A: Short selling can be very risky for both the investor and the broker. Brokers will often tell investors that only stocks above $5 can be sold short. Although this may be true for your particular brokerage firm, it is not a requirement set by the Financial Industry Regulatory Authority or the SEC.Most brokerage firms will have a "short list," which details all securities the firm allow...
A: Determining where the price of an asset will stop once it has hit a new high is one of the most difficult tasks for any trader. There is no magic way to determine what price an asset is likely to reach, but technical traders have developed a number of methods that can at least give you a fairly good estimate.Fibonacci ExtensionsThis tool is used by technical traders to forecast potential areas ...
A: The scenario you describe is very common and can be frustrating for any type of investor. Many traders will identify a potentially profitable setup and place a limit order after hours so their order will be filled at their desired price or better when the stock market opens. The problem is that many buyers do the same thing, and the increased demand can cause the price of the stock to gap ...
A: Successful investors possess the important trait of emotional stability, which means that they base their investment decisions on practical and calculated information. Emotional investors, on the other hand, are guided by their emotions. (To learn more about how emotions can influence your decision-making process, read When Fear and Greed Take Over.)You know you are an emotional investor if:You...
A: For general shorting information such as the short interest ratio, which is the short interest divided by the average daily volume, you can usually go to any website that features a stock quotes service. For example, you can find this information on the Yahoo Finance website in Key Statistics under Share Statistics. The New York Stock Exchange (NYSE) also calculates its own short interest ratio...
A: All other factors being equal, higher interest rates in a country increase the value of that country's currency relative to nations offering lower interest rates. However, such simple straight-line calculations rarely exist in foreign exchange. Although interest rates can be a major factor influencing currency value and exchange rates, the final determination of a currency's exchange ra...
A: A reverse split is a corporate action whereby a company reduces the number of shares outstanding and increases the price of its stock. A company may decide to use a reverse split to shed its status as a penny stock, or to avoid being delisted. A common type of reverse stock split is 1:2, which means that each investor receives one share for every two that he or she already holds. In other words...
A: An options contract undergoes an adjustment called "being made whole" when the underlying stock splits."Being made whole" means the options contact is modified so that the holder is neither negatively nor positively affected by the corporate action. While a stock split adjusts the price of an option's underlying security, the contract is adj...
A: Once you've identified a security that you want to purchase, you need to determine a price at which you want to sell if the price heads in an adverse direction and a price at which you want to take profits when the price moves in your favor. In many cases, this data is relayed to the broker using three separate orders.First, you will buy a security using either a market or a limit order. Th...
A: The simple answer is that the maximum return of any short sale investment is in fact 100%. However, the concepts underlying short selling - the borrowing of shares and the liability it forms, how returns are calculated, etc. - can be anything but simple. Let's try to clear up the confusion.To calculate the return on a short sale, all you need to do is calculate the difference between the pr...
A: A naked position refers to a situation in which a trader sells an option contract without holding a position in the underlying security as protection from an adverse shift in price. Naked positions are regarded as very risky because some positions can, in theory, lead to an unlimited amount of loss. This is why many brokers do not allow inexperienced traders to place this type of order.For exam...
A: The difference between these two market systems lies in what is displayed in the market in terms of orders and bid and ask prices. The order-driven market displays all of the bids and asks, while the quote driven market focuses only on the bids and asks of market makers and other designated parties.An order-driven market is one in which all of the orders of both buyers and sellers are disp...
A: Before learning about exotic options, you should have a fairly good understanding of regular options. Both types share the idea of having the right to buy or sell an asset in the future, but the way investors realize profits using these options can differ dramatically.Simply put, an exotic option is any type of option other than the standard calls and puts found on major exchanges. An investor ...
A: The term outrights is used in the forex (FX) market to describe a type of transaction where two parties agree to buy or sell a given amount of currency at a predetermined rate at some point in the future. This type of transaction is also referred to as a forward outright, an FX forward or a currency forward. A forward outright transaction is mainly used by parties seeking to hedge against ...
A: The letters 'B' and 'A' in the notation BxA refer to bid and ask, respectively. When you look at online stock quote data, some sources will provide you with a feed of the bid and ask outstanding order volumes for the stock in question. There is no standardized method for reporting this data, but usually the numbers you will see will be divided by 100, meaning that for every &quo...
What Does 'Buy on Cannons, Sell on Trumpets' Mean?A: All the events and news that happen around the world can have a great impact on the stock market. Very often, if a war breaks out or political problems arise the stock market will take a plunge. The saying of "buy on the sound of cannons, sell on the sound of trumpets" suggests that the start of, or the continuance of, a war is...
A: Owning a seat on the New York Stock Exchange (NYSE) enables a person to trade on the floor of this stock market, either as an agent for someone else (floor broker) or for one's own personal account (floor trader). Prices for seats on the exchange are determined by supply and demand, and they have ranged from $4,000 to over $2,500,000.However, to own a seat, a trader or broker must meet more...
A: Technical analysis is a trading tool that uses trading activity statistics, specifically price movement and volume, to try and predict future movement in the market. When a technical trader talks about price action, he is referring to the day-to-day fluctuation in the price of a particular stock. Traders gauge a stock's price action by monitoring patterns and indicators to help find or...
A: The term "float" refers to the regular shares a company has issued to the public that are available for investors to trade. This figure is derived by taking a company's outstanding shares and subtracting any restricted stock, which is stock that is under some sort of sales restriction (for example, stock that is held by insiders and cannot be traded because they are in a lock...
A: The quick answer is that the amount of shares shorted can actually exceed 50% of the float in a company. The percentage of shares shorted compared to the float is referred to as the short interest. It is calculated by taking the total amount of shares shorted and dividing it by the total amount of shares available for trade.For example, if 5 million shares are shorted and there are 20 million t...
A: Thanks to the internet, there is a huge range of service providers that investors can use to obtain investment research and execute trades in a cost-effective and timely manner. Some of the information providers are free, while others subscription based.Websites such as Investopedia and Yahoo Finance provide investors with a vast array of free stock information such as company financial stateme...
A: In a cash account, all transactions must be made with available cash or long positions. When buying securities in a cash account, the investor must deposit cash to settle the trade or sell an existing position on the same trading day, so cash proceeds are available to settle the "buy" order.A margin account allows an investor to borrow against the value of the assets in the ...
A: When trading or investing in options, there are two main option spread strategies, credit spreads and debit spreads. Credit spreads are options strategies that involve receipts of premiums, whereas debit spreads involve payments of premiums.A credit spread involves selling, or writing, a high premium option and simultaneously buying a lower premium option. The premium received from the written ...
A: The term "drawdown" appears in both the banking world and the trading world, but it has very different meanings within each context. In banking, a drawdown refers to a gradual accessing of credit funds, while in trading, a drawdown refers to a reduction in equity.Drawdowns in BankingWithin the context of banking, a "drawdown" commonly refers to the gradual acc...
A: Straddles and strangles are both options strategies that allow an investor to gain from significant moves either up or down in a stock's price. Both strategies consist of buying an equal number of call and put options with the same expiration date. The difference is that the strangle has two different strike prices, while the straddle has a common strike price.Let's say a comp...
A: Binary options and day trading are both ways to make (or lose) money in the financial markets, but they are different animals. A binary option is a type of options in which your profit/loss depends entirely on the outcome of a yes/no market proposition: a binary options trader will either make a fixed profit or a fixed loss. Day trading, on the other hand, is a style of trading in which positio...
A: The similarities between Chaikin Money Flow oscillator and the Money flow index end with the idea that they are both commonly used by active traders to monitor the flow of money and/or momentum. Yes, they are both commonly used momentum indicators, but how they are calculated and/or interpreted is quite different. The Chaikin money flow oscillator is similar to the MACD indicator in t...
A: In the world of economics, inflation is a term that gets thrown around every time the price of certain goods or services goes up suddenly. Inflation refers to prices rising over time, either in a particular industry or throughout the entire economy. Put another way, it's what happens when a unit of currency is worth incrementally less than it was in the previous fiscal period.Heal...
A: Moving averages are one of the most popular tools used by active traders to measure momentum. The primary difference between a simple moving average, weighted moving average and exponential moving average is the formula used to create them.Simple Moving AverageThe simple moving average (SMA) was prevalent before the rise of computers due to the ease in calculating. The incre...
A: On-balance volume and the accumulation/distribution line are similar in that they are both momentum indicators that use volume to predict the movement of “smart money”. Given the variation in the underlying formulas, this is where the similarities end. In the case of on-balance volume, it is calculated by summing the volume on an up-day and subtracting the volume on a down-day. As you can s...
A: One major difference between R-squared and the adjusted R-squared is that R-squared supposes that every independent variable in the model explains the variation in the dependent variable. It gives the percentage of explained variation as if all independent variables in the model affect the dependent variable. Adjusted R-squared, on the other hand, gives the percentage of variation explained by ...
A: Both the relative strength index (RSI) and stochastic oscillator are price momentum oscillators that are used to forecast market trends. Despite their similar objectives, they have very different underlying theories and methods. The stochastic oscillator is predicated on the assumption that closing prices should close near the same direction as the current trend. The RSI tracks overbought and o...
A: GoDaddy (GDDY) is the leading domain registrar in the world. The company also offers Web hosting and has millions of websites on its platform. It also provides various e-business services such as SSL certificates and related software.The company, which is headquartered in Scottsdale, Arizona, was founded in 1997 by Bob Parsons but is now publicly traded on the Nasdaq and had revenue of $1.13 bi...
A: The answer can be found in stock splits - or rather, a lack thereof. The vast majority of public companies opt to use stock splits, increasing the number of shares outstanding by a certain factor (e.g. by a factor of two in a 2-1 split) and decreasing their share price by the same factor.By doing so, a company can keep the trading price of its shares in a reasonable price range. Most publicly-t...
A: It's a fairly safe bet that as the delivery month of a futures contract approaches, the future's price will generally inch toward or even become equal to the spot price as time progresses. This is a very strong trend that occurs regardless of the contract's underlying asset. This convergence can be easily explained by arbitrage and the law of supply and demand.For example, supp...
A: Most stock exchanges work according to the forces of supply and demand, which determine the prices at which stocks are bought and sold. This means that no trade can occur until one participant is willing to sell the stock at a price at which another is willing to buy it, or until an equilibrium is reached. If there are more buyers than sellers, the stock's price will rise due to increased ...
A: When company A announces that company B is buying them out, you will almost always see a premium on company A's stock compared to its recent trading price. For example, company A's stock may be trading at $50 on the day a deal is announced for company B to acquire the company at $60 a share. In most cases, that announcement will cause company A's stock to jump closer the premiu...
A: In a currency pair, the first currency in the pair is called the base currency and the second is called the quote currency.Currency pairs can be separated into two types, direct and indirect. In a direct quote, the domestic currency is the base currency, while the foreign currency is the quote currency. An indirect quote is just the opposite: the foreign currency is the base currency and the do...
A: Generally speaking, when one country's currency is worth more than that of another, it does not necessarily indicate a stronger economy.For example, Japan's economy is regarded as one of the world's strongest, and yet a single Japanese yen exchanges for considerably less than US$1. On the other hand, Cyprus' economy is considerably smaller than the U.S. economy, but Cyprus' ...
A: You've likely heard the adage, "Buy the rumor, sell the news," which is the tendency for traders to push up a stock's price on rumors or expectations and then sell once that news has been released, even if the news is positive. This phenomenon is often seen with stocks releasing earnings reports.A stock's price is based in part on the expectations inves...
