Options vs. Stocks: Good vs. Bad

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They see benefits like being able to work comfortably from home using only a computer and Internet connection, not needing years of schooling in difficult subjects, and possibly making as much money as a typical full-time job. Now if this is what you think, then I have bad news for you. From my own reading and investment experience, I assure that the odds of success are stacked heavily against you. This contrasts with long-term investment over a period of years and even decades.

But I argue that it is hard to start from no experience and become an effective trader, which means earning money consistently in the long run. Trading stock options how to good or bad amount is comparable to a full-time minimum-wage job, and the time period is intended to reduce the trading stock options how to good or bad of luck.

Firstly, day trading implies interacting in the field of finance. This is a technical field that has its own set of terminology and concepts, and also requires modest mathematical skills. For example if you are buying a bond, you should understand that at the basic level it represents a piece of debt with a fixed payment schedule.

Digging deeper, you should understand bond concepts like coupon, yield, face value, credit rating, default, and so on.

Learning these financial concepts [0] is non-trivial because there are trading stock options how to good or bad of them, and some can have long explanations and subtle catches. If you think you can start trading without understanding these, you are already setting yourself up for failure.

Public news is worthless for making effective trade decisions. The efficient-market hypothesis is a widely held belief that states that the price of a security stock, bond, etc.

For example, if an oil company trading stock options how to good or bad discovered new resources which is considered a good thingthen its price will rise — but in reality, its price will have already risen by the time the news article reaches you, which means you would be too late to profit from the news.

Since public news is out of the question, this implies one of two things: As you can see, all 3 sources trading stock options how to good or bad information — public news, insider information, and guessing — have serious drawbacks; as a result, you are unlikely to make effective trades solely based on information.

As a corollary to the EMHit means stock prices are always correct and fair, every day, every minute. If you buy something because you expect its price to go up in the future, it would be a mistake to attribute your expectation to intuition or common sense — your expectation is based on mere beliefbecause anything that is a fact is already reflected in the security price.

These forecasts are a mixture of public news and mere guessing, which is not information that you can profit from. Irrational behaviors and cognitive biases cost you real money. These flaws in human reasoning are studied academically in fields like economics, game theory, and psychology, but when you make financial decisions according to a false interpretation of reality, you will end up with money-losing consequences with high probability.

People acquire essentially all of these biases by nature; it takes conscious effort to recognize them and mentally train against them.

These irrational behaviors take a bit of reading trading stock options how to good or bad serious thinking to understand, but truly recognizing them in real life is much harder than it sounds. When learning about these behaviors, the examples are purposely contrived and quite clear-cut. Institutional investors are big, powerful players in the financial markets.

For example, these are organizations that control a mutual fund, pension fund, hedge fund, university endowment fund, trading stock options how to good or bad. When institutional investors make investment decisions, they do it with expertise and influence. They employ professionals who are trained in finance and have experience working in the field; they employ people whose job is to monitor prices, analyze trends, and find non-obvious facts about the world.

Because of their large size, they can negotiate discounts and special deals with sellers; moreover, they can buy smaller companies outright and revamp their management for better profitability. You, as an individual investor, have none of these advantages.

In addition to humans, computer programs also participate in trading. Modern computers are spectacularly cheap and powerful, and a single computer can easily do a billion calculations per second [2]. A program running on a computer can analyze millions of data points in thousands of stocks a second, and have sophisticated algorithms to find patterns, all backed by knowledge from decades of academic and corporate research. Moreover, these programs can react to fluctuating prices, incoming orders, and financial news on a millisecond-by-millisecond basis.

Now, coming back to you — as a human trader who has a limited capacity to read, analyze, and remember information, and has a reaction time measured in seconds or minutes, how can your level of speed and expertise possibly compete against god-like algorithms designed by incredibly smart specialists? Okay, maybe that was too easy, maybe that only took a few seconds on your pocket calculator.

To make things worse for your hand calculation, the world has about a hundred currencies, and you will need to explore arbitrages that have a path longer than length 2, both making your task immensely more difficult.

The world has plenty of businesspeople who profit from your trading stock options how to good or bad and gullibility. There are people, companies, infomercials, and web sites that will show you large amounts of praise for a single concept like penny stocks, dividend aristocrat stocks, gold bullion, hidden secrets in the energy sector, speculative bonds, complicated derivatives, subtle forms of tax evasion, special real estate, you name it.

For the most part, you can trading stock options how to good or bad these schemes are ineffective, illegal, or both. If it sounds too good to be true, then it is too good to be true.

Another example, more modestly, is a salesman who persuades you to buy a venture fund and touts the benefits but fails to inform you that it is a high-risk investment, when you were hoping to invest in a more stable fund. When in doubt, ignore the solicitations and keep your money to yourself. The more often you trade, the more your brokerage wins. Individual retail traders like you and I have to go through a broker, and the broker charges commission fees for each completed trade usually in the range of 10 USD.

This would explain why brokerage firms offer free resources to encourage you to trade more — things such as tutorials on investing, market news, and historic price data.

However in these cases, the transaction fees are embedded within the bid-ask spread of the prices. If after reading my arguments you still think you can succeed, you can go try a stock simulator game. In light of all the negative points expounded above, what can you do as an individual investor? Understand trading stock options how to good or bad balance between risk and reward. If you want more returns from investment, you need to take on more risk. Consciously choose a level of risk that is acceptable to you, and stick to your plan.

Diversify your holdings to reduce risk and protect against volatility. Favor buying index funds especially ETFs instead of the stocks and bonds of individual companies. Invest for the long run. Checking once per quarter should be more than enough. Finally, invest in yourself — specifically your special skills. If you have a passion for art, spend more time making things.

If you run a business, figure out the next step for improvement. The videos are short about 1. Moreover, they have low factual errors, bias, and nefarious agendas.

See high-frequency tradingwith an infamous example being the Knight Capital Group. Also, see this example of how a computer program specifically avoids a number of human cognitive biases: See this cute story: So you want to be a day trader? Some of the points I mentioned are described in much more specific detail in his essay. Pervasive Displays e-paper panel hardware driver.

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