How to Outperform the Stock Market?

How to Outperform the Stock Market?

Albert Einstein once said there is nothing more powerful than compound interest. Apply that logic to buying a stock in the stock market, and you can double your money in ten years. Further leverage that logic by putting 5% down on a home, and you can possibly multiply your money by four times, eight times… even twelve times in those same ten years!

Need Proof?

Let’s say you have $10,000 and want to find the best return for your investment. You can certainly put your money in the stock market, and if your stock goes up by an average of 7% per year, your $10,000 nest-egg will be worth nearly double after 10 years. ($19,472 to be exact.) Not bad for passive income!

However, if you take that same $10,000, and apply it as a down payment toward a 200,000 home that appreciates by half the rate of the stock market (3.5% a year average), your home will be worth over $282,000! Even if you get an interest-only loan, your initial $10,000 investment will be worth over $92,000 after selling the home and paying off your loan! If your home appreciates at the same rate as the stock market (an average of 7% per year), and your initial $10K investment that bought a 200,000 home, will parlay into owning a $384,000 home! Pay off your $190,000 loan, and you’ll be sitting on $194,000 in cash!

If you’re wondering about monthly payments, you have two options: If this is for a home you will live in, the monthly payments will likely be the same as you would be paying in rent anyway, and there are additional tax benefits that haven’t even been discussed in this article. If you buy this property as a rental property, your tenant’s rent payments should more than cover your mortgage payment. (There’s nothing more beautiful than letting someone else pay for your real estate investment. You just can’t do that in the stock market, but it’s done all the time in Real Estate.) If you’re still in doubt, you might want to read a couple other well-known books — “The Wealthy Barber” by David Chilton, “Rich Dad, Poor Dad” by Robert Kiyosaki, or “How to get Rich” by Donald Trump. If you don’t feel like running out and buying a book right now, feel free to listen to a free recording where a Colorado real estate investor shares his secrets to success. Listen to the free recording at: http://www.automatedhomefinder.com/education/investments101.php

Too much risk?

Yes, there is risk, but it is doubtful that your risk is any higher than the risk involved with investing in the stock market in the first place. The higher the risk, the higher the reward, and real estate has been a time-proven investment vehicle for millions of wealthy individuals — Donald Trump, Warren Buffett and David Chilton (“The Wealthy Barber” himself.)

How to get started:

If you’d like to explore the idea of investing in real estate in your area, simply look up a buyer-agent in your area, or start a search on the internet and start a couple real estate searches to see what kind of home you can get in your area. If you’re not sure how much home you can afford, your Realtor can help, or put you in touch with a lender who can.

If you have money that you would like to invest to help grow your overall finances, you might have considered a high interest savings account in a bank, the stock market, bonds, and so forth. Of course, the fastest way to make profit (but also the riskiest) is by using the stock market. It is for this reason that people putting money into stocks should have as much information on them as possible to help them avoid losing it all.

1. How Trades Work on The Stock Market

If you are looking to do just one, or many, trades you will need to get a stockbroker. Brokers can also offer advice about that stocks to trade and the condition of the market. These full-service brokers charge a relatively high commission. To cut costs, many people use discount brokers that charge significantly less. The downside being that you don’t get expert advice, but if you’re willing to forgo that pleasantry you might want to rely on the fact that most brokers will not do a trade that is not profitable.

2. Brokerage Services

Brokers often engage in online trading and can even provide you with assistance for your trades. This is known as broker assisted trading and some brokers offer options like Interactive Voice Response System for placing orders by telephone and wireless trading systems for making orders by using web-enabled cellular phones or other handheld devices. They take their job very seriously and are always connected  to be able to make a trade.

3. Track Stock Market Movements

Most brokers will put forth the extra effort to be able to allow their clients to place orders over the internet. Special software may also be available to help clients see charts and graphs. The entire system is password protected and usually doesn’t cost a lot more. This can be very convenient and save you time and money.

4. Stock Orders Also, What They Mean

Market Order – The instruction to buy or sell at the current market price

Stop Order – Instructs the broker to trade at a specific price

Limit Order – Instructs the broker to trade at a given price or better

GTC – This stand for good until cancelled. Your desire to buy or sell will be executed until you say stop.

5. The Stereotypical Trade

Your average trade takes place in something called round lots, multiples of 100. While it’s possible to trade other amounts of stocks, but this kind of trade is called an odd lot. Trading software can handle both types of orders, but odd lot orders are slightly more difficult to fill than the most common trade denomination.

The key to using options to increase your stock market profits is that you must be able to correctly predict both the direction that the stock will move, and the approximate time frame in which the move will take place.  If you miscalculate on either of these values, you will either break even, or loose. On the other hand, if you are correct, your profits may well exceed three times the amount you would have made with just a straight investment in the stock.

An option gives the owner the right but not the obligation to purchase something. More specifically, stock options are financial instruments that come in four varieties: Long or Short positions on a Put or Call.

Long means a person purchases a Put or a Call. Short means a person sells or writes a Put or Call. Option writing is a more advanced topic so this course will focus on the more common long or option buying, and the following descriptions assume all positions are long.

A Put is the instrument that profits when the underlying stock declines in price. When the stock goes down, the value of a Put goes up. A Call is the reverse of a Put. The value of a Call goes up when the stock increases in price.

As you can see, if you expect the stock price to go up, you buy a call. If you expect the price to go down, you buy a put. There are two more parts to an option that need to be covered. First is the expiration date.

All options have a date in which they expire or become worthless. Remember that an option gives the owner the right to purchase something. This right is for a limited amount of time.  Depending on the stock, different options might be available for several consecutive months into the future, or there may be a couple of months skipped. The specific day of the month that an option expires is always the third Friday of the month, unless it is a holiday, in which case the expiration is on Thursday.

The second element is the strike price. This is the price that the option will be exercised at. Again, an option is the right to buy something, and the price at which something is bought is the strike or exercised price. Depending upon the option, these prices may be incremented by $2.50 up to $10.

This all adds up to a lot of choices when it comes to buying an option. Calls or puts plus different expiration months, and multiple strike prices within each month is a lot of different decisions.

With the abundance of choices, the number of contracts traded for a specific option can be small for a stock that is not particularly popular in the news. This fact my limit your trading opportunities or may result in a large price spread between the bid and ask prices.

If you can identify certain situations that will influence the stock price within a defined time period, you may be able to use stock options to triple your returns. Many investors have found such patterns and are making excellent profits by carefully selecting the right stock options.

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