Weekly Option Trader

Profits from stock trading come by buying low and selling high.  Profits fuel capitalism.  Profits built America.  Corporate profits come from buying low and selling high.  Every successful business is based on this simple concept.

The main difference between corporate profits and investing profits is, the adding of value.  McDonalds buys potatoes low and sells them high.  They add value by peeling, cutting and frying these potatoes; then selling them as french-fries.  The basic concept remains buy low/sell high.

Investors don’t add value.  They can’t dip their stock certificates in chocolate and have fancier more valuable shares.  A share is a share, is a share.  All shares are equal.

Buying low and selling high requires valuations.  How else would you know if something is high or low.  You can’t trade using 20/20 hindsight.  You need to know what something is worth and what it should be worth.  Not just stock or option valuations, but for anything.

There are rules of thumb for everything.  Example, something is only worth what someone is willing to sell it at or pay for it.  Price measures value.  To measure the value of a stock at any time look at the last price traded.  It is the most current match of a willing buyer and a willing seller.  Trades require buyers and sellers.  With every trade, you truly have both opinions.  Prices move based on supply and demand.  More buyers cause increasing prices, more sellers and prices decline.

Free Appraisals

Antique dealers earn their living through their knowledge.  Buying and selling provides their income, but their knowledge allows their transactions.  They need to verify authenticity, rate condition, know market values and marketability.  They use this insight to buy low/sell high.

Many antique dealers supplement their antique trading profits by offering appraisals.  Often before insuring certain items, insurance policies will require professional written appraisals stating value.  In the worse case scenario of a claim, a written appraisal saves untold amounts of grief.

Some antiques are too large or delicate to transit, so the appraiser must travel to inspect them.  Time cost money.  The appraisers need to charge for their time.  None of this is done for free, well almost nothing.  Many people seeking appraisals are doing so to value their item for sale.  Loss leader appraisal services generate antiques coming through the doors.  Many dealers offer appraisal services as a means to buy.

An antique dealer friend of mine told me a story of a client who didn’t want to pay for his services, but wanted them just the same.  He explained how this person had a “valuable” piece of antique furniture.  When told of the cost of the appraisal, including the travel time to come look at it, the client asked for a free appraisal over the phone.  The antique dealer was used to people trying to avoid paying for his services and played a little game with any skin-flints.

Hold It Up To The Phone

He told them to bring the phone near the piece to be able to better describe it.  Then he asked to have the phone held closer so he could see the item better.  He asked to have the phone moved around the piece very systematically.  The phone was placed inside every nook and cranny.  Upon completion, the antique dealer announced the piece looked counterfeit.  The person became so concerned.  Was he sure?  Well only in person could he know.

Knowledge also provides professional stock traders with their living.  And unlike antique dealers, they give free appraisals.  Every time they buy or sell, they state their opinion on what that particular stock is worth at that very moment.

The last trade gives the universally accepted valuation of a stock.  Whether one share or one million shares exchanged hands, the last recorded trade sets the value of all existing shares.  This skew allows profit potential.  Volume is a key to stock and option traders.  Price movements on low volume don’t confirm valuation changes as well as large volume moves.

The market capitalization of a company is figured by multiplying the number of shares outstanding by the current price of the stock.  Theoretically, if a stock trades millions of shares at a level, then trades one last share at a much different level, the market cap is based on this last share.

This is the problem with after hours trading.  The spreads are wide, with volume low.  Valuations swing wildly as trades take place from low bids to outrageous offers.  The willing buyers want to steal stock.  The willing sellers want a small fortune.  Until after hours trading gets tight bid/ask spreads, think of it like unscrupulous antique dealers trying to underpay ignorant owners or overcharge non-knowledgeable collectors.

Unlike businesses that add value, traders need to mine equity.  Investors need to use knowledge, experience and research to find gold mine stocks.  Not literal gold mining companies, but value waiting to be pulled out.  Gold in the ground is worthless until someone stakes a claim, commits resources to extract the value.