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Reflections of a Trader in the World of Stocks

Reflections of a TraderRalph Shell, ForexRazor analyst and one of our main contributors, discusses his 40+ years of experience with the world of stocks, futures, and options, reflecting on each market's advantages and disadvantages.

My first exposure to a market came as a 10 year old boy visiting my father’s law office in Dayton, Ohio, circa 1940.  After lunch at his club, we would visit his stock broker’s office. I can still remember the smell of the cigar smoke from the old men who sat and watched stock trades on the Western Union ticker tape, projected on a screen above the blackboard. There was a board marker, usually an attractive young girl, who would read the tape and mark the prices of stocks on the board.  Occasionally when a stock or an average would make a new high, there would be cheers. On days when the bears were running the market down, there were more seats, and those who were there were silent and morose. It seemed like the cigar smoke was thicker on days when the market was selling off.

Stock trading has been taking place for years. The New York Stock Exchange traces its roots to 1792 when a group of businessmen signed the “Buttonwood Agreement” to trade securities on a commission basis.  The first stock ticker was introduced in 1867. The computer age combined with the internet now makes it possible to trade stocks in real time from any place in the world. We have come a long way.

In the late 1990’s, when the dot-com bubble was inflating, day trading became very popular. In a bull market everybody is a genius. It can be easy money as long as the market continues going up, but once the market stops going in one direction there are big problems. Markets go to extremes, too high and too low. Novice investors are usually late arrivals for the bull stock runs, discovering the market long after the beginning of a big rally. When stocks are down, most people ignore them. Only after the stock market has gone up does the average new investor become interested. By the time your barber, your bartender, and your mother-in-law all have stock tips for you, it is sign that most likely the market has already had a big run up. Finally, when you meet people that have given up their jobs to day trade, this is a pretty good sign the bubble is about to pop.  

This is not to say that you cannot make money in stocks. You certainly can. If you develop the knowledge, analytical skills, and business acumen, there is no reason why an individual cannot be a very successful investor.  Success, of course, comes much easier when doing what you like to do. If you develop the skills and knowledge to analyze the ever-changing puzzle of markets, stocks, or currencies, this will serve you well over a period of time.

For those that get addicted to the equities market, and begin to think about a career as a stock broker, here is a word of advice. A stock broker and a stock trader are different people with different traits, skills, and personalities. Most stock brokers are salesmen who smile and dial, peddling the investments selected by management. There may often be a conflict of interest between what is good for the company and the customer. The underwriting department may have negotiated with a large company to sell stock designed to raise money for the company. The brokers (salesmen) receive generous pay selling what is known as a secondary issue to investors. Many times the company issuing the stock has some financial difficulties. That is why they are selling more stock. It was not too many years ago that General Motors was selling stock to pay for an under-funded retirement and health benefits program for their employees. We now know how that worked out when General Motors filed bankruptcy recently. Those stockholders lost all the money. Currently there are some banks in both the US and Britain that need to sell stock to raise money.

Stocks are ideal investments if you have money to set aside on a regular basis, and have a long horizon. If you have, for example, an extra $500 per month that you can set aside each month for ten years, you are a long term investor.  Invested properly, you are in a position to take advantage of the power and magic of compounded interest.

Day trading stock, however, presents some problems.  The volatile stocks are the ones that give you the opportunity to make money quickly, but they are also the most risky.  Trading less volatile stocks is a lot easier on your nerves, but making significant money in a short period of time is not easy.  Sure you can open a margin account.  Brokerage houses will be happy to accommodate you because you will trade more, pay more in commissions, and pay interest on a daily basis to the brokerage houses.  

Often markets go down, sometimes quickly, and further than expected.  Most investors buy and hold stock until it goes up. Sometimes it takes years for a stock to come back. Then, some stocks go down and never come back. People with Enron, Chrysler and GM stock regretfully have made that discovery. The amateur will hold the stock for years and then sell the stock unchanged; proudly claiming they broke even on the stock.  This ignores the time value of money. If the losing stock had been sold and the money invested in a better situation, that money would have made a lot more than lugging a loser for a lengthy period of time.   

Money can be made when stocks go down but this involves shorting, a concept alien to many new traders. When a trader thinks the market is about to go lower, he sells the stock first, and hopes to buy it back later at a lower price. Novice traders are likely to be one way traders. They are fine when the tide is busy raising all the boats, but when the tide goes out, they are left behind, beached, and on the sand.

To summarize stocks, they are great if you have a lot of money to invest or money to invest over a period of time, some general business knowledge, and enjoy reading the Wall St. Journal or IBD. They are great when the market is trending in one direction. Usually it is difficult to employ any significant amount of leverage in stocks, so it takes more money to make money.

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