The Way to Trade: Discover Your Successful Trading Personality by John Piper

Author:John Piper [Piper, John]
Language: eng
Format: epub, pdf
Tags: Business & Economics, Investments & Securities, Stocks
ISBN: 9780857192851
Google: qnVcEjRJr80C
Publisher: Harriman House Limited
Published: 2006-05-01T00:08:56.877522+00:00

Chapter 19: FUTURES AND OPTIONS

This book is primarily aimed at those looking to trade futures and options, but for the sake of completeness we also want to cover stocks, and our commentary on options will also be suitable for those (misguided souls?) who want to buy options.

Stocks

We will start with stocks, which are the most basic trading vehicle available. The mechanics are simple. You buy the stock and you then benefit from any price appreciation that accrues, and you also receive any dividends appropriate to your period of holding. However, if the price falls away then you suffer a corresponding loss. Gearing can be obtained by borrowing part of the funds to purchase the stocks initially and some brokers also have a similar arrangement. Although most people buy stocks, it is also possible to sell them short. If you do this you are looking to gain because of a fall in the price of that stock. Many people are confused by short selling, wondering how you can sell something before you own it. There is no easy answer to this, you just can, and the position is closed when you then buy it back. So whether you buy or sell short there are always two transactions, a purchase and a sale, you benefit if the sale price is higher than the purchase price, and it doesn’t matter which comes first, although the mechanics of the transaction may be a little different. However we must not ignore costs, which are important and which can account for up to 6 per cent on a stock transaction. That means that you have to make 6 per cent just to stand still. It is because of costs like these that it is so difficult to make money in markets because all the profit goes to the security houses which provide the brokerage services. Their profits come from you and me and that is why fewer than 10 per cent of traders make money.

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