Stock trader - Misplaced Pages

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A stock trader or a stock investor is an individual or firm who buys and sells financial instruments (such as stocks or bonds) in the financial markets.

Stock trader versus stock investor

Stock investors purchase stocks with the intention of holding for an extended period of time, usually several months to years. They rely primarily on fundamental analysis for their investment decisions and fully recognize stock shares as part-ownership in the company. Many investors believe in the Buy-and-Hold strategy, which as the name suggests, implies that investors will hold stocks for the very long term, generally measured in years. This strategy was made popular in the equity bull market of the 1980s and 90s where buy-and-hold investors rode out short-term market declines and continued to hold as the market returned to its previous highs and beyond. However, during the 2001-2003 equity bear market, the buy-and-hold strategy lost some followers as broader market indexes like the NASDAQ saw their values decline by over 60%. On the other hand, stock traders usually try to profit from short-term price volatility with trades lasting anywhere from several seconds to several weeks. Some try to rely upon the psychology of other stock market agents (buyers and sellers), and privileged or confidential information, in order to take their capital gain (see speculation and insider trading). In modern days, a number of truly committed full time traders are usually technical analysis (or charting) experts.

Individuals or firms trading as their principal capacity are called stock traders or simply traders. The stock trader is usually a professional. However, many people across the world can call themselves stock traders/investors or part-time stock traders/investors, despite having another profession in parallel with their regular trading activities in the financial markets. When a stock trader/investor has clients, and acts as a money manager or adviser with the intention of adding value to his clients finances, he is also called a financial adviser or manager. In this case, the financial manager could be an independent professional or a large bank corporation employee. This may include managers dealing with investment funds, hedge funds, mutual funds, and pension funds, or other professionals in equity investment, fund management, and wealth management. A very active stock trader who holds positions for a very short time and makes several trades each day is a day trader.

Several different types of stock trading or investing exist including day trading, swing trading, market making, trend following, scalping (trading), momentum trading, short-term countertrend trading, trading the news, and arbitrage. In the case of longer-term trend following, some trades may last longer than several months.

Methodology

Stock traders/investors usually need a stock broker, such as a bank or a brokerage firm, as an intermediate. Since the spread of the Internet banking, it is usual to use an Internet connection to manage their own financial portfolios, including ordering the sell/buying orders, set stop losses prices and define buying/selling prices. Using the Internet, specialized software and a personal computer, stock traders/investors make use of technical analysis and fundamental analysis to help them in the decision process. They utilize also several advising and information resources based on the Internet and the media, such as financial/business news and data firms (Thomson Financial, Reuters, Bloomberg, Financial Times, Yahoo! Finance, MSN Money, AFX News, Newratings, Forbes, BusinessWeek, Hoover's). They exclusively trade on their own behalf, as a principal, investing money on a share or other financial instrument, which they believe will increase in price aiming to sell it later with earnings.

Expenses, costs and risk

Trading activities are not free. First of all, they have a considerably high level of risk, uncertainty and complexity, especially for unwise and inexperienced stock traders/investors seeking for an easy way to make money quickly. In addition, stock traders/investors face several costs such as commissions, taxes and fees to be paid for the brokerage and other services, like the buying/selling orders placed at the stock exchange. According to each National or State legislation, a large array of fiscal obligations must be respected, and taxes are charged by the State over the transactions and earnings. Beyond these costs, the opportunity costs of money and time, the currency risk, the financial risk, and all the Internet Service Provider, data and news agency services and electricity consumption expenses must be added.

Stock Picking

Although many companies offer courses in stock picking, and numerous experts report success through Technical Analysis and Fundamental Analysis, many economists and academics state that because of Efficient market theory it is unlikely that any amount of analysis can help an investor make any gains above the stock market itself. In a normal distribution of investors, many academics believe that the richest are simply outliers in such a distribution (e.g. in a game of chance, they have flipped heads twenty years in a row).

For this reason most academics and economists recommend that investors invest in funds that follow an index in the market, i.e. long-term and well-diversified investments.

Dart Board Method

Financial journals and newspapers such as the Wall Street Journal have done articles on stock picking in the past. One famous article involved a stock picking contest between a panel of Wall Street experts, the public and a dart board. One member was elected to throw darts at the Journal's stock page in order to select a portfolio. At the end of the experiment, the public and the dart board both beat the board of Wall Street experts. Was the dart board more savvy? The dart board's triumph over the Wall Street experts can be attributed to chance (one could also attribute the dart board losing to the experts to chance as well).

Miscellaneous

Jules Verne, the famous writer, was a stock trader and broker at the Paris Stock Exchange (La Bourse de Paris).
Isaac Newton, the famous physicist lost some of his money due to speculation in The South Sea Company stock in the 1720s. Isaac Newton lost over 20,000 pounds (£1.68 million in today's money) of his fortune. As a result of this crisis, he stated "I can calculate the motions of heavenly bodies, but not the madness of people".
John Maynard Keynes, the famous economist, was a very successful stock investor.
David Ricardo, the famous political economist joined his father at the London Stock Exchange, where he began to learn about the workings of finance. This beginning set the stage for Ricardo's later success in the stock market.

Famous stock traders or stock investors

References

The Damn'd South Sea, Harvard Magazine (1999), accessed January 2007
South Sea Bubble, Stock Market Crash! (2006), accessed January 2007
FAMOUS FIRST BUBBLES? The South Sea Bubble, Erasmus School of Economics - Erasmus University Rotterdam (2006), accessed January 2007
The South Sea Bubble, History House Inc. (2006), accessed January 2007

External links

The 7 Deadly Sins of Investors A humorous article on the common failures of individual Stock traders

Category:

Stock traders