What about day trading?

[Blog #4 on financial markets]

There are five main types of trading that technical traders can utilise:

• Scalping
• Day trading
• Momentum trading
• Swing trading
• Position trading

They involve time frames from between seconds or minutes (for scalping) to weeks and months (for position trading) and everything in between.

A successful technical trader should at least be proficient in several different strategies, but every trader should specialise in one particular strategy and master it. This is dependent on:

• your personality,
• your timeframe and tolerance for risk, and
• the current market environment.

Day trading used to be the preserve of financial firms, professional investors and speculators. Many day traders are bank or investment firm employees working as specialists in equity investment and fund management. Day trading is the system of speedily buying and selling securities throughout the day in order profit from the marginal changes in the market for that particular day.

Day trading can be a fast paced and exciting hobby that depends upon the trader having the most up to date information. Some of the more commonly day traded financial instruments include stocks, options, futures contracts and currencies. In the ideal world, day trading strategies let investors garner profits from the tiny increases in the market. Day trading requires a great deal of time and close attention.

Day trading is not a get rich quick scheme - don't try to make it one. Day trading requires in-depth knowledge of the securities markets and trading techniques and strategies. In attempting to profit through day trading, you must compete with professional, licensed traders employed by securities firms. Day trading can't really be considered safe investing. You must realise that it may be a zero sum game – for every winner there is a loser!

Make sure you're ready and willing to monitor the near-perpetual shifts that occur moment to moment in the stock market.

Day trading is quite easy once you have the proper education. Technical analysis and fundamental market analysis are both necessary for successful day trading. Technical analysis is the counterpart of fundamental analysis.

Fundamental analysis is basically the ability to analyse a company’s financial strength and determine a decision based on value. Fundamental investors look for stocks that are below their intrinsic value. The objective in fundamental analysis is to make a projection on its future business performance.

Simply put, technical analysis is the process of analysing market (price) action and using past data on charts to attempt to forecast the highest likely outcome of the future. Charts are the primary tool. Technical analysis can be learnt in a short period of time. There are no financial statements to read over. It requires the reading and interpreting charts, their patterns, and determining the highest likely short-term outcome of the future.

Learn more: January finance and investment book reviews

Books provide you with the more detailed information to enjoy safe investing. We suggest the following:

Useful South African books (Kalahari)

Understanding South African Financial Markets,
van Zyl, Botha & Skerritt

A reference and guide for commerce students, public servants and the business fraternity, giving an overview of how the various institutions in the South African financial system operate as well as of the different financial markets in the economy and the instruments traded in those markets.Contents: Rudiments of the South African financial system; The South African Reserve Bank; Banks; Microfinance institutions; Regulation of the financial markets; Insurers; Retirement funds; Investment institutions; Risk and return; The money market; The bond market; The share market; The foreign exchange market; and Derivatives.

Economics for South African students,
Louis et al Fourie, Philip Mohr

Economics for South African students is an introduction to economics in general, set against a contemporary South African background. The easy style and many practical examples make this publication accessible. The title covers all the material usually prescribed for introductory courses, and it lays a solid foundation for intermediate and advanced studies in economics.


Useful USA books (Amazon)

The Neatest Little Guide to Stock Market Investing,
Jason Kelly

From the time of its first publication five years ago, The Neatest Little Guide to Stock Market Investing has established itself as a clear, concise, and highly effective approach to stocks and investment strategy. Since the dot.com crash and ensuing bear market, significant changes have come about in the investing world, and The Neatest Little Guide takes this into account. In this revised edition, readers will learn: Strategies on how to double the Dow with one simple investment and the latest products required for this approach; Methods investors can use to avoid disasters such as Enron and WorldCom. Thoroughly updated reference lists, including new websites, new software, new brokers, and new publications. With the right information for investors to keep pace, and rooted in the principles that made it invaluable from the start, The Neatest Little Guide to Stock Market Investing is a resource that no serious investor can be without.

Stock Investing for Dummies,
Paul Mladjenovic,

Stock Investing For Dummies covers all the proven tactics and strategies for picking the right stocks. Packed with savvy tips on today’s best investment opportunities, this book provides a down-to-earth, straightforward approach to making money on the market without the fancy lingo. With a different strategy for every investor - from recent college grad to married with children to recently retired - his valuable reference is a must-have. It also features tips and tricks on how to tell when a stock is on the verge of declining or increasing, how to protect yourself from fraud, and common challenges that every investor must go through, along with resources and financial ratios.

Share trading made easy

[Blog #3 on financial markets]

Do you want to build your own wealth and invest in shares, but don’t know exactly where to start? There’s no reason why investing has to be complicated. Investing in your future is smart. In this blog we look at online share trading.

Why trade online yourself? Safe investing can now be accomplished by trading online through the Internet. You effectively eliminate the “middle man” or financial advisor that you would normally just instruct to invest on your behalf. This also means that you end up saving lots of money on professional fees associated with investing through someone else.

Once you’ve committed yourself to investing, it’s important to understand that the more you practice the better you get! Take time doing research about a company you’re interested in investing in.

How do you know whether you’re doing the right thing?
A simple way to test the way you’re going about your decision-making is to practice on the simulated stock exchange which is often provided by your share trading platform.

There’s nothing more satisfying than learning a new skill. By educating yourself, you’ll realize that investing isn’t as complicated as people make it out to be.

Trading costs
Trading costs are an important aspect when you decide to start investing. There are a variety of costs involved so we’ll have a look at how you can minimise them and make the most out of this experience.

The main cost involved is the brokerage fee and is based on the value of the transaction. When you use an online share trading vendor you are minimizing a lot of the costs involved as you don’t take up too much of the stockbroker’s time. You pay a brokerage fee every time you buy or sell shares as well as a monthly fee for holding your shares. This fee structure differs from broker to broker so make sure you find out details from your individual broker.

What’s a fair price?
Before deciding what a fair price is for a share let’s look at some basic investing terms:

• The market for a share (or its trading price) is based on its buy and sell prices, not the last traded price.
• If you place a market order, you’ll be asking for the market price. This means that you must either buy at the lowest sell price or sell at the highest bid for the share.
• You are looking to buy shares at a fair value – this is the value that is considered to be reasonable in light of all the circumstances – how the shares are performing, what the growth prospects of the company are etc.
• Remember that if you are investing for the long term, you shouldn’t be too concerned if you see some fluctuations in the share price – if you see a bit of a dip don’t stress out and immediately sell your share – look carefully at why the share price has dropped and then decide whether it’s worth selling.

Practice, practice, practice!
Most share trading vendors offer simulated trading or a real-time stock trading game. It’s the perfect facility for you to learn how to trade, and because no “real” money changes hands, it’s completely risk-free!

You can visit SharePlanner and TheStreet.com in the US and Sharenet in South Africa for further information.

Test out your investment theories and strategies through simulation and you’ll get the peace of mind that you’re reading to start trading in the real market before you know it!

The real trading process
Once you’re ready to actually buy and sell shares on the market it’s helpful to understand how a trading system actually works. The stock exchange trading system matches buyers and sellers for each listed share. The trading system continuously looks to match bids and offers, comparing the new orders and those on the system to each other and executing trades whenever they match.

Market depth is an important aspect of this process – this is when you’re able to see the volume and price of all buyers and sellers in the market for a particular share. Viewing this information will help you analyse how that share is performing over a period of time.

Also have a look at the bid/offer spread on the share – basically what the buyers are prepared to pay and what the sellers are prepared to sell at. Once you have established what the last price traded was and what the above “spread” is, you’ll be in a good position to decide what price you can bid for the shares that you want.

Once you’ve decided on the price, you need to decide whether you’re going to place a price limit on your order or if you’re going to place an “at market” order. A price limit means that you tell your broker what the maximum price is that you’re willing to pay for that share, while the “at best” order is based on what the sellers want. It is generally recommended that you place a price limit order as prices can change very quickly and you don’t want to receive a nasty surprise if you pay way more or less for the shares you want. Once you’ve bought your shares, you’ll receive a broker’s note as confirmation of the trade. The funds will be deducted from your account on the settlement date.

In later blogs we will look choosing shares and at how official investor protection enables safe investing.

[based on the ShareNet report Guide to Investing on the JSE]

Things you have to know about share markets

[Blog #2 on financial markets]

A major segment of financial markets is the capital market. This consists of the equity, or share, market; and the money and bond markets. We are first going to look at the share market and what it means for safe investing.


The share market
The terms shares, equities or stocks are used interchangeably to describe marketable financial instruments of listed companies quoted and traded on a financial exchange (or stock exchange). These shares represent ownership by investors of the productive assets of listed companies. A stock exchange facilitates the raising of share capital by companies (borrowers) in the primary share market, and the trading of these shares in the secondary share market by investors (lenders).

Companies could source finance through the issuance of share capital or debt (borrowed funds). Share capital is raised through the issuance of shares, while debt is raised through the issuance of debentures and corporate bonds, or the incurrence of loans. The fundamental difference between shares and bonds is that shareholding represents co-ownership in contrast to bondholders being creditors.

Bondholders in their capacity as creditors (lenders of money) of the private company issuing debt are entitled to regular interest payments and repayment of principal at maturity. An investment in bonds delivers a steady cash flow in the form of interest receipts, and bondholders' prior claim on company assets make bonds more safe investing than shares. In normal circumstances, the lower level of risk associated with investments in bonds compared to shares should result in a lower level of return on bonds than on shares.

Shareholders in their capacity as co-owners of the company are entitled to share in profit by way of dividend payments (payments out of profits after tax and other prior claims) and in capital gains or losses (capital appreciation and depreciation). This depends on the market's assessment of the company as reflected by changes in market prices (the ruling share price at the time of the last recorded transaction) of listed shares.


In contrast to bonds, shares have no fixed maturity. Furthermore, shareholders can dispose of listed shares at current market prices in the secondary share market on a stock exchange.

Different classes of share
Listed companies can usually issue different types or classes of share to raise capital. the differentiation between the two main classes of share is based on shareholder priority in terms of rights to the distribution ot earnings (a company's net income or net profit during a specific period). The distribution of earnings to preference shares ranks higher than ordinary shares. This means that the dividends on preference shares have to be paid before dividends on ordinary shares are paid. Ordinary shares are the most widely used type of share. The dividends paid on ordinary shares can be in excess of dividends on preference shares, but the dividend payment remains uncertain, reflecting the higher degree of risk associated with dividends on ordinary shares relative to preference shares.

The two main characteristics of ordinary shares can be summarised as:

• the right to residual claim of income and assets after all prior claims - means that investors bear the full risk of the company and share in the profits by way of dividends only if profits are made after all other payments such as interest on debt and dividends on preference shares,
• limited liability - means that, at worst, shareholders can only lose the capital invested (may not really be considered as safe investing).

Other types of ordinary share are nonvoting ordinary shares, deferred ordinary shares, bearer shares, and nil-paid letters - these are not discussed here.

The primary and secondary share markets
The share market can be categorised as either the primary market (where newly issued shares are offered), or the secondary market where subsequent trading takes place. Borrowers raise share capital in the primary market and investors trade these shares at current market prices in the secondary market.

Issuing activity in the primary market determines the size of the pool of shares available for trade in the secondary market, whereas transactions in the secondary market determine the tradability (the ease with which shares can be traded), marketability (buying and selling shares without an impact on the price), and liquidity (ability to convert shares into cash or to purchase shares at short notice) of the pool of shares, and assist in the price formation process.

The secondary share market can be disaggregated into four markets:

• the formal market where listed shares on a stock exchange (the licensed formal exchange) are traded;
• the over-the-counter (OTC) market, an unlicensed informal market for the trading of shares;
• trades in listed shares off exchange; and
• direct trades between buyers and sellers without the intermediation of brokers.

The trade-off between demand and supply for shares influences the determination of the share prices. Issuers of share capital are also in competition with borrowers and investors in the bond market and other asset markets. Changes in investors' preferences for certain asset classes (financial and non-financial assets such as shares, bonds. cash, real estate etc.) also affect the availability of funding in the primary share market. Switching between asset classes by investors reflects investors' ever-changing assessment of expected risks and returns as market conditions change.

Things you have to know about financial markets

[Blog #1 on this subject]

It is unwise for you to invest in financial markets from a basis of ignorance, especially if you are managing your own portfolio of securities. Safe investing and avoiding fraud are facilitated when you gain an understanding of financial markets and instruments. We will help you in this regard by providing a series of blogs about investing for beginners [note 1].

In the first series of blogs we will look at the various capital (share, bond) and money markets typically faced by a trader or available to an investor. We will introduce various cash instruments, and help you understand their function, price and mark-to-market their interim values, and risk management.

Further assistance will be provided in the form of financial market book reviews

[Note 1. A sort of "investing for dummies" or"investment 101"]

But. first we will look at financial system in general.

The financial system

Basically, the financial system is a set of arrangements embracing the lending and borrowing of funds by non-financial "economic units" and the intermediation of this function by financial institutions in order to facilitate the transfer of funds, to create additional money when required, and to create markets in debt instruments so that the price and allocation of funds are determined efficiently.

There are six essential elements of a financial system:
1. Lenders and borrowers - the non-financial economic units (eg individuals and companies) that undertake the lending and borrowing process.
2. Financial intermediaries, which interpose themselves between the lenders and borrowers.
3. Financial instruments, which are created to satisfy the needs of the various participants.
4. Money creation (when required) - the unique money creating ability of banks.
5. Financial markets - the institutional arrangements and conventions that exist for the issue and trading (dealing) of financial instruments.
6. Rate of interest, or the time value of money = the price of money.

Financial markets

The participants in the financial markets are the borrowers (issuers of securities), the lenders (buyers of securities), the financial intermediaries (buyers and issuers of securities) and the brokers, fund managers, speculators, exchanges and regulators.

The terminology used can sometimes be confusing. For example, reference is made to the primary market, the secondary market, the spot market, the options and futures markets, financial exchanges, the money market, the capital markets, the debt markets, the swap market. and so forth. We will endeavour to clarify the picture, over time in further blogs.

Primary and secondary markets
A fundamental distinction has to be drawn between the primary and secondary markets in securities. The market for the issue of new securities to borrow money for consumption or investment purposes is referred to as the primary market.

The markets in non-negotiable instruments, eg mortgage loans, savings deposits and life policies, are entirely primary markets, while negotiable certificates of deposit, shares and bonds, for example, are issued in the primary market, but traded in the secondary market.

Secondary market is the term used for the markets in which previously issued securities are traded. These markets exist in many of the securities referred to in the previous section, but they differ in terms of so-called breadth and depth or liquidity, sometimes vastly.

When discussing the secondary market, it is important to distinguish between brokers and market makers. Brokers act on behalf of other financial market participants (principals) in return for a commission (although sometimes they may take speculative positions - act as principals for their own profit). Market makers are financial intermediaries, mainly banks, who are appointed by the issuers to perform, this function.

Market making means that the market makers are prepared to quote buying and selling prices/rates simultaneously for certain securities; the spreads quoted by them are small, and they are prepared to deal in reasonable volumes. Because these institutions are prepared to hold portfolios of securities for this purpose, they need to be adequately capitalised - usually the large domestic and international banks.

An active secondary market in securities is important for five reasons:

1. It assists the primary market - improves the ability of issuers to place securities, by providing investors with the assurance that they will be able to dispose of securities If they so desire.
2. It provides the basis for the determination of rates to be offered on new issues.
3. It registers changing market conditions rapidly, indicating the receptiveness of the market for new primary issues.
4. It enables investors to rapidly adjust their portfolios in terms of size, risk, return, liquidity and maturity.
5. It enables the central bank to buy and sell securities in order to influence liquidity in the financial markets (open-market operations).

_________

Our next blog will look at the share market.