QUESTION:
As a new trader, I am worried about getting stuck in a trade. How do I know if I’m going to be able to sell my shares?
Dear “New” Novice Trader,
When the market in a particular stock is said to be “liquid”, the quantity of shares available to purchase is large (often trading volume of such “liquid” stocks is greater than one million shares traded each day) Here, the stock can be purchased easily and more often instant execution of a sale can be anticipated. Conversely, when the market in a particular stock is illiquid, categorizing the stock as “thinnly traded” (share volume each day is often less than one hundred thousand shares of traded shares each day) the quantity of shares available to trade may be low or unavailable to trade out of at a particular price point or point in time causing drops in price to a point below “ask price” on sell side, lowest price a seller of stock is willing to accept for a share of that given stock. When price of a stock stumbles when you are trying to get out and you cannot get out, chaos may occur. Large amounts of money are lost quickly despite the best efforts of “traders” to exit a trade. Results of a falling market or a falling stock can be disasterous.
I recall one of the first days I was working at UBS Paine Webber, Aug 31, 1998. The stocks on the NYSE lost $589 billion in market capitalization. Investors in illiquid stocks were unable to get out until the stock price fell to prices below what sellers wanted or anticipated. Losses for the Nasdaq Composite during the same day tumbled 140.43 points, or 8.6 percent, to 1,499.25, the Nasdaq’s largest one-day point decline ever. My point, there are never any guarantees.
The language utilized by Mr Graham in the book, The Intelligent Investor, speaks about “the speculative investor” as someone who masters the art of trading. Mastery takes years and often times the art can be coupled by someone living through a major disaster or decline to become careful of speculative investing. When Buffett trades his perspective is for the long term, investing versus trading thus buying into a sound and fabulous company based on fundamentals with the goal to stay invested for the long term. When you say the word “new” and “trader” in the same sentence the best word that comes to mind when I provide any advice for you is caution. I have studied trading and become somewhat proficient in trading over the years. Furthermore, I am fascinated by the study of the markets, those who are the experts, the fundamentals, the technicals and the dynamic nature of the market as it relates to the world and daily news.
The best advice I can provide to you, is for you to manage a dummy account until you reach a point in time where you feel confident, in control, when you are able to get in to and out of trades greater than 60-70% of the time the way you dictate and you are able to make consistent profits. Mindset and confidence will glow, this is very important.
Prior to trading any of your hard earned money make absolutely certain you have invested sufficient time, attention and detail into the study of the markets, the movements of the markets despite earnings reports and despite the best efforts of others to teach you the process. Simulate trades acting the part of the trader, the investor and the speculator for long and for short periods, test out your best hypotheses based on your research and your understanding. Adequately explain to me fundamentals of companies you choose to follow, share with me what is liquidity of a stock you are about to trade in and why this is extremely important. Why is viewing the pattern of a stock trading on a daily, hourly, weekly and monthly basis important to when you get in, get out, or linger as swing trader for a day, a week more or less. Together such important variables which I have named but a few make the world of investing and stock market trading dynamic affecting the ability to buy and sell shares at a particular price at a particular time.
There is always high risk investing and trading in the markets. At the start if you choose to get in with cash make certain at the start the money you invest you are willing to loose each and every dollar of this money. There is no turning back once you press “buy” and the execution of a trade is sent and executed most times automatically in a liquid stock on the open market during market hours. You always risk the entire value of your investment portfolio if you are not clear, diligent and aware of the dangers in the market. Do not assume you can walk away, you can turn the account on autopilot or move away to do something else. The promise of gains must be equally matched by the amount of time devoted to study, the research efforts you expended each day, your clear understanding of company fundamentals derived from your study not the study of someone else providing you answers, a study of earnings reports including the 10K, product developments, announcements, news all things must be considered that will take far more time than this article can provide.
Despite the efforts of some of top traders, Market wizards, huge gains can become huge losses overnight. Remember at all times to understand your risks, and as the saying goes in Real Estate, Buyer Beware. Many individuals profess to be professional traders driving around in flashy cars and living in executive mansions. This view is matched many times over by those who attempt to do well with very good intention to master the skill and temperament required to trade, but at the same time due to one factor or another lose large amounts of money second to timing, liquidity, stock selection, buying hype, market events and often lack of mental management resulting in the loss of confidence, lack of attention to detail, not getting out on time due to not managing risk where upon large sums of money can be lost very very quickly.
I am honored to answer your challenging question.
I am here 24/7 to provide mentoring and support.
Jan Attard, MBA, RIA, Wealth Advisor
J. Oliver Maxwell, LLC
tele. # 925-876-1377
EmpowerYourMoney 