I Stocks in the New Economy Although the so-called new economy was dealt a severe blow by the bear market of 2000, the odds are that the new economy will be revived when technology once again regains its luster as an area for investors. Stock investing and trading are here to stay, and they will continue to play a major role in the future. Given the integral role of stocks in both the new and the old economy, the addition of SSFs will help to increase the variability and range of choices available to traders and investors. Some experts have expressed concerns that the availability of SSFs will dissuade traders from selecting stocks as their vehicle of choice. This has, in fact, not been the case in markets where SSF trading was introduced before its availability in the United States . Increased Stock Market Volatility, Day Trading, and SSFs Because of the lower margin requirement for futures, price moves in futures tend to be more volatile and more exaggerated than they are in stocks, particularly on an intraday basis. Day trading activity and interest reached its peak with the top of the bull market in 2000. The addition of SSFs now allows day traders another vehicle for their activities, one that allows them more intricate strategies. Stock day traders will find the leverage in SSFs more advantageous, whereas futures day traders will find more vehicles for their day trading activities. Rather than being restricted to day trading in five or six active futures markets, futures day traders now have a wide variety of vehicles at their disposal. I The New Era of Risk and Reward Clearly the introduction of SSFs now offers many possibilities to stock and futures traders. Although this new vehicle will create many opportunities, it will also bring with it dangers. Traders who lack discipline, organization, and effective trading strategies will be net losers in the new game, whereas professionals who follow a definitive plan implemented with discipline and consistency will emerge as winners. There is no substitute for education and self-discipline. The new era of risk and reward will, as always, be a two-sided situation. I hope the lessons and caveats offered in this book will tilt the advantage in your favor. The Basics of Stock and Futures Trading This chapter is intended primarily for those who are either unfamiliar with the basics of stock and futures trading or feel the need to freshen their understanding in one or both areas. Because this book will appeal to several levels of investors and traders, it needs to include at the outset the most basic information. I How Stock Trading Works The modern method of stock trading is significantly different from the specialist system that has been in use for many years. Even though many stocks are still traded in the old way, the specialist system is rapidly fading, eventually to be replaced by fully electronic trading that uses market maker firms. A middleman will still be there, but the process will be fully transparent, which will decrease the tricks and unfair price fills. The traditional method of stock trading at the New York Stock Exchange (NYSE) relied on the specialist as a facilitator of transactions. A given specialist or specialist firm would be responsible for making a market (i.e., maintaining) in a given stock or stocks. The specialist firm is responsible for maintaining a book or inventory of these given stocks in order to provide an orderly (if possible) base of transactions in the stocks by balancing buy and sell orders. Specialists maintain an inventory of shares and, when demand is strong, draw from the inventory, raising prices to balance the orders and make money for their own efforts. When there is an oversupply of sellers, specialists mark prices down and take in stock, holding it in inventory in order to sell it at a higher price when demand returns. This is, of course, a simplification of the process. And although many have criticized this system as archaic, unfair, or even manipulated, the system worked for many decades. This system is slowly being replaced by fully electronic procedures, as noted previously. The SSF market is fully electronic. preferred stock ~ futures brokers |