Are Stock Market Prices an Accurate Reflection of the Value of Your Stock Portfolio?

stock-priceThe usual description of any market assumes that every trader wishes to purchase or sell a known quantity at each possible price.  All the traders come together, and in one way or another price is found that clears the market – that is, makes the quantity demanded as close as possible to the quantity supplied.

After all it has been said by the authoritative stock trader W. Haddad of B.K. Labovitch that ultimately economics is supply and demand.

This may or may not be an adequate description of the markets for consumer goods, but it is clearly inadequate when describing security markets.  The value of any capital asset depends on its future prospects, which are almost always uncertain.  Any information that bears on such prospects may lead to a, which s we know are always uncertain.  Any information that depends on its future prospects may lead to a revised estimate of value.  The fact that a knowledgeable trader is willing to buy or sell some quantity of a security or commodity at a particular price is bound to be information just of that sort.  Offers to trade May this affect other offers.  Prices may, therefore, both clear markets and covey information.

The dual role of prices has a number of implications.  For example, it behooves the liquidity motivated trader to publicize his or her motives and thereby avoid an adverse effect on the market. Thus, an institution purchasing securities for a pension fund that intends, simply to hold a representative cross section of securities should make it clear that it does not consider the financial interments under priced.  On the other hand, any firm trying to buy or sell al large number of shares that it considers wrongly underpriced should try to conceal its motives, its identity or both (and may try).  Such attempts may be ineffective, however, as those asked to take the other side of such trades try very hard as you know to find out exactly what is going on and many do well succeed in these days of rapid communications and access to many sources of information succeed.

Most securities are sold in very standard ways which requires payment and electronic notification of delivery within the standard settlement period (standard is three Business as opposed to calendar days).  On rare occasions, a sale may be made as a cash transaction requiring payment immediately on receipt.  Sometimes as a reward or as in effect a marketing or sales promotion payment may be extended over a longer time period – usually 15, 30 or 60 days.

Sometimes in the case of new issues a payment extension period is also granted for the same reasons as above.

It would be extremely insufficient if every securities transaction had to end with a physical delivery of transfer of actual share certificates from seller to buyer.  A brokerage firms might well sell 1000 shares of ABC Co. for one client. , Mr. Stevens to another client and later that day buy 1000 shares for Mr. Felon obtained by accepting delivery from her seller. Mr. Stevens’s shares could be delivered to his buyer, and Mr. Felon’s shares could be obtained by accepting delivery from her seller.

However, it would be much easier to transfer Mr. Steven’s shares to Mr. Felon and instruct Felon’s seller to deliver the 1000 shares directly to Mr. Steven’s buyer.

This would be especially helpful if the brokerage firm’s clients Mr. Felon and Mr. Stevens held their securities in street name.  Then, the 1000 shares they traded would not have to be physically moved and then the ownership would not even have to change at ABC Company.

As you can see valuation of your portfolio of stocks and securities are not always indicative of the true and exact value of your securities.  Actual logistics, human emotion and even greed play major and ongoing roles.


Forex Trading Demystified

forexmarket

Forex involves the trading of currencies. It is the largest financial market in the world and has an estimated daily turnover of 1.9 trillion dollars. This turnover is larger than all the worlds? stock market on any given day.

The forex market does not have a fixed exchange. The forex market is considered an over-the-counter (OTC) market. The forex market is completely electronic and trades are executed over the phone or on the Internet. Until 10 years ago the forex market was the preserve of large financial institutions. Now an ever-increasing amount of individual traders thanks to the advent of the Internet and an increasing amount of online forex brokers are trading forex.

Currencies are always traded in pairs. A typical pair would be EUR/USD (Euro over US dollars). The first currency is the base. The second currency is the counter currency. The pair can be viewed, as the amount of the secondary currency that is needed to buy 1 unit of the first currency. If you were to buy the above pair you would buy Euro and simultaneously selling US dollars. If the pair were sold the reverse would happen you would sell the Euro and buy the US dollar. This might sound confusing but simply think of the pair as one item and you are buying or selling one item. If you think the Euro will go up against the US dollar you buy the EUR/USD pair. If you think the EUR will decrease against the US dollar you sell the EUR/USD pair.

When you see forex quotes you will see two numbers. If we use the EUR/USD as an example you might see 1.2350/1.2355 the first number 1.2350 is the bid price and is the price traders are prepared to buy euros against the US dollar. The second number 1.2355 is the offer price and is the price traders are prepared to sell the EURO against the US dollar. The difference between the bid and the offer price is the called the spread. The spread for the major currencies is usually 3 to 5 pips (explained later).

The most common increment of currencies is the pip. If the EUR/USD moves from 1.2350 to 1.2351 that is one pip. A pip is the last decimal point of quotation. Most currencies quoted to 4 decimal points. The exception is the Yen, which is quoted to 2 decimal points eg 139.41. The term pip is just forex lingo so if a forex trader says the EURO has gone up 20 pips against the US dollar add 20 points to decimal part of EUR/USD pair.

Forex is traditionally traded in lots also referred to as contracts. The standard size for a lot is $100,000. In the last few a mini lot size of 10,000 dollars has been introduced and this has become increasing popular. Forex trading is leveraged with most forex brokers offering 1% margins. This means you can control one standard lot of $100000 with $1000. Typically you would need a minium of $2500 to open a standard size forex account.

A mini account can be opened with $300 with most forex brokers. To trade a one mini lot you need a margin of $100, which in turn controls $10000. If the currency goes up 1% and if you traded one mini lot of $10000 you would make $100 dollars or 100% of your original margin. Forex trading is a very lucrative market to get into and it is suggested that traders new to forex trading trade a mini account for an extended amount of time. Trading a mini account is a low cost entry to the forex market, as only $300 is required to open an account. You can still make money while you become more experienced in forex trading. You can trade one mini lot until you have made your first $100 dollars then start trading 2 mini lots. As you gain more experience you can trade standard sized lots.

Forex trading is becoming increasing popular with traders of other financial products. It can be traded in amounts a lot smaller than other financial products, which makes learning forex trading safer than other markets. Forex trading can be a very lucrative market, which no trader can dismiss.


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