| By Annie Stevenson, Managing Editor, American Investor Today Dear American Investor, Happy Friday!
Today, we’re going to do something a little different. We’ve been loving all the feedback you’ve sent in lately, so we’re taking the time to address some of your questions.
You have written in to ask us about how stock trading works, how you can make the trades we recommend and about buzzy terms like “margin” and “after-hours trading” that are making the news.
Here at American Investor Today, we work to make sure that all our readers have everything they need to make Wall Street profits, made Main Street simple. People on Wall Street spend years learning finance to get the answers to some of these questions.
We’re going to break down the answers for you today (some of these are edited for length and clarity)…
And a former Wall Street insider is stepping forward with his No. 1 stock pick in a shocking new presentation. Details here.
Is After-Hours Trading Legal? Rutkoske asks: “When a store closes at 4 p.m., we have to wait till the next day to buy something. The New York Stock Exchange closes at 4 p.m., but it seems that there are investors who are able to keep trading … Is this legitimate or legal?”
Answer: Great question! Trading outside NYSE or Nasdaq business hours is certainly legal … but it’s not available to everyone.
High net worth individuals and those with certain brokers can trade with each other after the stock exchanges have closed. In return for the freedom of placing orders whenever they like, they are accepting low liquidity and high volatility.
Most people stick to trading during the market’s business hours, which means that’s when you’re able to get the best prices. Those trading with each other after hours are going to get a lot less wiggle room. And since there are so few of them, prices can swing wildly from trade to trade.
This after-hours activity can affect the price during regular market hours since it’s reported just like regular stock trades. But you’re always going to get the best prices when other people are trading — during normal business hours. What Is Margin, Really? Pat M. asks: “Can you tell us how margin accounts work?”
Answer: Sure thing, Pat!
Margin has been in the news a lot lately, but there are actually different types of margin accounts.
As my colleague and options expert, Chad Shoop, says, stock margin accounts are where margin gets its bad rap. People borrow money from their broker to bet on where a stock is going. They are essentially taking loans. And those loans come with interest rates. The broker can require them to hold a certain amount of cash in their accounts to cover the loan.
If the amount in your margin account falls below where the broker is comfortable covering you, they can issue what’s known as a “margin call,” which means they force you to close some of your positions to pay back the loan.
We don’t recommend stock margin accounts to our subscribers at American Investor Today.
Options margin accounts are a little different. Since options have set time horizons, margin accounts allow some flexibility for people who want to put their money to work elsewhere while the option plays out. We always recommend having enough money to cover your obligations in your account at all times. But options margin accounts make it easier by just asking you to have a certain amount set aside as a guarantee. Can We Practice Trading Before Jumping In? Lourdes asks: “Is there a way to set up a dummy account for us to practice with ‘paper trading’ before we place a real trade with a brokerage?”
Answer: Absolutely, Lourdes! Our editors have experience with Investopedia, and that’s one we’ve found very useful. According to the website, you can set up a “game” with options trading, broker fees — the works — without putting any real money at risk. It’s on the Investopedia website under “Simulator.” (Or you can click here.) How Do Options Get Executed? Judy asks: “Say I’m trading options … Does the call or put automatically execute on the expiration day? Or do we have to manually execute?”
Answer: Great question, Judy. As a refresher for our readers who are not familiar with options: When you buy a call or put, you are betting that a stock will go up or down by a certain date. That’s the expiration date of the option.
When you buy a call, you’re betting that the stock will go up, and when you buy a put, you’re betting that the stock will go down. When the expiration day comes for your call, if you were right — and the stock climbed — the option will be “executed.” You’ll buy the stock at the strike price. With a put, you sell the stock.
Brokers will automatically execute the options at the expiration date. If the stock didn’t come near your target, the option will expire without being executed.
And as our options expert, Chad Shoop, would note, most traders will sell their options before the expiration date if they don’t want to buy or sell the stock, or if they don’t want to see it expire.
If you’re interested in more information on options, Chad publishes a weekly options education letter called the Weekly Options Corner. Sign up to see how you can make options work for you! — Thank you all for writing in with your questions! There are no bad questions. As we’ve said before, Wall Street thrives on keeping Main Street in the dark. We want to bring all of Wall Street’s knowledge to our readers so that you can navigate the markets.
Do you have any questions for our experts? Email us at AmericanInvestor@BanyanHill.com.
Meanwhile, the markets have had a wild week. Our team jumped in to show you what happened…
He’s out to prove that the American stock market has been and continues to be the driver of wealth and financial freedom for untold millions of Americans. Will you help prove him right? Go here and see how … risk free.
This Week's Stories | | | | | | | We’re now 11 months into the pandemic, and many of us are still suffering. Even if you did everything right, you are probably still in the red. Here’s what you need to do. | | | | | Next week, we’ll be showing you our favorite new ways to take advantage of the markets — in industries and strategies you may not have thought about before.
We are excited to share them with you! 
Annie Stevenson
Managing Editor, American Investor Today
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