Online Investing 101

Since online trading is a balancing act, it's up to you to determine what information is most important to monitor, find out where it can be easily located, and decide how you want to keep track of it.

The Internet is overflowing with financial investment sites and online brokerages.  It's important to cut through the clutter, or separate the "wheat from the chaff" and filter what is truly important for the investment decision process.

What is a Stock?

A stock, also called a share, is a unit of ownership in a company.  The value of each share is based upon a wide variety of factors including the total number of outstanding shares, the value of the company, its earnings and debts, what the company produces now and is expected to produce in the future, and the overall demand for the stock.

Analyzing the Market

Stocks change in price due to a myriad of factors.  More often than not, the price changes are due to the arrival of new information.  For example, a stock price might move higher if the company reports strong profits, or the price may fall if there are important news events related to the industry or the economy.  These new events cause investors to buy or sell the shares, which causes a change in the supply and demand dynamic, which moves the price.

So at any moment, the mass psychology of the trading public can shift, triggering trend reversals that defy the odds.  This is why trying to analyze a stock in order to forecast price movement is so challenging; the number of variables and methodologies are infinite.  To take advantage of trading software or financial research sites, the first step is to develop a healthy understanding of fundamental market data, technical indicators, and the effects that news, commentary, and analysts have on market opinion.

John Hass of OptionsHouse states, "Consistently successful customers in the options space have much in common with those who invest in the underlying equity directly.  They understand the fundamentals of their strategies and the companies they are investing in and they are diversified both by strategy and security.  No lottery playing.  Just good fundamental investing."

In short, one of the first goals of new options traders should be to understand the fundamentals that drive both the underlying stock and the options prices.  In general, traders analyze stock fundamentals based on expectations of future events.  Current events change prices by changing the way investors forecast the future prospects of a company (i.e., profits), the industry, and/or the economy in general.  For that reason, the stock market is said to be a discounting mechanism.  That is, it discounts or reacts to information before it happens.  The present plays a role, but since that information is already known, most investors base their investment decisions on what will happen in the future.

Market Research and Price Forecasting can be divided into three basic fields:

  1. Individual stock assessment.
  2. Broad market analysis.
  3. Psychological market criteria.

For the beginner, picking the right stock is a great starting point.  If you can find a stock or market with very bullish or bearish fundamentals, the process of selecting option strategies becomes a lot easier.  Eventually, the stock price will move to reflect those fundamentals.

For example, in 2007 Apple Computer (AAPL) shares rose 133.5 percent.  Why?  Apple unveiled a series of new electronics that were seeing strong sales, including iPod music players, new notebook computers, and the iPhone.  Investors who bought shares in 2006 in anticipation of the launch of the innovative and extremely popular products were well rewarded in 2007.  Of course, hindsight is always 20/20, but the point is that a company with strong underlying fundamentals is generally rewarded with an appreciating stock price.  The key is to isolate those companies with improving fundamentals from those with deteriorating fundamentals.

  • Bearish - a declining market, especially over a prolonged period of time.  A bearish market is often caused by the mass conviction that a weak economy depresses corporate profits.
  • Bullish - a rising stock market, especially over a long period of time - at least six months.  A bullish market is often caused by the mass conviction that a strong economy produces increased corporate profits.
WASHINGTON (Reuters) - The Federal Reserve on Wednesday is expected to reaffirm its intention to keep U.S. interest rates at ultra-low levels for a long time to support the economy, even as signs of recovery accumulate.

The Fed's policy-setting Federal Open Market Committee resumed a two-day meeting at about 9 a.m. (1400 GMT), a Fed spokesperson said. The Fed will issue a statement around 2:15 p.m. (1915 GMT).

The central bank cut overnight rates close to zero percent last December and it has vowed to keep them there for an "extended period." While some analysts think the Fed could start to tip-toe away from that pledge, most say it is too soon.

Full Story from MSN Money