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Courtyard of theAmsterdam Stock ExchangeBeurs van Hendrick de Keyser) byEmanuel de Witte, 1653. The process of buying and selling theVOCs shares (on the Amsterdam Stock Exchange) became the basis of the worlds first formalstock market.
Courtyard of the Amsterdam Stock Exchange (Beurs van Hendrick de Keyserin Dutch).Stock tradingactivity, as we know it today, was originally a 17th-century Dutch investing technique.
Historical photo of stock traders andstockbrokersin thetrading floorof theNew York Stock Exchange(1963)
Astock traderorequity traderorshare traderis a person or company involved in tradingequity securities. Stock traders may be an agent,hedgerarbitrageurspeculatorstockbroker. Suchequity tradingin largepublicly traded companiesmay be through one of the majorstock exchanges, such as theNew York Stock Exchangeor theLondon Stock Exchange, which serve as managedauctionsfor stock trades. Stock shares in smaller public companies are bought and sold inover-the-counter(OTC) markets.
Equity trading can be performed by the owner of the shares, or by anagentauthorized to buy and sell on behalf of the shares owner.Proprietary tradingis buying and selling for the traders own profit or loss. In this case, theprincipalis the owner of the shares.Agency tradingis buying and selling by an agent, usually astockbroker, on behalf of a client. Agents are paid acommissionfor performing the trade.
Major stock exchanges havemarket makerswho help limit price variation (volatility) by buying and selling a particular companys shares on their own behalf and also on behalf of other clients.
Stock traders adviseshareholdersand help manageportfolios. Traders engage in buying and selling bonds, stocks, futures and shares in hedge funds. A stock trader also conducts extensive research and observation of how financial markets perform. This is accomplished through economic andmicroeconomicstudy; consequently, more advanced stock traders will delve intomacroeconomicsand industry specific technical analysis to track asset or corporate performance. Other duties of a stock trader include comparison offinancial analysisto current and future regulation of his or her occupation.
Professional stock traders who work for a financial company, are required to complete an internship of up to four months before becoming established in their career field. In theUnited States, for example, internship is followed up by taking and passing aFinancial Industry Regulatory Authority-administered Series 63 or 65 exam. Stock traders who pass demonstrate familiarity withU.S. Securities and Exchange Commission(SEC) compliant practices and regulation. Stock traders with experience usually obtain a four-year degree in a financial, accounting or economics field after licensure. Supervisory positions as a trader may usually require anMBAfor advanced stock market analysis.
TheU.S. Bureau of Labor Statistics(BLS)4reported that growth for stock and commodities traders was forecast to be greater than 21% between 2006 and 2016. In that period, stock traders would benefit from trends driven bypensionsofbaby boomersand their decreased reliance onSocial Securitywould also be traded on a more fluctuating basis. Stock traders just entering the field suffer since few entry-level positions exist. While entry into this career field is very competitive, increased ownership of stocks and mutual funds drive substantial career growth of traders. Banks were also offering more opportunities for people of average means to invest and speculate in stocks. The BLS reported that stock traders had median annual incomes of $68,500. Experienced traders of stocks and mutual funds have the potential to earn more than $145,600 annually.
Contrary to astockbroker, a professional who arranges transactions between a buyer and a seller, and gets a guaranteed commission for every deal executed, a professional trader may have asteep learning curveand his/her ultra-competitive performance based career may be cut short, especially during generalizedstock market crashes. Stock market trading operations have a considerably high level ofriskuncertaintyandcomplexity, especially for unwise and inexperienced stock traders/investors seeking an easy way to makemoneyquickly. In addition, trading activities are not free. Stock speculators/investors face several costs such as commissions, taxes and fees to be paid for the brokerage and other services, like the buying/selling orders placed at thestock exchange. Depending on the nature of each national or state legislation involved, a large array of fiscal obligations must be respected, and taxes are charged by jurisdictions over those transactions,dividendsandcapital gainsthat fall within their scope. However, these fiscal obligations will vary from jurisdiction to jurisdiction. Among other reasons, there could be some instances wheretaxationis already incorporated into thestock pricethrough the differing legislation that companies have to comply with in their respective jurisdictions; or that tax freestock marketoperations are useful to boosteconomic growth. Beyond these costs are theopportunity costsof money and time,currencyrisk,financial risk, and Internet, data and news agency services andelectricityconsumption expensesall of which must be accounted for.
Jrôme KervielSocit Gnrale) andKweku AdoboliUBS), tworogue traders, worked in the same type of position, theDelta Onedesk – a table wherederivativesare traded, and not single stocks or bonds. These types of operations are relatively simple and often reserved for novice traders who also specialize inexchange-traded funds(ETFs), financial products that mimic the performance of an index (i.e. either upward or downward). As they are easy to use, they facilitate portfolio diversification through the acquisition of contracts backed by a stock index or industry (e.g. commodities). The two traders were very familiar to control procedures. They worked in the back office, the administrative body of the bank that controls the regularity of operations, before moving to trading. According to the report of the Inspector General of Societe Generale, in 2005 and 2006 Kerviel led by taking 100 to 150 million-euro positions on the shares ofSolarworld AGlisted in Germany. Moreover, the unauthorized trading of Kweku Adoboli, similar to Kerviel, did not date back a long way. Adoboli had executed operations since October 2008 – his failure and subsequent arrest occurred in 2011.5
Stock speculators and investors usually need astock brokersuch as abankor abrokerage firmto access the stock market. Since the advent ofInternet banking, anInternet connectionis commonly used to manage positions. Using theInternet, specialized software, and apersonal computer, stock speculators/investors make use oftechnicalandfundamentalanalysis to help them in making decisions. They may use several information resources, some of which are strictly technical. Using the pivot points calculated from a previous days trading, they attempt to predict the buy and sell points of the current days trading session. These points give a cue to speculators, as to where prices will head for the day, prompting each speculator where to enter his trade, and where to exit. An added tool for the stock picker is the use of stock screens. Stock screens allow the user to input specific parameters, based on technical and/or fundamental conditions, that he or she deems desirable. Primary benefit associated with stock screens is its ability to return a small group of stocks for further analysis, among tens of thousands, that fit the requirements requested. There is criticism on the validity of using these technical indicators in analysis, and many professional stock speculators do not use them.citation neededMany full-time stock speculators and stock investors, as well as most other people in finance, traditionally have a formal education and training in fields such aseconomicsfinancemathematicsandcomputer science, which may be particularly relevant to this occupation since stock trading is not an exact science, stock prices have in general arandomorchaotic6behaviour and there is no proven technique for trading stocks profitably, the degree of knowledge in those fields is ultimately neglectable.
Although many companies offer courses in stock picking, and numerous experts report success throughtechnical analysisandfundamental analysis, many economists and academics state that because of theefficient-market hypothesis(EMH) it is unlikely that any amount of analysis can help an investor make any gains above the stock market itself. In thedistributionof investors, many academics believe that the richest are simplyoutliersin such a distribution (i.e. in a game of chance, they have flipped heads twenty times in a row). When money is put into the stock market, it is done with the aim of generating a return on the capital invested. Manyinvestorstry not only to make a profitable return, but also to outperform, or beat, the market. However, market efficiency – championed in the EMH formulated byEugene Famain 1970, suggests that at any given time, prices fully reflect all available information on a particular stock and/or market.
Thus, according to the EMH, no investor has an advantage in predicting a return on a stock price because no one has access to information not already available to everyone else. In efficient markets, prices become not predictable but random, so no investment pattern can be discerned. A planned approach to investment, therefore, cannot be successful. This random walk of prices, commonly spoken about in the EMH school of thought, results in the failure of any investment strategy that aims to beat the market consistently. In fact, the EMH suggests that given the transaction costs involved in portfolio management, it would be more profitable for an investor to put his or her money into an index fund.
In 1963Benoit Mandelbrotanalyzed the variations of cotton prices on a time series starting in 1900. There were two important findings. First, price movements had very little to do with a normal distribution in which the bulk of the observations lies close to the mean (68% of the data are within one standard deviation). Instead, the data showed a great frequency of extreme variations. Second, price variations followed patterns that were indifferent to scale: the curve described by price changes for a single day was similar to a months curve. Surprisingly, these patterns of self-similarity were present during the entire period 1900-1960, a violent epoch that had seen a Great Depression and two world wars. Mandelbrot used hisfractal theoryto explain the presence of extreme events in Wall Street. In 2004 he published his book on the misbehavior of financial markets – The (Mis)behavior of Markets: A Fractal View of Risk, Ruin, and Reward. The basic idea that relates fractals to financial markets is that the probability of experiencing extreme fluctuations (like the ones triggered by herd behavior) is greater than what conventional wisdom wants us to believe. This of course delivers a more accurate vision of risk in the world of finance. The central objective in financial markets is to maximize income for a given level of risk. Standard models for this are based on the premise that the probability of extreme variations of asset prices is very low.
These models rely on the assumption that asset price fluctuations are the result of a well-behaved random or stochastic process. This is why mainstream models (such as the famousBlack-Scholes model) use normal probabilistic distributions to describe price movements. For all practical purposes, extreme variations can be ignored. Mandelbrot thought this was an awful way to look at financial markets. For him, the distribution of price movements is not normal and has the property ofkurtosis, where fat tails abound. This is a more faithful representation of financial markets: the movements of the Dow index for the past hundred years reveals a troubling frequency of violent movements. Still, conventional models used by the time of the2008 financial crisisruled out these extreme variations and considered they can only happen every 10,000 years. An obvious conclusion from Mandelbrots work is that greater regulation in financial markets is indispensable. Other contributions of his work for the study of stock market behaviour are the creation of new approaches to evaluate risk and avoid unanticipated financial collapses.6
Outside of academia, the controversy surrounding market timing is primarily focused on day trading conducted by individual investors and the mutual fund trading scandals perpetrated by institutional investors in 2003. Media coverage of these issues has been so prevalent that many investors now dismiss market timing as a credible investment strategy. Unexposedinsider tradingaccounting fraudembezzlementandpump and dumpstrategies are factors that hamper an efficient, rational, fair and transparentinvesting, because they may create fictitious companys financial statements and data, leading to inconsistent stock prices.
Throughout the stock markets history, there have been dozens of scandals involving listed companies, stock investing methods and brokerage. A classical case related to insider trading of listed companies involvedRaj Rajaratnamand its hedge fund management firm, theGalleon Group. On Friday October 16, 2009, he was arrested by theFBIand accused of conspiring with others in insider trading in several publicly traded companies. U.S. AttorneyPreet Bhararaput the total profits in the scheme at over $60million, telling a news conference it was the largest hedge fund insider trading case in United States history.7A well publicized accounting fraud of a listed company involved Satyam. On January 7, 2009, its ChairmanRajuresigned after publicly announcing his involvement in a massive accounting fraud. Ramalinga Raju was sent to the Hyderabad prison along with his brother and former board member Rama Raju, and the former CFO Vadlamani Srinivas. In Italy,ParmalatCalisto Tanziwas charged with financialfraudandmoney launderingin 2008. Italians were shocked that such a vast and established empire could crumble so quickly. When the scandal was made known, the share price of Parmalat in the Milan Stock Exchange tumbled. Parmalat had sold itselfcredit-linked notes, in effect placing a bet on its own credit worthiness in order to conjure up anassetout of thin air. After his arrest, Tanzi reportedly admitted during questioning atMilanSan Vittoreprison, that he diverted funds from Parmalat into Parmatour and elsewhere. The familyfootballand tourism enterprises were financial disasters; as well as Tanzis attempt to rivalBerlusconiby buyingOdeon TV, only to sell it at a loss of about €45 million. Tanzi was sentenced to 10 years in prison for fraud relating to the collapse of the dairy group. The other seven defendants, including executives and bankers, were acquitted. Another eight defendants settled out of court in September 2008.8
Warren Buffettbecame known as one of the most successful and influential stock investors in history. His approach to investing is almost impossible for individual investors to duplicate because he uses leverage and a long-term approach that most people lack the will and wealth to follow.
Day trading sits at the extreme end of the investing spectrum from conventional buy-and-hold wisdom. It is the ultimate market-timing strategy. While all the attention that day trading attracts seems to suggest that the theory is sound, critics argue that, if that were so, at least one famous money manager would have mastered the system and claimed the title of theWarren Buffettof day trading. The long list of successful investors that have become legends in their own time does not include a single individual that built his or her reputation by day trading.
EvenMichael Steinhardt, who made his fortune trading in time horizons ranging from 30 minutes to 30 days, claimed to take a long-term perspective on his investment decisions. From an economic perspective, many professional money managers and financial advisors shy away from day trading, arguing that the reward simply does not justify the risk. Attempting to make a profit is the reason investors invest, and buy low and sell high is the general goal of most investors (although short-selling and arbitrage take a different approach, the success or failure of these strategies still depends on timing).
The problems withmutual fundtrading that cast market timing in a negative light occurred because the prospectuses written by the mutual fund companies strictly forbid short-term trading. Despite this prohibition, special clients were allowed to do it anyway. So, the problem was not with the trading strategy but rather with the unethical and unfair implementation of that strategy, which permitted some investors to engage in it while excluding others. All of the worlds greatest investors rely, to some extent, on market timing for their success. Whether they base their buy-sell decisions on fundamental analysis of the markets, technical analysis of individual companies, personal intuition, or all of the above, the ultimate reason for their success involves making the right trades at the right time. In most cases, those decisions involve extended periods of time and are based on buy-and-hold investment strategies.Value investingis a clear example, as the strategy is based on buying stocks that trade for less than their intrinsic values and selling them when their value is recognized in the marketplace. Most value investors are known for their patience, as undervalued stocks often remain undervalued for significant periods of time.
Some investors choose a blend of technical, fundamental and environmental factors to influence where and when they invest. These strategists reject the chance theory of investing, and attribute their higher level of returns to both insight and discipline.
Financial fail and unsuccessful stories related with stock trading abound. Every year, a lot of money is wasted in non-peer-reviewed (and largely unregulated) publications and courses attended by credulous people that get persuaded and take the bill, hoping getting rich by trading on the markets. This allow widespread promotion of inaccurate and unproven trading methods for stocks, bonds, commodities, orForex, while generating sizable revenues for unscrupulous authors, advisers and self-titled trading gurus. Most active money managers produce worse returns than an index, such as theS&P 500.10
Speculation in stocks is a risky and complex undertaking because the direction of the markets are considered generally unpredictable and lack transparency, alsofinancial regulatorsare sometimes unable to adequately detect, prevent and remediate irregularities committed by malicious listed companies or otherfinancial market participants. In addition, the financial markets are subject tospeculation. This does not invalidate the well documented true and genuine stories of large successes and consistent profitability of many individual stock investors and stock investing organizations in history.
Business Adventures: Twelve Classic Tales from the World of Wall Street
Economics 252, Financial Markets: Lecture 4 Portfolio Diversification and Supporting Financial Institutions (Open Yale Courses)
Stringham, Edward Peter (5 October 2015).How Private Governance Made the Modern World Possible. Cato Unbound (
AsEdward Stringham(2015) noted, In the first stock market in seventeenth century Amsterdam, (…) after the founding of theDutch East India Companyin 1602 asecondary marketfor shares emerged amongbrokerswho began specializing in trading stocks.
Jill Treanor,Trading tactics: Soc Gens Jrôme Kerviel and UBSs Kweku AdoboliThe Guardian(15 September 2011)
Mandelbrot, Benoît B.; Hudson, Richard L. (2004).
The (Mis)behavior of Markets: A Fractal View of Risk, Ruin, and Reward
SEC Charges Billionaire Hedge-Fund Manager with Insider Trading Dispatch WSJ.
Italian dairy boss gets 10 years. 18 December 2008 via .uk.
Dont follow Buffett because you cantReuters(August 24, 2012)
Alice Schroeder, the author of The Snowball: Warren Buffett and the Business of Life,Schroeder: Days of Easy Money End for Fund ManagersBloomberg(Jan 19, 2012)
Economic, financial and business history of the Netherlands
Economic history of the Netherlands (15001815)
Early modern industrialization in the Dutch Republic(1580s1700s)
Pulp and paper industry in the Dutch Republic
Amsterdam Stock ExchangeBeurs van Hendrick de Keyser)
Public companypublicly traded companypublicly listed company)
Collective investment schemesinvestment funds)
Economic globalizationcorporate globalization)
Articles needing additional references from July 2008
Articles with unsourced statements from July 2012
This page was last edited on 9 March 2019, at 21:47