Archive for February, 2010


New Regulation Around High Frequency Trading

Filed Under: Stock Trading Systems by Bill — Comments Off
February 22, 2010

High frequency trading can be a hugely profitable activity for the firms who are set up to do it. But in order to make those profits, firms have to trade incredibly high volume, because the profit margin on a per transaction basis is very low, in the region of a tenth of a cent per share.

It is for this reason that the high frequency trading firms on Wall Street are now worried about the latest proposals being put forward in US Congress for a new securities transaction tax. The tax rate proposed by Rep. Peter DeFazio (D-OR) is seven and a half cents per share, or 75 times their current profit margin!

This bill is gaining significant support. A similar bill has been put forward in the Senate by Sen Tom Harkin (D-IA). if passed, will force Wall Street to completely re-think its strategy around high frequency trading. Which is not necessarily a bad thing, but it will cause a sea change in the financial markets. Whether it will benefit the wider population of investors remains to be seen.

So far (late February 2009), 28 congressmen have signed on to support the DeFazio bill. Sen Harkin’s bill is also starting to pick up support.

If these bills are passed, in order for them to work, they will need to be highly detailed and well structured. It seems to be generally agreed amongst both supporters and detractors of these bills that they could result in a massive reduction in the volume of stock traded on US exchanges. Because high frequency trading firms account for around 70% of the volume on the US equity market, taking that volume out of the equation will result in a dramatic fall in volumes.

Will this benefit investors or the US economy in general? That of course is the big question. There is nothing to stop the big Wall Street firms setting up shop on other markets in other countries, so some argue that there is a danger that the bill will end up being detrimental to the US economy but nothing more than an inconvenience to the high frequency trading firms themselves.

Because less volume equals less liquidity. And less liquidity equals wider bid/ask spreads, which ends up hurting all investors. So it’s worth keeping an eye on these bills. The devil, as always, will be in the details.

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A Quick Explanation Of Stock Options

Filed Under: Glossary by Bill — Comments Off
February 21, 2010

Most investors, when they have a hunch that the price of a given stock is going to move up or down, will buy or sell short the company’s shares in an effort to benefit from the move that they anticipate. Call or put options allow investors to use leverage and attempt to make a greater percentage gain with a given amount of money than they would by simply buying or shorting shares. Options should be purchased by more sophisticated investors only, because being on the wrong end of a leveraged investment means that you leave yourself open to losing a greater percentage, or all, of the money you have in that position.

But you assume no risk in simply having stock options explained to you. An option is simply the right to buy (in the case of a call option) or sell (for a put option) 100 shares of stock at a given price, at a given date in the future. Here are a few critical things to understand:

You are buying the right to buy the shares, not the shares. The right has a value that will fluctuate between now and the so-called expiration date of the option, based on movements in the share price. You may buy and sell this right before options expiration; most people do not buy options to actually purchase the shares, but to make money from the fluctuations in the value of the option.

Stock options have a strike price that is the amount at which you may purchase the shares, if you hold to expiration. If, at options expiration, the price of the stock is below the strike price (i.e. out of the money) the option will expire worthless, because having the right to buy something at a price that is above the current market price has no value.

If, at options expiration, the price of the stock is above the strike price (i.e. in the money) the option will have an intrinsic value that is determined by how many points the stock price is above the strike price, times 100 (because each contract covers 100 shares of stock).

Maybe the hardest thing conceptually about understanding stock options is the concept of time value. In addition to the intrinsic value, which as we have seen will be zero if the stock price is below the strike price of the contract, the market will ascribe a value to our contract based on how much time is left until expiration, and the likelihood that the option will expire in the money (as determined by the “collective wisdom” of the market). This means that while an options contract may have zero intrinsic value, it can still have value because of the time value component, and the stock’s potential to move higher than the strike price before expiration.

Even the most seasoned investors use only a portion of their investment funds to trade options. The old adage is: buy options only with money that you can truly afford to lose. The good news about options is that you cannot lose more than you invest, but studies have shown that approximately 90% of long put and call options positions either expire worthless or are sold at a loss. That should be your real lesson from this stock options explanation: buyer beware: do your homework and don’t get greedy.

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Why online stock buying is superior

Filed Under: Stock Trading Systems by Bill — Comments Off
February 19, 2010

When it comes to online stock buying, there really isn’t a better way to make money from the stock market then to do it online. Well there’s almost no better way, I suppose you could have someone on the trading floor yourself, but even then it’s debatable. Regardless, for the average person there really is no better way to buy stocks then to do so online.

Trading stocks online is great because it allows for quick investing with the click of a button. There are millions of other traders around the world selling the same stock you are buying and buying the same stock you are selling, which allows for almost instant transaction of your stock purchase online. This means that you can press the buy shares button with confidence knowing that your order will be processed almost immediately.

If you’ve ever tried to buy stock offline, you know that you have to call your broker, then actually connect with him, and then he will have to take your order down, then he will have to relay this message to someone else, who will then go to the stock floor and attempt to execute your order, or else he will have to contact someone who has recently had a floorman purchase shares in bulk from which he can negotiate a deal. If it is done this way, it is very easy for him to fill your order at a much higher price which results in you missing out and losing out on some money.

Additionally, you can use charts and tools at your disposal and then use software that the pros use, then quickly relay that information and determine what trade you should place. You can set automated limit orders and stop prices to automatically buy and/or sell your stock if a certain action (such as a stock closing above or below) a certain price.

For example, if you set a limit order to buy a stock at $32.20, if the stock dips at or below that price a purchase for a set amount of shares will be made. This is useful for making sure you don’t pay too much, for buying a stock if dipping below a certain price will cause you to be under invested in a particular sector, or if you wish to buy a stock at or around a certain technical support level.

You could also set a stop buy which will buy a stock if it goes above a certain price. This may be useful when you are anticipating a breakout and only want to buy a stock if goes above a certain amount. Or perhaps you are online, stock buying and you want to invest more money into the stock if it’s doing well, this is one such way to accomplish that when you purchase stocks online.

You can learn more about buying stock, selling stock, trading stocks, managing your money, and investing at explosive stocks.

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Green Investing Ideas: Upcoming IPOs

Filed Under: Stock Pick of the Day by Bill — Comments Off
February 18, 2010

If your current stock market investments are not performing for you, perhaps you should try another tactic: consider green investing. The question most people ask is, “Can you really make money investing in green companies?” The answer is yes. Just because they are green doesn’t mean that you shouldn’t research their profit potential, debt and earnings ratios, and management history. This is simply another sector that can provide you with upcoming IPOs that will increase your investments.

Going green doesn’t mean preventing profits. It can be considered as revolutionary ideas or creations that will improve your life, or that of someone else, which won’t hurt the environment. One such example is the electric car. There are many new companies that have new patents which have been engineered for it. While the technology is not new, it is becoming more accessible for the general population. This provides a great possibility for a large market share and high stock price.

Another example of green profitability is solar energy. It was very expensive in the past if you wanted to incorporate that in your home. Now solar energy is used not only in the home, but by business and industry as well. You can keep abreast of new technology by watching the latest news, or a blog about green investments. You can monitor the various companies just as you would any other. You can then make your decisions about where to place your money.

The right IPO can provide you with enough profit to make a dent in your retirement, or college fund. You should start taking advantage of these new green inventions and their IPOs . You will find that it is possible to make money with green companies, and you won’t have to worry about sleeping at night wondering about the best intentions of the companies after you’ve purchased shares of their stock.

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