Discount Stock Trading

Imagine you are trying to do car repairs, and the only tool you have is a hammer. Sure, you’ll be able to get some jobs done, but they won’t be done properly and you’ll most likely break something else in the process. Trading stocks online is much like that. There are many ways to trade, but only some of them truly work. Sometimes, investors end up losing money because they didn’t take the time to find the proper investment method or tool. Here are some tips that can help you to trade successfully.

If you want to reduce the risk that comes with holding an investment, you will want to look into the practice known as hedging. One of the best ways to hedge your investments is to take any shares you have in a company and sell them to the company’s opposition.

For stability, you will want to look to investing a pre-arranged amount of money each month into one or more mutual funds. Mutual funds are composed of shares from approximately 10 companies, and often focus on a specific area of the market, such as energy, paper, or currency. Although there is still a risk that you can lose money through your mutual funds, they are much more stable and have a much higher chance of recovery, based on the fact that they center on stocks from more than one company. Be patient if the market takes a downturn; don’t sell your funds or stock immediately. History has shown that if a market goes down, it will also go up.

Another online trading tactic is to look at the stock market and find good, stable companies whose stock has taken a downturn. The way to find them is to look for ones that have dividend yields. Pick several of these companies and invest equal amounts of money in buying stocks from each of them. Although there is risk involved with this method, the history and stability of these companies is often enough to pull them through the slump they may be experiencing. And when their stocks begin to rise in value, you will benefit from this wise trading investment.

Talking about the Stock Market we seem to mean a different dimension, not a physical location.
However, the Stock Market does have physical locations.

Wall Street, also known as the Dow, or the NYSE, is located in New York

Wall Street is the Address(or is it?)

Many people think of Wall Street and the Stock Market as one in the same, and indeed, it used to be that way.

Dutch settlers initially built a stockade here in 1653 for defense purposes.
In 1685 the stockade was torn down and a street was built called Wall Street.
In 1790 the first Stock Exchange was founded in Philadelphia which became the model for the New York Stock Exchange.

In 1817 the NYSE was officially opened.
The NYSE was moderately successful till the early 1900′s when the market entered a boom period which lasted more or less until 1929.

This boom period of course could not last forever, things were so out of kilter that people were mortgaging their homes and leveraging themselves to the limit to buy shares.
The boom period crashed in 1929 and caused the Great Depression.

The 1929 Crash was caused in part by the fact that the Stock Market was virtually unregulated, which it remained even until after the market crash of 1987 which saw the Dow suffer what was the largest losing day in the Market’s history.

Black Tuesday – October 29th, 1929

On Black Tuesday, a record of 16.4 million shares were traded and the ticker tape fell behind two and a half hours. On Monday, the stock market suffered a record one-day loss of around 13 percent. On Black Tuesday, the market suffered a loss of about 12 percent and did not recover for 22 years.

The economy eventually recovered from its catastrophic losses but the unregulated Stock Market practices that had partially caused the crash in the 1929 still existed and caused the stock market crash of 1987, which saw the Dow Jones suffer what was the largest single-day loss in the stock market’s history.

Today’s Stock Market

Today’s stock market consists of about 500,000 computers all networked with dealers for the NYSE or market makers for the NASDAQ. Up until recently the Dow still used human intervention but at present all trades are computerized.

The 2 most important stock market networks are the NYSE and NASDAQ.
NASDAQ is a relatively new Stock Trading System that has been computerized since its inception, where market makers normally lead trades.

It used to be that more risky stocks were traded on the NASDAQ than on the NYSE, but that distinction is fading.

The difference between the NYSE and Nasdaq is in the way securities on the exchanges are transacted between buyers and sellers.

The Nasdaq is a dealer’s market, wherein market participants are not buying from and selling to one another but to and from a dealer, which, in the case of the Nasdaq, is a market maker.

The NYSE is an auction market, wherein individuals are typically buying and selling to each other and there is an auction happening; the highest bidding price will be matched with the lowest asking price.

All these computers are linked to computers worldwide. These computers can be found in banks, small businesses, and large corporations.

These computers comprise the banking networks which make computerized transactions possible.
To give you an idea as to how much gets traded: in New York City Stock Market Trades amount to over $2.2 trillion dollars daily

How has the U.S. Stock Market done in Times of War?

The worst Stock Market returns were achieved during the Vietnam War.If this happened because of the uncertainty of the times is a good question. Stock Markets do not like uncertainty and will act negatively.

Returns during the Korean War however were excellent and averaged about 18% per year while 2nd world war returns averaged about 13% per year.

The 1987 Stock Market Crash

The crash of 1987 was one of the most remarkable financial catastrophies of the 20th century, perhaps since the start of the financial system several centuries ago. Why it was so strange because it should not have happened and even today we cannot fully comprehend that it did happen.

Markets fell, an unbelievable 23%, and that they did so all over the world at the same time.
It only lasted one day.

There is no explanation. No definite reason for the crash has been isolated.
The best that one can say is that there were too many similarities to the 1929 crash and that this became a self-fulfilling prophecy.

The first quarter of 2006 is over. Now is a good time to reflect on stock prices and the opportunities they present.

Bargains are scarce. Equities are expensive. In recent weeks, I’ve heard several fund managers say valuations are still attractive. I don’t agree. Generally speaking, valuations are unattractive. Returns on equity are higher than historical levels. A market-wide return on equity of 15% is unsustainable. Price-to-earnings ratios may not fully reflect how expensive stocks are. Price-to-book ratios are more alarming.

There are two additional concerns. Most discussions of the relative attractiveness of equities focus on the S&P 500 and forward earnings. The S&P 500 is not the most representative index. It may not be the best index to consider when looking at market-wide valuations.

Forward earnings are (necessarily) estimates. Where current returns on equity are unsustainable, projected earnings that use similar returns on equity may overstate the earnings power of equities in general. This can occur even where the estimates appear reasonable given current earnings. If you start with unsustainable base earnings, you are likely to overestimate future earnings even if you truly believe you are assuming very modest earnings growth.

Assets in general are pricey. Value investors have few places to turn if they continue to insist upon a true margin of safety.

Bonds are unattractive. Long-term inflation risks make U.S. treasury, corporate, and municipal bonds a fool’s bet. There is little to gain and much to lose. The know-nothing investor who buys a top-quality bond today and holds it for decades may very well find his purchasing power diminished.

There may be some select opportunities in foreign equities. But, these are difficult to evaluate. Foreign government obligations are also difficult to evaluate, but that isn’t much of a problem for value investors, because most foreign government debt is priced to perfection. You’ll have to be willing to take a lot of uncompensated risks if you want to own such bonds.

Of course, there are exceptions to every rule. There may be a few bonds out there that are attractive. There certainly are a few attractive stocks out there. But, even those stocks that look very attractive relative to their peers don’t look nearly as attractive when compared to past bargains.

Value investors face a difficult choice. They can assume stock prices will return to historical levels, and hold cash until the correction comes. Or, they can accept the reality they currently face.

There is no logical reason stock prices must necessarily return to historical levels. During the twentieth century, real after-tax returns in diversified groups of common stocks were very high relative to other investment opportunities. There have been various reasons given for why this occurred. Many have said these returns were possible, because of the higher risks involved in holding equities. Over the long-term, risks were somewhat higher than today’s investors seem to remember, but they were hardly severe enough to justify the kind of performance spreads that existed during much of the twentieth century.

True, if you bought at inopportune times, it was possible to remain in a fairly deep hole for a fairly long time. But, if you gave no real consideration to the timing of your purchases or the prospects of the underlying enterprises, you did better than many bondholders who chose their investments with the utmost care.

This is a disconcerting problem. It may be that most investors are overly sensitive to the risk of an immediate “paper” loss in nominal terms, and therefore overlook the much greater risk of a gradual loss of purchasing power. Issuing fixed dollar obligations may be the best bet for any business or government that seeks to swindle investors.

For the sake of the common stockholders, I hope many of the best businesses continue to issue such obligations when money is cheap. Corporate debt gets a bad name, because it tends to be overused by those who don’t need it and shouldn’t want it (and, of course, by those businesses that do need it but won’t survive even if they get it). The businesses that would benefit the most from the use of debt usually appear to have more cash than they could ever need. But, it’s best to think ahead. For truly high quality businesses, the cost of capital will fluctuate far more wildly than the likely returns on capital.

If, during the last hundred years, stocks really were far cheaper than they should have been, is there any reason to believe stock prices will return to past levels? The past is often a pretty good predictor of the future – but, not always. It’s difficult to say whether, over the next few decades, valuations will, on average, be higher or lower than they are today. However, it isn’t all that difficult to say whether, at some point over the next few decades, valuations will be higher or lower than they are today. The answer to that question is almost certainly yes. They will be higher and they will be lower. Maybe for a few years or a few months. Maybe for a full decade. I don’t know.

What I do know is that value investors will have opportunities to make investments with a true margin of safety. But, should they wait?

That’s the most difficult question. Today, I am not finding opportunities that look particularly attractive when compared to the best opportunities of past years. But, I am still able to find a few (in fact, a very few) situations where the expected annual rate of return is greater than 15%.

That will be more than enough to beat the market. It will also likely be enough to provide a material increase in after-tax purchasing power. That’s not guaranteed, but it hardly seems holding cash would offer the better odds in this regard.

So, is an expected annual rate of return of 15% good enough? Is it reasonable to bet on the good opportunity that is currently available instead of waiting for the great opportunity that may yet become available?

I’ll leave that for you to decide.

As investors, and we all are investors these days, it is important that we understand the idiosyncrasies of the Stock Market pricing data we use to help us in our decision making efforts. On Wall Street, investing can be a minefield for those who don’t take the time to appreciate why securities prices are at the levels that appear on quarterly account statements. At least four times per year, security prices are more a function of institutional marketing practices than they are a reflection of the economic forces that we would like to think are their primary determining factors. Not even close… Around the end of every calendar quarter, we hear the financial media matter-of-factly report that Institutional Window Dressing Activities” are in full swing. But that is as far, and as deep, as it ever goes. What are they talking about, and just what does it mean to you as an investor?

There are at least three forms of Window Dressing, none of which should make you particularly happy and all of which should make you question the integrity of organizations that either authorize, implement, or condone their use. The better-known variety involves the culling from portfolios of stocks with significant losses and replacing them with shares of companies whose shares have been the most popular during recent months. Not only does this practice make the managers look smarter on reports sent to major clients, it also makes Mutual Fund performance numbers appear significantly more attractive to prospective “fund switchers”. On the sell side of the ledger, prices of the weakest performing stocks are pushed down even further. Obviously, all fund managements will take part in the ritual if they choose to survive. This form of window dressing is, by most definitions, neither investing nor speculating. But no one seems to care about the ethics, the legality, or the fact that this “Buy High, Sell Low” picture is being painted with your Mutual Fund palette.

A more subtle form of Window Dressing takes place throughout the calendar quarter, but is “unwound” before the portfolio’s Quarterly Reports reach the glossies. In this less prevalent (but even more fraudulent) variety, the managers invest in securities that are clearly out of sync with the fund’s published investment policy during a period when their particular specialty has fallen from grace with the gurus. For example, adding commodity ETFs, or popular emerging country issues to a Large Cap Value Fund, etc. Profits are taken before the Quarter Ends so that the fund’s holdings report remains uncompromised, but with enhanced quarterly results. A third form of Window Dressing is referred to as “survivorship”, but it impacts Mutual Fund investors alone while the others undermine the information used by (and the market performance of) individual security investors. You may want to research it.

I cannot understand why the media reports so superficially on these “business as usual” practices. Perhaps ninety percent of the price movement in the equity markets is the result of institutional trading, and institutional money managers seem to be more concerned with politics and marketing than they are with investing. They are trying to impress their major clients with their brilliance by reporting ownership of all the hot tickets and none of the major losers. At the same time, they are manipulating the performance statistics contained in their promotional materials. They have made “Buy High, Sell Low” the accepted investment strategy of the Mutual Fund industry. Meanwhile, individual security investors receive inaccurate signals and incur collateral losses by moving in the wrong direction.

From an analytical point of view, this quarterly market value reality (artificially created demand for some stocks and unwarranted weakness in others) throws almost any individual security or market sector statistic totally out of wack with the underlying company fundamentals. But it gets even more fuzzy, and not in the lovable sense. Just for the fun of it, think about the “demand pull” impact of an ever-growing list of ETFs. I don’t think that I’m alone in thinking that the real meaning of security prices has less and less to do with corporate economics than it does with the morning betting line on ETF ponies… the dot-coms of the new millennium. [Do you remember the "Circle of Gold" from the seventies? Isn't GLD, or IAU, about the same thing?]

As if all of these institutional forces weren’t enough, you need also consider the impact of tax code motivated transactions during the always-entertaining final quarter of the year. One would never suspect (after watching millions of CPA directed taxpayers gleefully lose billions of dollars) that the purpose of investing is to make money! The net impact of these (euphemistically labeled) “year end tax saving strategies” is pretty much the same as that of the Type One Window Dressing described above. But here’s an off-quarter buying opportunity that you really shouldn’t pass up. Simply put, get out there and buy the November 52-week lows, wait for the periodic and mysterious “January Effect” to be reported by the media with eyes wide shut amazement, and pocket some easy profits.

There just may not be a method to actually decipher the true value of a share of common stock. Is market price a function of company fundamentals, artificial demand for “derivative” securities, or various forms of Institutional Window Dressing? But this is a condition that can be used to great financial advantage. With security prices less closely related to those old fashioned fundamental issues such as dividends, projected profits, and unfunded pension liabilities and perhaps more closely related to artificial demand factors, the only operational alternative appears to be trading! Buy the downtrodden (but still fundamentally investment grade) issues and take your profits on those that have risen to inappropriately high levels based on basic measures of quality… and try to get it done before the big players do. To over simplify, a recipe for success would involve shopping for investment grade stocks at bargain prices, allowing them to simmer until a reasonable, pre-defined, profit target is reached, and seasoning the portfolio brew with the discipline to actually implement the profit taking plan.

Yeah, I do miss the days when there were just stocks and bonds, but maybe I’m just a bit too old fashioned. Interesting place Wall Street…

Online investing continues to be popular among consumers, due in part to the fact that it meets most Americans’ requirements – it’s fast, easy and convenient.

In fact, according to research conducted by business research firm JupiterResearch, online trading households are expected to grow from 17.3 million in 2005 to 22 million by 2010.

With so many companies competing for a piece of that pie, it can be difficult at best for consumers to navigate the ever-changing landscape of online investing.

For many, the hardest part is not making that initial stock purchase, but investigating the best (and worst) buys.

So, where does one start?

Fortunately, with the advent of the Internet, consumers are only a keystroke away from a plethora of information on the good, the bad and the awful. The downside? Users can be so overwhelmed by the amount of data that the task of researching stocks can be daunting.

One company is helping Internet investors by making it easier for them to get only the news and stock alerts they want.

Centale Inc. (OTC BB: CNTL), based in Fort Lauderdale, Fla., is building a “real time” comprehensive news and stock alert application that is keyword-programmable called “Market Fragger.” Forbes.com will be the first to implement this service.

The system will allow users to customize financial news by inputting their own search criteria. The information from the search is then delivered directly to the investor’s desktop on both PC and Macintosh. Centale also plans to release a wireless application version.

This capability can potentially allow the investor to spend less time searching and more time making smart investing decisions.

Forbes.com has approximately 8 million to 10 million visitors per month.

While there is no doubt that computerized trading can be faster, cheaper and more convenient than going through a traditional brokerage house, it’s important to research your options to determine what’s best for you and your portfolio.