Stock trader

People want to trade in the stock market, because everyone can make money through the stock market by using phone call or using internet from computer. Why stocks are good investments, because they can let you to own successful companies, and they have been the best investment over time. You can have equity in your home by owning its stock, so stocks are also called equities. Investing in stocks can help both investor and company. The stocks you have owned make you an owner of a company. Owning stocks is a good idea, because when a company prospers, so do the owner of the company: you. Company wants you to buy its stocks because it wants to use your money to develop better products, get new equipments, and expand its operations.

When the stock is bought and sold, this is called trading. Now, trading can be down in a second by making a phone call, or using the internet by clicking the mouse. People were trading stocks by using papers before, but now, the world is becoming more electrical world, trading becomes more electrical.

You can make money by owing stocks is through the capital appreciation and dividends. The dividend is pay by company every quarter year. The method of making money through capital appreciation is to buy at low price and sell it at high. In this case, the total return is the money made from the stocks’ capital appreciation.

Three main exchanges in USA

There are three main exchanges in the United States of America, which are the New York Stock Exchange (NYSE), the American Stock Exchange (AMEX or ASE), and the National Association of Securities Dealers Automated Quotation system (NASDAQ or OTC). Each of them provides a place for investors trading their stocks.

The NYSE is the biggest and oldest exchange of the three. To be listed on the NYSE, companies need to have at least 1.1 million shares of stock outstanding, 2.5 million or more of annual pre-tax profit, and 18 million of total worth. The AMEX or ASE is the exchange that is a little bit less demanding than the NYSE. To be listed on the AMEX or ASE, companies need to have at least 0.5 million shares of stock outstanding, 0.75 million or more of annual pre-tax profit, and 4 million of total worth. The NASDAQ or OCT is the most action exchange. It has become more prominent by trading high-tech companies. The OCT is stand for over-the-counter. To be listed on the NASDAQ or OCT, companies need to have at least 400 shareholders, 1 million or more of annual pre-tax profit, and 8 million of total stock outstanding worth.

Short-term trading method

Short-term is the period that is less than one or two years. If you do not have spare cash, or you are hurry to get some money for some payment, stay away from the stock market, and do not even think that stock market can solve the debt you have in short term. Because sometimes the stocks can be unexpected in the short term, it is not a good idea for short term consideration. A short term traders buy and sell the stocks very quickly, so the profit and loss they made from the stocks is not a lot. Day trading is to hold the stocks within a day, Swing trading holds stocks within a few days, and position trading holds stocks within a few months.

Intermediate-term trading method

Intermediate-term is the period that is reached within five years. You have to watch out for intermediate-term investment, because not all the stocks are good investment for intermediate-term.

There are many types and kind of stocks. The stocks are from larger or established companies may be fairly stable and holds their values well. The stocks of untested companies may not do as well as like the stocks of larger or established companies.

If your goal is intermediate-term investment, you would like to choose larger, established companies or much needed industries of dividend-paying companies, which are like drink, food or electric companies. Dividend is a good income in intermediate-term. The company that pays the owner dividends has more stable stock prices as well.

Long-term trading method

Long-term is the period that is longer than five years. The long-term investments can beat out financial investments, which are like bonds or bank investments, in ten year period. But, even the stocks are shine in long term; you still have to do your homework to choose the right stocks. You can still lose money when the companies you have invested go out of business after a few years

Investing

The most basic division of investing is growth investing and value investing. Most investors combine those two styles for their investment approach. Before the investment, thinking about what you need from growth investing and value investing. Use the investing that fits in your need.

Growth Investing

Investor who is a growth investor looks for the company that is sale and earnings. Growth investor is willing to pay for the company that has a lot of potential. In the growth investing, dividends are not that important because many of growth companies only pay small dividends or none. The growing company post bigger earning for each year, so the earning amount should become bigger. Most new growth stocks are being trade on the NASDAQ.

Growth investor wants to search for hot hands, but not the bargains because they are willing to pay more for good companies. Many of growth investors do not care about the price of the stock because they know lots of growth stocks are very expensive. Growth investor only looks at the potential of the stocks and invests what they found. You are not able to find many bargains of growth stocks. Even growth stocks are expensive, but if they can keep growing that are worth it. The growth stock is depending on its earnings and the acceleration of the earnings to have high expectation of analysts and investors.

Value Investing

Another kind of investor is Value investor. Value investor looks for the cheap stocks. Value investor compares the prices of stocks by using different measurements of companies’ business, which are earnings, cash flow, assets, and sales volume. In the value investing, paying attention to dividends is important. The idea of value investing is paying less for what you get to lower down the chance of losing money. Value stock has a low price. Value companies have been on hard time or slump by some reasons. But hopefully, they will get back to the track again. Value investor is buying the shares that climb up from the bottom. Value investor invests the company that is getting ready to start or recovering from the fall. So, value investor is a bargain hunter, who is opposite with growth investor. Value investor pays special attention to dividends. Value companies pay dividends to their investors. Even the price does not rise up, investor can still getting a small profit from the company. The dividend is also a great indicator for telling how the company is doing.

Finding companies

Two ways for evaluating the stocks. One is fundamental analysis, and another one is technical analysis. Fundamental analysis is to get more information about the company’s health and potential to succeed. Fundamental analysis can make you learn more about the company. Technical analysis is to get the past behavior of the stock price, and tries to predict the stock’s future price by its current market condition, projected market condition, and trading volume. Technical analysis can make you learn more about the company’s stock.

Fundamental analysis

When you use fundamental analysis to buy stocks, you own a piece of a corporation, not just a piece of paper. You are studying the corporation for you to decide which stock is a worthwhile investment. You should be able to pick the stocks that can give you the best chance for profits by using fundamental analysis. You would like to invest the stock that has a reasonable price when you compare to its earnings. Fundamental analysis is one of the most popular methods to determine the good bargain stocks. Fundamental analysis is just a tool that helps you to find and evaluate the stock that has offer good value. But this does not mean you can make a lot of money by using fundamental analysis. This is giving you a chance to find out whether fundamental analysis is right for you.

Technical analysis

Technical analysis relies on charts and graphs of the stocks for helping you determine which stock to buy and sell. Technical analysis can also use to forecast the future. You can make assumption of what might happen in the future by looking at how the stock behaves in the past. Technical analysis is the study of the stock price. Technical analysis can be use by short-term investors to help them make decision for selling and buying. Keep in mind that no matter what method you use, there is no guarantee that you will make profit. It depends on how much work you put into these stock picking methods.

Active stock traders, or day traders, who may account for a sizable proportion of US trading volume, hold stocks for only hours or even minutes. Examination of their trading profits reveals that about half of the 1,386 day traders in a study were profitable after paying commissions. Both profitable and unprofitable traders have very similar trading characteristics; they concentrate their trading at much the same time, on the same stocks, and in the same trading locations. Yet the skilled or lucky traders generate $9.5 million in net intraday profits, and the unskilled or unlucky lost $4.6 million in the same three-month sample period.

Investment Philosophies

An investment philosophy is a coherent way of thinking about markets, how they work (and sometimes do not) and the types of mistakes that you believe consistently underlie  investor behavior

Types of Investment Philosophies

• Market Timing versus Asset Selection: With market timing, you bet on the movement of entire markets – financial as well as real assets. With asset selection, you focus on picking good investments within each market.
• Activist Investing versus Passive Investing: With passive investing, you take positions in companies and hope that the market corrects its mistakes. With activist investing, you play a role (or provide the catalyst) in correcting market mistakes.
• Time Horizon: Some philosophies require that you invest for long time periods. Others are based upon short holding periods.

Trading costs

1. Brokerage Cost: This is the most explicit of the costs that any investor pays but it is by far the smallest component.
2. Bid-Ask Spread: The spread between the price at which you can buy an asset (the dealer’s ask price) and the price at which you can sell the same asset at the same point in time (the dealer’s bid price).
3. Price Impact: The price impact that an investor can create by trading on an asset, pushing the price up when buying the asset and pushing it down while selling.
4. Opportunity Cost: There is the opportunity cost associated with waiting to trade. While being a patient trader may reduce the previous two components of trading cost, the waiting can cost profits both on trades that are made and in terms of trades that would have been profitable if made instantaneously but which became unprofitable as a result of the waiting.

Market Timing

• Non-financial indicators
• Technical indicators such as price charts and trading volume.
• Mean reversion indicators, where stocks and bonds are viewed as mispriced if they trade outside what is viewed as a normal range.
• Macro economic variables, such as the level of interest rates or the state of the economy.
• Fundamentals such as earnings, cashflows and growth

Non-financial Indicators

• Spurious indicators that may seem to be correlated with the market but have no rational basis. Almost all spurious indicators can be explained by chance.
• Feel good indicators that measure how happy are feeling – presumably, happier individuals will bid up higher stock prices. These indicators tend to be contemporaneous rather than leading indicators.
• Hype indicators that measure whether there is a stock price bubble. Detecting what is abnormal can be tricky and hype can sometimes feed on itself before markets correct.

Technical Indicators

• Past prices
• Trading Volume: Market up movements accompanied by heavy volume: Is it a buying opportunity or is it a selling opportunity?
• Market Volatility: High stock price volatility accompanied by low stock returns but followed by high stock returns.

Fundamentals

• The simplest way to use fundamentals is to focus on macroeconomic variables such as interest rates, inflation and GNP growth and devise investing rules based upon the levels or changes in macro-economic variables.
• Intrinsic valuation models: Just as you value individual companies, you can value the entire market.
• Relative valuation models: You can value markets relative to how they were priced in prior periods or relative to other markets.
• While there are some studies that show promise in all of these, they are all very noisy indicators

Market Timing Strategies

• Asset Allocation: Adjust your mix of assets, allocating more than you normally would (given your time horizon and risk preferences) to markets that you believe are under valued and less than you normally would to markets that are overvalued.

• Style Switching: Switch investment styles and strategies to reflect expected market performance.

• Sector Rotation: Shift your funds within the equity market from sector to sector, depending upon your expectations of future economic and market growth.

• Market Speculation: Speculate on market direction, using either financial leverage (debt) or derivatives to magnify profits.

Price Patterns

Price changes themselves may provide information to markets. Thus, the fact that a stock has gone up strongly the last four days may be viewed as good news by investors, making it more likely that the price will go up today then down.

Investors are not always rational in the way they set expectations. These irrationalities may lead to expectations being set too low for some assets at some times and too high for other assets at other times. Thus, the next piece of information is more likely to contain good news for the first asset and bad news for the second.

Empirical Evidence on Price Patterns

Investors have used price charts and price patterns as tools for predicting future price movements for as long as there have been financial markets.

The first studies of market efficiency focused on the relationship between price  changes over time, to see if in fact such predictions were feasible.

Evidence can be classified into two classes

• Studies that focus on short-term (intraday, daily and weekly price movements) price behavior and
• Research that examines long-term (annual and five-year returns) price movements.

For a variety of reasons, financial economists tend to view individuals and institutions differently. In particular, while institutions are viewed as informed investors, individuals are believed to have psychological biases and are often thought of as the proverbial noise traders in the sense of Kyle (1985) or Black (1986).

Individual Investors

• The average individual investor does not beat the market, after netting out trading costs. Between 1991 and 1996, for instance, the annual net (of transactions costs) return on an S&P 500 index fund was 17.8% whereas the average investor trading at the brokerage house had a net return of 16.4%.

• The more individual investors trade, the lower their returns tend to be. In fact, the returns before transactions costs are accounted for are lower for more active traders than they are for less active traders. After transactions costs are accounted for, the returns to active trading get worse.

• Pooling the talent and strengths of individual investors into investment clubs does not result in better returns. Barber and Odean examined the performance of 166 randomly selected investment clubs that used the discount brokerage house. Between 1991 and 1996, these investment clubs had a net annual return of 14.1%, underperforming

Professional Money Managers

• Professional money managers operate as the experts in the field of investments. They are supposed to be better informed, smarter, have lower transactions costs and be better investors overall than smaller investors.

• Studies of mutual funds do not seem to support the proposition that professional money managers each excess returns.

Classification of Trader Types

• Fundamental Traders

These are traders who try to predict the near term movements of the stock based on how the company is doing.

• Buy and Hold Traders

Buy and Hold Traders, also called Long Term Traders, are stock market investors who are buying stocks and holding them for a long period of time. This category most likely constitutes the largest group of people who are buying stocks as it requires the least amount of time spent focused on the stock market.

• Swing Traders

Swing traders are also regarded as mid term traders. Swing traders normally hold on to a trading position from weeks to months. The swing trader is motivated by making large profits from holding large positions in a stock over a longer period.

• Position Traders

The position stock trader is a stock trader is probably the most common trader. Most investors fall under this category since most traders buy a stock and hold on to it for a very long time. The position stock trader can hold on to a stock from months to years in the hope that the stock will make them a profit.

Types of Order

• Market Orders

The simplest and most common type of stock trade is a market order. Market orders simply tell your broker that you are willing to take whatever price is presented to you when your order is executed.

• Limit Orders

A limit order allows you to limit either the maximum price you pay or the minimum price you are willing to accept when buying or selling a stock.

• All-or-None Orders

An all or none stock trades allow you to tell your broker that you only want an order filled if they can buy, or sell, all of the shares you instructed them to trade

Active Traders

Active traders or day traders differ from long-term investors in that they often hold stocks for minutes or hours, seldom overnight, closing out positions for small profits. Active  traders account for a fairly sizable percentage of trading volume in US equities. A study by Bear Stearns finds that approximately 40% of US share volume originates from an estimated 30,000 day traders.

Active traders are at information disadvantage to better informed market participants such as market makers. Large market-making firms, such as Knight Trading Group, can use order flow information to generate short-term trading profits (Ip, 2000), but individuals trading on their own account do not have this information.

While active traders face disadvantages from the onset, firms that cater to them continue to attract new customers (McGinn, 2003), and “brokerage firms are spending feverishly to attract and retain this lucrative segment of the market” (Patel, 2002).

Individuals engage in active trading strategies because they anticipate trading profitably. Whether they can generate consistent short-term trading profits remains an open question, and there is very little research examining the trading profits of retail day traders in the US. Harris and Schultz (1998) examine the trading profits of retail day traders before electronic communication networks (ECNs) became integrated into the national market system. They find that some day traders generated consistent trading profits under these conditions and that agency costs were the most likely reason.