Stock Trading - Stock Quotes - Stock Prices

October 17, 2007

Program Trading - Should You Care?

Probably you know by now that the big boys don't play nice. In the stock market, institutional and other investors with large sums have much more influence on events than the average trader. One way they do that is through the use of something called 'program trading', the purchase (or sale) of a group of stocks, usually by automated buy/sell orders.

Originally the term had little to do with 'computer program'. Program Trading got its name when index funds and other institutional investors embarked on large-scale trading to replicate a stock index. Before long, clever statistical analysts joined hands with even more clever arbitrageurs to try to 'beat' the market through the use of sophisticated trading algorithms, assisted by (then) new, high-speed computer programs.

Fundamental analysis met technical analysis and introduced themselves to software. The rest is rather bumpy history. In one famous case, though some studies deny this, it may have contributed heavily to the well-known Black Monday of October 1987 when the market dropped by over 20% in one day.

While not the largest drop in history (a larger percent decline occurred in 1914 and later a larger point drop, in 2001), nevertheless within one day, 500 billion dollars evaporated from the Dow Jones index. And, the event continued in markets around the world. Hong Kong shares fell over 45% (some say this happened before the U.S. decline - accounts differ) and London over 26%. Out of favor for, oh say maybe a day, program trading continued - albeit after a few software tweaks. New SEC rules were devised and major market players altered thresholds to slow or halt trading when certain percentage declines are reached.

While the NYSE defines a program trade as a basket of 15 stocks or having a total value of $1M (or more), trades can be executed in small lots (100-300 shares, for example). In theory, this allows orders to be completed before other investors get wise, and helps avoid large price movements before positions are solidified or liquidated.

As finance professors and large-firm specialists develop ever more sophisticated methods of taking advantage of small price discrepancies across global markets, program trading becomes ever more complex. In many cases, the individuals involved don't themselves understand well the consequences of implementing a particular strategy.

Program trading now comprises over 50% of NYSE volume on average and it can introduce large swings in a few stocks or large portions of the market. Clearly, the big boys wouldn't bother unless they believed - backed now by decades of studies - that there was an advantage in using the technique.

But whether villain or savior, it's here to stay. Over 50% of the volume on one exchange that trades over 1.6 billion shares a day is a huge amount of arbitrage activity. That effect can work against the average investor or for him, but only if included in a trading strategy that pays attention to where those trades are going.

Posted by Stock at 05:17 PM | Comments (0)

June 11, 2006

Getting Started in Stock Trading

Anyone with money to invest can buy and sell stocks. Stock trading has its own specialized vocabulary but once you have the basics under your belt you can understand better how the market works. As with any investment, the more knowledge you have about stock trading the more successful you are likely to be.

Most stock trades are done through a broker – an intermediary who takes orders and executes them. Brokers can also offer advice about which stocks to trade and the condition of the market. These 'full-service' brokers charge a relatively high commission. To cut costs, many people use discount brokers that charge significantly less. You don't get advice, but to some, that is an advantage.

Some of the services commonly offered by brokers include online trading, broker assisted trading and some brokers offer options like Interactive Voice Response System for placing orders by telephone and wireless trading systems for making orders by using web-enabled cellular phones or other handheld devices.

Some brokers have their own proprietary software for placing orders over the Internet while others allow you to access their order department through their website with a password. Whichever systems they use, almost every broker offers a variety of charting options that allows you to track movements on the stock market. Analysis software may also be included in their service or available for an extra fee.

Types of Orders

There are different types of orders that can be made when buying or selling stocks. A 'market order' is an instruction to buy or sell at the current market price. The order is usually executed very near the price you are quoted at the time of your order. However, if the stock price is fluctuating or is not actively traded there may be a difference between the quote and the actual transaction.

A 'stop order' or 'limit order' can be placed if you expect the stock price to move and wish to buy or sell at a certain price above or below the current market price. A stop order instructs the broker to trade at a certain price, while a limit order is an instruction to trade at a specified price or better.

A stop order helps to limit losses or protect profits. They become effective when the market hits the stop price but may trade above or below the stop price because they are traded at market price after they become active. Limit orders may not be placed at all even if the market reaches the limit price. If the market moves quickly there may not be time to execute your order before the price falls out of the limit price range.

For example: You buy Bell Canada (BCE) at $50 and then put in a stop order of $45. If the price of BCE falls to $45 your stop order will become effective and your stock will sell at market price. Conversely, if you place a limit sell after buying BCE for $60, when the price rises to that level your stock will be sold at a profit. You could also buy BCE with a limit buy order for $45. This allows you to (possibly) buy stock at less than current market. If the price does not fall to your limit buy price, however, you will not buy any of that stock.

All orders can be placed as 'good ‘til cancelled' (GTC) or as a 'day order.' GTC orders remain in effect until they are cancelled but day orders remain effective only until the end of the current trading day.

Stocks are usually traded in 'round lots' – lots of multiples of 100. It is possible to trade other amounts of stocks, but this kind of trade is called an 'odd lot'. Trading software can handle both types of orders, but odd lot orders are slightly more difficult to fill than round lot orders.

Posted by Stock at 09:20 PM | Comments (0)

June 09, 2006

Types of Trading

The stock market is a reliable indicator of the actual value of companies which issue stock. Values of stocks are based on verifiable financial data such as sales figures, assets and growth. This reliability makes the stock market a good choice for long term investing – well-run companies should continue to grow and provide dividends for their stockholders.

The stock market also provides opportunities for short-term investors. Market skittishness can cause prices to fluctuate quite rapidly and investor psychology can cause prices to fall or rise – even if there is no financial basis for these variations.

How does this happen? News reports, government announcements about the economy, and even rumours can cause investors to become nervous or to suspect that a company will increase in value. When the price starts to fall or rise, other investors will jump on the bandwagon, causing an even faster acceleration in price. Eventually the market will correct itself, but for savvy short-term investors who watch the market closely, these price changes can offer opportunities for profitable trading.

Short term traders are divided into 3 categories: Position Traders, Swing Traders, and Day Traders.

Position Traders

Position trading is the longest term trading style of the three. Stocks could be held for a relatively long period of time compared with the other trading styles. Position traders expect to hold on to their stocks for anywhere from 5 days to 3 or 6 months. Position traders are watching for fundamental changes in value of a stock. This information can be gleaned from financial reports and industry analyses. Position trading does not require a great deal of time. An examination of daily reports is enough to plan trading strategies. This type of trading is ideal for those who invest in the stock market to supplement their income. The time needed to study the stock market can be as little as 30 minutes a day and can be done after regular work hours.

Swing Traders

Swing traders hold stocks for shorter periods than position traders – generally from one to five days. The swing trader is looking for changes in the market that are driven more by emotion than fundamental value. This type of trading requires more time than position trading but the payback is often greater. Swing traders usually spend about 2 hours a day researching stocks and executing orders. They need to be able to identify trends and pick out trading opportunities. They usually rely on daily and intraday charts to plot stock movements.

Day Traders

Day trading is commonly thought of as the most risky way to play the stock market. This may be true if the trader is uneducated, but those who know what they are doing know how to limit their risk and maximize their profit potential. Day trading refers to buying and selling stock in very short periods of time – less than a day but often as short as a few minutes. Day traders rely on information that can influence price moves and have to plot when to get in and out of a position. Day traders need to be rational and analytical. Emotional buyers will quickly lose money in this type of trading. Because of the close attention needed to market conditions, day trading is a full-time profession.

Posted by Stock at 09:17 PM | Comments (0)