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What Is Coverage Ratio and How Calculating It Helps?

Company research is an essential element of making stock trading decisions. Helping in this research are calculations such as the coverage ratio.    

What Is Coverage Ratio and How Calculating It Helps? 

Coverage ratio is the measurement of a company’s capability to meet its financial obligations such as dividends and interest payments as well as its debt. It significantly helps in company research and is something you rely on along with advanced trading software.  

A higher coverage ratio makes it easier for the company to fulfil its financial obligations. Investors and analysts study the historical trend of a stock’s coverage ratios to detect whether the financial position of a company has changed.    

How Crucial Is the Coverage Ratio?

  • Coverage ratios help detect companies that could be heading for troubled financial waters. 

Calculating Coverage Ratio

  • Interest coverage ratio/Interest earned ratio

It measures a company’s ability to pay the interest of its debt.

It is calculated as: 

EBIT / Interest Expense

EBIT refers to earnings before interest and taxes. A satisfactory interest coverage ratio is usually 2 or more.  

  • Debt Service Coverage Ratio (DSCR)

It measures the ability of a company to pay all its near-term debt principal plus interest payments 

It is calculated as:

Net operating income / Total Debt Service

A figure of 1 or above indicates the company’s earnings are sufficient to cover all debt obligations

  • Asset Coverage Ratio

It measures a company’s balance sheet assets.

It is calculated as:

Total Assets – Short-term Liabilities / Total Debt

Total assets are buildings, machinery, inventory, land and other such tangible assets

A 1.5 ratio is satisfactory for utilities, while a ratio of 2 is satisfactory for industrials. The coverage ratio is one of the many indicators that can help stock traders gauge the worth of a business. It helps while trading stocks online.  

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Dividend Stocks to Deal with the Market Uncertainty

A steady flow of income through some solid dividend stocks can help calm the mind of any investor agitated by the uncertainty doing the rounds.

Dividend Stocks to Deal with the Market Uncertainty

Covid-19 cases are rising again in Europe and the US, causing further gloom. European countries are thinking of imposing lockdown again, generating fears of another economic slowdown. These are concerns that dominate online trading now. But all is not lost, and there are some great opportunities out there particularly if your interest is for stocks providing reliable income.   

Investors seek dividend stocks if they’re looking for regular income. Sometimes, these stocks come really cheap. That raises your potential for profits. Motley Fool analyst David Jagielski particularly has a few stocks in mind. Whatever the circumstances have been, these stocks have paid shareholders regular income.  

CVS Health ($CVS)

The company has been down 20% since the beginning of 2020, despite the S&P 500 climbing nearly 6%. Though the company experienced a decline, it has managed to adapt to the Covid-19 pandemic and has provided testing locations for patients all through the country as well as telehealth functionalities in almost every state. Sales have managed to be steady. 

The second-quarter results released by the company on August 5 actually revealed year over year sales up by 3% for the period till June-end, touching $65.3 billion. Its net income was reported to be $3 billion, a 54% rise. This improvement was significant enough for CVS to raise its cash and earnings guidance from its operating activities.     

What really makes the stock exciting is that it trades at a P/E (price-to-earnings) ratio much lower than any average healthcare stock listed on the Health Care Select Sector SPDR Fund. While a typical healthcare stock listed on the fund has a P/E ratio of 24 as well as a book value that’s over 4 times, the CVS stock trades at a P/E of only 9 as well as a book value of around 1.2. The quarterly dividend stock is currently at $0.5, a 3.3% yield. That’s higher than the average S&P 500 yield of around 2%.              

Pfizer ($PFE) 

Another healthcare stock in the attention of Jagielski is Pfizer. Pfizer is in the limelight for being in the race to get a Covid-19 vaccine developed. The stock is down 4% in 2020. Comparing it with CVS, Pfizer stock is actually performing better. Still, it isn’t anywhere close to the S&P 500. 

The great news about Pfizer is its BioNTech experimental coronavirus vaccine which is in phase 3 of trials. It has been making significant progress, which could eventually lead to the company applying for Emergency Use Authorization (EUA) by next month. With the vaccine coming through, the company could add $3.5 billion worth revenue in 2021, believes Jagielski. In 2022, that could add $1.4 billion to the company’s revenue. While those figures may not be significant for a company of the stature of Pfizer that earned a revenue of $51.8 billion in 2019, the stock is known for its consistency and the overall value it provides, even without the highlight of a Covid-19 vaccine. The company has earned profits margins exceeding 10% in every one of the previous 10 years.    

Moreover, Pfizer has a P/E of just 15, and its P/B is just 3.3. That’s way below the value of the average healthcare stock. Recently, the company has also been increasing its dividend payments every year. Its current quarterly dividend is $0.38, a yield of 4.1%.          These are just some of the stocks to consider if your strategy is to acquire a steady flow of income that could help tackle the uncertainty the market throws at you. Many trading strategies can be considered, including exchange traded funds (ETFs).

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Standout Stocks with Immediate Growth Potential

For investors with immediate growth objectives, stocks that are poised to rise above their competitors could be what they need.  

Standout Stocks with Immediate Growth Potential 

Are you looking for great growth stocks? Whatever be your investing strategy, you can get started with commission free trading

For immediate growth opportunities, how about stocks that are just breaking away from the other stocks in their segment? These stocks appear to grow faster than the others and fill investors with confidence for the short term at least, says Motley Fool analyst Zhiyuan Sun. With immediate growth prospects, these stocks are for those who want to buy right now and sell when these companies fail to deliver great results.      

Stocks such as these have the potential to provide instant growth though they may not necessarily be long-term options. Make the right trading decisions based on your financial goals, and use advanced trading platforms online. 

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Should You Be Worried about the Slump for Major Indexes?

Tech stocks led the recent slump for the major indexes. That brought the market to correction territory, but the bull market could keep going.    

Should You Be Worried about the Slump for Major Indexes? 

Investors employing long-term trading don’t need to be worried about short-term glitches. That’s exactly what you learn while trading stocks online. But still, it is hard to ignore what happened at the beginning of the second week of September.     

The Recent Tech Slump 

We have been recently seeing a tech slump. On Tuesday, as the markets reopened after a three-day weekend, Dow Jones dropped 2.3%, 632.42 points, to 27,500.89. The S&P 500 dropped 2.8%, 95.12 points, to 3,331.84. Nasdaq too dropped 4.1%, 465.44 points, to hit 10,847.69. This continued from the drops of the previous week. In fact, the Nasdaq dropped 10% from its record close of 12,056.44 on September 2. 

The first week of September saw the Nasdaq Composite ending at 11,313.13 for the greatest weekly decline it has experienced since March. That week also saw the Dow Jones losing 1.8%, closing at 28,133.31. The S&P 500 had a 2.3% drop to finish at 3,426.96. All three indexes suffered there greatest weekly falls since June. Nasdaq thereby entered correction territory, which is a situation where stocks end 10% lower at least from their previous closing high. In fact, data reveals that this was the quickest correction for the index on record. It took just three sessions for Nasdaq to get there. 

Factors Contributing to the Slump 

With the Covid-19 pandemic slowing down economic recovery, high valuations being showered on technology companies, and Trump aggravating US-China trade by threatening to end the United States’ manufacturing reliance on China; it is unclear where are we heading due to these types of events occurring.  

Major Tech Stocks Led the Slump 

The prime contributors to Nasdaq’s reversal were falls by some of the major tech components making up the index – Alphabet ($GOOG, $GOOGL), Amazon ($AMZN), Microsoft ($MSFT), Facebook ($FB) and Apple ($AAPL). These were the stocks that had received extremely high valuations. Investors started worrying whether the sector gains brought about by the market momentum were leading valuations far beyond sustainable levels.    

But what investors need to watch out for is whether the major US indexes can grow apart from the tech giants. It’s important to remember that the world of the pandemic is dependent on these tech stocks for its existence. With these stocks dropping, what scope is there for these indexes? Peter Oppenheimer of Goldman Sachs, however, says that the bull market could still go some way though he believes a selloff in the region of 10% can’t be avoided. 

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Impressive Tech Stock Growth Opportunities Despite Covid-19 Pandemic

There are tech stocks that have not been touched by the Covid-19 crisis, and some have experienced impressive growth.  

Impressive Tech Stock Growth Opportunities Despite Covid-19 Pandemic

Growth and income are the two major goals of investing in the stock market. Whatever be your requirements, you need the services of online stock brokers to get started. 

There Is Growth Around, Just Find It

High-growth stocks would have been considered a luxury as the effect of the Covid-19 crisis sent the market into recession. But safe-haven stocks, the few stocks that aren’t likely to be affected by the Covid-19 pandemic, could offer tremendous growth. Among these are tech stocks that are in huge demand, because the contactless working atmosphere encouraged to prevent the spread of the pandemic has made technology providers such as videoconferencing services indispensable. Also, among these were cloud technology providers, an investment option considered by Motley Fool’s Leo Sun.

High-growth cloud stocks have been successfully shielded from the crisis. Sun particularly remembers CrowdStrike ($CRWD) and Adobe ($ADBE), which have also weathered the storms in the past year. They have managed to experience double-digit growth in revenue even through the tough times. CrowdStrike has experienced a 120% rally this year while Adobe has surged 40%. But they’re still some way from all-time highs.                                  

Growth in the Past and More Growth to Come

CrowdStrike’s revenue in fiscal 2020, ending on January 31, was $481 million – a 93% surge. As the company’s gross margin expanded, its adjusted net loss reduced to $63 million from $119 million. The first quarter saw the growth continue, with year over year revenue rising 85%. There was more than a doubling of its subscriber base, and for the first time since its IPO in 2019, the company posted adjusted profit.

And there’s more to come. CrowdStrike is expecting a 72% to 76% annual rise in revenue in Q2 as well as a 58% to 61% rise for the full year. The company expects a significant narrowing of the full-year adjusted net loss to somewhere in the region of $15.2 million though it doesn’t quite expect consistent profitability.

Impressive, to Say the Least

It’s also been an impressive journey for Adobe in the past few years. It recently had a 24% revenue rise in fiscal 2019 that ended last November. While adjusted earnings soared 16%, revenue stood at $11.2 billion. In the first half of this year, Adobe’s revenue had an annual growth of 16%. The prime contributor to the company’s growth has been its Digital Media unit, which helped compensate for the weakness of the cloud services of its Digital Experience unit that suffered as a result of the Covid-19 pandemic. The company also witnessed a 33% improvement in adjusted EPS as well as an expansion of its gross margin.                      

Adobe expects a year over year growth of 11% and 17% in revenue and earnings in Q3. The full-year expectations are a 14% revenue growth and 24% earnings growth. 

Make use of high-tech platforms for advanced online stock trading. These technological advances can help you make the right decisions.  

An Industry & Stock with Huge Potential for the Next 50 Years

In the present situation, where the economy is in a remarkable rebound while there is also the fear of a crash, a really long-term outlook can be helpful. 

An Industry & Stock with Huge Potential for the Next 50 Years

In unpredictable situations, it is important to think long term. That’s a lesson to learn in online stock trading. It can help you prepare for life after retirement, or you could pass your savings on to the next generation.

Investing for the Future? Think Tech Innovation

When you think in terms of 50 years, you need to give room for significant advances in technology. If you just think about the past 50 years, you could realize how technologies such as smartphones and the Internet were born. You can expect the same level, or even greater innovation, to shape the world in the next 50 years. That means when dealing with stocks you can think in terms of these innovations when you consider investing options.

But Motley Fool analyst Dave Kovaleski also points out that there are some major companies that could, in all probability, still exist 50 years from now. So, buying and holding those stocks could help you earn significantly in the next 50 years.            

Cashless Payment – a Trend That’s Increasing

Kovaleski turns to a stock in the cashless payment industry – a technology that’s been around for some time but could see total adoption by the world in the years and decades to come. We’re talking of credit and debit cards. Visa ($V) is one of those companies that has been increasingly benefiting from the gravitation of the consumer towards electronic payment, digital transactions, and the overall fintech advancements.

The current Covid-19 situation has been extremely beneficial for companies banking on this trend. Contactless transactions are being encouraged everywhere to prevent the spread of infection. But even before Covid-19, back in 2019, around $3.5 trillion worth of global sales were accounted for by e-commerce, as per research by Global Data. A study conducted by Visa rival Mastercard, and quoted by Kovaleski reveals that France, Sweden, the Netherlands, and Singapore already have cashless purchases accounting for around 60% of their transactions. The US has 45% of its transactions as cashless.

Investing in the Market Leader

As you probably know, Visa leads the market in payment processing. The industry anyway has just a few major players, which makes it easier for the existing ones to expand. Visa recently made a crucial acquisition of the fintech company, Plaid. The company operates an important service that provides app-based mobile payments. It’s a rival to Venmo. As if Visa wasn’t already a major player in the payment processing industry specifically, and the fintech industry generally, this major acquisition gives the company a chance to attain a major foothold in the mobile payments market.

Despite Visa’s existence since 1958, it went public only in 2008 and currently trades in the region of $200 per share. Through the past 10 years, it has attained a 26.6% annualized return. Kovaleski reckons the company could keep expanding and continue its market-leading stint in the coming decades.  

With advanced free stock trading offered by experienced online broker-dealers, you know what to do to get started in the stock market. 

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Finding a Thriving Stock to Invest in Challenging Situations

The pandemic has made the market situation unpredictable, making it difficult to find a stock or industry to invest in. But there could be an opportunity here.

Finding a Thriving Stock to Invest in Challenging Situations

Unpredictable crises can unfold anytime in the stock markets and the economy. Many of these situations are driven by external causes. It is hard to be prepared for every such eventuality, but such circumstances could lead you to other industries or sectors you may not have thought of. A few stocks or industries thrive specifically in crisis situations, while there are other stocks that thrive in all situations.

It is interesting to see that while the Covid-19 pandemic has negatively affected the earnings and functioning of most businesses, some stocks have actually thrived. Understandably, these are tech stocks. Now with the second wave apparently showing itself, you may want to think of these kinds of stocks. There still is unpredictability as to when the pandemic would end.

A Stock and Industry Thriving in the Pandemic Situation

Let’s look at the home fitness industry. Any company offering products for home use – work or recreation – is bound to succeed at this time. That’s because people are spending more and more time at home. It’s the safest thing to do. And while remaining at home, those thoughts of movie watching and resolutions of keeping fit, come to mind. That’s why you need to look at the home fitness industry. One stock particularly shines brighter here, according to Motley Fool’s Andrew Tseng. And that is Peloton ($PTON).

The Interactive Fitness Industry Is Popular

The company specifically operates in a sub-sector of the fitness industry – interactive fitness, a category they invented when the company launched in 2012. Back then, the category sounded like a temporary trend. But Peloton’s performance since then has proved that this is a serious segment to consider. Interactive fitness attracts even people who are too lazy to exercise themselves.

The company offers many attractive features – a variety of fitness classes covering various activities such as indoor cycling, running, walking, stretching, meditation, yoga, bootcamp, etc. Peloton also offers engaging instructors and attractive fitness studio content. There’s something for just about everyone.

Subscriptions Double

That’s why the business has been doing well, even before the pandemic. Subscribers to its Connected Fitness program have doubled during every past fiscal year of the company. Tseng reports that the company is on course to repeat that performance. The Connected Fitness program includes subscribers who own the company’s Tread or bike while also subscribing to its interactive content.

Pandemic Further Increases Demand

And when the pandemic caused gyms to close down, Peloton products became even more popular, particularly the bikes. The soaring demand actually was overwhelming. The company had to significantly ramp up its production but was still not able to stop the long delivery times.

Peloton management believes that it can catch up with the demand by July end or early August. It is also significantly investing in a new high-tech factory in Taiwan, in collaboration with Tonic, which it acquired last year. Once that is functioning, the holiday demand could be fulfilled later in 2020.

Hardcore Subscribers

Peloton’s members are known to become fans. That can be understood from its subscriber cancellation figure, which is significantly below 1%. The company claims that the Net Promoter Score (NOS) of the Peloton bike is between 80 and 93. Its Tread treadmill has an NPS score in the region of 80. Tseng points out that any NPS score that’s above 0 is “good”. And if it’s above 70, it is “world-class”.

The company’s long-term future is strong, given its strong performance even in the midst of the global economic crisis. The demand for home fitness equipment and interactive fitness services and products is only set to keep growing. And even if the pandemic situation gets worse, this company will continue to churn great earnings.Successful online stock trading with direct access trading platforms gives more power to the trader. But success also depends on finding the right industry and stock that can give you a long-term advantage.

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Why Robotics & IoT Sectors Stand out in the Current Political Situation

Robotics and IoT are particularly relevant for American companies looking to shift manufacturing operations back to the US.

Why Robotics & IoT Sectors Stand out in the Current Political Situation

The months from February were dominated by the perceived effects of the Covid-19 pandemic. In online stock trading, investment decisions all revolved around combating the effects of the pandemic. As the lockdown eased and the economy reopened in the United States, the focus expanded to political events, particularly the trade and political tensions between the US and China.

Political Uncertainty Could Shift Operations Back Home

There is much uncertainty surrounding China’s trade conflict with the US, which has caused companies in the manufacturing field to think about moving their operations back to American shores. Tariffs for imported Chinese goods have risen and has made sourcing raw materials from China more expensive. Besides, there are significant disruptions in the supply chain caused by Covid-19. Therefore, companies would need to source raw materials and manufacture locally.

It was also reported by Motley Fool back in May that President Trump was looking for ways to direct back supply chains to the United States and away from China. The US government could provide incentives for bringing manufacturing back to American shores.

Robotics and IoT

If that were to happen, there are some companies that would particularly benefit. Analyst Lee Samaha points out some of them:

● Robotics company Rockwell Automation ($ROK) could hugely benefit from the simple fact that manufacturing plants in the US would need the services of Rockwell to set up the automation systems at their factories. Automated systems could help companies ensure cost-effective manufacturing to countries like the US with a high wage cost.

● While there are other bigger automation companies, Rockwell has a significant presence in North America. The continent has contributed to 61% of the company’s Q2 sales. The Covid-19 pandemic has affected the company, but with the manufacturing shift, you could soon see its best days. However, at $8.67 per share, it is trading 25 times its earnings in 2019. It is expected to continue at that level at least until fiscal 2022.

● Rockwell is in partnership with IoT company PTC ($PTC). As important as automation hardware is the software and digital technology powering the hardware. The Internet of Things (IoT) or connected tech is an essential part of automation technology. PTC is a leader in industrial software.

● There is a great deal of interest in PTC’s IoT and augmented reality solutions that help businesses manage their assets better. The importance of IoT and augmented reality is further realized in the era of Covid-19. PTC’s augmented reality solutions enable factory equipment to be checked and inspected even without the specialist being at the site.

These are two key industries that could play a major part in the months to come. The demand for all industrial services and infrastructure is bound to increase when many American manufacturers decide to shift their operations back home. As things stand, the government favors such a shift. But you still need to be watching the news to understand how the dynamics of US-China relations keep evolving.

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Day Trading Facts to Know for Long Term Success

Day trading is one of the most popular trading styles. Here are some top facts about day trading and how to get started.

Day Trading Facts to Know for Long Term Success

Stock market trading can be profitable but also carries certain risks. People who are new to trading may have an assumption that they can earn a lot of money by trading in stocks. Furthermore, day trading has earned an inordinate amount of hype over the past few years.

Technological developments like, mobile connections, high-speed broadband, and online trading houses have made it easier for an average individual investor to start trading. Many people are trying their luck with day trading. They trade throughout the day to see if they can profit from volatility and market swings. But, before beginning to trade stocks, it is important to understand what day trading is, and what the best strategies are to minimize risks and be in the game for the long haul.

Understanding Day Trading

Investopedia defines day trading as buying and selling financial instruments within a single trading day. Meaning, closing out positions at the end of each day and starting out afresh the next day. This can occur in any market place but it is quite common in the foreign exchange (forex) market and the stock market.

Day traders buy and sell many stocks, multiple times within the same day to take advantage of small market movements. An important aspect to recognize is that initial profits in day trading will often be followed by losses. In fact, it’s easy to get enthralled by the idea of investing in stocks and converting them into quick profits. But it is very important to understand that day trading may not make a person rich initially. According to the US Securities and Exchange Commission (SEC), day traders typically experience financial losses in their early trading months.

Starting Day Trading – What You Need to Know

Before you begin to day trade on any market, there are several factors to consider. Compared to the typical buy and hold strategy, the single-day trading practice requires putting in a lot more time and effort. In investing, the trader holds the stock for a longer period of time. Hence, daily movements have very little impact on the overall picture.

Investors generally purchase a stock that they regard as stable and hold it for a longer period (maybe years) to find out whether those companies are making favorable returns. When the returns are sufficiently favorable for their stock prices to increase, investors trade them to make a profit. But, for day trading, the prime focus will be on related factors that can affect daily market behavior.

Here are some prime factors that affect online stock trading:

Liquidity – The liquidity factor in a market relates to how easily and quickly positions can be entered and exited. For day traders, liquidity is an important factor as chances are that they will be engaged in multiple trades within a single day.

Volatility – Volatility of a security means how rapidly the price fluctuates. If there is high volatility expected during initial hours, the movements can create a lot of openings for short term profits.

Trading volume – Trading volume is a measurement of how many times the stock has been traded within a given period of time. For day traders, this is also known as ‘average daily trading volume.’ High volume trading is a sign that the stock is good and more people prefer to own these stocks.

Incorporate an Explicit Strategy

Many traders believe that a complicated strategy is key to succeed in day trading. But, following a straightforward approach that focuses on the basics of simple day trading can yield good results. Creating a business strategy, being diligent, focused, and disciplined are vital to day trading.  

Before starting to trade, it is important to develop the outlook of the day trader and take note of the following aspects:

Doing Basic Research – To succeed as a day trader, stay updated with the latest happenings that have an impact on the stock market. Such as federal interest rate, economic outlook, and other financial indicators. Maintain a list of stocks that you plan to trade and perform comprehensive research on those firms before starting to trade.

Lastly, have a clear understanding of the SEC rules that are applicable for day traders. To qualify as a pattern day trader, a minimum of $25,000 is required at all times in your trading account. You can only trade in margin accounts if you make four or more day trades in 5 market days.

Learn Trading Jargon – If you are new to day trading, chances are that you will encounter numerous trading terms such as – candlestick, reversal, breakout, false breakout, short trade, trend line, tick chart, price action, impulse wave, support areas and more. Learn some of the common trading terminologies before you start trading.

Create a Trading Plan and Budget – Before investing a single dollar, a trader needs to have some basic idea on how they will make a profit and this can be analyzed by creating a trading plan. A trading plan will include details about what, when, and how you will enter a trade. Additional rules can be added over time as required. Also, traders need to set aside the amount of capital they plan to invest in each trade. For successful traders, this should be no more than 1 to 2 percent of their overall trading account.

Create a Day Trading Routine – Create a specific routine for the trading day. This includes starting and quitting trading at the same time each day, checking for scheduled economic data releases that may impact the market, and reviewing all trading done. Have a checklist to verify that each trade done aligns with the specific trading plan.

Start Trading with a Few Stocks– Beginners may get confused with the many trading strategies available. So, start the trading process with one or two stocks, find out how they perform, and by experimenting with different strategies, a trader’s success rate may increase. Also, traders must focus on one market or even one specific instrument and become a master in it. This in turn will help produce more consistent results.

Broker Account – To trade stocks, one must have a broker account. When choosing a brokerage firm, it is important to consider certain key aspects like, the reputation of the firm, services offered, costs and fees (associated with the account), and whether the account allows for fast market access and trade execution on days that you require.

Recognize Stock Patterns – Generally, the trade patterns are stronger during the starting hours and before the closing bell. These busy times in the market typically create price volatility, which could increase your profits. However, keep a close watch for the first few days to identify trading trends. Until you understand the trading patterns, it’s best to choose to trade at midday when the activity slows down. There is no single best trading strategy for stocks, so analyzing profitable patterns can help you identify lucrative day trading opportunities.

Utilize a Stop Loss Order – Reduce losses by placing a stop-loss order that allows you to get out of a trade if the price of the stock does not move in the expected direction. It is a specific point wherein the trader admits that they are wrong in the trading pattern. Implementing a stop-loss also allows a trader to evaluate their position size accurately and the number of shares they will take on a single trade.

Choosing the right stock to buy and When to Buy – Day traders normally deal with currencies, stocks futures, and options. Choose the right type of asset by evaluating factors like – volatility, liquidity, and trading volume. To maximize profit as a day trader, it is important to identify stocks that are moving. Once you have analyzed a potential stock and determined that it is a good buy, you need to know when to buy the stock. Moreover, analyze the time-sensitive conditions that apply to your potential trades.

Deciding When to Sell – Day traders use different day trading strategies like scalping, momentum, profit targeting, selling, pivot points, etc. to know when to sell for optimal profit. Regarded as one of the most popular strategies, scalping involves selling more or less immediately after a trade becomes profitable. Momentum involves trading on news releases or finding strong trending moves. Daily pivots involve profiting from a stock’s daily volatility. Profit targeting or selling strategy is used when the profit on a transaction meets a predetermined threshold. In simple terms, traders should sell an asset as soon as they notice its value is decreasing.

All in all, as there are many factors that make the process challenging; day-trading requires a whole lot of practice, discipline, and technical know-how. Keep in mind that in online trading, you should never ever get carried away by the sheer thrill of investing more capital than you have. Make sure to begin trading only when you reach a stable financial position.

With TradeZero, you have the right online stock broker or dealer to assist you in your online stock trading journey in an efficient manner. Give us a call at 954-944-3885 and get started!

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Why You Need to Learn About the Delta Hedging Strategy

Traders who want to be more professional and make winning moves may need complex strategies such as delta hedging. 

Why You Need to Learn About the Delta Hedging Strategy

Once you have enhanced your experience of stock trading with direct access trading platforms, you may want to look for more advanced trading strategies to better manage risks and maximize earning opportunities. One of these advanced strategies is delta hedging.  It may be complicated to get it right, but if you’re looking for advanced strategies, you need to consider this.     

What Is Delta Hedging?

Delta hedging is a strategy in trading by which you arrange an option play. Which helps in decreasing or eliminating the potential directional risk exposure of an underlying stock, or any option contract you hold. 

Stocks and options generally have directional exposure to price moves. This exposure, called delta, is measured by how much a trading position earns or loses when the stock undergoes a $1 move. For example, if a call option makes a 50-cent movement for every $1 move of the underlying stock, it has a .50 delta. 

Options are used to balance the risk to another option holding or a whole portfolio. The investor aims to attain a state of delta neutrality without any directional bias. A long position without a hedge has a 1.00 delta while a short position without a hedge has a -1.00 delta. 

Pros as Well as Cons in Delta Hedging 

For traders, delta hedging can help isolate any changes in volatility. But a major drawback is that you would need to keep watching the positions involved and adjust them. And since delta hedges get added and removed with the underlying changes in price, the trader incurs further trading costs. 

Delta hedging is complicated, and it’s usually carried out by investment banks and institutional traders. But even individual traders can carry out a simple version of it. This involves buying or selling options before buying; or selling stock or ETF of an equivalent amount. 

But whatever delta hedging practice are used, the hedge needs to be constantly rebalanced since you are looking to neutralize the price of an option in relation to the price of an asset.

A Complex Delta Hedging Strategy

A more complex strategy involves trading volatility with a delta neutral trading strategy. Delta neutrality refers to a portfolio strategy where multiple positions are utilized along with positive and negative deltas to ensure that the overall delta of the concerned assets are zero. 

NewTraderU describes positive and negative delta positions. The positive delta positions are long stock shares, long call options, short put options, buying call spreads and selling put spreads. The negative delta positions are selling stock short shares, long put options, short call options, selling call spreads and buying put spreads.

Why You May Need Delta Hedging

Due to the complexity of the process, Delta hedging is expensive. But, it can be of great benefit for traders anticipating a strong move in the stock they hold, but are worried about the risk of over hedging; if the expected move doesn’t quite turn out that way. 

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