Stock Traders’ vs. Stock Investors' Roles in the Marketplace

Stock Traders’ vs. Stock Investors' Roles in the Marketplace

Stock Traders’ vs. Stock Investors' Roles in the Marketplace





Stock Traders’ vs. Stock Investors' Roles in the Marketplace
By Ian Harvey
Many people use the words "trading" and "investing" interchangeably when, in reality, they are two very different activities. While traders and investors participate in the same marketplace, they perform two very different tasks using very different strategies. Both of these parties are necessary, however, for the market to function smoothly.

Stock traders: Individuals or entities engaging in the trading of equity securities, or the transfer of financial assets in any financial market, either for themselves, or on behalf of someone else. They operate in the capacity of agent, hedger, arbitrageur, speculator or investor.   

Stock investors: Individuals or entities who use their own money to purchase equity securities, which offer potential profitable returns in the form of interest, income or appreciation in value (capital gains).

There is quite a variation of characteristics. To go into further detail on investors and traders:

Stock investors

Stock investors are the market participants whom the general public most often associates with the stock market. They rely primarily on fundamental analysis for their investment decisions and fully recognize stock shares as part ownership in the company. Many investors believe in the buy and hold strategy, which, as the name suggests, implies that investors will buy stock ownership in a corporation and hold onto those stocks for the very long term, generally measured in years.

These investors, who purchase shares of a company for the long term with the belief that the company has strong future prospects, typically concern themselves with two things:

Value - Investors must consider whether a company's shares represent a good value. For example, if two similar companies are trading at different earnings multiples, the lower one might be the better value because it suggests that the investor will need to pay less for $1 of earnings when investing in Company A, relative to what would be needed to gain exposure to $1 of earnings in Company B.
Success - Investors must measure the company's future success by looking at its financial strength and evaluating its future cash flows.
Both of these factors can be determined through the analysis of the company's financial statements along with a look at industry trends. At a basic level, investors can measure the current value of a company relative to its future growth possibilities by looking at metrics such as the PEG ratio - that is, their price earnings (value) to growth (success) ratio.

Stock traders

Stock traders are market participants, either an individual or firm, who purchase shares in a company with a focus on the market itself rather than the company's fundamentals. A stock trader usually tries to profit from short-term price volatility with trades lasting anywhere from several seconds to several weeks. The stock trader is usually a professional. Persons can call themselves full- or part-time stock traders/investors while maintaining other professions.

Markets involved in the trade of commodities are beneficial to a stock trader’s strategy. After all, very few people purchase wheat because of its fundamental quality - they do so to take advantage of small price movements that occur as a result of supply and demand. Stock traders typically concern themselves with:

Price patterns - Stock traders will look at past price history in an attempt to predict future price movements. This is known as technical analysis.
Supply and demand - Traders keep close watch on their trades intra-day to see where money is moving and why.
Market emotion - Traders play on the fears of investors through techniques like fading, where they will bet against the crowd after a large move takes place.
Trader support - Market makers (one of the largest types of traders) are actually hired to provide liquidity through rapid trading.
Ultimately, it is traders who 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.

Clearly, 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.



10 Great Ways to Learn Stock Trading as a New Investor

10 Great Ways to Learn Stock Trading as a New Investor
New investors taking their first steps towards learning the basics of stock trading should have access to multiple sources of quality education. Just like riding a bike, trial and error coupled with the ability to keep pressing forth will eventually lead to success.
One great advantage of stock trading lies in the fact that the game itself lasts a lifetime. Investors have years to develop and hone their skills. Strategies used twenty years ago are still utilized today. The game is always in full force.
So for new investors wanting to take their first steps, I offer 10 great answers to the simple question, “How do I get started?”
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1. Open a stock broker account
Find a good online stock broker and open an account. Become familiarized with the layout and to take advantage of the free trading tools and research offered to clients only. Some brokers offer virtual trading which is beneficial because you can trade with play money (see #9 below). A great tool for comparing online brokers can be found at StockBrokers.com.

2. Read books
Books provide a wealth of information and are inexpensive compared to the costs of classes, seminars, and educational DVDs sold across the web. Here on the site we have a full list of 20 great stock trading books for investors to consider. My personal all-time favorite is How to Make Money in Stocks by William O’Neil, founder of CANSLIM Tradingwhich is pictured below.

how to make money in stocks cover
3. Read articles
Articles are a fantastic resource for education. Our free Stock Education page here on StockTrader.com lists over 100 unique investment articles broken down into categories. Recommended websites for investment education are investopedia.com and of courseGoogle search.

4. Find a mentor
A mentor could be a family member, a friend, a past or current professor, co-worker, or any individual that has a fundamental understanding of the stock market. A good mentor is willing to answer questions, provide help, recommend useful resources, and keep spirits up when the market gets tough. All successful investors of the past and present have had mentors during their early days.

Forums can be another source for question and answer. Two recommendations includeElite Trader and Trade2Win. Just be careful of who you listen to. The vast majority of participants are not professional traders, let alone profitable traders. Heed advice from forums with a heavy dose of salt and do not, under any circumstance, follow trade recommendations.
5. Study the greats
Learning about the greatest investors of years past will provide perspective, inspiration, and appreciation for the game which is the stock market. Greats include Warren Buffett,Jesse LivermoreGeorge SorosBenjamin GrahamPeter LynchJohn Templeton and Paul Tudor Jones, among others. One of my favorite book series is the Market Wizards by Jack Schwager.

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6. Read and follow the market
News sites such as Yahoo Finance and Google Finance serve as a great resource for new investors. For in depth coverage, look no further than the Wall Street Journal andBloomberg. By monitoring the markets each day and reading headline stories investors can expose themselves to trends, 3rd party analysis, not to mention economic concepts and general business. Pulling quotes and observing fundamental data can also serve as another good source of exposure.

TV is another way to monitor the market each day with CNBC being the most popular channel. Even turning on CNBC for 15 minutes a day will broaden an investor’s knowledge base. Don’t let the lingo or the style of news be a nuisance, just simply watch and allow the commentators, interviews, and discussions to soak in. Beware though, over time you may find that a lot of the investing shows on TV are more of a distraction and are overall full of junk recommendations. This is a natural evolution; you are not alone!
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7. Consider paid subscriptions
Paying for research and analysis can be both educational and useful. Some investors may find watching or observing market professionals to be more beneficial than trying to apply newly learned lessons themselves. There are a slew of paid subscription sites available across the web, the key is in finding the right ones for you. 

IMPORTANT – Be careful. Many paid subscriptions come from independent traders and services that claim to have fantastic returns and can “teach” you how to be successful. 99% of them are a scam and come with higher prices of $99 – $149 per month.
IBD front
8. Go to seminars, take classes
Seminars can provide valuable insight into the overall market and specific investment types. Most seminars will focus on one specific aspect of the market and how the speaker has found success utilizing their own strategies over the years. Examples include Dan Zanger and Mark Minervini. Not all seminars have be paid for either. Some seminars are provided free which can be a beneficial experience, just be conscious of the sales pitch that will almost always come at the end.

When it comes to classes, these are typically pricey, but like seminars, can also be very beneficial. Will O’Neil workshps, Investools, Online Trading Academy, and Bulls On Wall Street provide a variety of courses on investing and trading.
IMPORTANT – Like paid subscriptions, be careful with classes and courses. Most are easily over $1,000 and are sold with false promises to acquiring valuable knowledge. Their fantastic sales funnels will suck you in, take your money, excite you during the course, then leave you with a strategy that wasn’t even profitable to begin with.
Dan-Zanger-Seminar-2012
9. Buy your first stock or practice trading through a simulator
With your online broker account setup, the best way to get started it to simply take the plunge and make your first trade. Don’t be afraid to start small, even 1, 10, or 20 shares will serve its purpose of getting you in the game.

If trading with real capital is not possible initially, consider using a stock simulator for virtual trading. A variety of online brokers offer virtual trading for practicing.
One of the most common mistakes traders make is to go all-in and try to score big with a full portfolio position out of the gate. This is an often painful mistake and why many new investors suffer big losses early on. Proper portfolio allocation is extremely important. For more tips of wisdom
10. Passive Index and follow Warren Buffett
For the vast majority, trading will be tough. Warren Buffett, the greatest investor of all-time, recommends individual investors simply passive index instead of trying to beat the market trading on there own.
Interested to see what stocks Warren Buffett recommends for your portfolio?
11. Sign up for our free daily market recaps
Join over 17,000 other investors and receive our daily posts via email using the subscribe box below or on the sidebar. I invite all new investors to make StockTrader.com a part of their daily investment routine.

HOW TO START YOUR TRADING EDUCATION

HOW TO START YOUR TRADING EDUCATION



The Financial Education Center is designed to give you an overview of our financial markets, either as an investor or as a more active trader. An investor buys a stock in hopes that it will increase in value over a relatively long period of time. As such, he is concerned with company fundamentals that will support an upside price move over a period of time that will be too long for the professional trader. The professional trader, on the other hand, is constantly looking for movements in prices, and is constantly transferring his capital into stock prices that are already “on the move,” regardless of whether that move is to the upside or downside. A trader is more in touch with short and intermediate-term price swings because of a tight form of risk management and in an effort to achieve a significantly higher return on his capital. Whether you choose to be an investor or a trader depends largely on your personality and your trading capital available.
Please understand this is a guide and is by no means a comprehensive course. Online Trading Academy has furnished this information to help create more responsible traders and investors in the public arena. For further information, please click on the links within each section (on the menu to the left) to find out how to get a more in-depth education in this fascinating world.
On the right side bar of almost every section, there are recommended reading and CD links that will give you more information about the topic and allow you to purchase the items. In addition, recommended courses that you can take at a local Online Trading Academy center are shown. If you feel you need more information about the topics covered in The Financial Education Center, these recommendations are the place to go.

ACCOUNT TYPES

ACCOUNT TYPES


Whether you intend to be an investor or trader, understanding the “small” print in your brokerage’s “Terms & Conditions” is very important. Each brokerage will have slightly different requirements for their specific operations. When you open an account, one of the very first important choices to make is the “type” of account to set up.
Each has specific requirements and obligations. The following are some typical types of accounts. Their descriptions and requirements are only an overview. Remember, each brokerage firm will have additional restrictions, powers and requirements beyond these descriptions.

Community Property

A Community Property Account is basically the same as Joint Tenants with Rights of Survivorship. However, only a married couple can hold a Community Property Account. Each party has equal rights to income and appreciation of assets.
In order to set up a Community Property Account, you must complete a regular account application and a Community Property Agreement.
You can open a Community Property Account based on the Community Property Laws of the state in which you reside. For tax purposes, income in community property states is considered to belong half to the husband and half to the spouse regardless of who actually earned the income. Regulations for each individual state vary and, currently, the community property states are as follows:
  • Arizona
  • California
  • Idaho
  • Louisiana
  • Nevada
  • New Mexico
  • Texas
  • Washington
  • Wisconsin

Corporate Account

A Corporate Account is opened on behalf of a corporation, which is a legal entity chartered by a state or federal government which keeps it separate from the persons owning it. It gives a corporation the opportunity to invest funds and assume debts.
To open a Corporate Account, you will need a Corporate Application, a tax ID number (not a social security number), and a Corporate Agreement form bearing a corporate seal or a notary stamp, if a seal does not exist. If only one corporate officer exists, a copy of the Articles of Incorporation is needed.
You can get a corporate Tax ID Number, also known as an Employer Identification Number (EIN), through the Internal Revenue Service (IRS). You will need to submit IRS form SS-4, which you can receive from your local IRS office or by calling the IRS at 1-800-829-1040. There is no cost for getting an EIN.
Authorized corporate officers may place trade orders in a corporate account; however, your brokerage relies on the Corporate Agreement to determine the authorized officers.
As long as a margin agreement has been completed and approved by your brokerage, corporate accounts may use margin. As well, if the account has been approved for option trading, you may place option orders in a corporate account.
A corporate resolution is needed to deposit stocks into a Corporate Account. The resolution will state which corporate officers are permitted to sign the certificate for deposit. The corporate resolution must either bear a corporate seal or be notarized. One corporate resolution is needed per certificate that is being deposited. Additionally, the person who signs the stock certificate cannot be the same person who signs the corporate resolution.
Should an officer leave the Corporation, a new Corporate Agreement signed by all the current officers and a copy of the letter of resignation from the officer leaving is required. To facilitate your brokerage’s record keeping, the brokerage will likely request you also include a copy of the previous Corporate Agreement. All changes of address must be reported to your brokerage in writing and signed by a corporate officer.

Custodial Account

A Custodial Account is created on behalf of a minor and is overseen by a custodian. Security transactions in a Custodial Account are effected by the custodian who manages the cash and other securities gifted to the minor under the Uniform Gifts to Minor Act. When the minor reaches the age of majority, he or she may assume control of the assets. Keep in mind that all assets in a Custodial Account belong to a minor and are taxed as such.
In order to open a Custodial Account, you will need to complete a regular account application. The requirements and characteristics of a Custodial Account are:
  • All assets represent an irrevocable gift to the minor.
  • The custodian must be of legal age.
  • Only one custodian and one minor can be named per account.
  • The social security number and date of birth must belong to the minor.
  • The custodian must sign the application.
  • Only covered call writing is allowed in a Custodial Account, and the custodian must sign an Options Agreement.
  • Only one Limited Power of Attorney is allowed for the account. A Limited Power of Attorney is an individual who is given authorization by the account holder to place trade orders, obtain account information, change the address of record and request checks.
  • The minor cannot place trade orders in the account. Only the custodian or the Limited Power of Attorney is authorized to place trade orders.
  • Check writing is allowed.
The age of majority is 18 in all U.S. states except Alabama and Alaska, where the age of majority is 19. When a minor reaches the age of majority, the custodian is responsible for reregistering the account in the name of the minor. A new account application needs to be completed and sent to your brokerage along with a letter and a copy of the custodial account holder's birth certificate. The custodian transfers all the securities in the name of the minor with a notarized letter of authorization.
Assets cannot be transferred out of a Custodial Account through special registration or by letters of authorization because all the assets in the account are the irrevocable property of the minor.

Estate Account


Estate

An Estate Account represents assets and liabilities possessed by a person at the time of his or her death. It gives the executor/executrix or the administrator of the estate the ability to manage and distribute the estate according to the deceased person's will or a court ruling.
The following documents are required when opening an Estate Account:
  • A completed Estate Account application.
  • A certified copy of the death certificate.
  • Letter of Testamentary, dated within 60 days, which names the estate's executor/executrix.
  • A Notarized Affidavit of Domicile, which indicates the deceased's last state of residence.
  • A Letter of Authorization, which is necessary to move assets from the deceased's account to an estate account.
Each certificate to be deposited requires the following additional information:
  • A certified copy of the death certificate.
  • A notarized Affidavit of Domicile, which indicates the deceased's last state of residence.
  • Original letters of Testamentary which must be under the seal of the court and dated within 60 days. This letter names the estate's executor/executrix.
  • The stock certificates signed by the administrator of the estate.
Only the executor/executrix and a Limited Power of Attorney, if one has been named, are authorized to place trade orders in an Estate Account.
Neither option nor margin trading is allowed in an Estate Account.

Joint Account

A Joint Account is a bank or brokerage account owned together by two or more people. Any one party may take such actions on his or her own in the account.
There are four types of Joint Accounts at your brokerage:
  • Joint Tenants with Rights of Survivorship
  • Tenants in Common
  • Community Property Account
  • Tenant by Entireties
In order to set up a Joint Account with Rights of Survivorship, you need to complete a regular account application. Joint Accounts are generally opened with one social security number, but certain brokers go a step further and require the social security numbers of all the parties.
In a Joint Tenants with Rights of Survivorship Account, upon the death of one party, the assets of the account become the sole property of the surviving party or parties. In a Tenants in Common Account, upon the death of one party, the account is evenly divided among the remaining party or parties and the decedent’s estate (or as otherwise specified).
In most cases, either party can place trade orders, sign Investors Money Management checks and make requests on the account. The only exception is a request to transfer assets to another account with a different title. This requires a notarized letter of authorization by all parties.

Personal Trust Account

A Personal Trust Account represents a fiduciary relationship between two individuals, in which a person, called a trustee, has responsibility for handling property for the benefit of another person, the beneficiary. Personal trust accounts are usually set up for tax, estate and gift purposes and are established by the grantor, under will or under agreement. The main reason a customer might establish a Personal Trust Account is for tax and estate planning purposes. The grantor usually transfers property to a trustee during the life of the grantor to reduce tax liabilities.
To open a personal trust account, you will need to complete a Personal Trust Application and a Trustee Certificate of Investment Powers (TCIP) Form, which is included in the application. All trustees must sign the application and the TCIP. Additionally, the trust must be pre-established by an attorney. U/W means under will, and U/A means under agreement. They denote the location of the terms for the trust.
Personal Trusts may be revocable or irrevocable, depending upon the outline of the title or terms of the trust. A Revocable Trust is an agreement providing transfer of property to heirs who may be terminated by the person creating the trust at any time. An irrevocable trust is a trust in which the grantor transfers the property to the trustee but does not have the right to cancel the agreement.
The TCIP states the powers of the trust. This summation of the trust negates the need for your brokerage to retain a full copy of the Trust Agreement.
In order to trade options or on margin, a Section 5 must be completed on the TCIP form. The option agreement must be approved for option trading and a margin agreement must be completed and signed by all the trustees.
Some of the characteristics of a Personal Trust account are as follows:
  • Any of the trustees listed on the account can place trade orders, authorize check payouts, and request securities be issued in the name of the trust.
  • Check writing is available for most personal trust accounts.
  • Only one Limited Power of Authorization (LPOA) is allowed, and the authorization for this person must come from all the trustees.
  • Assets may only be transferred from a personal trust to another account where all parties are also listed as trustees. The letter of authorization does not have to be notarized if you are moving assets to the account where the parties on the account are also trustees.

HOW THE STOCK MARKET WORKS

HOW THE STOCK MARKET WORKS
When you buy a share of stock, you become a part owner in a publicly held company. But what does that actually mean? Let’s take a closer look at how the stock market works, and how you can make it work to your advantage as a trader or investor.

Detailed guide on how the stock market works

What Are Stocks?

A company wants to raise money for expansion, so it “goes public” by making an initial public offering of common stock. That’s the way trading in most companies’ stock begins, and it is a familiar process if you’ve been following the IPOs of Twitter (ticker: TWTR), Facebook (ticker: FB) and other tech companies. Typically the amount of the company that is sold is only a fraction of its total ownership, so the price set for the stock (as determined by open bidding once it goes public) determines the value of the entire company by extension. Working with an underwriter (a Wall Street bank), the firm tries to guess an appropriate valuation (since that’s what actually goes into the pockets of its executives and private investors) but is usually off the mark, sometimes by quite a bit. (The day it opened TWTR quickly doubled from its offering price.)

What Determines Stock Price?


Part of know how the stock market works is knowing what determines price

Once the offering is completed, the stock price can move independent of the actual company’s success; a current example is the sky-high stock price for Tesla (ticker: TSLA), a company that may be years from profitability. Price changes reflect supply and demand, so when a stock is deemed desirable for whatever reason — recent success, a strong industry sector, or just plain faddishness and popularity — then its price goes up. At the other end of the spectrum, “value” investors like Warren Buffett specialize in finding unpopular stocks in forgotten industries that still have strong earnings and a solid future, buying them (or buying the entire company, as Buffett often does) and waiting for the price to rise.

How Does the Stock Market Work?

The picture Wall Street likes to paint of an “opening bell” followed by frantic trading in a huge room full of buyers and sellers is pretty much a historical fiction. Stock trading today is done electronically and the prevailing sound is silence, other than the fans that cool the huge supercomputers used by the exchanges and institutional traders. This is good news for the savvy trader and investor because it means a more efficient and predictable marketplace with much less left to chance and randomness.
But it’s fact, not fiction, that as a shareholder you are a part owner in the company. You will receive proxy materials before stockholder meetings and you have the right to vote on officers and policy. Some meetings are lots of fun, like Berkshire Hathaway’s in Omaha where Warren Buffet shares special offers on products from the companies he owns. Others can be tension provoking, if an activist shareholder (with far more shares than you) makes a move against the current management.
Having said all that, here’s how the stock market works for savvy traders and investors who have been educated at Online Trading Academy: pretty much like any other asset class. Our patent-pending supply and demand trading strategy allows us to anticipate market moves with a high degree of accuracy by identifying supply and demand zones. Once price enters one of these zones it typically changes direction, often dramatically. The catalyst of that move may be an earnings surprise, or a natural disaster affecting its market sector. But the price move itself is caused by the herd behavior of novice investors who have been conditioned to sell and buy at the worst possible time. These are the people we trade against at Online Trading Academy.

Strategies For Buying Stocks


Once you know how stock markets work you can learn the best trading entry and exit strategies

To trade or invest successfully with our strategy, price is always the single most important factor. Let’s say a stock is trading in the mid-twenties and you want it to decline to $20 because you know, based on your analysis, that there are a huge number of unfilled buy orders at that level. You might wait for it to drop below $20, then return to that level and buy. (This is a hypothetical example of one of several entry strategies.) If it continues to rise, then you may be on your way to significant profits. And that’s how the stock market really works.

INVESTMENT SEMINARS: WHAT YOU NEED TO KNOW

INVESTMENT SEMINARS: WHAT YOU NEED TO KNOW



So you got an invitation to an investment seminar. In just a few hours you can learn secrets that will allow you to strike it rich in the financial markets. Best of all, there’s no charge whatsoever. So what’s the catch?
At Online Trading Academy we offer our own investment seminar called the Power Trading Workshop, so let’s talk about that. It’s a $495 value based on our regular daily rates, but we give it away for free as long as the student is able to wait for an open date. (These events are often sold out months in advance.) We do this because we believe we have a quality product in our trader and investor education. The student who attends our investment seminar will learn about our simple, rules-based trading strategy. The instructor will probably take them through some live examples of what’s happening in the markets that day. They’ll get a tour of the facility, see the professional workstations used by our continuing students, get a chance to talk to some of these students one-on-one. It’s a “free sample” that makes you want the product, we hope.
A less valuable investment seminar is one in which the entire event is a sales pitch. A company might rent a hotel ballroom, bring in professional speakers for a “road show”, ask you to pay for the real thing, then disappear after the event. If you have questions, there’s nobody to answer them. And often you’re asked to buy proprietary software at considerable cost to get the “edge” that has been promised.
The key thing to remember is that the successful investor is the educated investor. You really do need training and practice to begin seeing patterns in the markets while you develop a trading rhythm and overcome personal bad habits that make you hit the sell button too soon, or hold onto a loser for too long. There is a winner and a loser in every trade, and the winner is almost always the more skilled and experienced investor.
An investment seminar has a legitimate place in providing these skills and experience. Just be sure it’s not a “one-and-done” concept. Ask these questions of the presenters or the company organizing the event:
  • Do the presenters have real world experience as investors and traders?
  • Is there a learning track for future education after the event?
  • If I have questions, can I get them answered in a timely fashion?
If the answer to all questions is “yes” then the investment seminar is worth your consideration.