Trading For Dummies book cover

Trading For Dummies

Published: June 26, 2017

Overview

Trade your way to a more profitable portfolio

Savvy traders can make money in both up and down markets—and now you can, too! In Trading For Dummies, investors from every walk of life will benefit from sample stock charts, position trading tips and techniques, fresh ways to analyze trends and indicators, and all the latest information on trading stocks wisely in any type of market.

Taking the stress out of the stock market, this no-nonsense guide walks you through all the steps to trade with authority—and takes your portfolio to exciting new heights. Whether you're an investor looking for a clear guide to successfully trading stocks in any type of market, or an investor who has experience trading and are looking for new, proven methods to enhance the profitability of investments, you'll find a proven system for eliminating doubt, decreasing risk, and, ultimately, increasing return.

  • Understand market cycles and choose a great broker
  • Manage your risk exposure
  • Build a balanced portfolio
  • Develop your own custom trading strategy

If you're in need of basic strategies and stock valuation methodologies that let you make smart trading decisions, this book has it all!

Trade your way to a more profitable portfolio

Savvy traders can make money in both up and down markets—and now you can, too! In Trading For Dummies, investors from every walk of life will benefit from sample stock charts, position trading tips and techniques, fresh ways to analyze trends and indicators, and all the latest information on trading stocks wisely in any type of market.

Taking the stress out of the stock market, this no-nonsense guide walks you through all the steps to trade with authority—and takes your portfolio to exciting new heights. Whether you're an investor looking for

a clear guide to successfully trading stocks in any type of market, or an investor who has experience trading and are looking for new, proven methods to enhance the profitability of investments, you'll find a proven system for eliminating doubt, decreasing risk, and, ultimately, increasing return.
  • Understand market cycles and choose a great broker
  • Manage your risk exposure
  • Build a balanced portfolio
  • Develop your own custom trading strategy

If you're in need of basic strategies and stock valuation methodologies that let you make smart trading decisions, this book has it all!

Trading For Dummies Cheat Sheet

Trading in the stock market can be challenging and lucrative. To be a successful trader, you need to know how to identify and invest in bear and bull markets, and you need to know how to use market analysis tools to help develop your own trading system. And, with the embarrassment of riches available on the internet, you need to know the websites that offer the most help.

Articles From The Book

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General Investing Articles

The Credentials You Need to Trade for Others

If you decide you want to trade for others as well as for yourself, you need to become a registered representative. The most comprehensive test you can take is the FINRA’s Series 7 exam. To qualify for the test, you’ll need a sponsoring broker. When you sign up for the required coursework for this exam, either through self-study courses online or a nearby training school, the school can help you locate a sponsoring broker if you don’t have one.

Why you need credentials

The license you'll earn allows you to buy and sell all securities products, including corporate securities, municipal securities, municipal-fund securities, options, direct participation programs, investment-company products, and variable contracts. There are other exams for people who want to sell only a specific type of security rather than the broader options that a Series 7 certification enables you to market. Professional certifications are not required to sell securities. Most pros who seek these certifications do so to show their clients that they have attained a level of proficiency and met or exceeded the standards within their specialties.

Many schools that train people for professional designations provide ways for you to take the coursework, even if you don’t plan to get the license or certification. You can study for many of these courses at home online.

Schools for aspiring securities and financial advisors

Selling securities is a highly regulated field that requires considerable training before you can sell even your first share of stock. Although some people trade for others without a license, they risk the possibility of an investigation by the FINRA or their state regulators.

Be sure that the trading activities you do for others fit within the law, or you can end up in a legal mess facing significant fines.

General Investing Articles

Types of Brokerage Accounts Traders Should Know

Traders can open brokerage accounts in a couple of different ways: as a cash account or a margin account. However, if you open a margin account, you also must open a cash account. You also may open separate accounts for retirement savings. Because retirement accounts have more restrictions, your trading alternatives are more limited in those accounts.

Cash accounts

The traditional brokerage account is a cash account, which also is known as a Type 1 account. With a cash account, you must deposit the full cost of any purchases by the settlement date of the transaction. At many brokerage houses prior to 2002, you were permitted to place an order to buy stock even if the cash was not yet in your account. Today, however, few brokers give you that kind of flexibility. Most brokers require funds to buy stocks to be in your cash account before you can place an order. The amount of cash you need to have on deposit varies by broker.

Margin accounts

You don’t have to have as much cash on hand to buy stock when you open a margin account. This type of account enables you to borrow certain amounts of money using cash or securities already in the account as collateral. Each respective brokerage firm has its own screening procedure to determine whether you can buy on margin. The Federal Reserve requires a $2,000 minimum deposit to open a margin account, and it currently limits the amount you can borrow on margin to 50 percent of the initial purchase price. Not all stocks can be bought on margin. When buying stocks on margin, you pay an interest rate on the margin loans, but most brokerage firms charge relatively low rates to encourage the transaction business. When opening a margin account, the firm also requires you to sign what’s called a hypothecation agreement, which stipulates regulations for the account and permits the broker to have a lien on your account whenever the balance in your account falls below the minimum maintenance margin. The agreement also enables your broker to loan your shares to short sellers. That’s where shorted stock comes from.

You’re taking a risk by purchasing shares of stock with borrowed money and using shares you own as collateral. If your stock holdings fall in value below the minimum maintenance margin requirement, your broker can force you to sell stock you don’t want to sell and use other assets you may not want to use to cover the outstanding loan.

Options

If you want to trade options, your broker will require you to sign a special options agreement acknowledging that you understand the risks associated with trading options or derivative instruments. This practice became common after brokers were sued by some clients because they suffered huge losses when trading options and claimed they were unaware of the risks. This protects the broker from a lawsuit.

IRAs and other retirement accounts

IRAs and other accounts in which you’re saving for retirement sometimes allow you to trade options, but margin trading is not allowed at all. These limitations are for your protection to avoid risking major losses in your long-term investments that never should be put at such high levels of risk. The amount you can contribute each year to all retirement accounts is limited by the Internal Revenue Code. Although you may be able to find a brokerage firm that allows you to trade using options — puts and calls, which are a type of option — you nevertheless risk penalties for certain trading activities that occur in your retirement account whenever the IRS determines the account is being used for trading purposes rather than long-term investing.

Officially, the Internal Revenue Code prohibits the “IRA or Keogh Plan account holder from loaning money to the account. Likewise, the holder cannot guarantee borrowing by the account or cover its losses.” That’s why margin accounts, which entail a type of borrowing, are not allowed.

Because these accounts are either tax-free or tax-deferred, you can’t write off any losses in them against any gains from investments held outside of them in other taxable accounts. You don’t have the same tax-planning choices with IRAs or retirement accounts to offset gains and losses. All money taken out of an IRA at retirement is taxed at your current income tax rate. For these stocks, you can use stock losses to minimize the tax you might have to pay on stock gains. If you hold the stock for longer than a year, you are taxed based on the lower capital gains rate of 15 percent for most taxpayers rather than your higher current income tax rate, which can be as high as 35 percent for some taxpayers. Here are some additional trading limitations of retirement accounts:
  • Margin is not allowed: Using funds within a retirement account as collateral for trading on margin isn’t permitted. It’s against the law. You won’t find a broker that will permit you to place retirement funds in margin accounts.

  • Short positions are prohibited: Speculative trading using short positions requires a margin account. When someone shorts a stock, he or she borrows the stock and sells it in the hope of buying it back later for less. Selling short requires the use of margin and is therefore not permitted in a retirement account.

  • Trading policies are more stringent: All brokers have more stringent trading policies for retirement accounts. Before you open a retirement account, check with your broker about their trading limitations to be sure they match your intentions for the account.

  • Options trading may not be permitted: If you’re an experienced trader, you can find some brokerage firms that allow options trading in your retirement account. Not all types of options, however, can be traded in a retirement account. The ones that you most likely can trade are covered calls, long call and put positions, or cash-secured puts.

Stocks Articles

Trading Websites to Check Out

As a trader, you make use of all sorts of tools, including those available on the Internet. The following list offers links to websites that offer general trading education and information, analysis of companies, and trading tools and advice. Use at your discretion!