15 Technical Indicators for Stock Trading

Using technical analysis to research stocks is a common strategy to profit from short-term movements in security prices. While some stock analysis tools are fundamental in nature, technical stock indicators typically seek patterns in past price and volume data to give investors and traders insights about how a stock might move in the future.

Naturally, every stock indicator has its pros and cons. Technical indicators can be used by traders to analyze supply and demand forces on stock price, to help investors to understand market psychology, or to manage risk. But while stock indicators and trading tools can help with buy and sell points, false signals can also occur.

For that reason, although technical indicators can assist with trend identification, it’s best to combine different indicators when conducting your stock analysis.

Learn more about the pros and cons of using the following 15 trading tools in your strategy.

Table of Contents

How Do Stock Technical Indicators Work?

Technical analysis uses various sets of data and indicators, such as price and volume, to identify patterns and trends. It does not use fundamental analysis to look at the underlying companies, their industries, or any macroeconomic trends that might drive their success or failure.

Rather, technical analysis solely analyzes a stock’s performance. Technical indicators are often rendered as a pattern that can overlay a stock’s price chart to predict the market trend, and whether the stock would be considered “overbought” or “oversold.”

One of the basic tenets of technical analysis is that history tends to repeat itself. By examining certain patterns in light of past outcomes, analysts can make an educated guess about where stock prices might be headed. That said, past performance is never a guarantee of future stock price movements, so traders must bear this in mind.

Knowing many of the most popular trading tools might benefit your investing strategy with easier to spot buy and sell signals. You don’t have to know every single technical indicator, and there are many ways to analyze stocks, but using multiple stock indicators may improve trading results. You can also use these stock indicators to help you manage risk when you are actively trading.

Trend indicators are some of the most important technical trading tools since identifying a security price’s trend is often a first step to forming a strategy. Long positions are often initiated during uptrends, while short sale ideas can occur when prices are in an established downtrend.

Volume technical indicators are also helpful to gauge the power or conviction of an asset’s price move. Some believe that the higher the stock volume on a bullish breakout or bearish breakdown, the more confident the move is. Higher volume could signal a lengthier trend continuation.

Two Types of Technical Indicators

Technical indicators generally come in two flavors: overlay indicators and oscillators.

Overlay Indicators

An overlay indicator typically overlays one trend onto another on a stock chart, often using different colors to distinguish between the lines.

Oscillator Indicators

On a technical analysis chart, an oscillator tracks the distance between two points in order to gauge momentum. The moving average is a common oscillator; it’s considered a lagging indicator as it measures specific intervals in the past.

An oscillator indicator can help traders determine support and resistance in certain price trends, so they can decide whether to sell or buy.

Oscillator indicators can be leading or lagging:

•   A leading indicator tracks current market movements to anticipate where the trend is headed next.

•   A lagging indicator is based on recent history and seeks patterns that will indicate potential price movements.

Top 15 Stock Indicators for Technical Analysis

It’s important to remember that these trading tools were developed based on the belief that mathematically derived patterns may be valuable as predictors of stock movements. Past performance, however, is not a guarantee of future results. So while it can be useful to employ stock technical indicators, they are best used in combination before deciding on a potential trade.

Also, many of these trading tools are lagging indicators, which can lead to an inaccurate reflection of current and future market conditions.

Following are 15 of the most common technical stock indicators, along with their advantages and disadvantages.

1. Moving Averages (MA)

A moving average (MA) is the average value of a security over a given time. The MA can be Simple Moving Average (SMA), Exponential Moving Average (EMA), and Weighted Moving Average (WMA).

A moving average smooths price volatility and is taken as an indicator of the direction a price may be headed. If the price is above the moving average, it’s considered an uptrend versus when the price moves below the MA, which can signal a downtrend. Moving averages are typically used in combination with each other, or other stock indicators, to identify trends.

Pros

•   Using moving averages can filter out the noise that comes from price fluctuations and focus on the overall trend.

•   Moving average crossovers are commonly used to pinpoint trend changes.

•   You can customize moving average periods: common time frames include 20-day, 30-day, 50-day, 100-day, 200-day.

Cons

•   A simple moving average may not help some traders as much as an exponential moving average (EMA), which puts more weight on recent price changes.

•   Market turbulence can make the MA less informative.

•   Moving averages can be simple, exponential, or weighted, which might be confusing to new traders.

2. Moving Average Convergence Divergence (MACD)

The Moving Average Convergence Divergence (MACD) also helps investors gauge whether a security’s movement is bullish or bearish, but it uses two different MAs to do so. Often, a 26-period exponential moving average is subtracted from a 12-period EMA to spot trading signals. Then a signal line, based on a shorter period EMA, is plotted on top of the MACD to help reveal buy and sell entry points.

Traders use the convergence or divergence of these lines to identify when bullish or bearish momentum is high.

Pros

•   The MACD, used in combination with the relative strength index (below) can help identify overbought or oversold conditions.

•   The MACD can be used to indicate a trend and also momentum.

•   Can help spot reversals.

Cons

•   May provide false reversal signals.

•   Responds mainly to the speed of price movements; less accurate in gauging the direction of a trend.

3. Relative Strength Index (RSI)

RSI is a tool that identifies bullish vs. bearish price momentum. The relative strength index is an oscillator — a tool that builds a trend indicator based on the price movement between two extreme values. It ranges from 0 to 100. Generally, above 70 is considered overbought and under 30 is thought to be oversold.

Pros

•   Can help investors spot buy or sell signals.

•   May also help detect bull market or bear market trends.

•   Can be combined with moving average indicators to spot breakout trends or reversals.

Cons

•   The RSI can move without exhibiting a clear trend.

•   The RSI can remain at an overbought or oversold level for a long time, making this tool less useful.

•   It does not give clues as to volume trends.

4. Stochastic Oscillator

The stochastic oscillator has two moving lines, or stochastics, that oscillate between and around two horizontal lines: The primary “fast” moving line is called the %K, while the other “slow” line is a three-period moving average of the %K line.

A signal is generated when the “fast” %K line diverges above the “slow” line or vice versa. The stochastic oscillator uses a 0 to 100 value range.The two horizontal lines are often pre-set at 30 and 70, indicating oversold and overbought levels, respectively, but can be modified.

Pros

•   Since it’s plotted on a 0 to 100 scale, it’s possible to gauge overbought and oversold levels.

•   Traders can adjust time frame and range of prices to reduce market fluctuation sensitivity.

•   Can be used by day traders.

Cons

•   A security can remain overbought or oversold for long periods as the range of oscillations is not always proportionate to a security’s price action.

•   It can be useful for implementing an overall strategy, but not for gauging the overall market sentiment or trend direction.

5. Williams %R

Similar to the stochastic oscillator, above, the Williams %R (a.k.a. the Williams Percent Range) is also a momentum indicator — but in this case it moves between 0 and -100 to identify overbought and oversold levels and find entry and exit points in the market. The Williams %R compares a stock’s closing price to the high-low range over a specific period, typically 14 days.

Readings between 0 and -20, which are in the top 20% of price during the look-back period, are considered overbought. Readings between -80 and -100, which are in the lowest 20% of price during the look-back, are considered to be oversold.

Pros

•   You can combine different short and long time periods to compare trends.

•   Identifies overbought and oversold levels.

Cons

•   False signals can happen if price strength or weakness leads to a brief movement in the Williams %R above 70% or below 30%.

•   There is no volume analysis with the Williams %R.

6. Bollinger Bands

Bollinger Bands are a set of three lines that help measure the relative high or low of a security’s price in relation to previous trades. The center line is the Simple Moving Average (SMA) of the stock price. The other two trendlines are plotted two standard deviations away from the SMA (one positively, one negatively). These can be adjusted.

The upper and lower lines show the high and low boundaries of the security’s expected price movement (90% of the time). The middle line shows real-time price action moving between those bounds as it fluctuates day-to-day.

Pros

•   Helps traders identify volatility.

•   Can help point to trading opportunities.

Cons

•   Large losses are possible when volatility surges unexpectedly.

•   Does not identify cycle turns quickly enough at times.

7. On-Balance Volume (OBV)

OBV is a little different from the other indicators mentioned. It primarily uses volume flow to gauge future price action on a security or market. When there’s a new OBV peak, it generally indicates that buyers are strong, sellers are weak, and the price of the security will likely increase. Similarly, a new OBV low is taken to mean that sellers are strong and buyers are weak, and the price is trending down.

The numerical value of the OBV isn’t important — it’s the direction that matters. Declining volume tends to indicate declining momentum and price weakness, while increasing volume tends to indicate rising momentum and price strength.

Pros

•   Volume-based indicator gauges market sentiment to predict a bullish or bearish outcome.

•   OBV can be used to confirm price action and identify divergences.

Cons

•   Hard to find definitive buy and sell price levels.

•   False signals can happen when divergences and confirmations fail.

•   Volume surges can distort the indicator for short-term traders.

8. Accumulation / Distribution Line (ADL)

The ADL is a momentum indicator that traders use to detect tops and bottoms and thus predict reversales. It does this by using volume versus price data to identify divergences and thereby show how strong a trend might be. For example: If the price rises but the ADL indicator is falling, then the accumulation volume may not actually support a true price increase and a decline could follow.

Pros

•   Traders can use the AD Line to spot divergences in price compared with volume that can confirm price trends or signal reversals.

•   The ADL can be used as an indicator of the flow of cash in the market.

Cons

•   Doesn’t capture trading gaps or factor in their impact.

•   Smaller changes in volume are hard to detect.

9. Average Directional Index (ADX)

The Average Directional Index (ADX) also helps investors spot asset price trends and to quantify the strength of those trends. ADX shows an average of price range values that indicate expansion or contraction of prices over time — typically 14 days, but it may be calculated for shorter or longer periods. Shorter periods may respond quicker to pricing movements but may also have more false signals. Longer periods tend to generate fewer false signals but may cause the indicator to lag the market.

The ADX uses positive and negative Directional Movement Indicators (DMI+ and DMI-). ADX is calculated as the sum of the differences between DMI+ and DMI- over time. These three indicators are often charted together.

Pros

•   Can help identify when price breakouts reflect a solid trend.

•   Can send signals to traders to watch the price and manage risk (e.g. thru divergences).

Cons

•   Can generate false signals if used to analyze shorter periods.

•   Can’t be used as a standalone indicator.

10. Price Relative / Relative Strength

Relative Strength should not be confused with the Relative Strength Index (above). Relative Strength is more of an investment strategy than a specific indicator. It involves comparing one asset to another or the broader market and helps traders find securities that are trending on a relative, not absolute, basis.

Pros

•   A stock indicator that helps compare one security’s price to another to find which is outperforming.

•   Can plot one stock versus a competitor or market benchmark.

Cons

•   Does not provide exact buy and sell levels.

•   False breakouts and breakdowns can happen.

•   Mean reversion can lead to losses for momentum traders.

11. Relative Volume (RVOL)

RVOL relays to traders how near-term volume compares to historical volume. The higher RVOL is, the more other traders might be paying attention to and trading the asset. Think of it as the stock being “in play.” Stocks that have a lot of volume have more liquidity and tend to trade better than stocks with low relative volume. The RVOL is displayed as a ratio.

So if it is showing 2.5 relative volume, that means it is trading at 3.5 times its normal volume for that time period.

Pros

•   Can offer clues to identify unusually powerful price moves.

•   High and low volume is easily detected by use of being above or below a value of one (1).

Cons

•   While volume is important, it does not give exact buy and sell price levels.

•   Volume surges can be fickle — like around an earnings date.

12. Rate of Change (ROC) and Momentum

ROC is just what it sounds like — the speed at which a stock is moving compared to its trend. The indicator measures a stock’s percentage price change compared to how it moved in recent periods. Like many of the tools mentioned, it can be used to spot divergences.

Pros

•   Works better in trending markets.

•   When used with other trading tools can help traders spot strong momentum.

•   A technical trading tool that can identify overbought and oversold levels.

•   Ideal for spotting divergences.

Cons

•   False signals can happen when the indicator suggests a price trend reversal will take place.

•   Does not give higher weight to more recent price action.

13. Standard Deviation

An asset’s standard deviation is a fundamental statistical tool to get a sense of volatility. It uses historical volatility to arrive at a percentage that is used to reflect how much a security moves. While volatility can indicate potential risk, it can also signal the potential for opportunity.

Pros

•   Mathematically captures the volatility of a stock’s movements, i.e. how far the prices moves from the mean.

•   Provides technicians with an estimate for expected price movements.

•   Can be used to measure expected risk and return.

Cons

•   Does not provide precise buy and sell signals.

•   Must be used in conjunction with other indicators.

14. Ichimoku Cloud

Ichimoku clouds are used to show support and resistance areas on a price chart in an extra-illustrative manner. An Ichimoku Cloud is comprised of five separate calculations that examine multiple averages, and uses the difference between two of the lines to create a shaded area (the cloud) that aims to predict support and resistance levels. It is also employed to identify momentum and trend. It is thought to provide more data than a simple candlestick chart.

Pros

•   A leading indicator of price.

•   Indicates support and resistance areas.

•   Useful for gauging the direction and intensity of a price trend.

Cons

•   Can give many false signals in trendless markets.

•   Can be confusing to traders given its complexity.

15. Fibonacci Retracements

Fibonacci Retracements are based on the golden ratio discovered by mathematician Leonardo Pisano in the 13th century. At its core, a Fibonacci retracement is a mathematical measurement of a particular pattern. The Fibonacci sequence and ratio are used to form support and resistance lines on a price chart.

Pros

•   Offers clues about where a stock might find support and resistance.

•   Helps define exit and entry levels.

•   Can be used to place stop-loss orders.

Cons

•   The use is subjective.

•   Some say Fibonacci Retracements are simply a self-fulfilling prophecy: if many traders are using these ratios, then outcomes will reflect this.

•   No logical proof of why it should work.

The Takeaway

Technical analysts use past price and volume data to help traders identify price trends and make buy and sell decisions. It’s important to know that technical analysis does not use fundamentals to assess the underlying companies, their industries, or any macroeconomic trends that might drive their success or failure. Rather, technical analysis solely analyzes a stock’s performance.

Technical indicators are often rendered as a pattern that can overlay a stock’s price chart to predict the market trend, and whether the stock would be considered “overbought” or “oversold.” There are countless stock technical indicators in existence, and it can quickly become overwhelming to learn them all. It might be more useful to focus on a handful of the most popular trading tools so you can execute a strategy that works for you.

To start trading stocks and gain a hands-on understanding of how technical indicators work, you can open a brokerage account online with SoFi Invest®. You can trade stocks, fractional shares, exchange-traded funds (ETFs), IPO shares, and cryptocurrencies right from your laptop or phone. As a SoFi member, you will have access to many online resources — including financial professionals who can guide you in your financial journey. Get started now!


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What Is a Moving Average (SMA & EMA) in the Stock Trading World?

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Price action happens fast in financial markets. One minute a stock price may move up, then the next minute it’s heading down. However, most investors pay little mind to the short-term fluctuations in prices. 

But how do investors weed out the noise of short-term volatility in market prices? Many use measurements called moving averages to spot longer-term trends. 

Read on to find out what a moving average is and how you can use this technical analysis tool to improve your investment returns. 


What Is a Moving Average (MA)?

A moving average is a statistical calculation for measuring long-term trends in the stock market. Moving averages smooth the choppy up and down movement the market is known for, making it easier for you to visualize trend direction and strength on a financial asset’s chart. 


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In financial markets, moving averages are used to create a constantly updated average price with closing prices as the central data points. The moving average is a lagging indicator because it uses past prices to determine a trend, rather than trying to predict the future as a forward-looking indicator would. 


How Does a Moving Average Work?

Moving averages work by plotting average prices over a period of time on a chart. Although most interactive charts can do the calculations and plot the moving average for you, it’s important that you understand how these calculations work. 

The moving average starts with the first set of closing prices over the period’s time frame. With each day that passes, the oldest closing price in the average is dropped off and the newest price is added in. 

For example, a 30-day moving average plots the average price over the past 30 days on the chart. This is calculated by adding the closing prices for the past 30 days together and dividing the total by 30. Then, at the close of each trading session, the closing price from the first day of the average is removed and the new closing price is added in. A line plotting these data points represents the moving average.

Check out Apple’s three-month stock chart below, complete with its 30-day moving average drawn in purple:

(Chart courtesy of Yahoo! Finance)

The blue line that tracks the stock’s day-to-day price movements fluctuates rapidly, making it difficult to determine a trend. However, the purple line, the 30-day moving average, smooths out these price movements. This shows that Apple’s stock has been moving downward gradually for the past three months. The stock’s recent upward movement has started to pull the 30-day moving average higher again, however, which suggests a reversal of this downtrend may be on the horizon.  


Types of Moving Averages

There are two different ways to calculate moving averages. Moreover, the time frames used in the calculations make a difference in the data the moving average yields. 

Simple Moving Average (SMA)

The simple moving average (SMA) is the easiest average to calculate. The SMA is made up of the raw price movement data, giving each day in the average an equal weight. The simple moving average plots the mean of price data over a predetermined number of days, with each closing price having an equal importance to the calculation. 

Exponential Moving Average (EMA)

The exponential moving average (EMA) uses the same information but gives more importance to the most recent price data. The calculation for the EMA is a weighted average calculation because of the emphasis it puts on the most recent data.  

This weight is created using a multiplier on the most recent price in the dataset. Multipliers in EMAs are determined using the following formula:

(2 ÷ (Time Frame +1) = Multiplier 

So, for a 30-day EMA multiplier:

(2 ÷ (30 +1) = 0.0645

Multiplying the most recent price by the multiplier puts more emphasis on the most recent data. This results in an EMA that’s higher than the SMA when the most recent stock prices are up and lower when prices are down. 

Take a look at the Apple chart below. The blue line is Apple’s stock price, the 30-day EMA is drawn in red, and the SMA appears in purple.

Notice how the red line (the EMA) reacts to movements in the stock price faster than the purple line (the SMA) does. This sensitivity makes it easier to catch recent price trend reversals by looking at EMA. 

Short-Term vs. Longer-Term Moving Average

The time period covered by the moving average makes a difference as well. Short-term moving averages show short-term trends, while long-term averages signal long-term trends. Oftentimes, investors and traders alike use a mix of short- and long-term averages as indicators that let them know when to jump into or out of an investment. 


Why Use Moving Averages?

There are two reasons investors and traders alike use moving averages:

Most financial markets are volatile in nature. That’s because these markets depend on supply and demand for price movement. When there are more buyers than sellers, the prices of assets rise, and when there are more sellers than buyers, the prices of assets fall. 

With high levels of volatility in financial markets, it may be difficult to determine the direction of a trend and when that trend is making a reversal. Moving averages help investors weed out the noise of short-term price changes and focus on the overall trend at hand. 

To Find Entrance and Exit Signals

Choosing the best time to enter or exit a financial position is one of the most challenging aspects of participating in financial markets. Moving averages help make decisions to enter or exit an investment more simple. 

Professionals use moving average oscillators and crossovers (described below) as signals that determine when they should buy or sell an asset. For example, when a short-term moving average crosses over a long-term moving average, the action acts as a buy signal that suggests it’s time for investors and traders to dive in. 


How to Use Moving Averages

Moving averages are an important part of technical analysis. They make up multiple key indicators that signal when to buy and sell assets. Here’s what you need to know when using these tools. 

Using Simple Moving Averages vs. Exponential Moving Averages

The exponential moving average is far more responsive to price movements because of the heavy weighting placed on the last piece of data in each dataset. This comes with advantages and disadvantages. 

Trends are easier to read when using a simple moving average because it’s less responsive to price movements. However, the EMA is more sensitive to price movements, making reversals easier to spot. EMA generally gives buy and sell signals faster than the SMA, making it a perfect tool for a short-term trader. 

Choosing a Time Frame

The time frame you choose when setting up a moving average makes a big difference in the trend that emerges. 

For example, take a look at the chart for Apple stock below. The purple line is a 30-day moving average while the green line is a 10-day average.

As you see, the 10-day average is more uneven than the 30-day average and the two lines cross several times over the course of three months. Here’s how to know when to use one, the other, or both:

  • Short-Term. Short-term averages are best used when investors and traders are interested in making short-term moves in the market. 
  • Long-Term. Long-term averages are best for determining long-term trends. They’re best used by investors who are interested in buying and holding an asset for a while. 
  • Both. Using short- and long-term moving averages together can help to determine the best time to buy and sell assets. When the short-term average crosses over a long-term average, it’s time to buy, and when it crosses below the long-term average, it’s time to sell. 

Advantages of a Weighted Moving Average

The primary advantage of a weighted moving average like the EMA is that it responds to price movement much more quickly than a simple moving average. This sensitivity helps spot reversals more quickly, giving traders an opportunity to act earlier. The ability to tap into trends early gives a trader a leg up in the market. After all, time is money!


Limitations of Using Moving Averages

Moving averages are an important tool for those accessing markets, but there are limitations to consider. The most notable limitations to moving averages include:

  • Purely Technical. Moving averages are technical indicators that derive their data solely from price movement. Investors should also understand the fundamental factors that explain why the movement is taking place and whether it’s likely to continue. 
  • Lagging. Moving averages are lagging indicators. It’s important to keep in mind that past performance isn’t always indicative of future price movements. 
  • Conflicting Signals. Moving averages can point to different trends when they span different periods of time. For example, a 10-day moving average could signal a buying opportunity at the same time the 200-day moving average for the same stock suggests it’s a long-term loser. 
  • Useless In Erratic Markets. When prices jump up and down frequently, it can be hard to determine a trend using moving averages. 

Trading Signals From Moving Averages

Moving averages are used to generate trading signals known as technical indicators. Some of the most common indicators that use moving averages include:

Crossover

Moving average crossovers happen when a short-term moving average crosses over a long-term moving average. 

When the short-term moving average, called the signal line, crosses above the long-term moving average, it’s a signal to buy the stock. Conversely, when the signal line crosses below the long-term moving average, the crossover is a sell signal. 

Take a look at the chart below — a three-month chart of Apple stock with a 30-day moving average (purple) and a 10-day moving average (orange):

The shorter, 10-day moving average line in orange is the signal line. When the orange line crosses below the purple line, it suggests it’s time to sell Apple stock. When the orange line crosses above the purple line, it’s time to buy. 

In the chart above, there are two buy and two sell signals. Can you find them?

Moving Average Convergence Divergence (MACD)

The moving average convergence divergence (MACD) is a momentum indicator that’s designed to determine trends and their momentum. The indicator is an oscillator that shows the relationship between two moving averages and the price of an asset. 

The indicator is an oscillator that can be found on most interactive charts. It is derived from the 26-day EMA and the12-day EMA, which creates the MACD line. A nine-day EMA of the MACD acts as the signal line. 

Like with moving average crossovers, traders who use MACD look for crossovers of the signal line and MACD line. When the signal line crosses above the MACD line, it’s considered a buy signal, while a cross below the MACD line is considered a sell signal. 

The MACD data is generally shown in a sub-chart below the main chart:

In the case above, the MACD line is purple and the signal line is orange. Any time the orange line crosses above the purple line, it’s a sign that it’s time to buy the stock. Conversely, when the orange line crosses below the purple line, it’s time to sell. 

Bollinger Bands

Bollinger bands are another oscillator created by plotting lines two standard deviations above and below the SMA. When the price moves closer to the upper band, the asset is believed to be overbought, suggesting it’s time to sell. On the other hand, when the price moves close to the lower band, it suggests the asset is oversold and it’s time to buy. 

See the chart below:

The orange line is a 20-day simple moving average. The space between the upper and lower Bollinger bands is shaded in. Notice that when the price nears the upper band, downtrends tend to follow. On the other hand, when prices near the lower band, Apple stock tends to make a recovery. 


Moving Average FAQs

Naturally, you might have a question or two about moving averages. You’ll find answers to the most common questions below.

What Does a Moving Average Tell You?

Moving averages tell you a few things. First and foremost, they’re great at pointing to trend directions. You can tell an uptrend is taking place when the moving average slopes upward and a downtrend sets in when the average slopes downward. 

Moving averages are also used as technical indicators that signal to investors and traders when to buy and sell financial assets. 

What Is a Good Moving Average to Use?

Simple and exponential moving averages, both short-term and long-term, have their pros and cons. The best moving average to use depends on your needs. 

For example, if you’re looking for a stock that has been trending upward for a long time and is likely to continue, a long-term SMA is the way to go. 

On the other hand, if you’re looking for a short-term opportunity to cash in on a new trend, short-term EMAs are the best bet. 

Which Moving Average Is Best for Swing Trading or Day Trading?

Short-term traders tend to use the EMA rather than SMA. This is because these traders make their money by taking advantage of short-term trends in the market, and the EMA is more responsive to these types of trends. 

What Is EMA In Forex?

The EMA works the same way in forex trading as it does for any other financial asset. It’s a weighted average of prices over a predetermined period of time with extra emphasis given to the newest data in the set. 

What Is a 50-Day Moving Average?

A 50-day moving average is the mean (average) of closing prices of a financial asset over the past 50 trading sessions. The 50-day moving average is one of the more common technical indicators used to spot technical trends in stocks. It is often used to identify key technical support and resistance levels.  

What Is a 200-Day Moving Average?

A 200-day moving average is the mean (average) of closing prices of a financial asset over the past 200 trading sessions.The 200-day moving average is a long-term indicator commonly used to identify much longer-term trends.  


Final Word

Moving averages are a great tool for investors and traders alike. However, they shouldn’t be the only tool in your toolbox. 

Before acting on a moving average signal, investors should research fundamental data that explains why the trend is moving in the direction it is and whether it’s likely to continue. Technical traders should use a mix of different technical indicators for the best shot at success in the market. 

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GME is so 2021. Fine art is forever. And its 5-year returns are a heck of a lot better than this week’s meme stock. Invest in something real. Invest with Masterworks.

Joshua Rodriguez has worked in the finance and investing industry for more than a decade. In 2012, he decided he was ready to break free from the 9 to 5 rat race. By 2013, he became his own boss and hasn’t looked back since. Today, Joshua enjoys sharing his experience and expertise with up and comers to help enrich the financial lives of the masses rather than fuel the ongoing economic divide. When he’s not writing, helping up and comers in the freelance industry, and making his own investments and wise financial decisions, Joshua enjoys spending time with his wife, son, daughter, and eight large breed dogs. See what Joshua is up to by following his Twitter or contact him through his website, CNA Finance.

Source: moneycrashers.com

Copy Trading Defined – Can You Make Money Mirroring a Professional?

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You’ve no doubt heard about people who made it big day trading in financial markets. But the learning curve for new traders can be steep — and potentially quite costly.

But what if beginners could trade like the top traders on the market?

A relatively new form of online trading, known as copy trading or mirror trading, promises to make doing so possible. But is it a good idea to take part in this new strategy?


What Is Copy Trading?

Copy trading, often called mirror trading, is the process of automatically copying the moves of other traders. This style of trading is possible with all assets, whether you’re trading on the stock market or you’re trading forex, contracts for difference (CFDs), or cryptocurrencies like Bitcoin. 


Since 2017, Masterworks has successfully sold three paintings, each realizing a net anualized gain of +30% per work. (This is not an indication of Masterworks’ overall performance and past performance is not indicative of future results.)
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The concept is simple. New traders, known as copiers, assess the performance of experienced traders, called signal providers. Once a new trader finds a signal provider they’re comfortable copying, they set parameters in their trading platform to copy trades that expert makes in real time. 


How Copy Trading Works

This style of trading starts with successful traders who are interested in helping beginners by allowing their portfolio activities to be copied. In some cases, these traders allow their portfolios to be copied simply because they want to help others. In other cases, the pros are paid each time someone makes the decision to copy their moves. 

These traders make their portfolios available, which are usually listed on mirror-trading platforms alongside statistics of the trader’s historical performance. 

From there, beginners search these platforms for portfolios to copy and can mirror their preferred experts’ moves automatically.

Always remember each trader is unique and the one you choose to mirror will make the difference between profits and losses. Carefully choose the trader you’ll follow based on their performance compared to others on the platform.  

Proportional Copying

Professional traders are likely to have a larger portfolio and make larger trades than those who are just getting involved. What if you don’t have enough money in your portfolio to make the same trades the pros are making?

Don’t worry — copy trading is proportional based on the amount of money in both the copy trader’s account and the professional’s account. 

For example, if a professional trader with a $100,000 balance makes a $10,000 trade, a copy trader with $1,000 would make a $100 trade, keeping one profile proportionally equal to the other. 

Forex Copy Trading

The foreign exchange market is highly volatile, making it a hotbed for traders. However, the high levels of volatility make trading forex highly risky. Success takes an intricate knowledge of technical analysis.  

Luckily, copy trading is available in the forex market as well. 

Like with any copy trading, it’s important to pay close attention to the expert you plan on copying. Only copy those with a proven record of success. This is especially important in the volatile forex market, where trades that go badly can go really badly.

Cryptocurrency Copy Trading

Cryptocurrencies like bitcoin are becoming popular among active traders. As with traditional currencies like the U.S. dollar (USD), cryptocurrency is known for experiencing high levels of volatility and creating opportunities for traders. 

Although big swings in value may be exciting, they are also risky. The mix of high volatility and the speculative nature of the asset makes cryptocurrency trading one of the riskiest forms of trading in any financial market. 

Even if you’re copying a pro with a compelling trading history in crypto, never risk too much of your portfolio on trading in this emerging industry. If you’re not comfortable losing it, you shouldn’t be using it for crypto trading. 


Copy Trading Platforms

There are several trading platforms that offer copy trading functionality. However, like any other product, not all trading platforms are equal. Some of the best copy trading platforms online include:

eToro

Founded in 2007, eToro has more than a decade of history providing quality trading services to its customers. The platform’s claim to fame is the technology it uses, and it was one of the first platforms to make copy trading available to the masses. 

eToro is known as one of the best brokers to work with when trading cryptocurrency. It incentivises professionals to share their portfolios by paying them each time their portfolio is copied. As a result, if you’re looking for a way to quickly gain exposure to digital currencies, you’ll find plenty of portfolios to copy with this broker. 

However, crypto isn’t the only arena eToro shines in. The company offers one of the best stock trading platforms and provides access to a wide range of other assets, like commodities and index funds. 

ZuluTrade

ZuluTrade is another pioneer in the copy trading industry. The company supports trading in cryptocurrencies, stocks, commodities, index funds, and forex. It’s one of very few forex brokers that offers traders the ability to copy one another. 

A unique feature of ZuluTrade is its profit-sharing capabilities. The professionals making the trades earn 20% of the profits copiers generate by using their signals. This incentivises smart moves in the market and the sharing of portfolios with other traders. As a result, there’s no shortage of quality traders to copy on the platform. 

ZuluTrade also has a proprietary ranking system, ranking traders who make their portfolios available to copy based on their performance in the market. For beginners, this ranking system can be key to choosing which traders they’ll follow. 

MetaTrader 4 

MetaTrader 4 is one of the most recommended trading platforms for the most active traders. Known as one of the best forex platforms online, MetaTrader 4 gives traders access to state-of-the-art technology, compelling charting capabilities, and other features that give them the upper hand in the market. 

MetaTrader 4 gives traders the ability to build and automate strategies. For beginners, the copy trading capabilities this offers are appealing, to say the least. 

Because it’s known as one of the best platforms online, especially in the forex space, there’s no shortage of traders to follow. 

Coinmatics 

Coinmatics is a platform dedicated to cryptocurrency trading, and more specifically, copy trading in the crypto market. The platform was founded in 2018 by the same experts behind Crunchbase, a popular business investment and funding platform. 

The platform features diversification and risk management capabilities that help ensure you don’t take too much of a hit in the volatile crypto market. The platform is also lightning fast, copying trades in less than two seconds on average — an important factor in a volatile market. 

The best part is that the platform is free. However, if you want prioritized copying, you’ll pay fees of $20 monthly or $180 annually. 


Copy Trading (Mirror Trading) vs. Social Trading

Copy trading and social trading are two ideas often lumped together. Although copy trading is a form of social trading, not all social trading strategies are centered around copying others. 

Essentially, social trading is the use of social media to find and learn about opportunities, whereas copy trading is the use of social tools to mirror the exact trades of another trader. 

In other words, copy trading is the process of directly copying the moves made in the market by other traders. There’s no research, expertise, or analysis required to do so, but copy traders take on the same level of risk as those they copy, which may prove to be uncomfortable in some situations. 

Social trading simply refers to using social media to find solid trading opportunities. Once these opportunities are found, social traders typically do their own research and technical analysis to make sure the trade fits in with their strategy and risk management parameters before making the trade. 


Pros and Cons of a Copy Trading Strategy

Any trading strategy you come across will come with its own list of pros and cons. After all, trading is making an attempt to predict the future, and nobody has a crystal ball. Any trading strategy comes with risk. Here are the benefits and drawbacks of the copy trading strategy. 

Pros of Copy Trading

Copy trading has become a popular method of making money in the market because there are several benefits to using it. Some of the biggest perks include:

Trade Like a Pro Today

Trading is a fast-paced process that requires a detailed understanding of markets and the practical use of technical analysis. This form of analysis can take years to perfect, but once mastered, it has the potential to result in significant gains. 

With copy trading, you don’t have to be a pro with years of experience under your belt to trade like one. All you need to do is find a portfolio that’s performing well and set your platform to duplicate its trades. 

Significant Profit Potential

Whether you’re in stocks, cryptocurrency, or forex, trading has the potential to generate significant returns far above what you would expect to see in the average long-term investor’s portfolio. Countless people trade for a living, earning annual returns that would make the average salaried employee’s jaw drop. 

Copying the trades made by these experts means you have the potential to earn similar returns from your activities in the market. 

Trading Education

Learning how to trade is often time consuming and expensive, whether you learn through an online day trading course or through trial-and-error. However, copy trading makes learning how to trade in financial markets free and easy. 

All you need to do is watch and learn from the trades that are being made in your portfolio while it’s copying an expert. Over time, you’ll find patterns in the winning trades being made. Looking for these patterns in the open market for yourself has the potential to result in even more winning trades. 

Cons of Copy Trading

Yes, there are plenty of benefits to getting involved in the copy trading process, but every rose has its thorns. Here are some of the biggest drawbacks to this style of trading:

Even Expert Traders Get It Wrong Sometimes 

Trading is inherently high risk. Traders make their money by exploiting high levels of volatility in the market, but that comes with higher levels of unpredictability. Even the best traders in the world make losing trades from time to time. 

Before getting involved in trading — whether you do it on your own or copy an expert — it’s important that you understand the risks associated with short-term trading strategies. 

Blind Following

When copy trading, you’ll be blindly following the leader. If the leader was to walk off a figurative cliff, leading to a portfolio freefall, you’ll be jumping off the cliff too. 

It’s generally suggested that investors and traders do their own research so they enter trades with a complete understanding of the potential risks and rewards the trades represent. Copy trading offers no such option.

Costly

In many cases, copy trading services can quickly become costly. Take ZuluTrade for example. Copy traders using the platform pay the expert trader who generated the signal a 20% cut of their profits, and ZuluTrade itself gets another 5% of the profits. In the end, the copy trader only retains 75% of the profits generated through the platform. 

These high costs aren’t a big concern if your portfolio is significantly outpacing the market, but if you’re just barely keeping up with market performance, your returns would be better simply investing in index funds.


Should You Be a Copy Trader?

Copy trading, as with any form of trading, comes with significant levels of risk. Even if the professionals are pulling the strings for you, that risk is present. As such, this method of accessing the market isn’t for everyone. You may want to consider copy trading if you have the following characteristics:

  • You’re Young. Due to the high level of risk associated with trading in general, it’s best for younger traders. Those nearing retirement or with short time horizons should avoid high-risk moves, but young investors with long time horizons have time to recover should something go wrong. 
  • You Have a High Risk Tolerance. Trading is not for the faint of heart. People with a low or moderate risk tolerance should avoid it and spare themselves the emotional roller coaster. However, if you like to ride on the wild side and are OK with taking big risks in return for big reward potential, copy trading might be for you. 
  • You’re Comfortable in the Passenger Seat. As a copy trader, you relinquish control to a professional you believe will make the right moves. However, you can’t grab the wheel if things go wrong. You have to be comfortable with taking a bumpy ride in the passenger seat from time to time. 

How to Start Copy Trading

If you’ve decided you want to start copy trading, here’s how it’s done:

Step #1: Open a Trading Account

You can’t copy trades into your own trading account until you have one set up. Compare brokers that offer copy trading like those listed above, paying close attention to the assets available and the fees they charge. Sign up for the platform you feel fits you best. 

Step #2: Assess Opportunities

Comb through the different traders who give others the ability to copy them. When assessing the traders, there are three key criteria to look for:

  1. Assets Traded. If you’re interested in trading stocks, you don’t want to track a trader who makes the vast majority of their moves in cryptocurrency. Make sure the traders you copy are interested in the same assets you are. 
  2. Track Record. Look into the past performance of each trader you’re interested in. Although past performance isn’t always indicative of the future, a strong historical performance does suggest the trader knows what they’re doing. 
  3. Longevity. How long has the trader been trading and how many trades have been made? A trader with an 80% success rate that only has five trades under their belt is far less impressive than a trader with the same success rate after 500 trades. You want to make sure the trader you follow not only has a strong performance, but that this strong performance has been repeated over time. 

Copy Trading With a Twist

If you’re not comfortable sitting in the passenger seat and you want to have full control over your own portfolio, there is another way to copy professionals. 

Become a social trader. 

When making your trading and investment decisions, take to social media to see what the pros are talking about. Once you find a compelling opportunity, do your own research and execute your own trades based on the parameters in your trading plan.


Final Word

Copy trading is an exciting concept, and many newcomers have quickly generated profits in financial markets taking advantage of it. 

However, not all traders have the same performance. If you plan to ride this vehicle into the markets, make sure to do your research and only copy traders who trade the assets you’re interested in and have a long-term history of compelling market performance. 

Also, when choosing a platform, pay close attention to fees. Fees associated with copy trading vary wildly and can cut deep gashes into your profit potential. 

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Since 2017, Masterworks has successfully sold three paintings, each realizing a net anualized gain of +30% per work. (This is not an indication of Masterworks’ overall performance and past performance is not indicative of future results.)

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Joshua Rodriguez has worked in the finance and investing industry for more than a decade. In 2012, he decided he was ready to break free from the 9 to 5 rat race. By 2013, he became his own boss and hasn’t looked back since. Today, Joshua enjoys sharing his experience and expertise with up and comers to help enrich the financial lives of the masses rather than fuel the ongoing economic divide. When he’s not writing, helping up and comers in the freelance industry, and making his own investments and wise financial decisions, Joshua enjoys spending time with his wife, son, daughter, and eight large breed dogs. See what Joshua is up to by following his Twitter or contact him through his website, CNA Finance.

Source: moneycrashers.com

Investing vs. Trading Stocks – What Exactly Is the Difference Between Them?

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As you learn about the stock market, you might notice there seem to be two different types of players on Wall Street. 

One is a bit reserved, makes calculated decisions based on a deep understanding of a business’s fundamentals, and has plenty of patience to wait for the right price. The other is ready to dig through every nook and cranny of the market for an opportunity to pounce and likes to read into stock charts and momentum. 

The former is an investor and the latter is a trader. Although the terms are sometimes used interchangeably, there are distinct differences between investing and trading. Understanding those differences is crucial when deciding which you would rather take part in. 


Investing vs. Trading Stocks – What’s the Difference Between Them?

The primary difference between investing and trading stocks is the time horizon of the positions taken. Investors are in it for a long period of time, often years, whereas traders may only be in a trade for minutes. 


Since 2017, Masterworks has successfully sold three paintings, each realizing a net anualized gain of +30% per work. (This is not an indication of Masterworks’ overall performance and past performance is not indicative of future results.)
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This difference in time horizon has significant implications in terms of risk, reward, market knowledge required, and strategies used. Here’s how investing and trading compare.

Stock Investing in 4 Simple Words: Longer-Term Asset Ownership 

As mentioned above, investing is a long-term process. The goal is to buy stocks, exchange-traded funds (ETFs), mutual funds, index funds, and other securities at a low price and hold them while they appreciate, with the goal of selling sometime down the line at a higher price. 

Successful investors look into both the past performance and forward-looking prospects of investments prior to diving in. Investing is all about taking a slow and steady approach to achieve your long-term financial goals. 

How Investing Works

Investing generally starts with an assessment of yourself. In order to make successful moves in the market, you need to have a detailed understanding of your investment goals and your level of comfort with risk. 

Once this understanding is achieved, the investor puts together an investment strategy. Strictly adhering to a quality investment strategy will keep emotions that could devastate your returns out of the equation. A quality strategy includes the following:

  • Criteria for Buying & Selling Stocks. Whether you plan on taking a growth, value, or income approach to the stock market, your strategy should outline specific criteria for when it’s time to buy and sell shares of stock.  
  • Diversification. Diversification is the process of spreading your investment dollars across a wide range of stocks and bonds to protect yourself from market fluctuations. If a single stock or group of stocks in your portfolio starts to take a dive, other assets in the portfolio will limit the losses you experience. 
  • Asset Allocation. Asset allocation plays an integral role in a well-balanced investment portfolio. By spreading your nest egg between different asset classes, such as equities and fixed-income investments, you’ll protect yourself from market volatility, which is one of the biggest risks posed to investors. 

Using their investment strategies, complete with parameters telling them what and when to buy and sell, investors analyze the stock market for opportunities. 

For the investor, fundamental analysis is key. 

Fundamental analysis includes researching a company’s financial standing, future prospects, management, and other key data to determine its fitness as an investment. This analysis can tell an investor whether the company — and therefore its stock — is likely to grow in the future, or if its dividends are sustainable and worthy of investment. 

If investors believe the value of the asset will grow in the long run or that its dividends are strong enough to warrant an investment, they snap up shares and wait for the eventual profits to set in. When a stock falls out of line with the strategy, the investor sells the shares and looks for the next opportunity, whether the trade proved to be a winner or a loser. 

Pros of Long-Term Stock Investing

Investing is the most common form of market activity among beginners and experts alike. This tried-and-true method for building wealth has become so popular because it offers many advantages. The most important of these include:

  1. Building Wealth. The stock market has an uncanny ability to help investors build wealth over time. Small, frequent investments can lead to long-term financial stability with the power of compounding returns,. 
  2. Ownership. Investors focus on the long-term ownership of assets. When you buy shares of stock, you actually own a piece of the companies you invest in. This entitles you to a share of profits and gives you voting rights on important aspects of corporate growth.  
  3. Income. According to FINRA, nearly 84% of S&P 500-listed companies pay dividends. With such a large portion of stocks offering dividends to their investors, income is a major benefit for those interested in holding long-term investments.  
  4. The Feel-Good Effect. Investors can choose which companies they will support with their investment dollars. As an investor, you can support companies developing cures for some of the world’s most debilitating conditions, taking aim at social injustice, or working to address climate change. Your investment dollars have the potential to make changes for good. 

Cons of Long-Term Stock Investing

Although there are plenty of benefits to being an investor, there are also a few drawbacks to consider when comparing investing to trading. Those include:

  1. Potential Losses. Investing is viewed as the lower-risk way to access the market. Although the risks aren’t quite as high as they are with trading, investors still take on risk and could lose capital. 
  2. Slower Growth. Long-term investing is centered around slow and steady growth. If you’re looking for quick short-term gains, trading may be the better option for you.  
  3. Research Required. Solid investment decisions require plenty of research. If you’re not willing to put the time into researching the current state and future prospects of a company or fund, investing may not be your strong suit.  

Trading Stocks: Short-Term Profits From Fluctuating Prices

Trading is arguably the more exciting option of the two. Unlike investing, traders aren’t making long-term decisions with their money. Their goal is to jump into stocks when the opportunity for significant gains is ripe, and get out — ideally with a profit — once the opportunity has passed. 

Trading is a short-term process, and although it comes with the potential for higher returns than investing, there are also bigger risks that should be considered before diving in. 

How Trading Works

There are several different styles of trading. Swing traders look to exploit volatility by jumping in while the market is swinging up or down. Day traders never hold a position for longer than a single trading session, and general stock traders may hold a stock for days or weeks. 

Whether you’re talking about swing trading, day trading, or another form of stock trading, the goal is the same: make as much money with as short a holding period as possible. 

Trading in the financial markets starts with a trading strategy designed to guide when to buy stocks and when to sell them. The trader then uses stock screeners adjusted to their strategy to find opportunities in the market that fit. 

Once an opportunity is identified, the trader looks to exploit fluctuations in the stock’s price. Traders use a process known as technical analysis, following price movements on stock charts closely, looking for technical indicators that act as signals to buy or sell stock. 

Considering the technical analysis required and the risks involved in trading, this is not the best path to stock market gains for beginners. Successful traders have a detailed understanding of the inner workings of the stock market and are willing to take on significant risk in search of large potential rewards. 

Pros of Short-Term Stock Trading

Countless stock traders have made exploiting fluctuations in the market their full-time job. For those who are good at it, trading comes with compelling perks. Some of the most important include:

  1. Higher Returns. Successful traders earn returns far in excess of average market returns. Due to the high-risk, fast-paced nature of stock trading, it’s not uncommon for professional traders to consistently beat widely accepted benchmarks. 
  2. Excitement. Many find the fast-paced nature of stock trading exciting. Traders are constantly looking for the next best opportunity in the market. So there’s never a dull moment.  
  3. Trade Full Time. If you get good at trading, making a full-time livable wage from it is possible. At this stage, traders are able to quit their day jobs and make their own hours, limited to open market hours of course. 

Cons of Short-Term Stock Trading

Sure, there are plenty of reasons to consider trading stocks. However, as with anything else in the world of finance, stock trading comes with drawbacks to consider as well. Some of the most important include:

  1. Significant Downside Potential. If there’s anything you get from this section of this article, it should be that trading stocks is risky. Traders look for high levels of volatility, which equate to larger opportunities. However, volatility means that the stock experiences sharp movements both upward and downward. As such, chasing short-term opportunities in high-volatility situations is often a recipe for serious declines. 
  2. Gains Taxed at a Higher Rate. Long-term investors have the benefit of taking advantage of the lower long-term capital gains tax rate. Short-term traders must pay their standard income tax rate on gains generated in the market, which is often substantially higher. 
  3. No 100% Accurate Method. Price fluctuations are, by nature, unpredictable. Making trades over a short period of time will ultimately result in a loss from time to time. There’s no 100% accurate method for determining where a stock price is heading. If there was, everyone would be rolling in stock market riches. 

Investing vs. Trading Stocks: Which Is Better for You?

There are multiple key differences between investing and trading, and determining which is better for you largely depends on a few factors:

Factor #1: Your Risk Tolerance

Although there will always be a certain level of risk associated with making an investment, there’s far less risk for long-term investors than there is for short-term traders. If you’re not very comfortable with risk, investing is the best option for you to access the stock market. 

On the other hand, if you’re comfortable living on the wild side and your interest is primarily in taking chances to achieve the highest level of gains possible, trading may just be your cup of tea. 

Factor #2: Technical or Fundamental?

Many people lack the patience to pore through a company’s earnings reports. Those who like to research new things are best fit for investing because the process requires quite a bit of fundamental research to understand the opportunities in front of you. 

The most successful investors research opportunities for a minimum of several days, learning everything they can about the company they want to invest in before buying. 

On the other hand, if you’re more into fast-paced concepts and a knowledge of the inner workings of things, trading might be more your style. Fast-paced technical analysis gives you the ability to look into the stock market in a way investors simply don’t, making the process exciting to many. 

Factor #3: Experience

The most successful traders have a detailed understanding of how the market works and the technical indicators that help predict where the market is headed. Their experience in the market has led to a level of comfort with risk beginners just don’t tend to have. 

On the other hand, investing can be done successfully by anyone who’s willing to take the time to research solid opportunities. As such, it’s a perfect vehicle for beginners to enter the market. 


Final Word

Although investing and trading both take place in the stock market, they are two very different animals. If you’re a beginner, even if trading seems like a good fit, take the time to practice investing and get an understanding of how the market works before taking the risks associated with trading. 

However, if you’ve had some experience in the market and are comfortable with your technical analysis and research capabilities, trading might just be your opportunity to expand your gains. 

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Joshua Rodriguez has worked in the finance and investing industry for more than a decade. In 2012, he decided he was ready to break free from the 9 to 5 rat race. By 2013, he became his own boss and hasn’t looked back since. Today, Joshua enjoys sharing his experience and expertise with up and comers to help enrich the financial lives of the masses rather than fuel the ongoing economic divide. When he’s not writing, helping up and comers in the freelance industry, and making his own investments and wise financial decisions, Joshua enjoys spending time with his wife, son, daughter, and eight large breed dogs. See what Joshua is up to by following his Twitter or contact him through his website, CNA Finance.

Source: moneycrashers.com

Calculating Margin for Stock Trading

Margin allows you to buy securities with borrowed funds. Traders find several margin balances when they open a margin trading account. It can be overwhelming trying to calculate and understand each one, but having a grasp on these figures can help you control risk and manage your profit and losses.

A stock margin calculator can help you know your margin requirements and balances. Learn more about how to calculate margin in a stock trading account.

How to Calculate Margins on Trades

Margin requirement calculators can help you track your margin levels and determine how much interest you might owe. Since trading on margin involves borrowing money, you owe margin interest that accrues daily.

A stock margin calculator also allows you to see the impact financial transactions can have on your margin balances and margin requirements. You can see how the numbers change by plugging in hypothetical buys, sells, deposits, and withdrawals.

With a margin loan, you can borrow money from your broker for any purpose, but you will owe interest on the loan based on the borrowing rate. Of course, you will also need the greater of either the $2k minimum margin requirement or 50% of the security’s purchase price in your account to buy on margin. For example, if you were to purchase 10 shares of a stock trading at $30, 50% is $1,500. However, since that is less than $2,000, you’ll need to deposit $2,000 in order to purchase the 10 shares on margin. Conversely, if you wanted to purchase 10 shares of a stock selling for $50, 50% is $2,500. In this case you would need to deposit $2,500, not $2,000, in order to make your purchase on margin.

Calculating Initial Margin

Initial margin refers to the percentage of the purchase price of a security on which the trader must use their own money — typically, at least 50%. This margin rate is set by Federal Reserve Board Regulation T. Some brokers might have stricter initial margin requirements, forcing traders to have a larger percentage of cash to establish positions.

An initial margin requirement is a straightforward calculation. It is the number of shares multiplied by the stock price multiplied by the margin rate.

Initial margin requirement = number of shares x stock price x margin rate

For example, let’s say you want to buy 100 shares of XYZ stock priced at $90 per share, with a 50% initial margin requirement. When you enter the long stock trade, the margin requirement is 100 x $90 x 50% = $4,500. The value of the long stock position is $9,000, so you only need $4,500 of equity to open that $9,000 stake.

In that example, you would need $4,500 to purchase 100 shares of XYZ stock — that is the initial margin requirement. The maximum loan value is 100 shares x $90 x 50% = $4,500. Your margin excess is $4,500.

Calculating Maintenance Margin

Once you own shares, there is a maintenance margin requirement which is often less than the initial margin amount. Maintenance margin is the minimum amount of equity a trader needs to keep in their account to continue to hold positions. Reg T sets this amount at 25%, but many brokerage firms have stricter maintenance margin rates to protect themselves against investors defaulting on their margin loans. Maintenance margin varies by stock; highly volatile stocks often feature higher margin requirements.

To calculate a maintenance margin, we’ll continue the example from above, using the same formula:

Maintenance margin requirement = number of shares x stock price x margin rate

Let’s assume XYZ stock is a fully marginable stock with a 25% requirement. You only need $2,250 of equity to continue to own the position. The formula is: 100 shares x $90 per share x 25% = $2,250.

If the stock price fell, however, you would face a margin call since your equity percentage would drop below 25%. Your margin loan would swell above 75%.

Calculating Margin on Short Stock

Here is a short stock margin calculation example. It’s worth noting that selling stocks short comes with its own set of risks since there is no limit on how high a stock value can go.

Let’s say you short sell 100 shares of XYZ stock at $90 per share. The margin requirement is 150%. Since you receive 100% cash from selling the shares, the additional margin requirement is 50% on top of that 100%.

The margin calculation is: 100 shares x $90 x 150% = $13,500.

Maintaining Adequate Margin

You are responsible for always keeping a minimum margin balance — that is the equity in your account. Let’s dive into what happens when your position value fluctuates.

Suppose you bought 1,000 XYZ shares at $10 per share and it has a 50% initial margin requirement. That $10,000 position requires $5,000 of equity. The maximum loan value is $5,000, or 50% of the purchase value.

Assuming a 25% maintenance margin, your equity must remain at or above 25% of the position value. Once the position is established, the maximum loan value is 1,000 shares x $10 x 75% = $7,500.

Now suppose the stock price rises to $15. The position value is now $15,000 and your equity has risen to $10,000. The maximum loan percentage is still 75%, but that equates to $11,250 — which means your equity must be at or above $3,750. You have excess margin of $6,250.

Now let’s say the stock price drops sharply to $6 per share. Your equity is $1,000 and you are borrowing $5,000. The maximum loan value is now: 1,000 shares x $6 x 75% = $4,500.

Since the loan balance is greater than the maximum loan value, you must resolve the shortfall immediately. The account requires a deposit of cash or marginable securities by the close of business that day.

Calculating Maximum Trade Size from Margin Excess

In this example, assume you have $6,000 of margin excess and seek to purchase the maximum number of shares of a stock with a 30% margin requirement. The stock price is $20.

Your stock margin calculator shows: $6,000 / 30% = $20,000.

At $20,000, you can buy 1,000 shares: $20,000 / $20.

Calculating Maximum Trade Value at Different Margin Rates for $10,000 Excess Margin

Here is a breakdown of maximum trade values at different margin rates for $10,000 of excess margin. You can employ a margin requirement calculator to easily determine margin levels.

25% Maintenance margin: $10,000 / 25% = $40,000
30% Marginable equities: $10,000 / 30% = $33,333
50% Initial margin: $10,000 / 50% = $20,000
75% Marginable equities: $10,000 / 75% = $13,333

It’s important to remember that different brokers will have different margin requirements. Moreover, margin rates vary by security.

Margin Calls

An online stock margin calculator can keep track of your margin balances to help avoid margin calls.

A margin call happens when the value of your margin account falls below the broker’s requirements. The brokerage firm will demand that you satisfy the call by depositing more cash or securities. You can also meet the call by selling your existing holdings. The broker can execute a forced sale if you do not act quickly enough.

The Takeaway

A stock margin calculator can help you know your margin balances when trading with borrowed funds. With changing stock prices and when holding multiple positions, account margin levels can vary minute by minute. Knowing how to calculate margin in stock trading is important in order to carefully manage your risk.

You can get started trading today on the SoFi Invest® online brokerage — and trade stocks, exchange-traded funds (ETFs), and IPOs.

Find out how to get started with SoFi Invest.


SoFi Invest®
The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . SoFi Invest refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
1) Automated Investing—The Automated Investing platform is owned by SoFi Wealth LLC, an SEC Registered Investment Advisor (“Sofi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC, an affiliated SEC registered broker dealer and member FINRA/SIPC, (“Sofi Securities).

2) Active Investing—The Active Investing platform is owned by SoFi Securities LLC. Clearing and custody of all securities are provided by APEX Clearing Corporation.

3) Cryptocurrency is offered by SoFi Digital Assets, LLC, a FinCEN registered Money Service Business.

For additional disclosures related to the SoFi Invest platforms described above, including state licensure of Sofi Digital Assets, LLC, please visit www.sofi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform. Information related to lending products contained herein should not be construed as an offer or pre-qualification for any loan product offered by SoFi Lending Corp and/or its affiliates.
*Borrow at 2.5% through 5/31/22 and 5% starting 6/1/22. Utilizing a margin loan is generally considered more appropriate for experienced investors as there are additional costs and risks associated. It is possible to lose more than your initial investment when using margin. Please see SoFi.com/wealth/assets/documents/brokerage-margin-disclosure-statement.pdf for detailed disclosure information.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
Third-Party Brand Mentions: No brands or products mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.
Photo credit: iStock/erdikocak
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Source: sofi.com

What Is the Arms Index (TRIN)? How to Use the Indicator

The Arms Index or Trading Index (TRIN) is a breadth indicator used to indicate when the stock market is overbought and oversold. In simpler terms, it measures how strong or weak the market is on any given day.

Technical analyst Richard W. Arms developed the Arms Index formula in 1967 as a tool for gauging market sentiment. Investors still use TRIN indicators to track volatility and price movements. By looking for upward or downward trends in the TRIN and comparing them to other technical indicators, investors can potentially identify buy or sell signals.

The Arms Index, Trading Index or TRIN for short is a breadth oscillator used to identify pricing and value trends in the stock market. Specifically, the index looks at two things: Advance Decline ratio and Advance Decline volume ratio. The former represents the number of advancing and declining stocks while the latter represents advancing and declining stock volume.

The TRIN Formula

TRIN = (Advancing stocks/Declining stocks) / (Composite volume of advancing stocks/Composite volume of declining stocks)

In this formula:

•   Advancing stocks refers to the number stocks trading higher

•   Declining stocks refers to the number of stocks trading lower

•   Advancing volume is the total volume of all advancing stocks

•   Declining volume is the total volume of all declining stocks

Investors use moving averages to smooth out the data and understand the relationship between the supply and demand for stocks during a given time period. The Arms Index aims to highlight bearish or bullish trends based on the relationship between the number of stocks being traded and the volume.

How to Calculate TRIN

To calculate TRIN, you’d simply apply the formula outlined earlier. Again, it looks like this:

TRIN = (Advancing stocks/Declining stocks) / (Composite volume of advancing stocks/Composite volume of declining stocks)

Here’s what calculating TRIN might look like in action:

•   Find AD ratio by dividing the number of advancing stocks by the number of declining stocks

•   Find AD volume ratio by dividing total advancing volume by total declining volume

•   Divide AD ratio by AD volume ratio

You’d perform these calculations over a set time period, recording each figure on a graph or chart as you go. For example, you might space the calculations out every few minutes, hourly or daily. You’d then connect each data point on your graph or chart to whether the TRIN is moving up or down.

Dive Deeper: How to Calculate AD Ratio

What Does TRIN Show You?

TRIN shows you the market’s volatility and the short-term direction of prices to help investors identify buying opportunities. When reading or interpreting TRIN data, you’re looking to see if it’s above 1.0 or below 1.0. This can tell you whether the market is bearish or bullish. A reading of exactly 1.0 is considered neutral.

For example, a reading below 1.0 is common when there are strong upward trends in price movements. Meanwhile, a reading above 1.0 is typical when there’s a strong downward trend. Here’s another way to think of it. When the reading is below 1.0 that means advancing stocks are driving volume but when it’s above 1.0, declining stocks are in the driver’s seat for generating volume.

You may also look at the direction TRIN is moving. A rising TRIN could indicate a weak market, while a falling TRIN may mean the market is getting stronger. Understanding how to read the data matters when determining whether the market is overbought or oversold at any given time.

Overbought

In stock trading, overbought means a stock is selling at a price above its intrinsic value. When the market is overbought, there’s generally a bullish attitude as investors keep buying in and driving up market capitalizations.

But a sell-off can happen if market sentiment turns negative. In that case, you get a reversal and prices begin to drop, potentially pushing market capitalizations down. Investors use the Arms Index or TRIN to spot this type of price movement trend and get ahead of a reversal before it happens.

Oversold

When an asset is oversold it means it’s trading below its intrinsic value. In other words, it’s trading for less than what it’s actually worth. This scenario can happen if an asset is undervalued for an extended period of time.

When investors assume the market is oversold, that can lead to an increase in buying activity. This, in turn, can drive stock prices up.

Example of Using TRIN

If you wanted to apply the TRIN in real time, you could do that using stock charts that illustrate technical indicators. So, say you want to track the movements of the S&P 500 Index for a single day, looking at prices in five-minute intervals. You begin calculating TRIN at 10:00 am, at which time it’s 1.10. This sends a sell signal to the market and prices begin edging down.

An hour later, you see that TRIN has dropped to 0.85 sending a buy signal. At this point, prices begin to move upward again. By following TRIN throughout the day you could see whether the upward trend looks like it will continue or whether it will eventually reverse. If you’re following the rule of “buy low, sell high“, you might want to time trades to correlate with stock price movements based on the trends forecasted by the TRIN.

How Is TRIN Different Than TICK?

The TRIN measures the spread or gap between supply and demand in the markets. The Tick Index or Tick Indicator shows the number of stocks trading on an uptick minus the number of stocks trading on a downtick. This trend indicator measures all of the stocks that trade on an exchange such as the New York Stock Exchange (NYSE) or Nasdaq.

Unlike Arms Index or TRIN, the Tick indicator does not factor in volumes. Instead, Tick index aims to pinpoint extreme buying or extreme selling on an intraday basis.

Is TRIN a Good Indicator?

The TRIN has both good points and bad points when used as an investment decision-making tool. No technical analysis indicator can yield precise answers when determining the best time to buy or sell.

It’s important to keep in mind that the Trading Index is just one indicator analysts use to evaluate the stock market and stock volatility. The TRIN is most helpful when used with other indicators in order to create a more comprehensive snapshot of the markets at a particular moment in time.

Pros of TRIN

The Arms Index or TRIN closely analyzes trends between advancing and declining assets. By comparing net advances to volume, it provides a picture of price movements. Volume can be a useful indicator in itself, as higher volumes can suggest more significant shifts in stock pricing.

The TRIN is forward-looking so it can be useful in forecasting which way the market will head next. By pointing out stocks that may be overbought or oversold, the indicator can provide investors with some direction when trying to buy the bottom or sell the top to maximize profits in the market.

Cons of TRIN

If the TRIN has one big flaw it’s that it may generate inaccurate readings because of the way the index accounts for volume. Specifically, you can run into problems when advancing volume falls short of expectations.

For example, say that on a given day the number of stocks advancing significantly outpaces the number of stocks declining. Meanwhile, the same trend happens with volumes, with advancing volume outstripping declining volume. When you calculate TRIN, the numbers could effectively cancel one another out, resulting in a neutral reading.

This can make it difficult to figure out if the market is trending bearish or bullish. For that reason, it may be helpful to apply a 10-day moving average (MA) to help even out the numbers and provide a more accurate picture of pricing trends.

How Investors Can Use TRIN

Technical investors can use the TRIN to analyze the market, decide whether to buy or sell, and when to make those trades to produce the best results. When using the index, you’re looking for clear markers of strength or weakness in the markets. By gauging overall market sentiment, it may become easier to make predictions about future prices.

The TRIN is, by nature, designed to monitor short-term trading activity so it may not work as well for spotting longer term trends. But you can use it to get a feel for whether the market is leaning more on the bullish or bearish side and how likely that trend is to either continue or reverse.

The Takeaway

The Arms Index or TRIN is an important concept to understand if you’re an active day trader using technical analysis. With technical analysis, you’re trying to find trends in the near term so that you can take action to capitalize them.

Whether you prefer active trading or you’re looking for automatic investing, SoFi Invest can help. With a brokerage account on the SoFi Invest investment app, you can trade stocks, exchange-traded funds (ETFs), IPOs and cryptocurrency with no hidden fees.

Photo credit: iStock/Delmaine Donson


SoFi Invest®
The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . SoFi Invest refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
1) Automated Investing—The Automated Investing platform is owned by SoFi Wealth LLC, an SEC Registered Investment Advisor (“Sofi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC, an affiliated SEC registered broker dealer and member FINRA/SIPC, (“Sofi Securities).

2) Active Investing—The Active Investing platform is owned by SoFi Securities LLC. Clearing and custody of all securities are provided by APEX Clearing Corporation.

3) Cryptocurrency is offered by SoFi Digital Assets, LLC, a FinCEN registered Money Service Business.

For additional disclosures related to the SoFi Invest platforms described above, including state licensure of Sofi Digital Assets, LLC, please visit www.sofi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform. Information related to lending products contained herein should not be construed as an offer or pre-qualification for any loan product offered by SoFi Lending Corp and/or its affiliates.
SOIN1021479

Source: sofi.com

SPAN Margin: How it Works, Pros & Cons

Options trading is far more complex than trading stocks and exchange-traded funds (ETFs). Trading and valuing options includes many variables including intrinsic value and time value, implied volatility, and weighing changes in interest rates.

The SPAN system determines margin requirements on options accounts by considering many inputs along with a portfolio’s global (total) assets to conduct a one-day risk assessment. This article will dive deep into how SPAN works and what investors need to know about it.

What Does SPAN Stand For?

SPAN stands for standardized portfolio analysis of risk, and is an algorithm used in options and futures margin trading.

What Is SPAN Margin?

The SPAN margin calculation helps options traders understand risk in their accounts and assists brokers in managing risk. SPAN is used by options and futures exchanges around the world to determine a trader’s one-day worst-case scenario based on their portfolio positions. Margin requirements can be set in an automated way from the calculation’s output.

Unlike the margin in a stock trading account, which is essentially just a loan from a broker, the margin in an options or futures account is considered a good-faith deposit or a performance bond. It is helpful to understand how a margin account functions before trading complex strategies.

How Does SPAN Margin Work?

The SPAN margin calculation uses modeled risk scenarios to determine margin requirements on options and futures. The primary variables included in the algorithm are strike prices, risk-free interest rates, price changes in the underlying assets, volatility shifts, and the effect of time decay on options.

While buying options typically does not require margin, writing (or shorting) options requires a deposit. In essence, the options seller exposes the broker to risk when they trade. To reduce the risk that the trader cannot pay back the lender, margin requirements establish minimum deposits that must be kept with the broker.

Rather than using arbitrary figures, the SPAN system automates the margin setting process, using algorithms and many sophisticated inputs to determine margin requirements. SPAN margin looks at the worst-case scenario in terms of one-day risk, so the margin requirement output will change each day.

The analysis is done from the portfolio perspective since all assets are considered. For example, the SPAN margin calculation can take excess margin from one position and apply it to another.

SPAN margin also imposes requirements on options and futures contract sellers, known as writers. Traders who are short derivatives contracts often expose the lender to greater risk since losses can be unlimited depending on the positions taken. The broker wants to ensure their risk is protected if the market turns against options and futures writers.

Pros and Cons of SPAN Margin

There are upsides and downsides to SPAN margin in options and futures trading.

The Advantages

Futures options exchanges that use the SPAN margin calculation allow Treasury Bills to be margined. Though fees are typically also imposed by many clearinghouses, the interest earned on the Treasurys may help offset transaction costs if interest rates are high enough.

There is another upside: Net option sellers benefit from SPAN’s holistic portfolio approach. SPAN combines options positions when assessing risk. If you have an options position with a substantial risk in isolation but another options position that offsets that risk, SPAN considers both. The effect is a potentially lower margin requirement.

The Downsides

While SPAN is savvy enough to look at both pieces of an option seller’s combination trade, there are never perfect hedges. Many variables are at play in derivatives markets. There can still be strict margin levels required based on SPAN margin’s one-day risk assessment.

Summary

Pros Cons
Determines margin requirements from an overall portfolio perspective There still might be high margin requirements when two positions do not offset
Traders know their margin amount each day based on the latest market variables Changing market conditions can mean big shifts in day-to-day SPAN margin amounts
Margin deposits in options or futures accounts can collect interest

SPAN and Exposure Margin

Exposure margin is the margin blocked over and above the SPAN margin amount to protect against any mark-to-market losses. Like SPAN margin, exposure margin is set by an exchange. The exchange will block off your entire initial margin (both SPAN margin and exposure margin) when you initiate a futures transaction.

The Takeaway

SPAN margin is helpful to manage risks in trading markets. Algorithms determine margin requirements based on a one-day risk analysis of a trader’s account. While primarily used in futures trading and when writing options, investors should know about this critical tool in financial markets.

Margin accounts come with a unique set of risks and rewards. You can learn more about margin trading with SoFi’s resources.

You can also explore investing options on the SoFi Invest® investment app. Our app allows members to research investment opportunities based on their individual risk and return objectives.

Find out how to get started at SoFi Invest.

FAQ

What does SPAN stand for in margin trading?
SPAN margin stands for “standardized portfolio analysis of risk.” It is a system used by many options and futures exchanges worldwide.

How is SPAN margin used?

SPAN margin is used to manage risk in trading markets. It calculates the suggested amount of good-faith deposit a trader must add to their account in order to engage in options or futures trading. To help mitigate the risk that traders will not be able to pay back the funds the broker lends them, exchanges use the SPAN system to calculate a worst possible one-day outcome and set a margin requirement accordingly. SPAN margin reduces the risk of a trader growing their leverage ratio too high based on the automated risk calculations. SPAN margin can also allow lower margin requirements for options sellers who trade multiple positions.

What is a SPAN calculation?

SPAN is calculated using risk assessments. That means an array of possible outcomes is analyzed based on different market conditions using the assets in a portfolio. These risk scenarios specify certain changes in variables such as price changes, volatility shifts, and decreasing time to expiration in options trading.

Inputs into a SPAN calculation include strike prices, risk-free interest rates, price changes in underlying assets, implied volatility changes, and time decay. After calculating the margin on each position, SPAN can shift excess margin on a single position to other positions that might be short on margin. It is a sophisticated tool that considers a trader’s entire portfolio.


Photo credit: iStock/NakoPhotography

SoFi Invest®
The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . SoFi Invest refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
1) Automated Investing—The Automated Investing platform is owned by SoFi Wealth LLC, an SEC Registered Investment Advisor (“Sofi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC, an affiliated SEC registered broker dealer and member FINRA/SIPC, (“Sofi Securities).

2) Active Investing—The Active Investing platform is owned by SoFi Securities LLC. Clearing and custody of all securities are provided by APEX Clearing Corporation.

3) Cryptocurrency is offered by SoFi Digital Assets, LLC, a FinCEN registered Money Service Business.

For additional disclosures related to the SoFi Invest platforms described above, including state licensure of Sofi Digital Assets, LLC, please visit www.sofi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform. Information related to lending products contained herein should not be construed as an offer or pre-qualification for any loan product offered by SoFi Lending Corp and/or its affiliates.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
Utilizing a margin loan is generally considered more appropriate for experienced investors as there are additional costs and risks associated. It is possible to lose more than your initial investment when using margin. Please see https://www.sofi.com/wealth/assets/documents/brokerage-margin-disclosure-statement.pdf for detailed disclosure information.
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Source: sofi.com

Alphabet Stock Split: A Win for Retail Investors … And the Dow?

Google parent Alphabet (GOOGL, $2,752.88) briefly added more than $180 billion in market value at the opening bell Wednesday after the search giant easily topped fourth-quarter estimates … and delivered on many investors’ longtime wishes by announcing a 20-for-1 stock split. 

An Alphabet stock split would not only make its A-class GOOGL shares and C-class GOOG shares more accessible to retail investors, but also perhaps open the door for inclusion into the elite Dow Jones Industrial Average one day.

Alphabet announced both the stock split and its quarterly results late Tuesday, resulting in a jump in GOOGL stock of as much as 10% in the first few minutes of Wednesday’s session. That’s the biggest opening gap-up on earnings for its shares since April 2008, when they popped 19.1%, according to data from Bespoke Investment Group.

As good as Alphabet’s quarterly results were – it earned $30.69 per share on $75.3 billion in revenues, topping respective estimates for $27.34 per share on $72.3 billion – Wednesday’s price action was likely driven every bit as much by news of its proposed share split. 

The Alphabet Stock Split Explained

The communication services behemoth intends to issue 20 shares for each share held of its Class A, Class B and Class C stock (subject to shareholder approval, of course) after the close of business on July 15.

Now, stock splits are meaningless on a fundamental basis. A company’s operations and prospects remain the same. In this particular case, the Google stock split is the equivalent of making change: Shareholders hand Alphabet a $20 bill and get 20 one-dollar bills in return.

But markets love splits all the same, and that seems to be the case yet again with Alphabet’s share split. 

And, to be fair, there are some technical reasons why this 20-for-1 split could give GOOGL stock a tailwind.

Alphabet closed Tuesday’s trade around $2,750 per share. Post-split, that comes to about $138 per share. Although brokerages already offer customers the option of buying and selling fractional shares for free, the split should theoretically make GOOGL more popular with retail investors currently put off by the four-figure share price.

Looking farther out, it also makes Alphabet available for inclusion in the Dow Jones Industrial Average.

Google in the Dow? Maybe, But …

The blue-chip barometer isn’t built like the other two major indexes, and that’s what makes Alphabet’s stock split so important.

The S&P 500 and Nasdaq Composite are weighted by market capitalization: the stock price multiplied by the number of shares outstanding. The Dow, however, is weighted by price. (If that seems weird, just know that the original 12 stock Dow was created in 1896 by Charles Dow, and the guy had to calculate the average every day by hand.)

One issue with the Dow’s price-weighted construction is that it shuts out any stock trading at GOOGL’s current lofty level. At $2,700 a share, Alphabet’s stock would skew the average into meaninglessness.

UnitedHealth Group (UNH, $468.41), at roughly $475 a share, holds the greatest weight in the average today. Adding Alphabet at $3,000 would turn the Dow into the “Google and 29 Other Stocks Average.”

Also know that it’s up to the Dow’s editors at S&P Dow Jones Indices on whether to add it to the average. That’s not a simple decision. Alphabet is a member of the market’s communication services sector. The Dow has two components from that sector already: Verizon (VZ, $53.20) and Walt Disney (DIS, $144.49). 

Does one of those stocks then get the boot? VZ is the only telecom in the blue-chip average. DIS is the only media and entertainment conglomerate. The editors construct the Dow to reflect the broader economy. Shouldn’t the Dow have a telco and a media giant?

And then there’s the weighting problem again. If Alphabet (at around $140) replaced Verizon (more than $50), the communications sector’s weight in the Dow would rise significantly.

The editors aren’t bound by some rule that requires them to swap stocks within sectors. International Business Machines (IBM, $135.53) hasn’t impressed anyone for going on a decade now. Pulling Big Blue and replacing it with Google might not be a bad idea. Their respective share prices would be roughly in line with each other after Alphabet’s stock split.

Still, by strict definition, such a move would lift the communications sector’s weight in the average at the expense of the tech sector. It’s something the Dow editors would have to think about.

A Small Impact on the Market

Lastly, it’s important to know that getting tapped for the Dow is largely symbolic. 

When a stock is included in the S&P 500, its shares rise because a total of $13.5 trillion is indexed or benchmarked to the most widely used gauge of U.S. equity performance. Passive funds tracking the S&P 500 must own all of its components, weighted by market value. There’s no way around it.

The Dow Jones Industrial Average, by comparison, is a dud in this regard. True, the blue-chip barometer can’t be beat for brand familiarity. When regular folks talk about what the market’s been up to lately, they usually mean the Dow.

But where the S&P 500 leads tens of trillions of dollars by the nose, only $36.6 billion is indexed or benchmarked to the Dow. Mega-cap stock GOOGL, by itself, is worth roughly 53 times all the money tracking and chasing the industrial average.

Sure, it would be neat if Alphabet became a Dow stock, and perhaps fitting too. But that’s all speculative.

What we do know about the Alphabet stock split is that it should bring in legions of retail investors, possibly adding a tailwind – for a time – to the share price. Volume would increase … but then so too would volatility.

So be careful what you wish for.

Source: kiplinger.com

Commodities Trading Guide for Beginners

Investing in commodities — e.g. agricultural products, energy, and metals — can be profitable if you understand how the commodity markets work. Commodities trading is generally viewed as high risk, since the commodities markets can fluctuate dramatically owing to factors that are difficult to foresee (like weather) but influence supply and demand.

Nonetheless, commodity trading can be useful for diversification because commodities tend to have a low or even a negative correlation with asset classes like stocks and bonds.

Commodities fall firmly in the category of alternative investments, and thus they may be better suited to some investors than others. Getting familiar with commodity trading basics can help investors manage risk vs. reward.

What Is Commodities Trading?

Commodity trading simply means buying and selling a commodity on the open market. Commodities are raw materials that have a tangible economic value. For example, agricultural commodities include products like soybeans, wheat, and cotton. These, along with gold, silver, and other precious metals, are examples of physical commodities.

There are different ways commodity trading can work. Investing in commodities can involve trading futures, options trading, or investing in commodity-related stocks, exchange-traded funds (ETFs), mutual funds, or index funds. Different investments offer different strategies, risks, and potential costs that investors need to weigh before deciding how to invest in commodities.

Unique Traits of the Commodities Market

The commodities market is unique in that market prices are driven largely by supply and demand, less by market forces or events in the news. When supply for a particular commodity such as soybeans is low — perhaps owing to a drought — and demand for it is high, that typically results in upward price movements.

And when there’s an oversupply of a commodity such as oil, for example, and low demand owing to a warmer winter in some areas, that might send oil prices down.

Likewise, global economic development and technological innovations can cause a sudden shift in the demand for certain commodities like steel or gas or even certain agricultural products like sugar.

Thus, investing in commodities can be riskier because they’re susceptible to volatility based on factors that can be hard to anticipate. For example, a change in weather patterns can impact crop yields, or sudden demand for a new consumer product can drive up the price of a certain metal required to make that product.

Even a relatively stable commodity such as gold can be affected by rising or falling interest rates, or changes in the value of the U.S. dollar.

In the case of any commodity, it’s important to remember that you’re often dealing with tangible, raw materials that typically don’t behave the way other investments or markets tend to.

Commodity vs Stock Trading

Take stocks vs. commodities. The main difference in stock trading vs commodity trading lies in what’s being traded. When trading stocks, you’re trading ownership shares in a particular company. If you’re trading commodities, you’re trading the physical goods that those companies may use.

There’s also a difference in where you trade commodities vs. stocks. Stocks are traded on a stock exchange, such as the New York Stock Exchange (NYSE) or Nasdaq. Commodities and commodities futures are traded on a commodities exchange, such as the New York Mercantile Exchange (NYME) or the Chicago Mercantile Exchange (CME).

That said, and we’ll explore this more later in this guide, it’s possible to invest in commodities via certain stocks in companies that are active in those industries.

Types of Commodities

Commodities are grouped together as an asset class but there are different types of commodities you may choose to invest in. There are two main categories of commodities: Hard commodities and soft commodities. Hard commodities are typically extracted from natural resources while soft commodities are grown or produced.

Agricultural Commodities

Agricultural commodities are soft commodities that are produced by farmers. Examples of agricultural commodities include rice, wheat, barley, oats, oranges, coffee beans, cotton, sugar, and cocoa. Lumber can also be included in the agricultural commodities category.

Needless to say, this sector is heavily dependent on seasonal changes, weather patterns, and climate conditions. Other factors may also come into play, like a virus that impacts cattle or pork. Population growth or decline in a certain area can likewise influence investment opportunities, if demand for certain products rises or falls.

Livestock and Meat Commodities

Livestock and meat are given their own category in the commodity market. Examples of livestock and meat commodities include pork bellies, live cattle, poultry, live hogs, and feeder cattle. These are also considered soft commodities.

You may not think that seasonal factors or weather patterns could affect this market, but livestock and the steady production of meat requires the steady consumption of feed, typically based on corn or grain. Thus, this is another sector that can be vulnerable in unexpected ways.

Energy Commodities

Energy commodities are hard commodities. Examples of energy commodities include crude oil, natural gas, heating oil or propane, and products manufactured from petroleum, such as gasoline.

Here, investors need to be aware of certain economic and political factors that could influence oil and gas production, like a change in policy from OPEC (the Organization of the Petroleum Exporting Countries). New technology that supports alternative or green energy sources can also have a big impact on commodity prices in the energy sector.

Precious Metals and Industrial Metals

Metals commodities are also hard commodities. Types of metal commodities include precious metals such as gold, silver, and platinum. Industrial metals such as steel, copper, zinc, iron, and lead would also fit into this category.

Investors should be aware of factors like inflation, which might push people to buy precious metals as a hedge.

How to Invest in Commodities

If you’re interested in how to trade commodities, there are different ways to go about it. It’s important to understand the risk involved, as well as your objectives. You can use that as a guideline for determining how much of your portfolio to dedicate to commodity trading, and which of the following strategies to consider.

Recommended: What Is Asset Allocation?

Trading Stocks in Commodities

If you’re already familiar with stock trading, purchasing shares of companies that have a commodities connection could be the simplest way to start investing.

For example, if you’re interested in gaining exposure to agricultural commodities or livestock and meat commodities, you may buy shares in companies that belong to the biotech, pesticide, or meat production industries.

Or, you might consider purchasing oil stocks or mining stocks if you’re more interested in the energy stocks and precious or industrial metals commodities markets.

Trading commodities stocks is the same as trading shares of any other stock. The difference is that you’re specifically targeting companies that are related to the commodities markets in some way. This requires understanding both the potential of the company, as well as the potential impact of fluctuations in the underlying commodity.

You can trade commodities stocks on margin for even more purchasing power. This means borrowing money from your brokerage to trade, which you must repay. This could result in bigger profits, though a drop in stock prices could trigger a margin call.

Futures Trading in Commodities

A futures contract represents an agreement to buy or sell a certain commodity at a specific price at a future date. The producers of raw materials make commodities futures contracts available for trade to investors.

So, for example, an orange grower might sell a futures contract agreeing to sell a certain amount of their crop for a set price. A company that sells orange juice could then buy that contract to purchase those oranges for production at that price.

This type of futures trading involves the exchange of physical commodities or raw materials. For the everyday investor, futures trading in commodities typically doesn’t mean you plan to take delivery of two tons of coffee beans or 4,000 bushels of corn. Instead, you buy a futures contract with the intention of selling it before it expires.

Futures trading in commodities is speculative, as investors are making educated guesses about which way a commodity’s price will move at some point in the future. Similar to trading commodities stocks, commodities futures can also be traded on margin. But again, this could mean taking more risk if the price of a commodity doesn’t move the way you expect it to.

Trading ETFs in Commodities

Commodity ETFs (or exchange-traded funds) can simplify commodities trading. When you purchase a commodity ETF you’re buying a basket of securities. These can target a picture type of commodities, such as metals or energy, or offer exposure to a broad cross-section of the commodities market.

A commodity ETF can offer simplified diversification though it’s important to understand what you own. For example, a commodities ETF that includes options or commodities futures contracts may carry a higher degree of risk compared to an ETF that includes commodities companies, such as oil and gas companies, or food producers.

Recommended: How to Trade ETFs

Investing in Mutual and Index Funds in Commodities

Mutual funds and index funds offer another entry point to commodities investing. Like ETFs, mutual funds and index funds can allow you to own a basket of commodities securities for easier diversification. But actively managed mutual funds offer investors access to very different strategies compared with index funds.

Actively managed funds follow an active management strategy, typically led by a portfolio manager who selects individual securities for the fund. So investing in a commodities mutual fund that’s focused on water or corn, for example, could give you exposure to different companies that build technologies or equipment related to water sustainability or corn production.

By contrast, index mutual funds are passive, and simply mirror the performance of a market index.

Even though these funds allow you to invest in a portfolio of different securities, remember that commodities mutual funds and index funds are still speculative, so it’s important to understand the risk profile of the fund’s underlying holdings.

Commodity Pools

A commodity pool is a private pool of money contributed by multiple investors for the purpose of speculating in futures trading, swaps, or options trading. A commodity pool operator (CPO) is the gatekeeper: The CPO is responsible for soliciting investors to join the pool and managing the money that’s invested.

Trading through a commodity pool could give you more purchasing power since multiple investors contribute funds. Investors share in both the profits and the losses, so your ability to make money this way can hinge on the skills and expertise of the CPO. For that reason, it’s important to do the appropriate due diligence. Most CPOs should be registered with the National Futures Association (NFA). You can check a CPO’s registration status and background using the NFA website.

Advantages and Disadvantages of Commodity Trading

Investing in commodities has its pros and cons like anything else, and they’re not necessarily right for every investor. If you’ve never traded commodities before it’s important to understand what’s good — and potentially not so good — about this market.

Advantages of Commodity Trading

Commodities can add diversification to a portfolio which can help with risk management. Since commodities have low correlation to the price movements of traditional asset classes like stocks and bonds they may be more insulated from the stock volatility that can affect those markets.

Supply and demand, not market conditions, drive commodities prices which can help make them resilient throughout a changing business cycle.

Trading commodities can also help investors hedge against rising inflation. Commodity prices and inflation move together. So if consumer prices are rising commodity prices follow suit. If you invest in commodities, that can help your returns keep pace with inflation so there’s less erosion of your purchasing power.

Disadvantages of Commodity Trading

The biggest downside associated with commodities trading is that it’s high risk. Changes in supply and demand can dramatically affect pricing in the commodity market which can directly impact your returns. That means commodities that only seem to go up and up in price can also come crashing back down in a relatively short time frame.

There is also a risk inherent to commodities trading, which is the possibility of ending up with a delivery of the physical commodity itself if you don’t close out the position. You could also be on the hook to sell the commodity.

Aside from that, commodities don’t offer any benefits in terms of dividend or interest payments. While you could generate dividend income with stocks or interest income from bonds, your ability to make money with commodities is based solely on buying them low and selling high.

The Takeaway

Commodities trading could be lucrative but it’s important to understand what kind of risk it entails. Commodities trading is a high-risk strategy so it may work better for investors who have a greater comfort with risk, versus those who are more conservative. Thinking through your risk tolerance, risk capacity, and timeline for investing can help you decide whether it makes sense to invest in commodities.

Fortunately, there are a number of ways to invest in commodities, including futures and options (which are a bit more complex), as well as stocks, ETFs, mutual and index funds — securities that may be more familiar. To explore some ways you might invest in commodities, open an online brokerage account with SoFi Invest®. And remember: SoFi members have access to complimentary financial advice from a professional.

Photo credit: iStock/FlamingoImages


SoFi Invest®
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Options involve risks, including substantial risk of loss and the possibility an investor may lose the entire amount invested in a short period of time. Before an investor begins trading options they should familiarize themselves with the Characteristics and Risks of Standardized Options . Tax considerations with options transactions are unique, investors should consult with their tax advisor to understand the impact to their taxes.
Investment Risk: Diversification can help reduce some investment risk. It cannot guarantee profit, or fully protect in a down market.
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Source: sofi.com