Trading: Understanding the Basics

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Understanding the Basics

How to Measure Risk

Standard Deviation (volatility)

Measures how much price fluctuate over time, high volatility the greater chance of losing more money.

Price to Earnings Ratio (PE Ratio)

Price to earnings ratio (PE ratio) – price of stock divide by earnings per share eg. 20/2 = 10 read more…

Price to Book Ratio (PB Ratio)

Methods of Trading

  1. Algorithmic Trading
  2. Quantitative Trading

Stock Trading Markets (Financial Markets)

NYSE, NASDAQ, AMEX

What are ETFs?

Exchange traded funds (group of stocks) eg. spy (local and international)

Pricing

Bid – most someone willing to pay

Ask – most someone willing to sell

Bid-Ask Spread – is the difference deciding whether trade proceeds, the bigger the spread it is less likely for the trade and results in liquidity.

Types of Orders

Market Order: market orders involve buying stock at the best available price, routed the time it is placed.

Limit Order: willing to buy stock at certain price

Trading: Price to Earnings Ratio

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Price to Earnings Ratio

Measures how much you are paying for the company’s earning.

The higher the price-to-earnings ratio the more expensive is the stock price.

Higher price-to-earnings ratio indicates that the company is very popular and it attracts more buyers in the market.

Average P/E Ratio = 17

High P/E Ration > 25

High P/E companies are very optimistic about future and stock price are overvalued and when bubble happens investors are more likely to lose quite a lot.

Low P/E

  • Company is undervalued, trading at low price
  • Company most likely have high earnings

It is best to find the correlation between low P/E ratio and above average returns.

Trading: Dollar Cost Averaging

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Dollar Cost Averaging

DCA (Dollar Cost Averaging) vs LSI (Lump Sump Investing)

In stock market past performance cannot guarantee the future performance because every bear market decline, crash and panic.

DCA is simply where you invest same amount of money at regular intervals: every month, year or week regardless of market trend.

It will force the invester to buy more when the price is low and less vise versa.

Benefits related to DCA is that the invester will not be devasted by the losses that come along.

DCA encourages you to be patient and stick to the market for a long term during ups and down.

Example:
Month 1 : Stock Price $10 Bought 50 shares 
Month 2 : Stock Price $5 Bought 100 shares 
Month 3 : Stock Price $5 Bought 100 shares
Month 4 : Stock Price $15 Total 250 shares

Trading: Stock Beginners Guide

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Stock Beginners Guide

What is Stock?

Ownership share in a company.

What is investment?

An asset or item purchased that will appreciate in the future, generate income or sold at a higher price.

With money you can buy shares, bonds, mutual funds or do fixed deposit.

Inflation

When cost of living increases (prices of goods and services increases).

Dividend – share of profits paid out to shareholders

Market Capitalization Analysis

Price * No of shares outstanding = total value of all of the stock outstanding.

RangeStock ValueAnalysis
Nano Cap< $50mHighly Risky
Micro Cap< $250mHighly Risky
Small Cap$250m – $1bPotential growth
Mid Cap$1b – $10b Safety investing and potential growth
Large Cap$10b – $50b Conservative stock investors
Greater safety
Ultra Cap> $50bBiggest of the big eg. Apple, Google

Read More:

Dollar Cost Averaging

Price to Earning Ratio