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Why Stock Prices Move

Stock prices move up and down but much of their movement is difficult to explain. We often see headlines explaining that changes in the price of oil or the Japanese yen affected stock prices but that seems unlikely to be the real reason the price of a company that sells sports collectibles in California, for example, moves up or down 3% in a day. In addition to headlines, there are a couple of academic theories about why stock prices move. The Efficient Market Hypothesis (EMH) is probably the most popular academic theory but a new theory, the Adaptive Market Hypothesis ...
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Generate Immediate Income Selling Puts Like Warren Buffett

Almost every investor wants to be like Warren Buffett in some way. While there is unlikely to ever be another Buffett, we can certainly learn from studying his investments. Many analysts point to his ideas about value investing and being patient as keys to his success. What they could be missing is how, at times, Buffett has combined value investing, patience and a desire to generate cash into a successful investment strategy. The strategy associated with this lesson is one any individual investor can apply.One of Warren Buffett’s biggest winner is Coca-Cola (NYSE: KO) according to Berkshire Hathaway’s latest annual ...
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Trading the End of the Year in the Stock Market

In everyday living, we expect certain seasonal patterns to unfold every year. In the fourth quarter of the year, we expect Halloween to give way to Thanksgiving and then Christmas. Each holiday has its own customs and decorations and each is unique. But each follows a well-defined pattern.  It’s human nature to expect this level of predictability to be seen in the stock market simply because we like to see some sense of order in the chaos of the market action. The result of this is popular strategies like “sell in May and go away.”Testing has shown that you can ...
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Benefiting from market selloffs: A Low-Cost, Low-Risk Bear Market Trade

In hindsight, we all know it was a good idea to short internet stocks in the first quarter of 2000. Shorting a stock involves selling it without owning it. You borrow shares from your broker. Eventually you’ll need to buy the shares to repay the loan. If the price drops before then, you are buying at a lower price than you sold at and you earn a profit. The idea of short selling is essentially the same as with any other trade. You want to buy low and sell high. With short selling, the selling comes first.Short sellers can make ...
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Nobel Prize Winning Ideas Can Help You Become a Better Investor

Finance and economics professors have spent years trying to explain how stock markets work. One of the most popular theories, the Efficient Market Hypothesis (EMH), starts with the assumption that investors are rational and they rationally set prices using all of the information that is available. This theory fails to explain market crashes like the one that occurred in October 1987.There was no news to justify a one-day, 22% selloff in the Dow Jones Industrial Average. If investors are rational, there was no need for selling. In fact, they should have been buying under the EMH since prices were quickly ...
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Stocks at a Discount: Call Options for Traders

Based on its growth prospects, Alphabet Inc. (Nasdaq: GOOGL) appears to be an attractive stock. Amazon.com, Inc. (Nasdaq: AMZN) also appears to be attractive. The problem for many individual investors is their price with both stocks trading above $700 for much of the past year. For a small investor, one with an account of $5,000 or even less, these stocks can be out of reach. One share could represent 15% of the account or more.High-priced stocks present small investors with a problem. There are about 60 stocks priced at more than $200 a share and some of these stocks are ...
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Intermarket Trading Strategies: An Overview of How Other Markets Impact Stocks

It seems obvious to state that markets are connected and moves in one market are often related to moves in other markets. But in 1991, this was a new idea. In that year, John Murphy published Intermarket Technical Analysis Trading Strategies for the Global Stock, Bond, Commodity, and Currency Markets to provide the first explanation of the relationships between markets. First, let’s look at Murphy’s ideas and then we can develop trading strategies based on intermarket relationships.Many traders believe intermarket relationships can define the best time to buy and sell asset classes. For example, as the economy dips into recession, ...
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An Introduction to Options

Options are among the most versatile investments available to individual investors. They also might be among the most misunderstood.Options are low-priced derivative contracts that can help improve investment results or they can help reduce risks. Options can also be used to generate income. Unfortunately, many individual investors believe options are too risky for them. The truth is, when used properly, options can be a low risk way to increase and protect wealth. In future articles, we will explain specific trading strategies for options. This article will provide an overview of the trading instruments.As the name implies, trading options gives the ...
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