Stock Online TraderBulls & Bears Make Money, Pigs Get Slaughtered…Let Us Not Be That Pig…

The words investors and traders are commonly used in the world of stock market. Many people actually use them interchangeably as if they mean the same. Infact it is not true. Both words have different meaning. Even though investors and traders buy/sell stocks, they perform two very different tasks using very different strategies. Nonetheless, both of them are needed for the market to function smoothly.

So are you an investor or a trader ? Confused ? Let us find out the difference between an investor and a trader and then judge for yourself, which one you fit into.

Who Is an Investor?
An investor is someone who buys stocks of a company based on fundamental analysis. They hold the stock for long term with the belief that the company will have a strong growth in the future. They derive this based on two basic things.

Both of these factors can be determined through the analysis of the company’s financial statements along with a look at industry trends that may define future growth prospects.

Who Are the Major Investors?
There are many different investors that are active in the marketplace. Vast majority of the money in the stock market belongs to investors. Major investors include:

All of these parties are looking to hold their positions for the long term in an effort to stick with the company while they continue to be successful.

Who Is a Trader?
Trader is someone you buys stock of a company based on technical analysis. They hold the stock for short term to make quick profit. Traders derive this based on four basic things.

Ultimately, it is traders that provide the liquidity for investors and always take the other end of their trades. Whether it is through market making or fading, traders are a necessary part of the marketplace.

Who Are the Major Traders?
When it comes to volume, traders beat investors by a long shot. There are many different types of traders that can trade as often as every few seconds. Among the most popular types of traders are:

Conclusion: Both traders and investors are necessary in order for a market to function properly. Without traders, investors would have no liquidity through which to buy and sell shares. Without investors, traders would have no basis from which to buy and sell. Combined, the two groups form the financial markets as we know them today.

(Source: Investopedia)

From the “oh, puh-leez” school of economics comes this headline from the recent G7 summit. A week ago the Federal Reserve estimated that domestic US GDP grew at an annual rate of 2.2%; after stripping out the more questionable data it’s more like zero growth. Reminds me of the old Soviet Union: everything was fine until things imploded the next day.

You guys better not sell or you’ll blow this whole scheme for the rest of us. Psst. Japan, we know your monetary base makes no sense and your economy is built on shifting currency sands. If you don’t say anything we won’t either.

Of course there is more to the story than national interests and witty personalities. Why, international finance is simply roiling with intrigue; ah, but why waste bytes telling the tale when everything is really run by a cabal of smirking machines? Welcome to the modern era of program trading, said to account for an astounding 80% of daily NYSE volume. If you do the math, that means total daily trading volume in the dollar in fact exceeds actual U.S. GDP by a factor of 3. It’s the machines, you see. The days of sitting behind a desk to make buy and sell decisions was over years ago … but don’t tell anyone lest they realize the system is run by the machines. Still, broke teenagers are getting credit card offers by the score. Does that sound rational? Of course not but someone has to keep this house of cards afloat. And as long as we can push the responsibility off to yet another generation … sorry not my problem. I’m retired. No job, no worries, no problem.

In the 1940′s, 50′s, and 60′s the U.S. economy was divided roughly in half between manufacturing and services. By the 1980′s we were becoming a service economy (translation: a nation of burger flippers). But what the powers-that-be forgot to tell us was that the services we would all soon be providing could be moved to India, Mexico, Poland, or some other low-rent district before we even figured out who to blame. And they were.

The fact is the U.S. is not a manufacturing economy, a service economy, or an information economy. We are actually the world’s premiere finance economy; we make and sell debt, and we are exceedingly good at it so as long as the Chinese are willing to work for $1.00 a day we can do what we do and the game will persist. Although come to think of it, something tells me the Chinese are too smart to occupy the bottom rung on the global ladder for too long. What with 4,000 years of experience and all, it’s not going to be easy to pull the wool over their eyes.

Shh … don’t tell the Chinese, they might want a raise!

Guest Author: Mazy Hedayat

Let us say someone told you to buy stocks on margin. Do you really know what it means ? Do you need to know about margin trading ? Do you really understand margin trading ? Do you understand all the pros and cons of margin trading ? If you have answered No to anyone of them, it is time you understand one of the most powerful investment tool in the stock market.

Buying stocks on margin is nothing but buying stocks by borrowing money from your broker. Think of it as a loan given to you by your broker. Why would you want to borrow money from your broker ? Obviously to buy more stocks. Generally novice investors begin with a cash account which only uses the money deposited in their account. For margin trading you need to open a margin account, which can be opened during the time of opening a cash account. Margin account generally requires a minimum deposit of $2,000. Once the margin account is opened you can borrow upto 50% of the purchase price of a stock from your broker. However you can borrow less than 50% if you wish to.

Example on Margin Trading
Let’s say that you deposit $10,000 in your margin account. This means you can borrow another 50% (i.e. $10,000). This brings your total buying power to $20,000. Say you buy stocks worth $5,000. In that case you have the option of either using your cash account and pay the full amount of $5,000 for the stocks or use the margin account and borrow the $2,500 from the broker. If paid from the cash account, you do not have any obligation to the broker. However if you paid from the margin account, you definitely have to follow the above listed restrictions.

Now instead of $5,000, let us say you purchase stocks worth $20,000. In that case you would be using your margin account and borrowing $10,000 from your brokerage and paying $10,000 yourself. If the value of the stocks drop to $15,000, the money in your account falls to $5,000 (ie. $15,000 – $10,000 = $5,000). Assuming that the maintenance margin (minimum account balance) is 25%, you must have $3,750 in equity in your account (25% of $15,000 = $3,750). Thus, you’re fine in this situation as the $5,000 worth of equity in your account is greater than the maintenance margin of $3,750. But let us assume the value of the stocks drop to $12,000, leaving your money in the account to $2,000 (ie. $12,000 – $10,000 = $2,000). In this case, your money is less than the maintenance margin. As a result, the brokerage may issue you a margin call. If for any reason you cannot meet a margin call, the brokerage has the right to sell your stocks to increase your account equity until you are above the maintenance margin. Additional your broker may not be required to consult you before selling and can sell stocks you did not intend to sell.

Savvy investors use the power of leverage for higher rewards. Margin trading provides the facility to trade stocks based on leverage. However leverage has the power of amplifying your gains as well as losses. This can be explained easily by the following 2 examples.

Example on Power of Leverage – Amplify Gain
Going back to the previous example, say you bought stocks worth $20,000. In that case you would be borrowing $10,000 from your brokerage and paying $10,000 yourself. Let us also assume that the price of each stock you bought is $100. Had you bought the stocks only using your money, you would end up buying 100 shares (ie. $10,000/$100 = 100 shares). Since you are buying on margin, you have the ability to buy 200 shares ($20,000/$100 = 200 shares). In one month due to solid earning, say the stock price jumped to $125 (a 25% price increase). Your investment is now worth $25,000 (200 shares x $125) and you decide to cash out. After paying back your broker the $10,000 you originally borrowed, you get $15,000 back with a net profit of $5,000. That’s a 50% return even though the stock went up only 25%. If you minus the broker commission and interest for borrowing the money, you still end up getting 45% return. This is definitely better than 25% you would have gained had you not used margin account.

Example on Power of Leverage – Amplify Loss
Say that instead of rocketing up 25%, our shares fell 25%. Now your investment would be worth $15,000 (200 shares x $75). You sell the stock, pay back your broker the $10,000, and end up with $5,000. That’s a 50% loss, plus commissions and interest, which otherwise would have been a loss of only 25%. So as you see, the power of leverage can work both ways.

Pros of Margin Trading

• Leverage: Provides the power of leverage. Investors can borrow money and leverage the cash they invest. If you pick the right investment, margin can dramatically increase your profit.
• Buying Power: A 50% initial margin allows you to buy up to twice as much stock as you could with just the cash in your account.
• Amplify Returns: With twice the buying power, margin does offer the opportunity to amplify your returns.
• Flexibility: Money obtained from the stocks sold through the cash account has to wait 3 business days to clear. This does not apply to margin accounts.

• Lose More Than Invested: Buying on margin is the only stock-based investment where you stand to lose more money than you invested.
• Pay Interest: Borrowing money isn’t without its costs. You have to pay the interest on your loan. The interest charges are applied to your account unless you decide to make payments.
• Reduced Return Rate: If you hold an investment on margin for a long period of time, your return rate will be reduced due to interests accrued. Therefore buying on margin is mainly used for short-term investments.
• Dis-qualification: Not all stocks qualify to be bought on margin. Brokers will not allow you to purchase penny stocks, over the counter securities or initial public offerings (IPOs) on margin because of the level of risk involved with these types of stocks.
• Maintenance Margin: You are required to keep a minimum amount of equity in your margin account that can range from 25% – 40% (maintenance margin).
• Forced Deposit/Selling: In a cash account, there is always a chance that the stock will rebound. But in a margin account your broker will force you to deposit more funds or sell off your securities if the stock price dives. This means that your losses are locked in and you won’t be able to participate in any future rebounds that may take place. Additional your broker may not be required to consult you before selling and can sell stocks you did not intend to sell.