Internet Stock Trading and Market Research for the Small Investor presents a fresh perspective on online trading that eliminates the prerequisite of technical charting, and simplifies the formulation of buying and selling positions down to a fundamental interpretation of corporate news that drives the market.
The first part of the book introduces novice traders to basic market dynamics and terminologies, and exposes them to online trade regulations and web resources where market information can be accessed to formulate short-term daily trading positions.
The investment strategies recommended in this book target the growing trend of online investors, including short-term and first-time traders who don't employ technical analysis as a trading compass.
In the second part, Internet Stock Trading and Market Research for the Small Investor offers individual market researchers an alternative software tool to financial database subscriptions called SMART, which provides free access to discrete-time market data necessary for technical analysis.
This combination of the trading and research aspects of the stock market leaves you with an encompassing introduction to the market dynamics, and to the sensible investment strategies that maximize profit from short-term positions in an environment of financial volatility.
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INTERNET STOCK TRADING AND MARKET RESEARCH FOR THE SMALL INVESTOR
By Paul M. Moubarak Amy E. Steele
iUniverse, Inc.Copyright © 2012 Paul M. Moubarak and Amy E. Steele
All right reserved.
Chapter OneMARKET STRUCTURE AND TERMINOLOGIES
1-1. STOCK EXCHANGE
A stock exchange represents the floor on which most trading and brokerage activities take place, and constitutes the entity that regulates and controls the exchange and pricing of equities between buyers and sellers. In the United States, there are three major trading floors located in the financial district of New York City.
These floors are known as the New York Stock Exchange (NYSE), the National Association of Securities Dealers Automated Quotations (NASDAQ), and the American Stock Exchange (AMEX), the latter representing an integral body of NYSE. Together, these three stock exchange entities encompass a total listing of 5,189 public American and international companies (as of 2011).
All three exchange floors share a reasonable amount of similarities and have to adhere to the regulations imposed by the federal regulatory commission (known as Securities and Exchange Commission or SEC) of the United States. However, their modes of operation differ in many aspects, most notably with respect to listing/delisting requirements and maintenance fees. For instance, companies listed on NYSE are required to maintain a minimum market capitalization of $50 million, while the minimum market capitalization for listing requirements on NASDAQ is $1.1 million.
Maintenance fees also largely differ between stock exchanges, where NYSE imposes more expensive and stringent listing fees in comparison to NASDAQ. As such, companies listed on NYSE normally represent an agglomeration of the largest most prestigious and least volatile public corporations in America, which possess high market capitalization and can afford listing fees. NASDAQ exchange body on the other hand agglomerates smaller corporations, including those with share pricing under $1, and those companies with low trading volumes and higher price volatility.
In the event where a company trading on the floors of any of the regulated stock exchanges fails to comply with the listing requirements—such as in the event of bankruptcy or failure to maintain a share price above $1 for an extended duration of time—it normally becomes delisted to one of the Over-The-Counter markets better known as OTC or Pink Sheets.
These markets are not subjected to the same regulations that govern the organized stock exchanges, and encompass delisted corporations and firms with a very small market capitalization and a small number of shareholders (as low as 300 shareholders in some cases). As a consequence, OTC and Pink Sheet stocks are very risky and extremely volatile.
From an investment perspective, it is important to understand that the stock exchange under which a company trades is of little relevance to investment decisions, in particular when the objective is short-term buying and selling activities. For individual investors, the most important aspect about stock exchanges and the difference between the organized bodies of NYSE, NASDAQ and AMEX is the share price, the short-term return prospects and the volatility rate of a specific stock.
Companies trading on NYSE are in general more stable with expensive share pricing (above $10) and low prospects for high short-term returns. In comparison, companies listed under NASDAQ and AMEX internet Stock Trading and Market Research for the Small investor are less expensive (under $10) and subsequently more volatile, but often possess the ability to generate large single-day gains and short-term returns under low trading volumes.
Moreover,foronlinetradingactivities,onlypubliccompanieswithstocks listed under NYSE, NASDAQ and AMEX can be traded electronically through an online brokerage firm. In principle, an individual investor placing orders online should be capable of buying and selling stocks of any listed public company. However, it is not uncommon that brokerage firms impose buying restrictions on some cheap stocks, especially those with high volatility rates and low average daily trading volumes. OTC and Pink Sheet stocks on the other hand cannot be traded through online brokers and are not accessible to such investors.
1-2. STOCK INDICES AND AVERAGES
Stock indices and averages represent a statistical metric that measures the performance of the market as a whole, or the performance of specific sectors of the market on daily basis and over the course of a period of time. These indices reflect the general mood and direction of the market, and are used as indicators of the growth or decline of local and global economies.
From a statistical perspective, stock indices normally encompass a listing of stocks that share common market characteristics. Some indices agglomerate stocks attributed to the same industry or commodity, such as an agglomeration of technology or mining companies. Others encompass corporations that share similar trading characteristics, such as similar capitalizations or similar daily trading volumes.
The methodologies used to calculate the value of the average also differ from one index to the other. For instance, the Dow Jones industrial Average (DJIA) (Figure 1.1) which encompasses thirty large public corporations in the United States, calculates the value of the index based on the price change of the stock during the trading session, without any consideration for the stock volume or market capitalization. Other indices, such as the S&P 500 and the NYSE and NASDAQ Composite (Figure 1.1) are more encompassing, and use capitalization-weighted compensators to account for the difference in companies' market size and trading activities.
Typically, market analysts, economists, and journalists rely on stock indices to interpret the behavior of the market and indicate the health of the local and global economy. In the United States for example, there are many such indices, with the most popular being the Dow Jones, the NASDAQ Composite and the NYSE Composite.
These three indices encompass a large body of American public companies and serve as an indicator for the overall health of the local economy. An illustration of the relevance of these indices is shown in Figure 1.1, where a sample five-year history of the three leading American indices is plotted between 2006 and 2011.
In this figure, it is obvious that a decline in the indices coincides with a period of economic instability such as the financial collapse of Wall Street experienced between 2008 and 2009. On the other hand, a market growth period similar to the one exhibited prior to, and after the financial collapse of 2008 is accompanied by a positive trend in the indices.
To individual investors, despite the relevance of statistical indices and their usefulness as overall market indicators, these averages should only be regarded as abstract measures of the overall market direction, and should not be used to formulate buying and selling positions related to a specific stock. This recommendation can be made more sensible if one realizes that stock indices are statistical methodologies internet Stock Trading and Market Research for the Small investor whose values are largely influenced by the movement of larger corporations that normally drive the market.
This means that the individual movement of companies with small market capitalization and low trading volumes is often overshadowed by big market drivers, since the formers' influence on the market direction is minimal. Therefore, it is important to realize that a negative movement in a stock index does not necessarily translate into a similar movement for all companies encompassed by the index. in fact, it is not an uncommon occurrence on the market that stocks of smaller companies be spiking during trading sessions dominated by negative trends in major indices, and that conversely, stocks of large corporations be losing value during trading sessions with positive trends in the indices.
1-3. STOCK SYMBOL
A stock symbol or ticker symbol is a combination of one, two, three, or four letters (rarely numbers) that uniquely abbreviate the name of a public company trading on a stock exchange floor. These symbols are also used to associate news, quotes, technical analysis and trading activities with the corresponding stocks of the public firm.
One-, two-, and three-character symbols are normally reserved for the stocks of NYSE, while AMEX stocks are generally denoted by three characters, and NASDAQ stocks by four. Examples of these different categories of symbols are provided in Table 1.1.
In some cases, stock symbols may include more than four letters, and may even include other special characters such as hyphens (-) and periods (.). A fifth letter appended to a NASDAQ stock symbol, or a series of letters appended to the original NY SE or AMEX symbol through hyphens or periods, indicate that there are special considerations about the stocks of the corresponding firm.
For instance, a company's symbol hyphenated with the letter A or B indicates the specific class of the stock. For example, Berkshire Hathaway stocks with symbol BRK are divided into two categories; BRK-A denoting the class A of the stock (the more expensive stock), and BRK-B denoting the class B of the stock (the less expensive stock). On the other hand, suffixes .PK and .OB appended to the end of the stock symbol refer to pink sheets and over-the-counter trading, respectively.
Online trading orders can only be executed using the appropriate stock symbol. Therefore, it is important for investors to familiarize themselves with these abbreviations and the connotations they may carry, such as the market where a specific stock is traded, which is often reflected by the character length of the symbol. Stocks with special characters in the abbreviation ("-" and ".") are normally not available for trading through online brokerage firms. Data and quotes for these stocks may also be rarely available on open-access web pages and online resources.
1-4. MARKET HOURS
in the United States, trading hours are divided into three sessions: Early trading hours, Regular market hours and After-hours.
The early trading session, or pre-market hours, starts at 4:30 am (EST) in the morning and ends at the opening of the regular trading session at 9:30 am (EST). The regular market hours start at 9:30 am, right after the closing of the pre-market hours, and end at 4:00 pm (EST), while the after-hours start at 4:00 pm and end at 8:00 pm (EST) in the evening. Exceptions are some holidays, where extended (pre-market and after-hours) and regular trading hours are shortened, most notably the regular hours which end at 1:00 pm (EST) instead of 4:00 pm (EST).
The objective of the extended trading hours is to allow investors to react to news reports released prior to the beginning, or after the closing of the regular trading session. Although this may generally be profitable during the early trading hours where the trading volume and optimism are normally higher; it is rather less profitable in the after-hours where the volume is lower and the price is more volatile. In any case, the bulk of the trading activities will always occur during the regular hours as these are longer and available to a larger body of investors.
For individual investors, it is safer to trade during regular market hours, as these follow very strict operating schedules and attract significantly larger volume activities. Online trading is in most cases available for small investors only during regular hours, since pre-market and after-hour sessions are normally reserved to privileged and institutional investors. For this reason, individual investors are encouraged to trade during regular hours to avoid the irregularities of extended sessions which may be unavailable, interrupted, delayed, or even terminated abruptly without any prior notice depending upon the volume activity of the stock.
1-5. STOCK QUOTES AND DATA
Stock quotes represent a list of metrics that characterize the movement of a stock during regular market hours, and summarize relevant statistical measures about the stock performance over the course of a period of time.
Unlike intraday quotes which reflect the performance of a stock during regular market hours (9:30 am to 4:00 pm), pre-market and after-hour internet Stock Trading and Market Research for the Small investor quotes have a lesser importance, especially to online investors who typically have no access to these trading activities. As such, this section focuses on intraday quotes, and reserves the discussion on pre-market and after-hours quotes to section 1-6.
Understanding and correctly interpreting intraday quotes is a critical aspect of stock trading, as the information they carry directly influences the performance of a stock during every instance of the trading session. Depending upon the source of information, updates for intraday stock quotes can be available to online traders either instantaneously, or can be delayed by 15 to 20 minutes.
A sample stock quote depicted in Figure 1.2 shows a summary of the metrics that are normally calculated during intraday trading sessions. Although some quotes are more detailed than others (depending upon the source), quote metrics in general exhibit different levels of importance, where some metrics forge a higher impact on the stock performance than others. Therefore, in the following paragraphs, the focus will be on discussing those metrics that play a major role in framing trading decisions during regular market hours.
1-5-1. Share Price/Last Trade
One of the most important metrics quoted for a stock in real-time is the share price and its variations over the course of a trading session. A share price denotes the amount of money a buyer is expected to pay in order to acquire a single share in the company's common stock offering. Access to this information is therefore critical, as it depicts the number of shares an investor can buy with a given monetary investment.
Variations in the share price during every trading session is dictated by a number of factors, most notably, by the volume of buying orders compared to the volume of selling orders obeying the laws of supply and demand.
Share price increases when the buying volume exceeds the selling volume. This, for instance, occurs when a company releases positive news that enthuses investors to purchase stakes in the company's stock offering, thus driving the share price up. On the other hand, a share price loses value when the selling volume outweighs the buying volume, such as in the aftermath of a news release depicting a disappointing company's performance. A share price will maintain the same price if no buying or selling interests are exhibited in the stock.
1-5-2. Share Volume
Share volume represents another important metric quoted for a stock in real-time. The share volume, or volume for short, represents the sum of the total number of shares bought or sold during a given period of time, or over the course of one trading session.
Share volume can be regarded as a measure of daily activity and interest in a specific stock. A buying or selling order placed during high volume trades can be executed almost instantaneously, at or near the desired price. In contrast, orders placed at low volume activities may require an extended amount of time to be executed, and may even only be processed at an undesirable price dictated by the availability of buyers and sellers.
Stock volume therefore reveals the amount of liquidity in a stock. In the simplest form possible, liquidity can be defined as the ease of buying into a stock, and the ease of selling or getting out of a stock. If a stock is trading at low volume, the number of investors buying and selling into the stock is low, which typically results in large price fluctuations between one order and the other.
A sample example shown in Figure 1.3 illustrates an intraday price chart for a stock trading at low volume (6,000 shares for the whole trading session). In this chart, a selling order of 2,900 shares placed during the first 30 minutes of the session caused the stock to drop in value by 21% (from $3.5 to $2.75). Subsequently, buying orders totaling 2,100 shares placed during the remainder of the session caused the stock to gain 26% in value.
Excerpted from INTERNET STOCK TRADING AND MARKET RESEARCH FOR THE SMALL INVESTOR by Paul M. Moubarak Amy E. Steele Copyright © 2012 by Paul M. Moubarak and Amy E. Steele. Excerpted by permission of iUniverse, Inc.. All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
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Table of Contents
PART A: STOCK TRADING....................1
Chapter 1 MARKET STRUCTURE AND TERMINOLOGIES....................3
Chapter 2 ONLINE TRADING AND REGULATIONS....................31
Chapter 3 WEB RESOURCES FOR STOCK TRADING....................53
Chapter 4 INTERPRETING MARKET NEWS—PART I....................72
Chapter 5 INTERPRETING MARKET NEWS—PART II....................90
Chapter 6 CORPORATE NEWS TO AVOID....................103
Chapter 7 RECURRENT INTRADAY PRICE CHART TRENDS....................115
PART B: MARKET RESEARCH....................29
Chapter 8 OVERVIEW OF TECHNICAL CHART ANALYSIS....................131
Chapter 9 SMART SOFTWARE....................155
This book is well researched and well organized, which makes it fairly easy for the reader (small investor or beginner trader) to get a great introductory knowledge about stocks trading. The authors make their case by introducing the reader to market terms and terminologies, then move on to discuss online trading tools and regulations (free riding, settlment period, …). The most important chapters of this book in my opinion are Chapters 4,5,6,7. That’s where the authors recommend their trading strategies based on a strong explanation of the impact of news (fundamentals) on the stock market from pre-market, to intraday and until the after-hours. All explanations are supported with real figures which I found very helpful. I think the read is good and I recommend it to anyone looking to learn or improve upon their trading knowledge in the stock market.