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Short-Term Stock Market Investing Techniques

Instructor: Yuanxin (Amy) Yang Alcocer

Amy has a master's degree in secondary education and has taught math at a public charter high school.

In this lesson, you will learn what techniques you can use when investing in stocks for the short-term. You will also learn some techniques for buying and selling stocks within the day and over longer periods of time.

Short-Term Stock Market Investing

When it comes to buying and selling stocks, people have different strategies. Some people hold on to their stocks for the long term while other people buy and sell within a relatively short period of time. When people buy and sell within a short period of time, they are participating in what is called short-term market investing. Let's take a look at some techniques that people use when they participate in short-term market investing.

Day and Trend Trading

When people follow short-term trends in the stock market and buy and sell accordingly, it is called trend trading. They look at the chart of a particular stock, and they pay attention to the ups and downs of this chart. When the chart starts to show an upswing, that's when these people buy, and when the upswing is almost over, these people sell. When people buy and sell in the same day, then it is referred to as day trading.

For example, say a particular stock drops down to $13.23 per share at 11:15 am and then begins to climb to $13.54 at 11:30 am, and $14.02 at 11:45 am. Trend traders will pick up on this and proceed to purchase the stock. Say such a trend trader purchased 100 shares at $14.02 at 11:45 am. This trend trader then proceeds to keep a close eye on this stock. He watches the stock as it grows during the day. It is still growing when the market closes, so this trend trader holds on to his shares overnight. Then when the market opens up again the next day, he is again closely watching this stock. He sees the stock prices go up a little more: $15.23 at 10:00 am and $15.24 at 10:15 am. Then he sees the stock price drop a little: $15.21 at 10:30 am. He is seeing a break in the upward trend of this stock. He then proceeds to sell. He sells his 100 shares for $15.21 at 10:30 am.

How much did he make? He spent $14.02 * 100 = $1,402 to purchase these stocks, and then he earned $15.23 * 100 = $1,523 when he sold his stocks. His earnings minus his purchase amount is $1,523 - $1,402 = $121. Subtracting his trading fees of $14, he made a total profit of $121 - $14 = $107. Not bad for a day's worth of following the trend.

Options Trading

Another technique people use is that of options trading. This is when traders purchase the right to buy or sell at a particular price point. You can liken it to seeing a car you really want to purchase, but you want to purchase it 3 months from now. The seller tells you that if you pay him $2,000 today, he will let you purchase the car for $40,000 in 3 months. When these 3 months are up, it is up to you to decide whether you want to exercise your right to purchase the car for $40,000 or not. Either way, you are out $2,000. Now, if this car has increased in value because it was found out that this car appeared in a really famous movie back in the day and is now worth $80,000, then you will certainly want to take up your option to purchase the car for $40,000. But on the other hand, if you find out that this car was involved in three major accidents and is really only worth $1,500, then you probably wouldn't want to take up on your option to buy for $40,000. As you can see, there is a certain amount of risk you take when you purchase such an option. When it comes to stocks, you risk the price of the stock either dropping too low if you purchase a right to sell or rising too high if you purchase a right to buy.

For example, if you purchase a right to buy a particular stock at $34.98 in 2 months and the stock drops to $30.97, you wouldn't want to buy at your price as you'll spend more money than you need to. You have lost out on this options purchase. But if you purchase a right to buy a particular stock at $34.98 in 2 months and the stock increases to $35.01, then you will succeed. You will be saving money, and your portfolio will have increased in value just from exercising your right to purchase.

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