Although you p robably will n ot find y ourself a mid a g roup of screaming
stockbrokers on Wall Street ( and these days, m ost o f t he trading is done by
computer anyway), k nowing that learning t o t alk t he talk is part of walking the
walk.
Margins,Spreads,A ndOtherCondiments
Okay, s o it is margins, n ot margarines, b ut it s ounds very similar. I n order t o
understand the stock market, especially on F orex, you need t o s peak n ot a
language m eant for c ommon communication, b ut t he language of trade. F or
instance, w hen y ou think o f a m argin, for many this m eans a variable – like t he
“marginoferror”ina statistic.
However, in trade, it r efers to the sum o f m oney borrowed from a b roker in
order t o p urchase s tocks w hen the m arket is o n a d owntrend. Then, when t he
value b egins its next u pswing, you sell t he s tock a t t he h igher price, p ay back
themargin( alongwiththepremiuma ccrued),andr etaintheprofit.
When you buy on margin, the money lent b y t he s tockbroker is referred to as a
margin a ccount. The margin a ccount is p rovisional based o n the value of t he
stock. Occasionally, if t he v alue of t he s tocks p urchased s hould drop too low
for t he s afety m argin set forth by the b roker, t he a gent will r equest t hat more
money be deposited into t he m argin account to m ake up for loss. T his is
referredt oasam argincall.
In some t rades, t he m arket value does not come into p lay. F or instance, a
forward trade is s et u p b etween two individuals or two companies o utside t he
open m arket. I t involves a process of n egotiation a nd a n eventual compromise
inprice.
There is usually a bid m ade – the o ffer t o buy a c ommodity at a certain p rice –
and an asking price or offer – t he p rice for which t he o ther b usiness e ntity is
willing to sell the s ecurities or o ther h oldings. The d ifference b etween these
twopurchasen umbersisr eferredt oa sthespread.
If the spread cannot be narrowed and eventually closed, no deal can be made.
This a greed-upon p rice is called t he forward p rice, a nd all d etails involved in
the trade p rocess when t his type of transaction takes p lace are d etailed in a
contractandreferredtoa sforwardp oints.
Usually, the forward price is outlined a s available for a particular d ate, a nd
should the t ransaction n ot b e completed o n this d ate ( referred t o as t he
transactiond ate),t hent hetrademustb erenegotiated.
Jobbers,Y ards,AndO ther“ Brit”T erms
One of the m ajor foreign m arkets t hat Americans trading o n F orex w ill
encounter is that of t he British. While s everal o ther terms r elating t o the stock
market w ill be s imilar because of the c ommon language, there a re some
specifict ermsthatareveryd ifferentintheB ritisht radingvocabulary.
For example, in the United S tates, stockbrokers w ho hold onto s ecurities
purchased a t low prices for the purpose o f s elling them to clients in a h igher
priced market ( so t hat t he c lient c an turn a round a nd resell t hem for the profit
on the open m arket) a re c alled m arket-makers. H owever, in Britain, t his t ype
ofinvestoriss implyr eferredtoa sa “ jobber”.
Another t erm you w ill want t o be familiar w ith is “yard”. T his d oes n ot refer t o
a green p atch o f land, a m easurement in inches, or even 36 of s omething. The
term is u sed in reference to q uantity of c urrency rather t han v alue a nd is
equivalenttoonemillionunitso ft hec urrencyinquestion.
In o ther w ords, y ou can have a y ard o f d ollars or a y ard o f yen, a nd t hough it is
the s ame q uantity o f bills, c oins, o r w hatever p hysical currency is used, it is
notn ecessarilye quivalentinv alue.
In Britain, t hey d o not u se t he E uro, a nd t hey do not use t he U .S. dollar. T hey
have c hosen to still u se the pound sterling, a currency t hat h as b een u sed in
the c ountry for hundreds of years. H owever, Britain is c urrently o n a p ath t o
maket hec onversiont ot heEurowithinthenextfivey ears.
OpenA ndShut
In the stock market, there are v arious types of orders t hat can be placed t o
help protect y ou from m aking a bad investment o r t o limit the amount you pay
for a certain s ecurity o r o ther c ommodity. For instance, if you h ave made a
bad investment a nd do n ot want to r einvest in a p articular security, you should
sella llsharesofthats tock,r egardlesso ft akingo na smallloss.
Thisa ctionisr eferredtoa sc losinga p osition.
On t he c ontrary, if you are d oing w ell with y our investment, you might r einvest
anye arningsinadditionals hareso ft hes tockorsecurity.
An o pen order is exactly what it s ounds like, meaning that the order remains
pending until it is e ither e xecuted b y your s tockbroker o r c anceled b y y ou a s
the c lient. A stop o rder w ould c ancel a ny pending orders y ou have placed with
yours tockbroker.
You also h ave o ptions like One Cancels the Other Orders. T hese allow you to
have interest in several c ommodities, leaving o rders w ith y our s tockbroker t o
buya llofthem,s houldtheyd ropt oacertainprice.
Then, s hould one o f t hose r each this preset low p rice, y our s tockbroker w ill
follow your direction a nd invest y our money in t hat p articular s ecurity,
followedbyacancellationofalladditionalo rders.
When a broker g ives you a n e stimate o n the p rice for a p articular stock o r
commodity, it is considered a q uote. A q uote is n ever completely accurate and
is usually r eferred to as a spot p rice, a s the value of a s ecurity c an c hange
within a few s econds. H owever, it is as close to a ccurate as c an be e xpected.
When y ou p ut in a n order, t he b roker t hen processes t he fill, or completion, of
that o rder. T he actual v alue a t which the t rade is c ompleted is called the fill
price. The completion of a trade or purchase, r eferred t o as a settlement, can
alsob ec alledthee xecutiono fa t ransactiono rr ealizationofa norder.
As you s ee, there are a lot o f t erms t o take into c onsideration, a nd w e h ave n ot
evenb eguntoconsidertermsu sedinsomeoft het ougherareasofthemarket.
Next, w e w ill c onsider s ome s pecialized, m ore c omplex t rading o ptions that
you can u se o n F orex to take a dvantage of t he volatility of the m arket a nd the
constantlyv aryinge xchanger ates.
Chapter10: ExpertTradingOptions
After s pending a lot of time buying and t rading on both d omestic a nd foreign
markets, you w ill find t hat t he process b ecomes e asier and almost intuitive.
You no longer h ave to w ork s o h ard to d etermine currency c onversion o r find
thenextbige xplosivec ommodity. Itwillbelikes econdnatureforyou.
What, t hen, b ecomes t he next b ig challenge for someone t rading on t he open
market? Whatk eepsthingsfromb ecomingm onotonousandboring?
F irst o f a ll, there is a lways s omething new and different happening on t he
Foreign E xchange M arket. R emember, it operates 24 h ours a day, a nd you
never know what y ou w ill find w hen y ou wake u p in t he m orning. However,
there are v arious w ays that y ou c an t ake advantage o f the v ariance in currency
conversionanda lagintimebetweenm arketst hatcana ffectt radingv alues.
Arbitrage
There are s ome commodities that a re t raded in m ultiple currencies on
multiple markets on Forex. Although c omputers have m ade worldwide
communication a lmost lightning fast these days, all of these markets can t rade
together w ith fairly e quivalent v alues for t he securities shared a cross
currencies.
However, the s ystem is n ot perfect, a nd t he v alue m ay rise or fall in one
country a nd c urrency p rior to t he s ame change in v alue reaching across
another border. S easoned t raders h ave learned to t ake a dvantage of this lag in
them arkett rendingbyusinga p rocessc alleda rbitrage.
In t his t ransaction, y ou p urchase t he p articular s tock or security o n the
market w ith the lower price w hile simultaneously selling the s ame in a market
wheret hev alueish igher.
The process is a bit c omplex, so w e will use a n e xample. L et’s say t hat one U.S.
dollar is equivalent to .5 British pounds, meaning that e verything is g oing t o
bet wiceasexpensiveinBritishpounds.
Now, let’s t ake a look at the p rice of a s tock t hat is t raded o n both markets. I f
they were e quivalent, t hen t he stock would trade for t wo d ollars in the United
States and one pound in B ritain. H owever, if s omething happens and the s tock
value d rops in Britain, it is six hours a head o f t he U nited S tates, and t his drop
maynothitt heAmericanm arketimmediately.
If the value of t he stock drops in B ritain t o .8 pounds, t he p urchase price is
nowbelowt hato fthepriceind ollarsd uet othec urrencyconversion.
In this c ase, a rbitrage w ould t ake p lace w hen y ou b ought shares o f the stock in
on the British market in p ounds a nd s old it o n the U .S. market in dollars,
benefiting by the slow c ommunication o f t he fall in v alue of t he s tock. In
effect,y ouw illm ake$ .40p ers tock.
VolatilityofC urrencyConversion
Another way t o t ake a dvantage o f the ever-shifting v alue of each individual
currency is t o t rade b ased o n the c hanging rates. What e xactly d oes this
involve? Y oumustc loselywatcht hechangingconversionr ates.
When a currency c onversion rate c hanges drastically, it is time to m ake a
move. T his is very s imilar to a rbitrage, b ut the area is much r iskier d ue t o high
volatility.
For instance, if you h ave purchased a s tock in t he scenario above on t he U .S.
market for two dollars a share, and suddenly the B ritish p ound g ains value,
dropping to a c onversion of only h alf a p ound for e very t wo d ollars, you would
want t o s ell your s hares o n the B ritish market b ecause the value o f a pound is
highera ndnowhasg reaterpurchasingp ower.
One p iece of advice t o k eep in mind, though, is that it is b est to immediately
disposeo fallliquidassetsinforeigncurrency,usuallyint hesameday.
This is referred t o a s tomorrow n ext because it t akes t wo t o t hree business
days for foreign c urrency to b e delivered, and b y exchanging the currency for
value in s tocks o n the s ame b usiness d ay, y ou avoid h aving t o t ake d elivery of
thec urrencyaltogether.
Chapter11: OtherTradingOptions
Besides the expert options described above, t here are o ther n ontraditional
ways to m ake m oney on the stock m arket. I n considering these options,
however, y ou s hould c onsider m aking a career o f trading s tocks and securities.
Some t ypes of t rading are s imply not for the faint of h eart, a nd t hat m eans y ou
must have c omplete m otivation a nd an adventurous s pirit t o take part in these
areasofthem arket.
Thechanceso ft akinga g ianthitande xperiencinga g reatlossarem ultiplied.
DayTrading
Day t raders take o n s ome o f the g reatest m arket risk o f all. B ecause day
traders w ork with investments that c hange d rastically w ithin h ours, they a re
by nature p laying in t he lion’s den. These stocks a re extremely volatile, a nd for
most, d ay trading is a quick way to lose a g reat d eal o f money. I t is d ifficult to
make a great d eal of c ash in t his m anner, a nd it is e ven m ore d ifficult to
forecast the o utcome o f t hese d ay trade stock o ptions. Y ou cannot be c ertain
of t he o vernight p osition ( the net v alue a t w hich a stockbroker o r day t rader
willopenthefollowingm orning).
And in Forex, t here is little room for day t rading, as the market never shuts
down during the workweek. In these c ases, t he d ay trader has t o set a t ime
limit for h im- o r h erself t o g et out, selling all s hares, so that he o r she can s leep
soundlywhilethew orldspinsrounda nds tartt henextd ayfresh.
Day t rading is v ery d angerous a nd is not r ecommended to n ewcomers. In fact,
it is not really recommended a t a ll, a nd m ost p eople w ho p artake o f this
volatile part of the industry a re extremely s easoned in trading on t he o pen
market, d o not c onsider t he r isk factors c arefully e nough p rior to e ntering this
branch of the m arket, or have e nough m oney that t hey simply w ish to try this
formofinvestmentanddon otc areift heyloseagoodlysum.
SecondaryM arkets
Secondary m arkets a re interesting in that t hey a re created b y t he government
to h elp r edistribute m oney t hat is used for loans. Fannie M ae and F reddie Mac
are t wo of the major c orporations from which stocks are p urchased o n a
secondarym arket.
Here is h ow it works. When a p erson purchases a h ome, he o r she r equests a
loan from the bank, u sually for a bout eighty percent o f the c ost of t he house.
This is granted, a nd the house is p urchased by t he bank for the individual o r
family,w hobeginst op ayofft heloant ot heb ank.
Meanwhile, t o a ssure that m oney is available a t t hat b ank for the next person
who needs a m ortgage loan, Fannie M ae or F reddie M ac, two entities originally
established b y t he U nited S tates g overnment, will p urchase t he loan from t he
bank. T herefore,themoneyisr eturnedtotheb ankforuseinthefuture.
What do t hese agencies then d o w ith t he deficit t hey h ave acquired? They sell
it. On the s econdary m arket, t hey b reak up the loan into s hares t hat are
backed b y the mortgage itself a nd sell those s hares, r ecovering the money
frominvestors.
Eventually, t hose s ecurities m ature, probably about t he same t ime that t he
original loan is p aid off t o the b ank, and the investors reap t he b enefits of their
investmentw iththeintereste arned.
Another way to t ake advantage o f a v olatile international s tock m arket is t o
make a swap. T his is the exchange o f s ecurities or b onds in order to take
advantageoflowerinterestr ates.
For example, if a b usiness entity in Britain is in p ossession o f one security, and
another in Japan is in p ossession of a different s ecurity, t he two commodities
may be beneficially t raded o r sold to each other in o rder t o s ave on t he
interest rates, if the currently h eld bond o r s ecurity is kept at a lower interest
rateint heo pposingm arket.
For example, let’s s ay one business is in possession o f a bond “A” that is paying
out o nly two percent interest in its c urrent market, and a nother is h olding
bonds“ B”initsmarketa tthreepercentinterest.
If bond A is actually p aying out t hree percent on the foreign m arket, and bond
B c an b e cashed in for four percent o n t he first m arket, both p arties can m ake
more m oney o n a trade of b onds. They can mutually b enefit from a s ale of t he
securitiest oeachotherduet oa gaino fm oreinterest.
If t hat seems c onfusing, then p erhaps a s wap is n ot in y our near future. T his is
more o ften processed between b usinesses on the foreign market r ather t han
individualp arties,t houghwiththec orrectbroker,itc ouldb eaccomplished.
However, s hould you w ork t he d eal, you n eed k now little except that you are
looking at a h igher p rofit m argin t han previously, and your broker will take
careoftherest.
If you d etermine that you s hould have stock o ptions a s a business, y ou will
probably d ecide to hire a fulltime c onsultant for all y our financial n eeds,
includingt heh andlingo fyours hareh oldings.
In fact, w hen businesses a re large e nough a nd p resent a s trong enough t rading
presence within t he market, especially o n F orex, y ou will find t hat t here are
entiredepartmentsd edicatedt omaintenanceo nt hes tocko ptions.
Chapter12: InReview
After s hoveling t hrough p iles o f information and taking in so much k nowledge,
you probably feel like you a re s wimming in terminology and cannot r emember
justwheret ob egin.
The b est w ay t o r etain k nowledge is through repetition, and h aving a q uick
reference g uide is n ever a bad idea, either. The following pages a re a b rief
overview o f t he in d epth discussions in this b ook, a llowing y ou to quickly
referencea t opicina bind.
TheB asicT rade
A share is a holding o f a c ompany that v aries in value b ased on the desire o r
need for t hat particular c ompany’s goods or services. As a s hareholder, your
net worth increases and d ecreases b ased on taking a short position ( selling)
whenv aluesa rehighanda longposition(buying)w henp ricesarelow.
As long as t he s tock or s ecurity is in your possession, t he change in value is
considered u nrealized gain or loss because you cannot m easure it in liquid
assets( cash).
When most c ommodities t raded o n t he market are o n a strong upward t rend
for a period o f time, t his is referred to a s a bull m arket. S hould v alue t ake a
sharp downward s wing a nd continue o n that p ath, it is c alled a b ear m arket. I f
no such t rend is recognized, a nd the v alue o f s tocks a nd s ecurities is fairly
even,thisisr eferredt oasflat.
TheForeignE xchangeMarket
The F oreign E xchange Market is t he s tock e xchange o n which s everal d ifferent
countries a cross several d ifferent t ime z ones trade their domestic and
international commodities in various c urrencies. C urrency is t he
denomination or m onetary division u sed in a particular land ( such as the U .S.
dollarort heEuro).
When multiple c urrencies a re in use, t hey are t ypically expressed a s a ratio
called a c ross-rate t hat shows t he amount o f a second currency t hat is
equivalent to the first listed. Determining what the equivalent is would be
referredt oa sc urrencyc onversion.
Several c ountries in Europe, which have n ow consolidated t heir currencies t o
agree o n t he Euro ( since 1999) trade o n Forex, as it is c alled for short. Britain,
which t o this p oint has opted to continue u sing t he pound sterling, a lso t akes
partininternationaltrade,aswella stheU nitedS tates,Japan,andA ustralia.
Each o f these c ountries u tilizes its o wn currency for s tandard t rading
purposes,w ithoptionsforinvestmentinforeignc urrencies.
Determining w hether or not t his is worthwhile d epends on the c urrency
conversionr ate.
The v alue of a n ation’s currency is determined b y its g overnment and federal
bank (the Federal R eserve, better k nown a s t he F ED, is t he federal b ank o f the
United States). P urposeful c hange in the r ate o f conversion by a government is
referred t o a s v aluation – d evaluation is taking v alue a nd s trength from the
currency,andrevaluationa ddsstrengthandp urchasep owertot hec urrency.
If t he s ame c hange t o the r ate of c onversion occurs n aturally through e vents
andt hevolatilityo ft hemarket,itisthenc alleda ppreciationa ndd epreciation.
CareersI nTheMarket
Without t he assistance o f p rofessionals, it is n early impossible to trade o n the
open m arket. Market a nalysts t rack t rends in the stock market that affect t he
value o f share holdings. They use s uch information a nd b asic history to help
predictt heo utcomeo fdifferentaspectsofthem arketinthefuture.
Other individuals, r eferred to as chartists, c reate c harts and graphs that
interpret all t he d ata – v arious numbers, s tatistics, p ercentages, etc – into a n
easy to read c andlestick c hart that t racks the t rends o f specific commodities
ont hem arket.
A stockbroker is a n individual or a company that a ssists you in making your
investments. A b roker c an a id y ou in m aking smart financial d ecisions,
helping y ou t rack y our and place your orders, and following t rends in t he
market.
A m arket-maker does t he same job as a stockbroker, w ith the e xception t hat
this individual or company r etains an investment in a p articular variety of
securities and b onds that c an be s old in short o rder to a client for a lower
price s o that the client c an m ake money b y immediately selling t he s ame
sharesa tt heh igherm arketprice.
Other individuals c an assist with loans, a llowing y ou to buy on margin. This
involves the opposite approach – b orrowing m oney t o p urchase a stock o r
security t hat is a t a low m arket value so that t he c lient can later r esell the
commoditya ta h igherp rice.
ProtectingY ourInvestments
There a re s everal ways to p rotect y our investments. B y placing limit orders,
you g uarantee to the best of y our a bility that y ou w ill n ot lose money on the
marketa ndvirtuallyguaranteeatleasta minimalprofit.
However, if y ou c hange your m ind about t hose limits, you can always p lace a
stop order. If y ou leave standing instructions w ith y our stockbroker, these a re
referred to a s o pen orders that remain s uch until the t ransaction is executed
andt heorderfilled.
Try to s et y our limit orders just a bove the s upport levels (the lowest levels o f
value to w hich a stock c an drop) and just b elow the level of r esistance (the
upperlevela bovew hichitisd ifficultforthev alueo fastocktorise).
Also, s et a v alue date – a d ate a t w hich time y ou can t ake an average o f the
value of a particular c ommodity and review your o ptions. T his should be
reviewed at least every s ix months, if y ou p lan t o retain any h oldings of a
particulars ecurity.
Chapter13: OneFinalOption
While “Chapter 1 3” is not an appropriate w ay t o end a financial e ndeavor, it is,
in this c ase, one o f t he m ost important conclusions to a n incredibly h elpful
tool full o f investment a dvice, e specially w hen it is placed a t the end o f a b ook
to offer assistance to those threatened with bankruptcy d ue t o b ad investment
decisions.
There a re always w ays t o t urn a round when y ou h ave begun to walk d own the
wrong path. Much like m oving o n to a n ew car a fter p urchasing a lemon that
hasbeenn othingbuta n ightmare,youcanr everseyourd irection.
Some people can s pend d ays, months, and e ven years trying to conquer the
stock m arket and still fail. I n s ome c ases, it is v irtually impossible for an
individual t o ever get t he h ang of t he functionality of the m arket. If you cannot
follow market trends, t hen it is b est that y ou d o n ot make any investment
decisions.
It is okay not t o fit into the m arket. A t the same time, you c an still m ake
moneywithinvestments.
One final o ption y ou have is to c reate a discretionary account. This m eans t hat
you s ign a contract with your s tockbroker a nd turn o ver a s um of money to the
agent for investment, leaving t he determination o f p lacement o f that
investment in the h ands o f y our agent. Y ou n ever again h ave to w orry t hat you
have m ade a b ad investment. In fact, in t his s cenario, you d o n ot even have t o
follow a ny m arket trends or o ther information t hat h as anything to d o with
financial investment. Your b roker will s imply let y ou know when you have
increasedyournetw ortho rifyoura ssetsh avetakena dive.
Whatever choices y ou m ake in r egards to m oving in o n the s tock m arket, you
need not w orry a bout n ot having t he e ssential information t o h elp you get
throughyourfirstfewtradingexperiences.
Now, y ou h ave t he b asic knowledge and the essential reference guide t o get
you s tarted o n t he p ath t o success a nd wealth that you can access at any g iven
time.
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