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If you’ve been trading for any length of time you’ll find there are periods in which there are more opportunities than you have leverage available. Recently, a new trading method has become available using penny priced options.

Penny priced options are options that are priced in pennies as opposed to the traditional nickel or dime increments. The advantage to penny priced options is obvious. By reducing the bid/ask spread, it’s more likely you can place a put on a profitable short term position. This is because you’re not paying as much for the privilege of getting in and out of the trade. This advantage opens up a new realm of trading techniques using options instead of the underlying stock. Options allow for a much higher potential leverage than trading the underlying stock.

Of course, there are certain disadvantages to options in the first place. One of them is the time decay as an option approaches its expiration date. You’ll always want to make sure you pick an option whose expiration date is much larger than the anticipated number of trading days. So, for example, if you expect your trade to last for four days, you will want to use an option that is at least forty days out; in any case, not the front month option. The exception to this is when you’re almost certain your trade will simply be a day trade.

Another issue with trading options is that you have to check the liquidity. And of course, it’s always possible for an option premium to flare if there is a sudden and unexpected volatility, which may or may not work in your favor.

Finally, it’s important to make sure you understand the brokerage’s option cancellation policy.

Currently, Interactive Brokers is the only brokerage I’m aware of offering penny priced options, but I’m sure that as this experiment succeeds, other brokerages will make this option available as well.

Here are some tips for working with penny priced options:

o It may take longer to get a fill if you put bids in at penny priced increments than when you use nickel increments.

o Usually I split the difference between the bid and the ask and I work a penny on either side of that split. For example, if the bid and ask are 2.0 and 2.1, I would work a 2.04 and 2.06, depending on whether I was buying or selling.

o Be patient. It may take a minute or two to get the fill, but in a rapidly moving market, the option price may have moved in the meantime. This strategy works best if there is no rapid movement in your stock picks in the meantime.

o Make sure you’re using options that are in the money; that is, the delta is approaching one. Since presumably you are trading on fairly small price changes, you do need the delta to be close to one to get the most bang for your option buck.

Getting a brokerage account that let’s you trade in penny priced options does require some advance planning, but I think once you’ve had the opportunity to test out a trade with penny priced options, you’ll appreciate the wonderful leverage this technique provides.

Introduction: Trading stocks is basically trading ownership in companies. However, not all companies are traded on the stock market. In order to become a traded company, there are steps that must first be taken.

1) Private vs. Public Companies

When a company first forms, it is a private company and is not traded on the stock market. Eventually, a private company may decide that it wants to become a publicly traded company. In order to do this, they must issue stock certificates.

2) Going Public

When a company decides to “go public” by selling shares (stock) to investors,they have an Initial Public Offering (IPO) to sell shares. The number and price of shares issued varies with each IPO.

3) Why or why not?

Why would a company decide to go public?
Well the biggest reason is because they get all that money from selling shares. This has two benefits – it increases the financial base of the company and gives them money to expand the business.

So if companies get $$, why wouldn’t they go public?
There are many reasons but one big one is that as soon as a company becomes public they have to answer to a lot of different investors and regulators. More on this later.

Definitions-

Private company: one that does not offer stock to the general public.

Public company: one that has issued stock for purchase by the general public.

Shares (stocks): Certificates representing part ownership of a company.

Initial Public Offering (IPO): Process where a company first sells shares of stock to the public.

Wrap-up: In order for a company to be traded on the stock market, it must first issue (sell) shares in the company to investors. They do this by having an IPO. The money received from this is reinvested into the company, increasing financial stability and allowing them to expand their services/products.

After the markets up and downs these days, the question of “How does the stock market work?” is an often asked by a lot of people. one, especially amongst those who have little to no background in finance and economics.? Fortunately, the stock market is not as complicated as it seems with its bewildering array of numbers flashing on giant screens and brokers shouting quotations at the top of their lungs.?

The Concept of Stocks

Simply put, one share of stock represents partial ownership of the company issuing it.? There are two kinds of stocks issued – preferred stocks and common stocks – each with unique properties.? Often, preferred stockholders are provided with more benefits than common stockholders in, say, the order and amount of dividends issued on one share.

Similarly, there are also two values attached to stocks – par value and market value.? Par value is the price of the stock as set by the company while market value pertains to the price of the stock as determined by market forces.? ?For example, a share of stock may be valued at par for $1 but its market value may reach as high as $100, thanks to market dynamics at work. ?This can also work in reverse since the same share of stock can be virtually worthless in the current market.

Stocks are the foundation upon which the stock market works since it is the basic commodity being traded, bought and sold in the billions daily.? Once you have understood the concept of stocks, you are better prepared for the answers to the question of “How does the stock market work?”

The Concept of Stock Trading

Stocks are sold and bought in venues known as stock exchanges, with said transactions conducted by licensed stockbrokers.? Take note that the buildings housing the New York Stock Exchange and NASDAQ, two of the world’s most prominent exchanges, are heavily restricted from unauthorized personnel.?

Fortunately, the power of the Internet has made it possible for ordinary citizens to dabble in the stock market without actually being inside the stock exchange buildings. Plus, you have the stockbrokers and the market makers to do the dirty work of finding sellers and buyers, as the case may be, for your stocks.?

Your stockbroker will only execute a transaction upon your orders or upon your predetermined criteria, which means that you still retain control over your shares of stocks.? He/she earns commissions from each successful transaction while you earn profits from favorable spreads.?

Of course, your profits will also come from the difference between your purchase price and your selling price of the same shares of stock, usually over a long period of time.? For example, if you bought shares of Microsoft stock when it was just a startup company at $1 per share and you decided to hold on to it, you will recoup your initial investment hundreds of times over today when Microsoft is a powerhouse company.

So, now that you have the basic answers to the basic question of how the stock market works, it is time to expand your investment portfolio from the usual savings accounts.? With the right decisions borne of experience, you will earn thousands more in profits than you will probably have in interests.?