Did you know that the Large Mutual Funds, Money Managers, Broker Dealers, Hedge Funds, Market Makers, Specialists and Floor Brokers are the most active, successful, and profitable day traders
in the markets today. Yes, I said day traders. Most people are surprised when I tell them that. But that is exactly what they are. They can and do move markets, and in the process they make millions of dollars every day stock trading stocks with a good portion of that money being made off the backs of the uninformed individual trader and investor who blindly trades or invests in the stock market today.
When it comes to stock trading or investing in stocks, most individuals are not at all prepared, or aware of what the Wall Street professionals have in store for them. And they are very good at what they do. Things like questionable analyst upgrades for companies that are clients of the brokerage firm that the analyst works for . . . so as to facilitate the selling of stock by company and corporate insiders at a higher price than normal by selling into the momemtum and price action created by the upgrade. I honestly don't know how some of these analyst can sleep at night, or how they can look at themselves in the mirror in the morning. But those are the facts, and it happens almost every day.
And, did you know about how the big players run and gun stocks, or tank them to make a killing off the underlying put or call options they had previosly loaded up on. Or how they manipulate the financial futures to manipulate stock prices, option prices, or the financial futures prices themselves so they can make large amounts of money, often at your expense. For every winner on a stock trade or investment, there has to be a loser. The market is a zero sum game. Is that loser you?
The truth of the matter is that the market is a game of money flow played by the big players as they move money around from stocks, to options, to financial futures, and back and forth in a number of different ways, all in the pursuit of greed and large profits. And remember, I previously mentioned that "a good portion of that money is being made off the backs of the uninformed individual stock trader and investor who blindly trades and invests in the stock market today."
Education is the key to the success of every indivdual stock trader and investor involved in the stock market today, witkout exception. The good news is that . . . once you learn the inner secrets of how you can trade and invest with them and not against them, like the pros do . . . you can confidently and consistently trade and invest in stocks profitably most days of the year, too.
Once you know what you are really doing, it is not uncommon to make $2,500 to $5,000 and more, per day. I have done it, and continue to do it when I trade. But if you don't know what you are doing, it is not uncommon to lose that kind of money, too. I feel very fortunate that I had the opportunity to learn from the same stock traders and investors you will meet on the pages of
this site.
You can become a very successful stock trader and/or investor, but only if you are willing to invest the time and effort required educating yourself about the real workings of the stock market and how everything fits together. You won't find a better place on the internet to get the critical information you need to succeed.
If you are losing money in the markets today stock trading or investing, or not making enough money, it is time for you get out of the markets for awhile and sit back and try and analyze what you are doing wrong. If you are honest with yourself, you are going to realize that you really don't know what you are doing when it comes to stock trading and investing.
The best advice anyone can give you is to take a stock trading or investing traing course, either here or elsewhere, and find out what you should be doing. Some of these courses are not cheap, but the cost is really minimal when you consider the success you can have, and the money you can make in the stock market. You have to decide what you want to do. There is an old saying that goes like this "If you continue to do what you have always done, then you will continue to get what you have always got".
Here at DowTrend.com you will find everything you need to know and learn to become successful at stock trading and investing in today's stock market. There are free trading lessons, free trial offers, and comprehensive stock trading and investing courses from the most successful, market savy and knowledgeable traders and investors in the world. They hold nothing back. These are the same individuals that I originally learned from years ago, and yes there are many days when I make a lot more money than they do.
Spend some time looking around this site. Take your time and check everything out. There is no one around to bother you. I sincerely believe you will like what you see.
by Larry Schade
Can Gross Domestic Product (GDP) Figures be Trusted?
GDP (Gross Domestic Product) The formula to calculate GDP is this:
GDP (Gross Domestic Product) =
Consumption + investment + government expenditure + net exports (exports minus imports) =
Wages + rents + interest + profits + non-income charges + net foreign factor income earned
But the GDP figure is vulnerable to "creative accounting":
1. The weight of certain items, sectors, or activities is reduced or increased in order to influence GDP components, such as industrial production. Developing countries often alter the way critical components of GDP like industrial production are tallied.
2. Goods in inventory are included in GDP although not yet sold. Thus, rising inventories, a telltale sign of economic ill-health, actually increases the GDP!
3. If goods produced are financed with credits and loans, GDP will be artificially HIGH (inflated).
4. In some countries, PLANS and INTENTIONS to invest are counted, recorded, and booked as actual investments. This practice is frowned upon (and landed quite a few corporate managers in the gaol), but is still widespread in the shoddier and shadier corners of the globe.
5. GDP figures should be adjusted for inflation (real GDP as opposed to nominal GDP). To achieve that, the calculation of the GDP deflator is critical. But the GDP deflator is a highly subjective figure, prone, in developing countries, to reflecting the government's political needs and predilections.
6. What currency exchange rates were used? By selecting the right "points in time", GDP figures can go up and down by up to 2%!
7. Healthcare expenditures, agricultural subsidies, government aid to catastrophe-stricken areas form a part of the GDP. Thus, for instance, by increasing healthcare costs, the government can manipulate GDP figures.
8. Net exports in many developing countries are negative (in other words, they maintain a trade deficit). How can the GDP grow at all in these places? Even if consumption and investment are strongly up - government expenditures are usually down (at the behest of multilateral financial institutions) and net exports are down. It is not possible for GDP to grow vigorously in a country with a sizable and ballooning trade deficit.
9. The projections of most international, objective analysts and international economic organizations usually tend to converge on a GDP growth figure that is often lower than the government's but in line with the long-term trend. These figures are far better indicators of the true state of the economy. Statistics Bureaus in developing countries are often under the government's thumb and run by political appointees.
Governments and Growth
It is a maxim of current economic orthodoxy that governments compete with the private sector on a limited pool of savings. It is considered equally self-evident that the private sector is better, more competent, and more efficient at allocating scarce economic resources and thus at preventing waste. It is therefore thought economically sound to reduce the size of government - i.e., minimize its tax intake and its public borrowing - in order to free resources for the private sector to allocate productively and efficiently.
Yet, both dogmas are far from being universally applicable.
The assumption underlying the first conjecture is that government obligations and corporate lending are perfect substitutes. In other words, once deprived of treasury notes, bills, and bonds - a rational investor is expected to divert her savings to buying stocks or corporate bonds.
It is further anticipated that financial intermediaries - pension funds, banks, mutual funds - will tread similarly. If unable to invest the savings of their depositors in scarce risk-free - i.e., government - securities - they will likely alter their investment preferences and buy equity and debt issued by firms.
Yet, this is expressly untrue. Bond buyers and stock investors are two distinct crowds. Their risk aversion is different. Their investment preferences are disparate. Some of them - e.g., pension funds - are constrained by law as to the composition of their investment portfolios. Once government debt has turned scarce or expensive, bond investors tend to resort to cash. That cash - not equity or corporate debt - is the veritable substitute for risk-free securities is a basic tenet of modern investment portfolio theory.
Moreover, the "perfect substitute" hypothesis assumes the existence of efficient markets and frictionless transmission mechanisms. But this is a conveniently idealized picture which has little to do with grubby reality. Switching from one kind of investment to another incurs - often prohibitive - transaction costs. In many countries, financial intermediaries are dysfunctional or corrupt or both. They are unable to efficiently convert savings to investments - or are wary of doing so.
Furthermore, very few capital and financial markets are closed, self-contained, or self-sufficient units. Governments can and do borrow from foreigners. Most rich world countries - with the exception of Japan - tap "foreign people's money" for their public borrowing needs. When the US government borrows more, it crowds out the private sector in Japan - not in the USA.
It is universally agreed that governments have at least two critical economic roles. The first is to provide a "level playing field" for all economic players. It is supposed to foster competition, enforce the rule of law and, in particular, property rights, encourage free trade, avoid distorting fiscal incentives and disincentives, and so on. Its second role is to cope with market failures and the provision of public goods. It is expected to step in when markets fail to deliver goods and services, when asset bubbles inflate, or when economic resources are blatantly misallocated.
Yet, there is a third role. In our post-Keynesian world, it is a heresy. It flies in the face of the "Washington Consensus" propagated by the Bretton-Woods institutions and by development banks the world over. It is the government's obligation to foster growth.
In most countries of the world - definitely in Africa, the Middle East, the bulk of Latin America, central and eastern Europe, and central and east Asia - savings do not translate to investments, either in the form of corporate debt or in the form of corporate equity.
In most countries of the world, institutions do not function, the rule of law and properly rights are not upheld, the banking system is dysfunctional and clogged by bad debts. Rusty monetary transmission mechanisms render monetary policy impotent.
In most countries of the world, there is no entrepreneurial and thriving private sector and the economy is at the mercy of external shocks and fickle business cycles. Only the state can counter these economically detrimental vicissitudes. Often, the sole engine of growth and the exclusive automatic stabilizer is public spending. Not all types of public expenditures have the desired effect. Witness Japan's pork barrel spending on "infrastructure projects". But development-related and consumption-enhancing spending is usually beneficial.
To say, in most countries of the world, that "public borrowing is crowding out the private sector" is wrong. It assumes the existence of a formal private sector which can tap the credit and capital markets through functioning financial intermediaries, notably banks and stock exchanges.
Yet, this mental picture is a figment of economic imagination. The bulk of the private sector in these countries is informal. In many of them, there are no credit or capital markets to speak of. The government doesn't borrow from savers through the marketplace - but internationally, often from multilaterals.
Outlandish default rates result in vertiginously high real interest rates. Inter-corporate lending, barter, and cash transactions substitute for bank credit, corporate bonds, or equity flotations. As a result, the private sector's financial leverage is minuscule. In the rich West $1 in equity generates $3-5 in debt for a total investment of $4-6. In the developing world, $1 of tax-evaded equity generates nothing. The state has to pick up the slack.
Growth and employment are public goods and developing countries are in a perpetual state of systemic and multiple market failures. Rather than lend to businesses or households - banks thrive on arbitrage. Investment horizons are limited. Should the state refrain from stepping in to fill up the gap - these countries are doomed to inexorable decline.
by Sam Vaknin
GDP (Gross Domestic Product) =
Consumption + investment + government expenditure + net exports (exports minus imports) =
Wages + rents + interest + profits + non-income charges + net foreign factor income earned
But the GDP figure is vulnerable to "creative accounting":
1. The weight of certain items, sectors, or activities is reduced or increased in order to influence GDP components, such as industrial production. Developing countries often alter the way critical components of GDP like industrial production are tallied.
2. Goods in inventory are included in GDP although not yet sold. Thus, rising inventories, a telltale sign of economic ill-health, actually increases the GDP!
3. If goods produced are financed with credits and loans, GDP will be artificially HIGH (inflated).
4. In some countries, PLANS and INTENTIONS to invest are counted, recorded, and booked as actual investments. This practice is frowned upon (and landed quite a few corporate managers in the gaol), but is still widespread in the shoddier and shadier corners of the globe.
5. GDP figures should be adjusted for inflation (real GDP as opposed to nominal GDP). To achieve that, the calculation of the GDP deflator is critical. But the GDP deflator is a highly subjective figure, prone, in developing countries, to reflecting the government's political needs and predilections.
6. What currency exchange rates were used? By selecting the right "points in time", GDP figures can go up and down by up to 2%!
7. Healthcare expenditures, agricultural subsidies, government aid to catastrophe-stricken areas form a part of the GDP. Thus, for instance, by increasing healthcare costs, the government can manipulate GDP figures.
8. Net exports in many developing countries are negative (in other words, they maintain a trade deficit). How can the GDP grow at all in these places? Even if consumption and investment are strongly up - government expenditures are usually down (at the behest of multilateral financial institutions) and net exports are down. It is not possible for GDP to grow vigorously in a country with a sizable and ballooning trade deficit.
9. The projections of most international, objective analysts and international economic organizations usually tend to converge on a GDP growth figure that is often lower than the government's but in line with the long-term trend. These figures are far better indicators of the true state of the economy. Statistics Bureaus in developing countries are often under the government's thumb and run by political appointees.
Governments and Growth
It is a maxim of current economic orthodoxy that governments compete with the private sector on a limited pool of savings. It is considered equally self-evident that the private sector is better, more competent, and more efficient at allocating scarce economic resources and thus at preventing waste. It is therefore thought economically sound to reduce the size of government - i.e., minimize its tax intake and its public borrowing - in order to free resources for the private sector to allocate productively and efficiently.
Yet, both dogmas are far from being universally applicable.
The assumption underlying the first conjecture is that government obligations and corporate lending are perfect substitutes. In other words, once deprived of treasury notes, bills, and bonds - a rational investor is expected to divert her savings to buying stocks or corporate bonds.
It is further anticipated that financial intermediaries - pension funds, banks, mutual funds - will tread similarly. If unable to invest the savings of their depositors in scarce risk-free - i.e., government - securities - they will likely alter their investment preferences and buy equity and debt issued by firms.
Yet, this is expressly untrue. Bond buyers and stock investors are two distinct crowds. Their risk aversion is different. Their investment preferences are disparate. Some of them - e.g., pension funds - are constrained by law as to the composition of their investment portfolios. Once government debt has turned scarce or expensive, bond investors tend to resort to cash. That cash - not equity or corporate debt - is the veritable substitute for risk-free securities is a basic tenet of modern investment portfolio theory.
Moreover, the "perfect substitute" hypothesis assumes the existence of efficient markets and frictionless transmission mechanisms. But this is a conveniently idealized picture which has little to do with grubby reality. Switching from one kind of investment to another incurs - often prohibitive - transaction costs. In many countries, financial intermediaries are dysfunctional or corrupt or both. They are unable to efficiently convert savings to investments - or are wary of doing so.
Furthermore, very few capital and financial markets are closed, self-contained, or self-sufficient units. Governments can and do borrow from foreigners. Most rich world countries - with the exception of Japan - tap "foreign people's money" for their public borrowing needs. When the US government borrows more, it crowds out the private sector in Japan - not in the USA.
It is universally agreed that governments have at least two critical economic roles. The first is to provide a "level playing field" for all economic players. It is supposed to foster competition, enforce the rule of law and, in particular, property rights, encourage free trade, avoid distorting fiscal incentives and disincentives, and so on. Its second role is to cope with market failures and the provision of public goods. It is expected to step in when markets fail to deliver goods and services, when asset bubbles inflate, or when economic resources are blatantly misallocated.
Yet, there is a third role. In our post-Keynesian world, it is a heresy. It flies in the face of the "Washington Consensus" propagated by the Bretton-Woods institutions and by development banks the world over. It is the government's obligation to foster growth.
In most countries of the world - definitely in Africa, the Middle East, the bulk of Latin America, central and eastern Europe, and central and east Asia - savings do not translate to investments, either in the form of corporate debt or in the form of corporate equity.
In most countries of the world, institutions do not function, the rule of law and properly rights are not upheld, the banking system is dysfunctional and clogged by bad debts. Rusty monetary transmission mechanisms render monetary policy impotent.
In most countries of the world, there is no entrepreneurial and thriving private sector and the economy is at the mercy of external shocks and fickle business cycles. Only the state can counter these economically detrimental vicissitudes. Often, the sole engine of growth and the exclusive automatic stabilizer is public spending. Not all types of public expenditures have the desired effect. Witness Japan's pork barrel spending on "infrastructure projects". But development-related and consumption-enhancing spending is usually beneficial.
To say, in most countries of the world, that "public borrowing is crowding out the private sector" is wrong. It assumes the existence of a formal private sector which can tap the credit and capital markets through functioning financial intermediaries, notably banks and stock exchanges.
Yet, this mental picture is a figment of economic imagination. The bulk of the private sector in these countries is informal. In many of them, there are no credit or capital markets to speak of. The government doesn't borrow from savers through the marketplace - but internationally, often from multilaterals.
Outlandish default rates result in vertiginously high real interest rates. Inter-corporate lending, barter, and cash transactions substitute for bank credit, corporate bonds, or equity flotations. As a result, the private sector's financial leverage is minuscule. In the rich West $1 in equity generates $3-5 in debt for a total investment of $4-6. In the developing world, $1 of tax-evaded equity generates nothing. The state has to pick up the slack.
Growth and employment are public goods and developing countries are in a perpetual state of systemic and multiple market failures. Rather than lend to businesses or households - banks thrive on arbitrage. Investment horizons are limited. Should the state refrain from stepping in to fill up the gap - these countries are doomed to inexorable decline.
by Sam Vaknin
Short Selling and Volatility
Short selling involves the sale of securities borrowed from brokers who, in turn, usually borrow them from third party investors. The short seller pays a negotiated fee for the privilege and has to "cover" her position: to re-acquire the securities she had sold and return them to the lender (again via the broker). This allows her to bet on the decline of stocks she deems overvalued and to benefit if she is proven right: she sells the securities at a high price and re-acquires them once their prices have, indeed, tanked.
A study titled "A Close Look at Short Selling on NASDAQ", authored by James Angel of Georgetown University - Department of Finance and Stephen E. Christophe and Michael G. Ferri of George Mason University - School of Management, and published in the Financial Analysts Journal, Vol. 59, No. 6, pp. 66-74, November/December 2003, yielded some surprising findings:
"(1) overall, 1 of every 42 trades involves a short sale; (2) short selling is more common among stocks with high returns than stocks with weaker performance; (3) actively traded stocks experience more short sales than stocks of limited trading volume; (4) short selling varies directly with share price volatility; (5) short selling does not appear to be systematically different on various days of the week; and (6) days of high short selling precede days of unusually low returns."
Many economists insist that short selling is a mechanism which stabilizes stock markets, reduces volatility, and creates incentives to correctly price securities. This sentiment is increasingly more common even among hitherto skeptical economists in developing countries.
In an interview he granted to Financialexpress.com in January 2007, Marti G Subrahmanyam, the Indian-born Charles E Merrill professor of Finance and Economics in the Stern School of Business at New York University had this to say:
"Q: Should short-selling be allowed?
A: Such kind of restrictions would only magnify the volatility and crisis. If a person who is bearish on the market and is not allowed to short sell, the market cannot discount the true sentiment and when more and more negative information pour in, the market suddenly slips down heavily."
But not everyone agrees. In a paper titled "The Impact of Short Selling on the Price-Volume Relationship: Evidence from Hong Kong", the authors, Michael D. McKenzie or RMIT University - School of Economics and Finance and Olan T. Henry of the University of Melbourne - Department of Economics, unequivocally state:
"The results suggest (i) that the market displays greater volatility following a period of short selling and (ii) that asymmetric responses to positive and negative innovations to returns appear to be exacerbated by short selling."
Similar evidence emerged from Australia. In a paper titled "Short Sales Are Almost Instantaneously Bad News: Evidence from the Australian Stock Exchange", the authors, Michael J. Aitken, Alex Frino, Michael S. McCorry, and Peter L. Swan of the University of Sydney and Barclays Global Investors, investigated "the market reaction to short sales on an intraday basis in a market setting where short sales are transparent immediately following execution."
They found "a mean reassessment of stock value following short sales of up to ?0.20 percent with adverse information impounded within fifteen minutes or twenty trades. Short sales executed near the end of the financial year and those related to arbitrage and hedging activities are associated with a smaller price reaction; trades near information events precipitate larger price reactions. The evidence is generally weaker for short sales executed using limit orders relative to market orders." Transparent short sales, in other words, increase the volatility of shorted stocks.
Studies of the German DAX, conducted in 1996-8 by Alexander Kempf, Chairman of the Departments of Finance in the University of Cologne and, subsequently, at the University of Mannheim, found that mispricing of stocks increases with the introduction of arbitrage trading techniques. "Overall, the empirical evidence suggests that short selling restrictions and early unwinding opportunities are very influential factors for the behavior of the mispricing." - Concluded the author.
Charles M. Jones and Owen A. Lamont, who studied the 1926-33 bubble in the USA, flatly state: "Stocks can be overpriced when short sale constraints bind." (NBER Working Paper No. 8494, issued in October 2001). Similarly, in a January 2006 study titled "The Effect of Short Sales Constraints on SEO Pricing", the authors, Charlie Charoenwong and David K. Ding of the Ping Wang Division of Banking and Finance at the Nanyang Business School of the Nanyang Technological University Singapore, summarized by saying:
"The (short selling) Rule's restrictions on informed trading appear to cause overpricing of stocks for which traders have access to private adverse information, which increases the pressure to sell on the offer day."
In a March 2004 paper titled "Options and the Bubble", Robert H. Battalio and Paul H. Schultz of University of Notre Dame - Department of Finance and Business Economics contradict earlier (2003) findings by Ofek and Richardson and correctly note:
"Many believe that a bubble was behind the high prices of Internet stocks in 1999-2000, and that short-sale restrictions prevented rational investors from driving Internet stock prices to reasonable levels. Using intraday options data from the peak of the Internet bubble, we find no evidence that short-sale restrictions affected Internet stock prices. Investors could also cheaply short synthetically using options. Option strategies could also permit investors to mitigate synchronization risk. During this time, information was discovered in the options market and transmitted to the stock market, suggesting that the bubble could have been burst by options trading."
But these findings, of course, would not apply to markets with non-efficient, illiquid, or non-existent options exchanges - in short, they are inapplicable to the vast majority of stock exchanges, even in the USA.
A much larger study, based on data from 111 countries with a stock exchange market was published in December 2003. Titled "The World Price of Short Selling" and written by Anchada Charoenrook of Vanderbilt University - Owen Graduate School of Management and Hazem Daouk of Cornell University - Department of Applied Economics and Management, its conclusions are equally emphatic:
"We find that there is no difference in the level of skewness and coskewness of returns, probability of a crash occurring, or the frequency of crashes, when short-selling is possible and when it is not. When short-selling is possible, volatility of aggregate stock returns is lower. When short-selling is possible, liquidity is higher consistent with predictions by Diamond and Verrecchia (1987). Lastly, we find that when countries change from a regime where short-selling is not possible to where it is possible, the stock price increases implying that the cost of capital is lower. Collectively, the empirical evidence suggests that short-sale constraints reduce market quality."
But the picture may not be as uniform as this study implies.
Within the framework of Regulation SHO, a revamp of short sales rules effected in 2004, the US Securities and Exchange Commission (SEC) lifted, in May 2005, all restrictions on the short selling of 1000 stocks. In September 2006, according to Associated Press, many of its economists (though not all of them) concluded that:
"Order routing, short-selling mechanics and intraday market volatility has been affected by the experiment, with volatility increasing for smaller stocks and declining for larger stocks. Market quality and liquidity don't appear to have been harmed."
Subsequently, the aforementioned conclusions notwithstanding, the SEC recommended to remove all restrictions on stocks of all sizes and to incorporate this mini-revolution in its July 2007 regulation NMS for broker-dealers. Short selling seems to have finally hit the mainstream.
by Sam Vaknin
A study titled "A Close Look at Short Selling on NASDAQ", authored by James Angel of Georgetown University - Department of Finance and Stephen E. Christophe and Michael G. Ferri of George Mason University - School of Management, and published in the Financial Analysts Journal, Vol. 59, No. 6, pp. 66-74, November/December 2003, yielded some surprising findings:
"(1) overall, 1 of every 42 trades involves a short sale; (2) short selling is more common among stocks with high returns than stocks with weaker performance; (3) actively traded stocks experience more short sales than stocks of limited trading volume; (4) short selling varies directly with share price volatility; (5) short selling does not appear to be systematically different on various days of the week; and (6) days of high short selling precede days of unusually low returns."
Many economists insist that short selling is a mechanism which stabilizes stock markets, reduces volatility, and creates incentives to correctly price securities. This sentiment is increasingly more common even among hitherto skeptical economists in developing countries.
In an interview he granted to Financialexpress.com in January 2007, Marti G Subrahmanyam, the Indian-born Charles E Merrill professor of Finance and Economics in the Stern School of Business at New York University had this to say:
"Q: Should short-selling be allowed?
A: Such kind of restrictions would only magnify the volatility and crisis. If a person who is bearish on the market and is not allowed to short sell, the market cannot discount the true sentiment and when more and more negative information pour in, the market suddenly slips down heavily."
But not everyone agrees. In a paper titled "The Impact of Short Selling on the Price-Volume Relationship: Evidence from Hong Kong", the authors, Michael D. McKenzie or RMIT University - School of Economics and Finance and Olan T. Henry of the University of Melbourne - Department of Economics, unequivocally state:
"The results suggest (i) that the market displays greater volatility following a period of short selling and (ii) that asymmetric responses to positive and negative innovations to returns appear to be exacerbated by short selling."
Similar evidence emerged from Australia. In a paper titled "Short Sales Are Almost Instantaneously Bad News: Evidence from the Australian Stock Exchange", the authors, Michael J. Aitken, Alex Frino, Michael S. McCorry, and Peter L. Swan of the University of Sydney and Barclays Global Investors, investigated "the market reaction to short sales on an intraday basis in a market setting where short sales are transparent immediately following execution."
They found "a mean reassessment of stock value following short sales of up to ?0.20 percent with adverse information impounded within fifteen minutes or twenty trades. Short sales executed near the end of the financial year and those related to arbitrage and hedging activities are associated with a smaller price reaction; trades near information events precipitate larger price reactions. The evidence is generally weaker for short sales executed using limit orders relative to market orders." Transparent short sales, in other words, increase the volatility of shorted stocks.
Studies of the German DAX, conducted in 1996-8 by Alexander Kempf, Chairman of the Departments of Finance in the University of Cologne and, subsequently, at the University of Mannheim, found that mispricing of stocks increases with the introduction of arbitrage trading techniques. "Overall, the empirical evidence suggests that short selling restrictions and early unwinding opportunities are very influential factors for the behavior of the mispricing." - Concluded the author.
Charles M. Jones and Owen A. Lamont, who studied the 1926-33 bubble in the USA, flatly state: "Stocks can be overpriced when short sale constraints bind." (NBER Working Paper No. 8494, issued in October 2001). Similarly, in a January 2006 study titled "The Effect of Short Sales Constraints on SEO Pricing", the authors, Charlie Charoenwong and David K. Ding of the Ping Wang Division of Banking and Finance at the Nanyang Business School of the Nanyang Technological University Singapore, summarized by saying:
"The (short selling) Rule's restrictions on informed trading appear to cause overpricing of stocks for which traders have access to private adverse information, which increases the pressure to sell on the offer day."
In a March 2004 paper titled "Options and the Bubble", Robert H. Battalio and Paul H. Schultz of University of Notre Dame - Department of Finance and Business Economics contradict earlier (2003) findings by Ofek and Richardson and correctly note:
"Many believe that a bubble was behind the high prices of Internet stocks in 1999-2000, and that short-sale restrictions prevented rational investors from driving Internet stock prices to reasonable levels. Using intraday options data from the peak of the Internet bubble, we find no evidence that short-sale restrictions affected Internet stock prices. Investors could also cheaply short synthetically using options. Option strategies could also permit investors to mitigate synchronization risk. During this time, information was discovered in the options market and transmitted to the stock market, suggesting that the bubble could have been burst by options trading."
But these findings, of course, would not apply to markets with non-efficient, illiquid, or non-existent options exchanges - in short, they are inapplicable to the vast majority of stock exchanges, even in the USA.
A much larger study, based on data from 111 countries with a stock exchange market was published in December 2003. Titled "The World Price of Short Selling" and written by Anchada Charoenrook of Vanderbilt University - Owen Graduate School of Management and Hazem Daouk of Cornell University - Department of Applied Economics and Management, its conclusions are equally emphatic:
"We find that there is no difference in the level of skewness and coskewness of returns, probability of a crash occurring, or the frequency of crashes, when short-selling is possible and when it is not. When short-selling is possible, volatility of aggregate stock returns is lower. When short-selling is possible, liquidity is higher consistent with predictions by Diamond and Verrecchia (1987). Lastly, we find that when countries change from a regime where short-selling is not possible to where it is possible, the stock price increases implying that the cost of capital is lower. Collectively, the empirical evidence suggests that short-sale constraints reduce market quality."
But the picture may not be as uniform as this study implies.
Within the framework of Regulation SHO, a revamp of short sales rules effected in 2004, the US Securities and Exchange Commission (SEC) lifted, in May 2005, all restrictions on the short selling of 1000 stocks. In September 2006, according to Associated Press, many of its economists (though not all of them) concluded that:
"Order routing, short-selling mechanics and intraday market volatility has been affected by the experiment, with volatility increasing for smaller stocks and declining for larger stocks. Market quality and liquidity don't appear to have been harmed."
Subsequently, the aforementioned conclusions notwithstanding, the SEC recommended to remove all restrictions on stocks of all sizes and to incorporate this mini-revolution in its July 2007 regulation NMS for broker-dealers. Short selling seems to have finally hit the mainstream.
by Sam Vaknin
Important Details About Online Stock Market Investing
Today's financial marketplace is all about convenience, flexibility and technology, and stock market investing is by no means an exception.
An extremely convenient way to trade in stocks - for day traders as well as for medium- or short-term traders who want to grab a piece of the stock market action on a regular basis - is online stock market investing and trading. One look at the following advantages of online stock market investing would be enough to convince any market-savvy investor or trader to ditch the phone and go online instead to place their stock orders for buying or selling:
1. One of the biggest advantages of online stock investing is the time that is saved in executing a transaction. When you trade online, absolutely no time is wasted and transactions are executed in real time. This is a huge booster because in the stock market a delay of few seconds can make all the difference in the profits versus loss equation.
2. The brokerage charges for this type of stock investing are pretty low compared to normal charges. So, it makes it convenient for you, and saves you cash too!
3. You can trade at your own pace and convenience, and even in your pyjamas if you want to.
4. Another great advantage of this method of stock investing is that you rely on the only person in the world you truly believe in - yourself! Imagine investing and trading stocks by calling up a stockbroker who's more interested in admiring his iPhone rather than watching your stock positions on a volatile day!
5. The firm that provides you online trading facility will most likely supply you with in-house recommendations and market chatter too. Information is power, and quite often, this information can prove to be goldmine if timely action is taken. Plus, the firm will also provide you the technical indicators that show the possibility of a stock moving up or down depending on the indicated price triggers. All these extra services will be available to you without any extra charges!
6. Finally, you will be able to check on your account position in an instant and won't have to wait for the account papers to arrive from your stockbroker's office. You can also check your transactions on a daily basis at the click of a mouse. You don't need to pour over your account papers and check them thoroughly, tracing back the transactions to your diary or computer.
These are, in a nutshell, are some of the most important details about online stock market investing. Of course, you're a responsible person and you know how best to deal with your money, but the following rider needs to be added: Trading in stock markets is a risky game and you must fix your limits before you play the game, and stick to them.
Here's wishing you all the luck in all your forthcoming online trading sessions.
by Roger Overanout
An extremely convenient way to trade in stocks - for day traders as well as for medium- or short-term traders who want to grab a piece of the stock market action on a regular basis - is online stock market investing and trading. One look at the following advantages of online stock market investing would be enough to convince any market-savvy investor or trader to ditch the phone and go online instead to place their stock orders for buying or selling:
1. One of the biggest advantages of online stock investing is the time that is saved in executing a transaction. When you trade online, absolutely no time is wasted and transactions are executed in real time. This is a huge booster because in the stock market a delay of few seconds can make all the difference in the profits versus loss equation.
2. The brokerage charges for this type of stock investing are pretty low compared to normal charges. So, it makes it convenient for you, and saves you cash too!
3. You can trade at your own pace and convenience, and even in your pyjamas if you want to.
4. Another great advantage of this method of stock investing is that you rely on the only person in the world you truly believe in - yourself! Imagine investing and trading stocks by calling up a stockbroker who's more interested in admiring his iPhone rather than watching your stock positions on a volatile day!
5. The firm that provides you online trading facility will most likely supply you with in-house recommendations and market chatter too. Information is power, and quite often, this information can prove to be goldmine if timely action is taken. Plus, the firm will also provide you the technical indicators that show the possibility of a stock moving up or down depending on the indicated price triggers. All these extra services will be available to you without any extra charges!
6. Finally, you will be able to check on your account position in an instant and won't have to wait for the account papers to arrive from your stockbroker's office. You can also check your transactions on a daily basis at the click of a mouse. You don't need to pour over your account papers and check them thoroughly, tracing back the transactions to your diary or computer.
These are, in a nutshell, are some of the most important details about online stock market investing. Of course, you're a responsible person and you know how best to deal with your money, but the following rider needs to be added: Trading in stock markets is a risky game and you must fix your limits before you play the game, and stick to them.
Here's wishing you all the luck in all your forthcoming online trading sessions.
by Roger Overanout
Do You Know When to Buy and Sell? Use The Sine Wave Model
Probably the hardest decision for most stock investors is knowing when to buy or sell a stock. Some investors buy and sell very actively. Others buy stocks on a regular schedule, but don't know when, if ever, to sell. Some investors believe the answer is to "never" sell, buying and holding essentially forever. There is a whole spectrum of philosophies and approaches.
What makes the most sense? Is there even a single right answer?
In order to think logically about this all-important issue, let's create a simple model of how stock prices change. The model is idealized and represents no real stock, but it is a powerful tool for thinking about when to buy and when to sell.
Here's the model: Picture a simple sine wave across the page, with a horizontal line through the center of it. The line represents time, while the sine wave represents the changing price of your stock over time. The wave starts at the left end of the timeline, at "time = 0." It rises smoothly for a while, levels off at a peak, declines for a while, passes down through the centerline (so the price goes below where it started), levels off again in a trough, rises smoothly back up through the centerline, goes on to another peak, and so on. Each full rise, fall, and re-rise of the stock's price is one cycle.
Anybody familiar with stock price movements knows that prices go up and come down. They never, of course, trace a perfect sine wave, but the sine wave picture is a simplifying assumption: It is a smoothed-out version of what stock prices actually do.
For our model, let's say that each peak in the cycle is 20% above the centerline, and that each trough is 20% below the centerline. So there is a 40% difference between the peak price and the lowest price of each cycle. That happens to be the difference in the real world between many stocks' high and low prices for a year. Each cycle is one year long.
Finally, tilt the whole thing upwards slightly, so that the centerline ramps upward at 10% per year. This represents the average return of the stock market over the past century or so.
That's our idealized model. Let's call the company that it represents Sine, Inc. Sine's stock has behaved like this since the company went public 100 years ago, and it will behave like this infinitely into the future.
What can we learn from this simple model? Plenty!
Question: What would be the ideal times to buy and sell Sine? There are at least four good answers:
(1) Since we know that the model is tilted upwards at 10% per year, just buy the stock at time = 0 and hold it as long as possible. Or if you are buying Sine in chunks, you can make your purchases at any time. You don't care where Sine is in its cycle, because you know that, over time, you'll make 10% per year on your average chunk. You know that because the centerline is tilted upwards at a 10% grade. There's a name for this approach: Dollar cost averaging. Sometimes you get a good price, sometimes you don't. But your blended return from all those purchases will match the 10% upward tilt of the chart itself.
(2) But you can do better. Wait nine months and purchase the stock at the exact bottom of its price cycle. There's a name for this approach too: Buy on the dip. That will increase your returns by a surprising amount, because you will get more shares for your money. For example, if Sine's price is $100 at time = 0, and you wait until the cycle hits its low point at $80, then $1000 will get you 12½ shares instead of 10. That's 25% more shares for the same amount of money.
You'll benefit from those extra shares forever. By the way, this is exactly what value investors aim to do. This is a widely recommended approach, although in the real world it is impossible to know exactly when the bottom of the cycle has been hit.
(3) If you continue the assumption that you have perfect knowledge that Sine is going to keep repeating its steady performance year after year, then you can improve on #2 above. Buy at the bottom of a cycle, hold until the top of the cycle, sell right there, bide your time for six months until the next bottom, re-buy, sell at the next top, and so on. Your returns would be astronomical. Let's follow this through two years of the cycle (and make it simple by ignoring the tilt). Your first purchase would get you 12.5 shares at $80 each, same as in #2 above. At the top of the cycle (six months later), you would sell those shares for $112 each (40% more than you paid), or $1400 total. Wait six months for the next trough, when that money will buy you 17.5 shares at the bottom of the cycle. Wait six more months, and the sale of the 17.5 will bring in $1960 at the top. Wait six more months and the $1960 will buy you 24.5 shares. After 6 more months, the cycle will reach another peak, and your shares will have gone up 40% again to $2744. And so on. In the first 18 months from time = 0, you make 174% ($2744 divided by your original $1000), and every year after that it gets better and better as everything compounds. And that's ignoring the 10% upward tilt, which brings in even more money. Your $1000 will turn into $1,000,000 in just a few years, even though on average the stock's price is rising just 10% per year. The name for this is timing or trend following.
(4) Trend following can add an additional component that increases returns even more. Rather than biding your time during the downward portion of the cycles, many trend followers simply reverse their position from long (owning the stock) to short (betting against the stock). That way, they make money when the stock's price is declining. This adds more orders of magnitude to the returns of our idealized model.
OK, that is the model. Now let's see how it informs our real-life decisions.
First and most obviously, no one knows the future. No real stock's price is guaranteed to have a clear trend line pointing upwards at 10% a year, or any other percentage. No one can foresee with confidence how long any trend will last. We only can look at what has happened in the past and try to discern probabilities of what is likely to happen in the future.
Second, real stock prices do not follow smooth sine waves. Their movement is jagged, subject to sudden reversals, unclear as to long-term and short-term trends, and certainly not as predictably cyclical as in our idealized model.
Nevertheless, the model points to a systematic method of looking for advantageous buy and sell points. The model epitomizes "buy low and sell high."
For the Sensible Stock Investor, the model tells us that value investors have it figured exactly right on the "buy" side of the equation. Wait for a low price, at the very trough of a stock's cycle. That's the best time to buy.
How do you know when a stock has hit its low? You don't, exactly. But by insisting on favorable valuations--when the stock's price is low compared to the long-term value of the company--you can come pretty close to buying at the trough. Some investors wait for a turn upwards from an actual recent low price to confirm that the stock just hit its low. They are willing to forego a little bit of the upturn in return for a little more certainty that the stock hit its low.
How do you know when a stock has hit its high? You don't know that either. But when valuations become high, when they suggest that the price is too much for the underlying worth of the company, it becomes more likely that the stock is approaching a peak, and that the market will "correct" the price of the stock. The Sensible Stock Investor uses a trailing sell-stop to protect on the downside. Set the stop at, say, 15% below the stock's current price. Reset it weekly, and keep moving it up as long as the price keeps going up. If the stock starts to reverse, you can depend on your trailing stop to get you out before too much damage has been done.
In practice, you will sometimes find that your trailing sell-stop never triggers a sale, and you become a long-term holder of an excellent stock. In other cases, your trailing stop will trigger and preserve most of your gains if the stock's price goes into decline. Either way, you are protected.
By: David Van Knapp
What makes the most sense? Is there even a single right answer?
In order to think logically about this all-important issue, let's create a simple model of how stock prices change. The model is idealized and represents no real stock, but it is a powerful tool for thinking about when to buy and when to sell.
Here's the model: Picture a simple sine wave across the page, with a horizontal line through the center of it. The line represents time, while the sine wave represents the changing price of your stock over time. The wave starts at the left end of the timeline, at "time = 0." It rises smoothly for a while, levels off at a peak, declines for a while, passes down through the centerline (so the price goes below where it started), levels off again in a trough, rises smoothly back up through the centerline, goes on to another peak, and so on. Each full rise, fall, and re-rise of the stock's price is one cycle.
Anybody familiar with stock price movements knows that prices go up and come down. They never, of course, trace a perfect sine wave, but the sine wave picture is a simplifying assumption: It is a smoothed-out version of what stock prices actually do.
For our model, let's say that each peak in the cycle is 20% above the centerline, and that each trough is 20% below the centerline. So there is a 40% difference between the peak price and the lowest price of each cycle. That happens to be the difference in the real world between many stocks' high and low prices for a year. Each cycle is one year long.
Finally, tilt the whole thing upwards slightly, so that the centerline ramps upward at 10% per year. This represents the average return of the stock market over the past century or so.
That's our idealized model. Let's call the company that it represents Sine, Inc. Sine's stock has behaved like this since the company went public 100 years ago, and it will behave like this infinitely into the future.
What can we learn from this simple model? Plenty!
Question: What would be the ideal times to buy and sell Sine? There are at least four good answers:
(1) Since we know that the model is tilted upwards at 10% per year, just buy the stock at time = 0 and hold it as long as possible. Or if you are buying Sine in chunks, you can make your purchases at any time. You don't care where Sine is in its cycle, because you know that, over time, you'll make 10% per year on your average chunk. You know that because the centerline is tilted upwards at a 10% grade. There's a name for this approach: Dollar cost averaging. Sometimes you get a good price, sometimes you don't. But your blended return from all those purchases will match the 10% upward tilt of the chart itself.
(2) But you can do better. Wait nine months and purchase the stock at the exact bottom of its price cycle. There's a name for this approach too: Buy on the dip. That will increase your returns by a surprising amount, because you will get more shares for your money. For example, if Sine's price is $100 at time = 0, and you wait until the cycle hits its low point at $80, then $1000 will get you 12½ shares instead of 10. That's 25% more shares for the same amount of money.
You'll benefit from those extra shares forever. By the way, this is exactly what value investors aim to do. This is a widely recommended approach, although in the real world it is impossible to know exactly when the bottom of the cycle has been hit.
(3) If you continue the assumption that you have perfect knowledge that Sine is going to keep repeating its steady performance year after year, then you can improve on #2 above. Buy at the bottom of a cycle, hold until the top of the cycle, sell right there, bide your time for six months until the next bottom, re-buy, sell at the next top, and so on. Your returns would be astronomical. Let's follow this through two years of the cycle (and make it simple by ignoring the tilt). Your first purchase would get you 12.5 shares at $80 each, same as in #2 above. At the top of the cycle (six months later), you would sell those shares for $112 each (40% more than you paid), or $1400 total. Wait six months for the next trough, when that money will buy you 17.5 shares at the bottom of the cycle. Wait six more months, and the sale of the 17.5 will bring in $1960 at the top. Wait six more months and the $1960 will buy you 24.5 shares. After 6 more months, the cycle will reach another peak, and your shares will have gone up 40% again to $2744. And so on. In the first 18 months from time = 0, you make 174% ($2744 divided by your original $1000), and every year after that it gets better and better as everything compounds. And that's ignoring the 10% upward tilt, which brings in even more money. Your $1000 will turn into $1,000,000 in just a few years, even though on average the stock's price is rising just 10% per year. The name for this is timing or trend following.
(4) Trend following can add an additional component that increases returns even more. Rather than biding your time during the downward portion of the cycles, many trend followers simply reverse their position from long (owning the stock) to short (betting against the stock). That way, they make money when the stock's price is declining. This adds more orders of magnitude to the returns of our idealized model.
OK, that is the model. Now let's see how it informs our real-life decisions.
First and most obviously, no one knows the future. No real stock's price is guaranteed to have a clear trend line pointing upwards at 10% a year, or any other percentage. No one can foresee with confidence how long any trend will last. We only can look at what has happened in the past and try to discern probabilities of what is likely to happen in the future.
Second, real stock prices do not follow smooth sine waves. Their movement is jagged, subject to sudden reversals, unclear as to long-term and short-term trends, and certainly not as predictably cyclical as in our idealized model.
Nevertheless, the model points to a systematic method of looking for advantageous buy and sell points. The model epitomizes "buy low and sell high."
For the Sensible Stock Investor, the model tells us that value investors have it figured exactly right on the "buy" side of the equation. Wait for a low price, at the very trough of a stock's cycle. That's the best time to buy.
How do you know when a stock has hit its low? You don't, exactly. But by insisting on favorable valuations--when the stock's price is low compared to the long-term value of the company--you can come pretty close to buying at the trough. Some investors wait for a turn upwards from an actual recent low price to confirm that the stock just hit its low. They are willing to forego a little bit of the upturn in return for a little more certainty that the stock hit its low.
How do you know when a stock has hit its high? You don't know that either. But when valuations become high, when they suggest that the price is too much for the underlying worth of the company, it becomes more likely that the stock is approaching a peak, and that the market will "correct" the price of the stock. The Sensible Stock Investor uses a trailing sell-stop to protect on the downside. Set the stop at, say, 15% below the stock's current price. Reset it weekly, and keep moving it up as long as the price keeps going up. If the stock starts to reverse, you can depend on your trailing stop to get you out before too much damage has been done.
In practice, you will sometimes find that your trailing sell-stop never triggers a sale, and you become a long-term holder of an excellent stock. In other cases, your trailing stop will trigger and preserve most of your gains if the stock's price goes into decline. Either way, you are protected.
By: David Van Knapp
Understanding Technical Analysis
Stocks need to be understood before making any major moves. This can be accomplished by a few methods known as analyses. Technical analysis is one of the most useful methods to understand the trends of the stock market. Technical analysis is a method in which the stock chart data is examined and the future moves in the market are predicted on their basis.
Investors using technical analysis are not bothered about the kind of companies they are dealing in. These investors are playing for short-term. They will sell their stock as soon as they reach the limits of their projected profit.
Experts who study technical analysis presume that the stocks will move in certain predictable patterns. These would take into account natural disasters that could drastically affect the stock market. These experts consider both geographical and historical information to decide in what manner the stock market would move in the future. Technical analysis depends on such external factors, but it does not study the potential of the company itself whose stock is being considered.
For this reason, investors who rely on technical analysis do not play for the long-term. They are not interest in the growth potential of a particular company, because they will likely be gone from the market by then. The whole premise is based on the movement of the market as a whole, and the entry and exit points will be charted on the base of such market fluctuations.
It is possible for investors to benefit from upswings as well as downswings in the market by playing for either the long-term or the short-term. Orders such as stop loss and limit can be used to make the investments safe.
The modern technical analyst has several tools available at his/her disposal. Since the stock market has been playing for several centuries now, many stock patterns have developed. The basic concepts are still the support and resistance, which are applied to the lowest limit a downswing price can go to and the highest limit an upswing price can go to, respectively. Support and resistance are the limits from which the prices will bounce back, once they reach that level.
Charts are a very important tool used by the technical analyst. The most popular charts are the bar charts, which contain vertical bars representing the stock prices over a particular time period. The bar chart will show the highest and the lowest prices at both ends of the bar. If the bar is long, it means a larger price spread, while if the bar is short, then it means a smaller price spread. The position of the side bars would indicate whether the price increased or decreased and also the spread between the opening and closing prices.
Another popular kind of chart is the candlestick chart. Here solid bars (known as candles) are used to show the variations between the closing prices and the opening prices. Shadows are used from the candles to indicate the highest and lowest prices respectively. Color coding is used in this method. A black or red candlestick would indicate that the closing price was lower than the previous period, while a white or green candlestick would indicate the price closed higher. Apart from the color coding, shapes can also be used to indicate several things. A green candlestick with short shadows would mean a bullish market, while a red candlestick with short shadows is a bearish market. The candlestick pattern is a very sophisticated type of pattern, with about twenty different kinds of shaped in use.
By: Adam Heist
Investors using technical analysis are not bothered about the kind of companies they are dealing in. These investors are playing for short-term. They will sell their stock as soon as they reach the limits of their projected profit.
Experts who study technical analysis presume that the stocks will move in certain predictable patterns. These would take into account natural disasters that could drastically affect the stock market. These experts consider both geographical and historical information to decide in what manner the stock market would move in the future. Technical analysis depends on such external factors, but it does not study the potential of the company itself whose stock is being considered.
For this reason, investors who rely on technical analysis do not play for the long-term. They are not interest in the growth potential of a particular company, because they will likely be gone from the market by then. The whole premise is based on the movement of the market as a whole, and the entry and exit points will be charted on the base of such market fluctuations.
It is possible for investors to benefit from upswings as well as downswings in the market by playing for either the long-term or the short-term. Orders such as stop loss and limit can be used to make the investments safe.
The modern technical analyst has several tools available at his/her disposal. Since the stock market has been playing for several centuries now, many stock patterns have developed. The basic concepts are still the support and resistance, which are applied to the lowest limit a downswing price can go to and the highest limit an upswing price can go to, respectively. Support and resistance are the limits from which the prices will bounce back, once they reach that level.
Charts are a very important tool used by the technical analyst. The most popular charts are the bar charts, which contain vertical bars representing the stock prices over a particular time period. The bar chart will show the highest and the lowest prices at both ends of the bar. If the bar is long, it means a larger price spread, while if the bar is short, then it means a smaller price spread. The position of the side bars would indicate whether the price increased or decreased and also the spread between the opening and closing prices.
Another popular kind of chart is the candlestick chart. Here solid bars (known as candles) are used to show the variations between the closing prices and the opening prices. Shadows are used from the candles to indicate the highest and lowest prices respectively. Color coding is used in this method. A black or red candlestick would indicate that the closing price was lower than the previous period, while a white or green candlestick would indicate the price closed higher. Apart from the color coding, shapes can also be used to indicate several things. A green candlestick with short shadows would mean a bullish market, while a red candlestick with short shadows is a bearish market. The candlestick pattern is a very sophisticated type of pattern, with about twenty different kinds of shaped in use.
By: Adam Heist
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