![NY stock exchange traders floor LC-U9-10548-6](https://upload.wikimedia.org/wikipedia/commons/e/ea/NY_stock_exchange_traders_floor_LC-U9-10548-6.jpg)
A stock trader or equity trader or share trader, also called a stock investor, is a person or company involved in trading
equity securities
In finance, stock (also capital stock) consists of all the shares by which ownership of a corporation or company is divided.Longman Business English Dictionary: "stock - ''especially AmE'' one of the shares into which ownership of a company ...
and attempting to profit from the purchase and sale of those securities. Stock traders may be an
investor
An investor is a person who allocates financial capital with the expectation of a future return (profit) or to gain an advantage (interest). Through this allocated capital most of the time the investor purchases some species of property. Type ...
, agent,
hedger,
arbitrageur
In economics and finance, arbitrage (, ) is the practice of taking advantage of a difference in prices in two or more markets; striking a combination of matching deals to capitalise on the difference, the profit being the difference between t ...
,
speculator, or
stockbroker. Such equity trading in large
publicly traded companies
A public company is a company whose ownership is organized via shares of stock which are intended to be freely traded on a stock exchange or in over-the-counter markets. A public (publicly traded) company can be listed on a stock exchange (l ...
may be through a
stock exchange. Stock shares in smaller public companies may be bought and sold in
over-the-counter
Over-the-counter (OTC) drugs are medicines sold directly to a consumer without a requirement for a prescription from a healthcare professional, as opposed to prescription drugs, which may be supplied only to consumers possessing a valid prescr ...
(OTC) markets or in some instances in
equity crowdfunding
Equity crowdfunding is the online offering of private company securities to a group of people for investment and therefore it is a part of the capital markets. Because equity crowdfunding involves investment into a commercial enterprise, it is ...
platforms.
Stock traders can trade on their own account, called
proprietary trading
Proprietary trading (also known as prop trading) occurs when a trader trades stocks, bonds, currencies, commodities, their derivatives, or other financial instruments with the firm's own money (instead of using depositors' money) in order to m ...
, or through an
agent
Agent may refer to:
Espionage, investigation, and law
*, spies or intelligence officers
* Law of agency, laws involving a person authorized to act on behalf of another
** Agent of record, a person with a contractual agreement with an insuranc ...
authorized to buy and sell on the owner’s behalf. Trading through an agent is usually through a
stockbroker. Agents are paid a
commission for performing the trade.
Major stock exchanges have
market maker
A market maker or liquidity provider is a company or an individual that quotes both a buy and a sell price in a tradable asset held in inventory, hoping to make a profit on the ''bid–ask spread'', or ''turn.'' The benefit to the firm is that i ...
s who help limit price variation (
volatility) by buying and selling a particular company's shares on their own behalf and also on behalf of other clients.
Stock trading as a profession/career
![U](https://upload.wikimedia.org/wikipedia/commons/1/19/U.S._Securities_and_Exchange_Commission_headquarters.JPG)
Stock traders may advise
shareholders and help manage
portfolio
Portfolio may refer to:
Objects
* Portfolio (briefcase), a type of briefcase
Collections
* Portfolio (finance), a collection of assets held by an institution or a private individual
* Artist's portfolio, a sample of an artist's work or a c ...
s. Traders engage in buying and selling bonds, stocks, futures and shares in hedge funds. A stock trader also conducts extensive research and observation of how financial markets perform. This is accomplished through economic and
microeconomic study; consequently, more advanced stock traders will delve into
macroeconomics and industry specific technical analysis to track asset or corporate performance. Other duties of a stock trader include comparison of
financial analysis to current and future regulation of his or her occupation.
Professional stock traders who work for a financial company are required to complete an internship of up to four months before becoming established in their career field. In the
United States
The United States of America (U.S.A. or USA), commonly known as the United States (U.S. or US) or America, is a country primarily located in North America. It consists of 50 states, a federal district, five major unincorporated territori ...
, for example, internship is followed up by taking and passing a
Financial Industry Regulatory Authority
The Financial Industry Regulatory Authority (FINRA) is a private American corporation that acts as a self-regulatory organization (SRO) that regulates member brokerage firms and exchange markets. FINRA is the successor to the National Associat ...
-administered Series 63 or 65 exam. Stock traders who pass demonstrate familiarity with
U.S. Securities and Exchange Commission
The U.S. Securities and Exchange Commission (SEC) is an independent agency of the United States federal government, created in the aftermath of the Wall Street Crash of 1929. The primary purpose of the SEC is to enforce the law against market ...
(SEC) compliant practices and regulation. Stock traders with experience usually obtain a four-year degree in a financial, accounting or economics field after licensure. Supervisory positions as a trader may usually require an
MBA
A Master of Business Administration (MBA; also Master's in Business Administration) is a postgraduate degree focused on business administration. The core courses in an MBA program cover various areas of business administration such as accounti ...
for advanced stock market analysis.
The
U.S. Bureau of Labor Statistics (BLS) reported that growth for stock and commodities traders was forecast to be greater than 21% between 2006 and 2016. In that period, stock traders would benefit from trends driven by
pensions of
baby boomer
Baby boomers, often shortened to boomers, are the Western demographic cohort following the Silent Generation and preceding Generation X. The generation is often defined as people born from 1946 to 1964, during the mid-20th century baby boom. ...
s and their decreased reliance on
Social Security
Welfare, or commonly social welfare, is a type of government support intended to ensure that members of a society can meet basic human needs such as food and shelter. Social security may either be synonymous with welfare, or refer specifical ...
.
U.S. Treasury
The Department of the Treasury (USDT) is the national treasury and finance department of the federal government of the United States, where it serves as an executive department. The department oversees the Bureau of Engraving and Printing and t ...
bonds would also be traded on a more fluctuating basis. Stock traders just entering the field suffer since few entry-level positions exist. While entry into this career field is very competitive, increased ownership of stocks and mutual funds drive substantial career growth of traders. Banks were also offering more opportunities for people of average means to invest and speculate in stocks. The BLS reported that stock traders had median annual incomes of $68,500. Experienced traders of stocks and mutual funds have the potential to earn more than $145,600 annually.
Risks and other costs
![Crowd outside nyse](https://upload.wikimedia.org/wikipedia/commons/e/e1/Crowd_outside_nyse.jpg)
Contrary to a
stockbroker, a professional who arranges transactions between a buyer and a seller, and gets a guaranteed commission for every deal executed, a professional trader may have a
steep learning curve
A learning curve is a graphical representation of the relationship between how Skill, proficient people are at a task and the amount of experience they have. Proficiency (measured on the vertical axis) usually increases with increased experience ...
and his ultra-competitive performance based career may be cut short, especially during generalized
stock market crash
A stock market crash is a sudden dramatic decline of stock prices across a major cross-section of a stock market, resulting in a significant loss of paper wealth. Crashes are driven by panic selling and underlying economic factors. They often foll ...
es. Stock market trading operations have a considerably high level of
risk
In simple terms, risk is the possibility of something bad happening. Risk involves uncertainty about the effects/implications of an activity with respect to something that humans value (such as health, well-being, wealth, property or the environm ...
,
uncertainty
Uncertainty refers to epistemic situations involving imperfect or unknown information. It applies to predictions of future events, to physical measurements that are already made, or to the unknown. Uncertainty arises in partially observable ...
and
complexity, especially for unwise and inexperienced stock traders/investors seeking an easy way to make
money
Money is any item or verifiable record that is generally accepted as payment for goods and services and repayment of debts, such as taxes, in a particular country or socio-economic context. The primary functions which distinguish money are as ...
quickly. In addition, trading activities are not free. Stock speculators/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. Depending on the nature of each national or state legislation involved, a large array of fiscal obligations must be respected, and taxes are charged by jurisdictions over those transactions,
dividend
A dividend is a distribution of profits by a corporation to its shareholders. When a corporation earns a profit or surplus, it is able to pay a portion of the profit as a dividend to shareholders. Any amount not distributed is taken to be re-i ...
s and
capital gains that fall within their scope. However, these fiscal obligations will vary from jurisdiction to jurisdiction. Among other reasons, there could be some instances where
taxation
A tax is a compulsory financial charge or some other type of levy imposed on a taxpayer (an individual or legal entity) by a governmental organization in order to fund government spending and various public expenditures (regional, local, o ...
is already incorporated into the
stock price through the differing legislation that companies have to comply with in their respective jurisdictions; or that tax free
stock market operations are useful to boost
economic growth. Beyond these costs are the
opportunity costs of money and time,
currency
A currency, "in circulation", from la, currens, -entis, literally meaning "running" or "traversing" is a standardization of money in any form, in use or circulation as a medium of exchange, for example banknotes and coins.
A more general ...
risk,
financial risk, and Internet, data and news agency services and
electricity
Electricity is the set of physical phenomena associated with the presence and motion of matter that has a property of electric charge. Electricity is related to magnetism, both being part of the phenomenon of electromagnetism, as describ ...
consumption expenses—all of which must be accounted for.
Stock market volatility can trigger mental health issues such as
anxiety
Anxiety is an emotion which is characterized by an unpleasant state of inner turmoil and includes feelings of dread over anticipated events. Anxiety is different than fear in that the former is defined as the anticipation of a future threat wh ...
and
depression. This fits in with research on the long term effects of the stock market on a person's mental health. Seasoned, experienced stock traders and investors generally achieve a level of psychological resilience able to deal with these detrimental factors in the long run or otherwise risk continuous suffering from some type of mental health issue during the course of their careers or financial activities which are dependent on the stock market.
Methodology
Stock speculators and investors usually need a
stock broker
A stockbroker is a regulated broker, broker-dealer, or registered investment adviser (in the United States) who may provide financial advisory and investment management services and execute transactions such as the purchase or sale of stocks an ...
such as a
bank
A bank is a financial institution that accepts deposits from the public and creates a demand deposit while simultaneously making loans. Lending activities can be directly performed by the bank or indirectly through capital markets.
Because ...
or a
brokerage firm
A broker is a person or firm who arranges transactions between a buyer and a seller for a commission when the deal is executed. A broker who also acts as a seller or as a buyer becomes a principal party to the deal. Neither role should be confu ...
to access the stock market. Since the advent of
Internet banking
Online banking, also known as internet banking, web banking or home banking, is an electronic payment system that enables customers of a bank or other financial institution to conduct a range of financial transactions through the financial insti ...
, an
Internet connection
Internet access is the ability of individuals and organizations to connect to the Internet using computer terminals, computers, and other devices; and to access services such as email and the World Wide Web. Internet access is sold by Internet ...
is commonly used to manage positions. Using the
Internet
The Internet (or internet) is the global system of interconnected computer networks that uses the Internet protocol suite (TCP/IP) to communicate between networks and devices. It is a '' network of networks'' that consists of private, pub ...
, specialized software, and a
personal computer
A personal computer (PC) is a multi-purpose microcomputer whose size, capabilities, and price make it feasible for individual use. Personal computers are intended to be operated directly by an end user, rather than by a computer expert or tec ...
, stock speculators/investors make use of
technical
Technical may refer to:
* Technical (vehicle), an improvised fighting vehicle
* Technical analysis, a discipline for forecasting the future direction of prices through the study of past market data
* Technical drawing, showing how something is co ...
and
fundamental
Fundamental may refer to:
* Foundation of reality
* Fundamental frequency, as in music or phonetics, often referred to as simply a "fundamental"
* Fundamentalism, the belief in, and usually the strict adherence to, the simple or "fundamental" idea ...
analysis to help them in making decisions. They may use several information resources, some of which are strictly technical. Using the pivot points calculated from a previous day's trading, they attempt to predict the buy and sell points of the current day's trading session. These points give a cue to speculators, as to where prices will head for the day, prompting each speculator where to enter his trade, and where to exit. An added tool for the stock picker is the use of
stock screen
In financial markets, stock valuation is the method of calculating theoretical values of companies and their stocks. The main use of these methods is to predict future market prices, or more generally, potential market prices, and thus to profit f ...
s. Stock screens allow the user to input specific parameters, based on technical and/or fundamental conditions, that he or she deems desirable. Primary benefit associated with stock screens is its ability to return a small group of stocks for further analysis, among tens of thousands, that fit the requirements requested. There is criticism on the validity of using these technical indicators in analysis, and many professional stock speculators do not use them. Many full-time stock speculators and stock investors, as well as most other people in finance, traditionally have a formal education and training in fields such as
economics
Economics () is the social science that studies the production, distribution, and consumption of goods and services.
Economics focuses on the behaviour and interactions of economic agents and how economies work. Microeconomics analyzes ...
,
finance,
mathematics and
computer science
Computer science is the study of computation, automation, and information. Computer science spans theoretical disciplines (such as algorithms, theory of computation, information theory, and automation) to practical disciplines (includi ...
, which may be particularly relevant to this occupation – since stock trading is not an exact science, stock prices have in general a
random
In common usage, randomness is the apparent or actual lack of pattern or predictability in events. A random sequence of events, symbols or steps often has no order and does not follow an intelligible pattern or combination. Individual ra ...
or
chaotic
Chaotic was originally a Danish trading card game. It expanded to an online game in America which then became a television program based on the game. The program was able to be seen on 4Kids TV (Fox affiliates, nationwide), Jetix, The CW4Kid ...
behaviour and there is no proven technique for trading stocks profitably, the degree of knowledge in those fields is ultimately neglectable.
Stock picking
The efficient-market hypothesis
![MACD example, fast=12 slow=26 smooth=9](https://upload.wikimedia.org/wikipedia/commons/6/6a/MACD_example%2C_fast%3D12_slow%3D26_smooth%3D9.png)
Although many companies offer courses in stock picking, and numerous experts report success through
technical analysis
In finance, technical analysis is an analysis methodology for analysing and forecasting the direction of prices through the study of past market data, primarily price and volume. Behavioral economics and quantitative analysis use many of the sam ...
and
fundamental analysis
Fundamental analysis, in accounting and finance, is the analysis of a business's financial statements (usually to analyze the business's assets, liabilities, and earnings); health; and competitors and markets. It also considers the overall sta ...
, many economists and academics state that because of the
efficient-market hypothesis
The efficient-market hypothesis (EMH) is a hypothesis in financial economics that states that asset prices reflect all available information. A direct implication is that it is impossible to "beat the market" consistently on a risk-adjusted bas ...
(EMH) it is unlikely that any amount of analysis can help an investor make any gains above the stock market itself. In the
distribution Distribution may refer to:
Mathematics
*Distribution (mathematics), generalized functions used to formulate solutions of partial differential equations
* Probability distribution, the probability of a particular value or value range of a vari ...
of investors, many academics believe that the richest are simply
outliers in such a distribution (i.e. in a game of chance, they have flipped heads twenty times in a row). When money is put into the stock market, it is done with the aim of generating a return on the capital invested. Many
investor
An investor is a person who allocates financial capital with the expectation of a future return (profit) or to gain an advantage (interest). Through this allocated capital most of the time the investor purchases some species of property. Type ...
s try not only to make a profitable return, but also to outperform, or beat, the market. However, market efficiency, championed in the EMH formulated by
Eugene Fama
Eugene Francis "Gene" Fama (; born February 14, 1939) is an American economist, best known for his empirical work on portfolio theory, asset pricing, and the efficient-market hypothesis.
He is currently Robert R. McCormick Distinguished Servic ...
in 1970, suggests that at any given time, prices fully reflect all available information on a particular stock and/or market.
Thus, according to the EMH, no investor has an advantage in predicting a return on a stock price because no one has access to information not already available to everyone else. In efficient markets, prices become not predictable but random, so no investment pattern can be discerned. A planned approach to investment, therefore, cannot be successful. This "random walk" of prices, commonly spoken about in the EMH school of thought, results in the failure of any investment strategy that aims to beat the market consistently. In fact, the EMH suggests that given the transaction costs involved in portfolio management, it would be more profitable for an investor to put his or her money into an index fund.
Mandelbrot's fractal theory
In 1963
Benoit Mandelbrot analyzed the variations of cotton prices on a time series starting in 1900. There were two important findings. First, price movements had very little to do with a normal distribution in which the bulk of the observations lies close to the mean (68% of the data are within one standard deviation). Instead, the data showed a great frequency of extreme variations. Second, price variations followed patterns that were indifferent to scale: the curve described by price changes for a single day was similar to a month’s curve. Surprisingly, these patterns of self-similarity were present during the entire period from 1900 to 1960, a violent epoch that had seen a Great Depression and two world wars. Mandelbrot used his
fractal theory
In mathematics, a fractal is a geometric shape containing detailed structure at arbitrarily small scales, usually having a fractal dimension strictly exceeding the topological dimension. Many fractals appear similar at various scales, as illus ...
to explain the presence of extreme events in Wall Street. In 2004 he published his book on the "misbehavior" of financial markets ''The (Mis)behavior of Markets: A Fractal View of Risk, Ruin, and Reward''. The basic idea that relates fractals to financial markets is that the probability of experiencing extreme fluctuations (like the ones triggered by herd behavior) is greater than what conventional wisdom wants us to believe. This of course delivers a more accurate vision of risk in the world of finance. The central objective in financial markets is to maximize income for a given level of risk. Standard models for this are based on the premise that the probability of extreme variations of asset prices is very low.
These models rely on the assumption that asset price fluctuations are the result of a well-behaved random or stochastic process. This is why mainstream models (such as the famous
Black–Scholes model
The Black–Scholes or Black–Scholes–Merton model is a mathematical model for the dynamics of a financial market containing derivative investment instruments. From the parabolic partial differential equation in the model, known as the Black ...
) use normal probabilistic distributions to describe price movements. For all practical purposes, extreme variations can be ignored. Mandelbrot thought this was an awful way to look at financial markets. For him, the distribution of price movements is not normal and has the property of
kurtosis
In probability theory and statistics, kurtosis (from el, κυρτός, ''kyrtos'' or ''kurtos'', meaning "curved, arching") is a measure of the "tailedness" of the probability distribution of a real-valued random variable. Like skewness, kurt ...
, where fat tails abound. This is a more faithful representation of financial markets: the movements of the Dow index for the past hundred years reveals a troubling frequency of violent movements. Still, conventional models used by the time of the
2008 financial crisis ruled out these extreme variations and considered they can only happen every 10,000 years. An obvious conclusion from Mandelbrot’s work is that greater regulation in financial markets is indispensable. Other contributions of his work for the study of stock market behaviour are the creation of new approaches to evaluate risk and avoid unanticipated financial collapses.
Beating the market, fraud and scams
Outside of academia, the controversy surrounding market timing is primarily focused on day trading conducted by individual investors and the mutual fund trading scandals perpetrated by institutional investors in 2003. Media coverage of these issues has been so prevalent that many investors now dismiss market timing as a credible investment strategy. Unexposed
insider trading,
accounting fraud
Accounting, also known as accountancy, is the measurement, processing, and communication of financial and non financial information about economic entities such as businesses and corporations. Accounting, which has been called the "language ...
,
embezzlement and
pump and dump
Pump and dump (P&D) is a form of securities fraud that involves artificially inflating the price of an owned stock through false and misleading positive statements, in order to sell the cheaply purchased stock at a higher price. Once the operat ...
strategies are factors that hamper an efficient, rational, fair and transparent
investing
Investment is the dedication of money to purchase of an asset to attain an increase in value over a period of time. Investment requires a sacrifice of some present asset, such as time, money, or effort.
In finance, the purpose of investing i ...
, because they may create fictitious company's financial statements and data, leading to inconsistent stock prices.
Throughout the stock markets history, there have been dozens of scandals involving listed companies, stock investing methods and brokerage.
Jérôme Kerviel
Jérôme Kerviel (; born 1977) is a French rogue trader who was convicted and imprisoned in the 2008 Société Générale trading loss for breach of trust, forgery and unauthorized use of the bank's computers, resulting in losses valued at € ...
(
Société Générale
Société Générale S.A. (), colloquially known in English as SocGen (), is a French-based multinational financial services company founded in 1864, registered in downtown Paris and headquartered nearby in La Défense.
Société Générale ...
) and
Kweku Adoboli
Kweku Adoboli (born 21 May 1980) is a Ghanaian investment manager and former stock trader. He was convicted of illegally trading away US$2 billion (£1.3 billion STG) as a trader for Swiss investment bank UBS. While at the bank he pr ...
(
UBS), two
rogue trader A rogue trader is person who makes financial trades in an unauthorised manner.
Rogue trader may also refer to:
* ''Rogue Trader'' (book), the autobiography of (and later a movie about) Nick Leeson, the man who caused the collapse of Barings Bank
* ...
s, worked in the same type of position, the
Delta One desk: a table where
derivatives are traded, and not single stocks or bonds. These types of operations are relatively simple and often reserved for novice traders who also specialize in
exchange-traded funds (ETFs), financial products that mimic the performance of an index (i.e. either upward or downward). As they are easy to use, they facilitate portfolio diversification through the acquisition of contracts backed by a stock index or industry (e.g. commodities). The two traders were very familiar to control procedures. They worked in the back office, the administrative body of the bank that controls the regularity of operations, before moving to trading. According to the report of the Inspector General of Societe Generale, in 2005 and 2006 Kerviel "led" by taking 100 to 150 million-euro positions on the shares of
SolarWorld
SolarWorld is a German company dedicated to the manufacture and marketing photovoltaic products worldwide by integrating all components of the solar value chain, from feedstock (polysilicon) to module production, from trade with solar panels to ...
listed in Germany. Moreover, the "unauthorized trading" of Kweku Adoboli, similar to Kerviel, did not date back a long way. Adoboli had executed operations since October 2008; his failure and subsequent arrest occurred in 2011.
A classical case related to insider trading of listed companies involved
Raj Rajaratnam
Rajakumaran Rajaratnam (born June 15, 1957) is a Sri Lankan-American former hedge fund manager and founder of the Galleon Group, a New York-based hedge fund management firm.
On October 16, 2009, he was arrested by the FBI for insider trading ...
and its hedge fund management firm, the
Galleon Group
The Galleon Group was one of the largest hedge fund management firms in the world, managing over $7 billion, before closing in October 2009. The firm was the center of a 2009 insider trading scandal which subsequently led to its fall.
The firm w ...
. On Friday October 16, 2009, he was arrested by the
FBI
The Federal Bureau of Investigation (FBI) is the domestic intelligence and security service of the United States and its principal federal law enforcement agency. Operating under the jurisdiction of the United States Department of Justice, t ...
and accused of conspiring with others in insider trading in several publicly traded companies. U.S. Attorney
Preet Bharara
Preetinder Singh Bharara (; born October 13, 1968) is an Indian-born American lawyer, author, podcaster and former federal prosecutor who served as the United States Attorney for the Southern District of New York from 2009 to 2017. He is curren ...
put the total profits in the scheme at over $60 million, telling a news conference it was the largest hedge fund insider trading case in United States history. A well publicized accounting fraud of a listed company involved Satyam. On January 7, 2009, its Chairman
Raju
The Raju are a Telugu caste found mostly in the Indian state of Andhra Pradesh.
Varna Status
The Raju caste, which A. Satyanarayana calls the "locally dominant landed gentry", claims Kshatriya status in the varna system despite there being ...
resigned after publicly announcing his involvement in a massive accounting fraud. Ramalinga Raju was sent to the Hyderabad prison along with his brother and former board member Rama Raju, and the former CFO Vadlamani Srinivas. In Italy,
Parmalat's
Calisto Tanzi
Calisto Tanzi (17 November 1938 – 1 January 2022) was an Italian businessman and convicted fraudster. He founded Parmalat in 1961, after dropping out of college. Parmalat collapsed in 2003 with a €14bn ($20bn; £13bn) hole in its accounts ...
was charged with financial
fraud and
money laundering in 2008. Italians were shocked that such a vast and established empire could crumble so quickly. When the scandal was made known, the share price of Parmalat in the Milan Stock Exchange tumbled. Parmalat had sold itself
credit-linked note A credit-linked note (CLN) is a form of funded credit derivative. It is structured as a security with an embedded credit default swap allowing the issuer to transfer a specific credit risk to credit investors. The issuer is not obligated to repay th ...
s, in effect placing a bet on its own credit worthiness in order to conjure up an
asset
In financial accounting, an asset is any resource owned or controlled by a business or an economic entity. It is anything (tangible or intangible) that can be used to produce positive economic value. Assets represent value of ownership that can ...
out of thin air. After his arrest, Tanzi reportedly admitted during questioning at
Milan
Milan ( , , Lombard: ; it, Milano ) is a city in northern Italy, capital of Lombardy, and the second-most populous city proper in Italy after Rome. The city proper has a population of about 1.4 million, while its metropolitan city h ...
's
San Vittore prison
San Vittore is a prison in the city center of Milan, Italy.
Its construction started in 1872 and opened on 7 July 1879.
The prison has place for 600 inmates, but it had 1036 prisoners in 2017.
History
The construction of the new prison was de ...
, that he diverted funds from Parmalat into Parmatour and elsewhere. The family
football and tourism enterprises were financial disasters; as well as Tanzi's attempt to rival
Berlusconi
Silvio Berlusconi ( ; ; born 29 September 1936) is an Italian media tycoon and politician who served as Prime Minister of Italy in four governments from 1994 to 1995, 2001 to 2006 and 2008 to 2011. He was a member of the Chamber of Deputies ...
by buying
Odeon TV
''Odeon 24'' was an Italian channel owned by Gold TV, a television network. Originally airing movies, news and weather bulletins, political debates and variety shows, the channel was bought by Primarete and became almost dedicated to infomercials, ...
, only to sell it at a loss of about €45 million. Tanzi was sentenced to 10 years in prison for fraud relating to the collapse of the dairy group. The other seven defendants, including executives and bankers, were acquitted. Another eight defendants settled out of court in September 2008.
![Warren Buffett KU Visit](https://upload.wikimedia.org/wikipedia/commons/5/51/Warren_Buffett_KU_Visit.jpg)
Day trading sits at the extreme end of the investing spectrum from conventional buy-and-hold wisdom. It is the ultimate market-timing strategy. While all the attention that day trading attracts seems to suggest that the theory is sound, critics argue that, if that were so, at least one famous money manager would have mastered the system and claimed the title of "the
Warren Buffett
Warren Edward Buffett ( ; born August 30, 1930) is an American business magnate, investor, and philanthropist. He is currently the chairman and CEO of Berkshire Hathaway. He is one of the most successful investors in the world and has a net ...
of day trading". The long list of successful investors that have become legends in their own time, where
George Soros
George Soros ( name written in eastern order), (born György Schwartz, August 12, 1930) is a Hungarian-American businessman and philanthropist. , he had a net worth of US$8.6 billion, Note that this site is updated daily. having donated mo ...
rivals
Warren Buffett
Warren Edward Buffett ( ; born August 30, 1930) is an American business magnate, investor, and philanthropist. He is currently the chairman and CEO of Berkshire Hathaway. He is one of the most successful investors in the world and has a net ...
for the title of most successful stock investor of all time, does not include a single individual that built his or her reputation by day trading.
Even
Michael Steinhardt
Michael H. Steinhardt (born December 7, 1940) is an American billionaire hedge fund manager, philanthropist, and former antiquities collector. In 1967, he founded a hedge fund, Steinhardt Partners which he ran until he closed it in 1995. After a ...
, who made his fortune trading in time horizons ranging from 30 minutes to 30 days, claimed to take a long-term perspective on his investment decisions. From an economic perspective, many professional money managers and financial advisors shy away from day trading, arguing that the reward simply does not justify the risk. Attempting to make a profit is the reason investors invest, and buy low and sell high is the general goal of most investors (although short-selling and arbitrage take a different approach, the success or failure of these strategies still depends on timing).
![Masayoshi Son (孫正義) on July 11, 2008](https://upload.wikimedia.org/wikipedia/commons/a/a8/Masayoshi_Son_%28%E5%AD%AB%E6%AD%A3%E7%BE%A9%29_on_July_11%2C_2008.jpg)
The problems with
mutual fund
A mutual fund is a professionally managed investment fund that pools money from many investors to purchase securities. The term is typically used in the United States, Canada, and India, while similar structures across the globe include the SICAV ...
trading that cast market timing in a negative light occurred because the prospectuses written by the mutual fund companies strictly forbid short-term trading. Despite this prohibition, special clients were allowed to do it anyway. So, the problem was not with the trading strategy but rather with the unethical and unfair implementation of that strategy, which permitted some investors to engage in it while excluding others. All of the world's greatest investors rely, to some extent, on market timing for their success. Whether they base their buy-sell decisions on fundamental analysis of the markets, technical analysis of individual companies, personal intuition, or all of the above, the ultimate reason for their success involves making the right trades at the right time. In most cases, those decisions involve extended periods of time and are based on buy-and-hold investment strategies.
Value investing
Value investing is an investment paradigm that involves buying securities that appear underpriced by some form of fundamental analysis. The various forms of value investing derive from the investment philosophy first taught by Benjamin Graham an ...
is a clear example, as the strategy is based on buying stocks that trade for less than their intrinsic values and selling them when their value is recognized in the marketplace. Most value investors are known for their patience, as undervalued stocks often remain undervalued for significant periods of time.
Some investors choose a blend of technical, fundamental and environmental factors to influence where and when they invest. These strategists reject the 'chance' theory of investing, and attribute their higher level of returns to both insight and discipline.
![BernardMadoff](https://upload.wikimedia.org/wikipedia/commons/a/a4/BernardMadoff.jpg)
Financial fail and unsuccessful stories related with stock trading abound. Every year, a lot of money is wasted in non-peer-reviewed (and largely unregulated) publications and courses attended by credulous people that get persuaded and take the bill, hoping getting rich by trading on the markets. This allow widespread promotion of inaccurate and unproven trading methods for stocks, bonds, commodities, or
Forex
The foreign exchange market (Forex, FX, or currency market) is a global decentralized or over-the-counter (OTC) market for the trading of currencies. This market determines foreign exchange rates for every currency. It includes all as ...
, while generating sizable revenues for unscrupulous authors, advisers and self-titled trading gurus. Most active money managers produce worse returns than an index, such as the
S&P 500
The Standard and Poor's 500, or simply the S&P 500, is a stock market index tracking the stock performance of 500 large companies listed on stock exchanges in the United States. It is one of the most commonly followed equity indices. As of ...
.
Speculation in stocks is a risky and complex undertaking because the direction of the markets are considered generally unpredictable and lack transparency, also
financial regulators
Financial regulation is a form of regulation or supervision, which subjects financial institutions to certain requirements, restrictions and guidelines, aiming to maintain the stability and integrity of the financial system. This may be handled ...
are sometimes unable to adequately detect, prevent and remediate irregularities committed by malicious listed companies or other
financial market participants
There are two basic financial market participant distinctions, investor vs. speculator and institutional vs. retail. Action in financial markets by central banks is usually regarded as intervention rather than participation.
Supply side vs. ...
. In addition, the financial markets are subject to
speculation. This does not invalidate the well documented true and genuine stories of large successes and consistent profitability of many individual stock investors and stock investing organizations in history.
In order to successfully address all the shortcomings, doubts, fallacies, noise and bureaucratic bottlenecks associated with stock investing, like unchecked speculation and fraud as well as
imperfect information
In economics, perfect information (sometimes referred to as "no hidden information") is a feature of perfect competition. With perfect information in a market, all consumers and producers have complete and instantaneous knowledge of all market pri ...
, excessive risk and costs, stock investor
John Clifton "Jack" Bogle (1929 – 2019) became world-renowned for founding the American investment fund manager
Vanguard Group in 1975, and for designing the first
index replication fund. Bogle studied economics at Princeton University, specializing in
mutual fund
A mutual fund is a professionally managed investment fund that pools money from many investors to purchase securities. The term is typically used in the United States, Canada, and India, while similar structures across the globe include the SICAV ...
s, and early on demonstrated a strong inclination toward the principles of
passive stock management on which he later built the Vanguard Group. Bogle felt that it would be virtually impossible for an investor to consistently beat the
stock market, and that the potential gains made are usually diluted by the heavy cost structure associated with security selection - number of transactions - resulting in a below-average return. Based on this principle, he designed the first index fund, allowing his investors to access the entire market in a simple, comprehensive way and at extremely competitive costs.
Psychology
Trading psychology is the study of human mindset and how it functions in terms of identity, beliefs and behaviors while actively trading regulated and non-regulated assets. This area of psychology can reveal core human inclination s because trading requires a different mindset for success than our more primitive brain has developed and a mindset that is successful in most other endeavors. This area of study clarifies the
mental and
emotional aspects that will dictate a trader's decision and is an important factor in determining his success or failure in the trading process.
Certain emotions like
greed
Greed (or avarice) is an uncontrolled longing for increase in the acquisition or use of material gain (be it food, money, land, or animate/inanimate possessions); or social value, such as status, or power. Greed has been identified as und ...
,
fear
Fear is an intensely unpleasant emotion in response to perceiving or recognizing a danger or threat. Fear causes physiological changes that may produce behavioral reactions such as mounting an aggressive response or fleeing the threat. Fear ...
and
regret
Regret is the emotion of wishing one had made a different decision in the past, because the consequences of the decision were unfavorable.
Regret is related to perceived opportunity. Its intensity varies over time after the decision, in regard ...
play important roles in the trading process. Greed is defined as excessive desire to accumulate more wealth. It can be both beneficial or destructing depending on how a trader utilize it in different situations. It has positive results in the bull market. The longer a trader stays on the game, the greater wealth he can gather. However, it is destructive when suddenly a
bear market
A market trend is a perceived tendency of financial markets to move in a particular direction over time. Analysts classify these trends as ''secular'' for long time-frames, ''primary'' for medium time-frames, and ''secondary'' for short time-fram ...
strikes in. Fear on the other hand is the exact opposite to greed. It is the one that holds back a trader in taking the steps in the trading process. And like greed, it can be both destructive and useful depending on the situation of the market. Regret is another emotion a trader must take careful consideration. There are many traders who jumped into the trading process because of regret and finally finding themselves losing more money in the process.
One study analyzing trades from 2000 to 2016 found elite traders were better than random chance at buying stocks, but worse than random chance when selling, perhaps because they did not track post-sale performance, and spent more time thinking about buying than selling.
There's A Way You Can Beat The Best Investors. You've Just Got To Know When To Sell
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See also
* Brokerage firm
A broker is a person or firm who arranges transactions between a buyer and a seller for a commission when the deal is executed. A broker who also acts as a seller or as a buyer becomes a principal party to the deal. Neither role should be confu ...
* Day trader
Day trading is a form of speculation in securities in which a trader buys and sells a financial instrument within the same trading day, so that all positions are closed before the market closes for the trading day to avoid unmanageable risks a ...
* Dead cat bounce
In finance, a dead cat bounce is a small, brief recovery in the price of a declining stock. Derived from the idea that "even a dead cat will bounce if it falls from a great height", the phrase, which originated on Wall Street, is also popularly ap ...
* Don't fight the tape
Trend following or trend trading is a trading strategy according to which one should buy an asset when its price trend goes up, and sell when its trend goes down, expecting price movements to continue.
There are a number of different techniques, ...
* Fundamental analysis
Fundamental analysis, in accounting and finance, is the analysis of a business's financial statements (usually to analyze the business's assets, liabilities, and earnings); health; and competitors and markets. It also considers the overall sta ...
* Option (finance)
In finance, an option is a contract which conveys to its owner, the ''holder'', the right, but not the obligation, to buy or sell a specific quantity of an underlying asset or instrument at a specified strike price on or before a specified d ...
* Paper trading
* Shareholder
* Slippage (finance)
With regard to futures contracts as well as other financial instruments, slippage is the difference between where the computer signaled the entry and exit for a trade and where actual clients, with actual money, entered and exited the market usin ...
* Stock
* Stockbroker
* Stock exchange
* Stock market
* Stock market data systems Stock market data systems communicate market data—information about securities and stock trades—from stock exchanges to stockbrokers and stock traders.
History
The earliest stock exchanges were in France in the 12th century and in Bru ...
* Technical analysis
In finance, technical analysis is an analysis methodology for analysing and forecasting the direction of prices through the study of past market data, primarily price and volume. Behavioral economics and quantitative analysis use many of the sam ...
* Technical analysis software
In finance, technical analysis is an analysis methodology for analysing and forecasting the direction of prices through the study of past market data, primarily price and volume. Behavioral economics and quantitative analysis use many of the sam ...
* Trader (finance)
A trader is a person, firm, or entity in finance who buys and sells financial instruments, such as forex, cryptocurrencies, stocks, bonds, commodities, derivatives, and mutual funds in the capacity of agent, hedger, arbitrageur, or speculator. ...
* Value investing
Value investing is an investment paradigm that involves buying securities that appear underpriced by some form of fundamental analysis. The various forms of value investing derive from the investment philosophy first taught by Benjamin Graham an ...
* Derivatives market
The derivatives market is the financial market for derivatives, financial instruments like futures contracts or options, which are derived from other forms of assets
In financial accounting, an asset is any resource owned or controlled by a ...
References
{{Stock market
Financial services occupations
Investors
Stock traders