A Beginner's Guide to Short-Term Trading

Maximize Your Profits in 3 Days to 3 Weeks

Toni Turner

• Publisher: Adams Media
• Year: 2008
• ISBN:
  9781440515200
• Topic: Commerce
• Subtopic: Investissements et valeurs mobilières

Trade you way to financial success! Are you tired of playing the "buy-and-hope" game with your stocks? Savvy stock trader Toni Turner shows you the ins and outs and ups and downs of short-term trading. You'll learn how to buy and sell stocks on a monthly, weekly, or even daily basis, so you can own the right stocks at the right time. Turner's clear, common-sense advice, easy-to-follow explanations, and helpful examples will help you invest in the exciting and profitable world of short-term trading quickly and safely. In this revised edition, you'll get completely up-to-date information on: -New products such as ETFs and expanded coverage on sector investing-Resources for choosing an online broker New SEC (Securities and Exchange Commission) rules and regulations-Updated charts and graphs with current examples A Beginner's Guide to Short-Term Trading is the hands-on book designed to get you actively involved in every step of the trading process. Now you can take control of your portfolio and secure the financial freedom you've always dreamed of. Start planning your trades today!

CHAPTER 1

Wall Street: The Greatest Game on Earth

“The game taught me the game.”—Jesse Livermore

Wall Street and the financial markets represent a global tournament played with heart-stopping stakes, where people from the world over come together to trade money for dreams. Will humans ever stop trading? Doubtful. No matter whether the assets involved are tangible or intangible, the act of trading seems inherent to our very souls.

WHERE IT ALL ST ARTED

Mankind’s love of trading—or swapping items of equal value—started with our earliest ancestors, who swapped meat for fish and furs. As human thought processes evolved into more complex frames of reference, trading systems reached higher levels of sophistication. Now we, as contemporary men and women, have transformed the exchange of goods of perceived equal value into a refined (well, mostly) art form that involves all sorts of maneuvering.

The first stock exchange opened its doors in 1602 in Amsterdam, Holland. It was called the Dutch Bourse (bourse means “moneybag”) and it was backed by the Dutch East India Company.

The U.S. financial center, Wall Street, originated from an earthen embankment, which was erected in 1644 to keep the cows from wandering around the southern tip of the farmland. The farmland is now known as Manhattan.

In 1663, Governor Peter Stuyvesant of New York (then called New Amsterdam) ordered that the embankment be raised and fortified with logs to protect colonists from the British, whom he suspected would attack New York by land. The British, however, arrived in 1664 by sea. They captured the settlement without firing a shot. In 1699, the makeshift wall was torn down. The street that ran alongside survived, though, and retained its name: Wall Street.

The securities markets in the United States began with speculative trading in the debts of the new colonies and government. When the first Congress met in New York’s Federal Hall in 1789, it issued roughly $80 million in government notes, creating an exciting new market in securities. These securities, along with additional stocks, bonds, orders for commodities, and warehouse receipts, were offered to the public for purchase.

To participate in these markets, investors funded American companies by buying shares of ownership. In this way, common citizens had “equity” and could prove so by the “certificates of stock” issued by the company in exchange for capital given by the investor. The stock proved the investor’s participation, and secured the debt. That’s why shares of stock are alternately called stocks, equities, and securities.

In 1790, the first U.S. stock exchange was established in Philadelphia. At the same time, New York City’s exchange was more informal; traders gathered each day under the buttonwood tree at 68 Wall Street to buy and sell securities.

The New York Exchange began trading formally in 1792, when two dozen brokers formed a club. Competition was fierce. The brokers focused on padding their own profits and commissions, rather than on their customers. When the public rebelled, the brokers regrouped and instituted brokerage houses that offered stocks to the public at fair prices.

In 1827, the new Merchants Exchange building, erected at Wall and Hanover streets, housed the New York Stock and Exchange Board. By 1842, the American Stock Exchange opened its doors, and the New York Stock Exchange (NYSE) adopted its present name. Both exchanges enforced strict rules governing the sale of stocks.

In the early 1900s, leading up to the Crash of 1929, “bucket shops” flourished. These independent businesses provided opportunities for individual traders and investors to speculate on the price of securities by tossing money into a bucket carried around by a clerk.

The action in these shops—most of which were unlicensed and illegal—ran fast and furious. The speculators bought and sold the stocks as clerks called out prices from a nonstop telegram called the “ticker.” One clerk read the ticker tape while another jotted prices on a chalkboard.

The honesty of the bucket shop operators determined how much money the traders won or lost, and honesty was a rare commodity. As “Larry Livingston,” the character who represents the turn-of-the-twentieth-century trader Jesse Livermore in Edwin Lefevre’s Reminiscences of a Stock Operator, lamented, “There are no bucket shops here [in New York] that a fellow could trust.”

In the early 1930s the exchanges became strictly regulated, and they evolved into premier financial centers: the New York Stock Exchange (NYSE, or the Big Board), the NASDAQ Stock Market, and the American Stock Exchange. Regional exchanges include the Boston Stock Exchange (BOS), the Philadelphia Stock Exchange (PHLX), Chicago Mercantile Exchange (CME, which trades commodities), and Chicago Board Options Exchange (CBOE, which trades options).

As previously mentioned, the floors of the New York Stock Exchange and the American Stock Exchange are located in New York City, in the financial district, at the lower tip of Manhattan. The NASDAQ Stock Market is an electronic market, and doesn’t have an actual trading “floor.” If you watch the financial television networks, though, you’ve probably seen the NASDAQ MarketSite Tower on television, which is located in New York City’s Times Square.

OUT OF CHAOS COMES ORDER: THE CRASH OF 1929

The Crash of 1929, and the Great Depression that followed it, transformed America’s way of transacting business. In 1934, Congress established the U.S. regulatory commission now known as the Securities and Exchange Commission (SEC).

To ensure that another market crash would not take place, the newly formed SEC instituted sweeping regulations to restore investor confidence by ending misleading sales practices and stock manipulations.

Once in gear, the SEC established regulations that prohibited purchasing equities without having adequate funds to cover the transaction. Next, it provided for the registration and supervision of all U.S. securities markets and stockbrokers, wrote rules for solicitation of proxies, and prevented unfair use of nonpublic information in stock trading. The organization stipulated that a company offering securities make full public disclosure of all relevant data. Finally, the commission decided to act as adviser to the court in corporate bankruptcy cases.

In 1971, the National Association of Securities Dealers (NASD) created a fully integrated, computerized trading system called the NASDAQ, or National Association of Securities Dealers Automated Quotron. Its purpose was to automate and trade over-the-counter securities, and it linked the terminals of more than 500 market makers to its automated system in Connecticut. By the 1990s, the NASDAQ grew into the second-largest securities market in the United States, and the third-largest in the world.

The Crash of 1987: More Chaos and the Resulting Order

During the 1970s and 1980s, the exchanges fluctuated between bull and bear markets until the collapse of October 19, 1987. The “crash” caused America’s investing public to panic. Frightened customers overwhelmed their stockbrokers with sell orders, yelling “Get me OUT.” Frantic stockbrokers flooded specialists and market makers with orders. As the day wore on, some market makers stopped answering their phones—which caused frustrated stockbrokers to stop answering their phones. This forced many unhappy investors to ride out the fall.

After the panic subsided, the SEC executed new regulations to protect the individual investor. The organization ruled that when individual investors wanted to sell their securities, NASDAQ market makers were obliged to buy a specified amount of stock from them.

Later, additional regulations allowed investors to participate in the market by connecting them directly to the market via their computers and the Internet, and market makers were required to handle the transactions. Just like specialists on the NYSE, market makers were held responsible for conducting “fair and orderly” markets.

THE NEW YORK ST OCK EXCHANGE: HOW IT WORKS

In terms of market capitalization, the New York Stock Exchange (www.nyse.com) is the largest stock market in the world. That’s why it’s also termed “the Big Board.” It’s located at 11 Wall Street. CNBC and other financial television networks televise the busy floor of the exchange each morning.

The first stock listed on the NYSE in 1792 was the Bank of New York. Presently the NYSE lists more than 3,000 companies, and averages trading volume of 1.5 billion shares per day. These equities are referred to as “listed stocks,” and most have large market capitalizations.

“Market cap” is measured by an equity’s number of shares outstanding (shares available to the public not held by corporate insiders) multiplied by the price of a single share of stock.

For example, as of this writing, industry titan General Electric (GE)...