee, cotton and sugar)

The Nasdaq Composite

Most investors know that the Nasdaq is the exchange on which technology stocks are traded. The Nasdaq Composite Index is a market-capitalization-weighted index of all stocks traded on the Nasdaq stock exchange. This index includes some companies that are not based in the U.S Although this index is known for its large portion of technology stocks, the Nasdaq Composite also includes stocks from financial, industrial, insurance and transportation industries, among others. The Nasdaq Composite includes large and small firms but, unlike the Dow and the S&P 500, it also includes many speculative companies with small market capitalizations. Consequently, its movement generally indicates the performance of the technology industry as well as investors' attitudes toward more speculative stocks.

Non bounded

Non-bounded indicators are less common, but still help form buy and sell signals as well as show strength or weakness in trends. However, they accomplish this in many ways without the use of a set range.

Oscillators

Oscillators are the most common type of technical indicator and are generally bound within a range. For example, an oscillator may have a low of 0 and a high of 100 where zero represents oversold conditions and 100 represents overbought conditions.

Name 4 different trading time frames

Position Trade Swing Trade Day Trade Momentum Trade

What does 'Spiders SPDR' mean

Spider (SPDR) is short form name for a Standard Poor's depositary receipt, an exchange-traded fund (ETF) managed by State Street Global Advisors that tracks the Standard & Poor's 500 index (S&P 500). Each share of a SPDR containsa 10th of the S&P 500 index and trades at roughly a 10th of the dollar-value level of the S&P 500. SPDRs can also refer to the general group of ETFs to which the Standard & Poor's depositary receipt belongs.

P/E Ratios

Price to earning ratios are calculated by dividing the stock's price by its earning per share figure Ex: much like Democrats and Republicans, both points of view have their good parts.

proprietary trading

Proprietary trading occurs when a firm or bank invests for its own direct gain instead of earning commission dollars by trading on behalf of its clients. This type of trading occurs when a firm decides to profit from the market rather than from the thin-margin commissions it makes from processing trades. Firms or banks that engage in proprietary trading believe that they have a competitive advantage that will enable them to earn excess returns.

Short Interest

Shares that have been sold and short and not yet repurchased

BREAKING DOWN 'Spiders - SPDR

Spiders are listed on the New York Stock Exchange (NYSE) after the acquisition of the American Stock Exchange (AMEX) under the ticker symbol SPY. By trading similar to stocks, spiders have continuous liquidity, can be short sold, bought on margin, provide regular dividend

What is the CRB

Stand for Commodities Index and Treasury Bond

The Standard and Poor's 500 (The S&P 500)

Standard & Poor's 500 Index (known commonly as the S&P 500) is a larger and more diverse index than the DJIA. Made up of 500 of the most widely traded stocks in the U.S., it represents about 80% of the total value of U.S. stock markets. In general, the S&P 500 index gives a good indication of movement in the U.S. marketplace as a whole. Because the S&P 500 index is market weighted (also referred to as capitalization weighted), every stock in the index is represented in proportion to its total market capitalization. In other words, if the total market value of all 500 companies in the S&P 500 drops by 10%, the value of the index also drops by 10%. A 10% movement in all stocks in the DJIA, by contrast, would not necessarily cause a 10% change in the index. Many people consider the market weighting used in the S&P 500 to be a better measure of the market's movement because two portfolios can be more easily compared when changes are measured in percentages rather than dollar amounts. The S&P 500 index includes companies in a variety of sectors, including energy, industrials, information technology, healthcare, financials and consumer staples.

Swing Trade

Stock may be held for two to five days

Position Trade

Stock may be held from weeks to months

Prices don't change by themselves. Tell me how they change in price.

Stock prices move up and down every minute due to fluctuations in supply and demand. If more people want to buy a particular stock, its market price will increase. Conversely, if more people want to sell a stock, its price will fall. ... This is because the market is always building future expectations into prices. Also, price patterns on charts reflect the collective mind set of the stock participants. Pattern repeat themselves because those buyers and sellers operate from memory.

Day Trade

Stock will be bought and sold (or the reverse) the same day

The Dow Jones Average (DJIA)

The Dow Jones Industrial Average (DJIA) is one of the oldest, most well-known and most frequently used indices in the world. It includes the stocks of 30 of the largest and most influential companies in the United States. The DJIA is what's known as a price-weighted index. It was originally computed by adding up the per-share price of the stocks of each company in the index and dividing this sum by the number of companies—that's why it's called an average. Unfortunately, it is no longer this simple to calculate. Over the years, stock splits, spin-offs, and other events have resulted in changes in the divisor, making it a very small number (less than 0.2). The DJIA represents about a quarter of the value of the entire U.S. stock market, but a percent change in the Dow should not be interpreted as a definite indication that the entire market has dropped by the same percent. This is because of the Dow's price-weighted function. The basic problem is that a $1 change in the price of a $120 stock in the index will have a greater effect on the DJIA than a $1 change in the price of a $20 stock, even though the higher-priced stock may have changed by only 0.8% and the other by 5%. A change in the Dow represents changes in investors' expectations of the earnings and risks of the large companies included in the average. Because the general attitude toward large-cap stocks often differs from the attitude toward small-cap stocks, international stocks or technology stocks, the Dow should not be used to represent sentiment in other areas of the marketplace. On the other hand, because the Dow is made up of some of the most well-known companies in the U.S., large swings in this index generally correspond to the movement of the entire market, although not necessarily on the same scale.

The Russell 2000

The Russell 2000 is a market-capitalization-weighted index of the 2,000 smallest stocks in the Russell 3000, an index of the 3,000 largest publicly-traded companies, based on market cap, in the U.S. stock market. The Russell 2000 index gained popularity during the 1990s when small-cap stocks soared, and investors moved more money to the sector. The Russell 2000 is the best-known indicator of the daily performance of small companies in the market; it is not dominated by a single industry.

The Wilshire 5000 (total stock market index" or "total market index")

The Wilshire 5000 is sometimes called the "total stock market index" or "total market index" because almost all publicly-traded companies with headquarters in the U.S. that have readily available price data are included in the Wilshire 5000. Finalized in 1974, this index is extremely diverse, including stocks from every industry. Although it's a very comprehensive measure of the entire U.S. market, the Wilshire 5000 is referred to less often than the less comprehensive S&P 500 when people talk about the entire market.

Tell me why traders don't rely of fundamental analysis

The reason stock traders don't delve into fundamental analysis is the time challenge. Although it provides highly valuable information, the research consumes too much time. Most of us don't have time to spend researching a single company's new product potential, along with earnings as compared to past earnings.

Major market Indices

They include The Dow Jones Average (DJIA) The Standard and Poor's 500 (The S&P 500) The Wilshire 5000 (total stock market index" or "total market index") The Nasdaq Composite The Russell 2000 The Bottom Line

statistics (n)

a collection of facts in the form of numbers that shows information about something

short selling (shorting)

a process by which traders sell a stock that they do not own in belief that the price will fall and the security can be bought back at a lower price

supply and demand

relationship between the amount of product and the desire for the product The price P of a product is determined by a balance between production at each price (supply S) and the desires of those with purchasing power at each price (demand D). The diagram shows a positive shift in demand from D1 to D2, resulting in an increase in price (P) and quantity sold (Q) of the product. In microeconomics, supply and demand is an economic model of price determination in a market. It postulates that in a competitive market, the unit price for a particular good, or other traded item such as labor or liquid financial assets, will vary until it settles at a point where the quantity demanded (at the current price) will equal the quantity supplied (at the current price), resulting in an economic equilibrium for price and quantity transacted.

market makers

securities dealers who "make markets" by offering to buy or sell certain securities at stated prices A market maker is a broker-dealer who facilitates the trading of shares by posting bid and ask prices along with maintaining an inventory of shares. It is important to note that a specialist is a type of market maker. The NYSE has seven specialist firms while the Nasdaq has nearly 300 market makers. Specialists and Market Makers adjust the price of their stocks each morning according to the orders waiting to be filled