Stock and Day Trading

leea9999_kl1lc96m Finance

What is common Stock? It is also called common equity which is a piece of ownership claim of a public traded corporation in a certain exchange such as Hong Kong Stock Exchange (HKEX). When you buy a share of stock, you buy it from its previous owner, not from the corporation that issued it. Therefore, any future profit or potential loss is none of the business of the public company. However, when you buy stock, you need to buy it from a broker working in a bank or a brokerage house. Therefore, you need to pay commission for owning a piece of a company. Most people who familiar with stock would agree that stock is a negative sum game NOT A ZERO SUM GAME! (Why?)

Because stock is a negative sum game, it is hard to get an edge by day trading. Day trading is a practice that you make a profit by buying and selling one or several stocks in a given day to make a profit. To avoid the overnight risk, they would usually close out all their positions at the end of any trading day. That is probably why you would most likely see stocks drop at the end of a trading day (But if they short, the stock would rise when they rush to close their positions). Unless you know the future, I can tell you that day trading is not as profitable as one might thinks (In fact, you can lose lots of money in day trading).

I would NOT suggest you to learn about charting (technical analysis). Some people spend thousands of dollars to learn about the charting techniques or indicators: eg, the Relative Strength Index (RSI), Moving Average Convergence Divergence (MACD), Exponential Moving Average (EMA). They only discover later that those indicators does not work most of the time. Also, those indicators give you an illusion of control of the stock price. Remember this: It is the stock price that control the indicators, not other way around. A bullish signal would fail if the stock price does not go up and you can do nothing about it!

You may say that you would set a stop loss order in case that something went wrong. Stop loss order is not as good as it seems. It sometimes also stop your gain. What if the stock fills your stop loss order and shoot up without you? It happens more often than you think! I am not a proponent of “random walk”, but I would say that the short term movements of stock price are not predictable. That is why you don’t see many rich day traders but lots of broke day traders.

You May Also Like..

Present Value and Future Value

The fundamental building blocks of Finance include the concept of the present and future value. What is future value? I […]

Leave a Reply

Your email address will not be published. Required fields are marked *