Financial Markets: Stocks

This article will be the first of a 3 post series that goes into more depth about the different investment vehicles and financial markets available to the retail trader. The most common and well-documented investment vehicle available in the United States is of course the U.S. stock market. The stock market is among the oldest of all the financial markets and has been the preferred method of investment for many years. Stocks, also known as securities, are publicly traded shares of the company that corporations issue in order to raise funds to conduct business. Most people are familiar with the major indices: the Dow Jones Industrial Average, the Standard & Poor's 500, the NASDAQ 100, and the lesser known Russell indices. When you hear on the news that the markets are up or down, generally news anchors are talking about the Dow Jones Industrial Average; also known as the Dow 30 or simply that Dow. The Dow 30 is comprised of the 30 largest US corporations and is the oldest index in the United States. Contrary to popular belief, the actual value of the Dow Index is a derived number and is in no way related to a physical dollar figure. The Dow Index is calculated based upon a weighted average of the 30 corporations that make it up. An investor cannot invest in the Dow as it is simply a value. In recent years, Mutual funds have created index funds which mimic the Dow by owning a portion of all 30 companies that it is comprised of. Index funds are a great way to start investing for retirement or other purposes if you have little knowledge; however, investors who consistently beat the market do not rely on highly diversified baskets of stocks. Instead, these investors choose specific companies to purchase, specific times to purchase them, and specific prices to pay for them. This science is lovingly referred to as “stock-picking.” Investors who create their own portfolio of securities always have the goal of "beating the market.” Beating the market usually means making a greater return than the overall movement of the major indices. For these investors, a 10% annual return is considered good, a 15% annual return is considered well above average, and a 20% or greater annual return is considered exceptional. It should be noted that even the most sophisticated investors like Warren Buffett and Carl Icahn are often unable to achieve 20% annual returns. In recent years, market makers have created more complex instruments for trading securities which allow prospective investors an opportunity to achieve greater returns. Most people believe that in order to make money from the stock market, one must "buy low and sell high.” However, individuals with large accounts also have the opportunity to “go short” which allows an investor to borrow shares at a higher price and then loan them back when the underlying stock decreases in value. Essentially, going short allows an investor to "sell high and buy low" to achieve greater returns. Trading stocks is a great way to get started in the world of day-trading. While the returns are often low, so is the risk, and for this reason, the securities market is a great place for both new and highly sophisticated investors alike.

CFTC Required Rule 4.41:

Hypothetical or simulated performance results have certain limitations. Unlike an actual performance record, simulated results do not represent actual trading. Also, since the trades have not been executed, the results may have under-or-over compensated for the impact, if any, of certain market factors, such as lack of liquidity. Simulated trading programs in general are also subject to the fact that they are designed with the benefit of hindsight. No representation is being made that any account will or is likely to achieve profit or losses similar to those shown.

Hypothetical Performance Disclaimer: 

Hypothetical performance results have many inherent limitations, some of which are described below. No representation is being made that any account will or is likely to achieve profits or losses similar to those shown. In fact, there are frequently sharp differences between hypothetical performance results and the actual results subsequently achieved by any particular trading program One of the limitations of hypothetical performance results is that they are generally prepared with the benefit of hindsight. In addition, hypothetical trading does not involve financial risk, and no hypothetical trading record can completely account for the impact of financial risk of actual trading. For example, the ability to withstand losses or to adhere to a particular trading program in spite of trading losses are material points which can also adversely affect actual trading results. There are numerous other factors related to the markets in general or to the implementation of any specific trading program which cannot be fully accounted for in the preparation of hypothetical performance results and all which can adversely affect trading results.