If you can’t wait to earn money slowly with short or long term investment, you can use the following strategies to earn money in huge sum really fast. As you can guess, with these strategies, if you don’t really know what you’re doing, they can burn your pocket even faster.
Day Trading: Buying and Selling in Minutes
Totally different to investors, day traders buy and sell within seconds, minutes, or hours. Day trading is an extreme trading strategy that involves constantly moving in and out. Using technical analysis, they attempt to anticipate where a stock will go in the near future and trade accordingly. Usually, they sell all their stocks and move to cash by the end of each day. The beauty is they can trade from anywhere providing that they have laptop and broadband Internet (for some online brokers, customized trading software maybe required).
An online trader can use a number of short-term strategies besides day trading. For example, swing trading involves buying a stock early in the week and selling it a few days later. Another short-term trading strategy, called position trading, is to buy stock and hold it for a few months. Some traders follow the trend of the market, buying when the market is trending up and selling when the market is trending down.
Market Timing: A Controversial and Difficult Strategy
If you thought day trading was hard, being a market timer is even harder. With market timing, you predict in advance where a stock or the market is headed. Then you make your move before the market does. For example, if you believe that the market will rise in the next week, you will shift your money out of cash or bonds and into stocks. The idea is to shift your money to the most profitable investment before it goes up (something that is easier said than done). Market timing is a risky strategy that can cost you if you make the wrong bet. To be a successful market timer, you have to know not only when to get into the market, but also when to get out, which is why so few traders are successful market timers. Timing the market is difficult for most people.
Short the Rallies: The Opposite of Buy and Hold
A very effective, but rather risky, trading strategy is to short the rallies. Instead of buying more stock when the market falls (buying on the dip), you do the opposite: When the market or your stock goes up a lot, you sell short (that is, you borrow the stock from your broker, sell it at higher price, then buy it back at a lower price to return to your broker). Shorting the rallies is extremely risky, although it worked quite well for several years. After all, stocks go down faster than they go up. Nevertheless, keep in mind that successfully shorting the rallies takes a tremendous amount of time, skill, and patience. If you are wrong and the stock keeps rising, it takes considerable discipline to buy back the shares (called covering your position) for a small loss.
Exchange-Traded Funds: A Clever Way to Spice Up Your Portfolio
Trading exchange-traded funds (ETFs) has recently become popular with traders and investors, including many professionals. An ETF is an investment product that is similar to a mutual fund, but that trades like a stock. You can buy and sell ETFs on any major stock exchange just as you would a stock. For as little as $500 you can buy an ETF that tracks a specific index or sector. The most common ETFs are index funds, such as the stocks that make up the Nasdaq 100 (QQQQ), the S&P 500 (SPY), and the Dow Jones Industrial Average (DIA). Just like those of stocks, prices of ETFs change continuously during the day. The advantage of trading ETFs is that they are cheap, liquid, and tax-friendly. Because they consist of a basket of individual stocks, ETFs provide instant diversification. After all, it would be too costly and time-consuming to buy so many individual stocks on your own.
Trading on News
Like day trading, trading stocks based on the news is a difficult method to play and win. It’s impossible to know how the market will react to news about your stocks. There is a wise old saying: Buy on the rumour and sell on the news. Often a stock will rise or drop in price in anticipation of a news event, such as an earnings release or a Fed meeting. Once the news is released, however, the stock will go in the opposite direction, which explains why it is so difficult to buy or sell stocks based on what is in the news.
In reality, news is coming at you from dozens of different directions: newspapers, magazines, the Internet, television, and friends. The hard part is figuring out which information is valuable and which should be ignored. It’s amazing how wrong people (both professionals and amateurs) have been about the market. Most of what people tell you about the market are useless. Nevertheless, keep in mind that stocks go up or down based on what people perceive to be the truth.
Some people deliberately try to influence the direction of stocks by spreading false information about companies. A few years ago, a stock could rise or fall based on nothing more than a well-placed rumour in an Internet chat room. So many people lost money by trading on tips and rumours that they stopped listening, at least temporarily. When the next bull market appears (and it is likely to be a long wait), the scam artists will crawl from beneath the rocks to lure unsuspecting investors into losing money on stocks.
Trading Options
Although options are rather difficult to understand, with a little practice, they begin to make more sense. That’s why many professional traders include option strategies in their portfolios. In particular, traders will use options to hedge their position (taking the opposite side of a trade to reduce risk). For example, if a trader is long a stock, he or she might use options to short the same stock.
Think of an option as a contract that gives you the right, but not the obligation, to purchase or sell an item. It could be a house, a commodity like oil or corn, or a stock. One type of stock option, for example, gives you the right to purchase a particular stock at a given price by a certain date. The wonderful part about options is that you don’t have to own the stock to trade them. Options are also called derivatives because their price comes from, or is derived from, the stock price. For a fraction of the price, you can control hundreds or thousands of dollars worth of stock.
The two most popular types of options are the call and the put. A call option gives you the right to buy a stock at a specified price. A put option allows you the right to sell a stock at a specified price. You have the right to buy or sell the underlying stock, but most people don’t exercise this right. They simply buy and sell the option.
There is a catch, however. When you buy an option, you also have to specify an expiration date, usually from 1 to 3 months from the date of purchase. This means that your stock must go in the right direction you want before the expiration date or you will lose your entire investment. You also have the right to sell before the expiration date, so when things are going right for you, it may be wise to consider closing your position and taking profit.
The downside to options is that a lot of things have to go right for you to make money. First, if things go wrong, your options can expire worthless and you lose your entire investment. The options game is a tough to win, but well-rewarded to win as well. To make money on options, you have to be right about both the timing and the price direction of the underlying stock. If you’re wrong on either count, you will lose your investment.
Writing Covered Calls: An Advanced Option Strategy to Generate Income
There is an intriguing option strategy that actually works well in a sideways market. It’s called writing covered calls on a stock that you already own. This is considered one of the most conservative option strategies. It works like this: You sell a call option on a stock that you own to a call buyer, giving the buyer the right to take the stock out of your account at the agreed-upon price. When you sell the calls, you immediately receive money (called option premium) from the call buyer. If the stock never go up, then you keep the money (premium), and the option expires worthless for the call buyer. You then can write another call option for the same stock and sell again.
The ideal market environment for a call writer is one in which stocks are going sideways. In a sideways market, the stock is unlikely to go very high, which is why writing calls can be a consistent money-maker.
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Wednesday, June 6, 2007
