Feb 23, 2009

Well, today was a horrible day in the market. But there are trends that are building. I have noticed that gold goes to about 1040 an ounce then it falls back. If you are into risky plays I think this is something that I would short or buy a put on. Now a lot of people do not understand “shorting” a stock, and know even less about “puts”. Shorting a stock is selling a stock that you do not own with the promise to buy it back at a later date. So if stock ABC is selling for ten dollars and you think it is going lower than you “short” it, which means you put out a number of stocks that someone else can purchase in hopes that the stock goes down in price. If stock ABC goes to eight dollars and you are happy with the profit you have made and you want to get out of the trade you would need to purchase the same amount of shares that you shorted which is called covering your position. Once you have purchased the same amount you shorted you have none of the stock and whatever money you have left over from the purchase. That is how shorting works and how money is made doing it. Puts are a form of options and options are a lot more complicated. I will not explain puts in detail in this post because it will be a whole post all to itself in the future.
Another thought I had today is a lot of people can’t decide what kind of investor they are. When purchasing stocks it is imperative to know a timeframe on your trade. You need to know if you are buying a stock for a long term investment, or if it is for a quick profit. Most of my trades I give 18 months to work there course. When I make a recommendation on my blog I will give a timeframe for the trade and where I expect it to go. With that said, I always put in a 20% stop loss on all my stock trades.
I hope this information has helped you. The trade comment I made for gold is a brief one, but I would short gold at 1040 and would be out after a bear market rally which should bring gold down to 925-950.