Saturday, November 10, 2007

ONLINE TRADING






An online trading community exists to provide its members with a structured method for trading, bartering, or selling goods or services. These communities often have forums and chat rooms designed to facilitate communication between the members. These communities are sometimes described as the electronic equivalent of bazaars, flea markets, garage sales, and so on.

History

The earliest trading site known to the internet (Not including sites such as eBay that accept cash transactions for all goods) appears to be Game Trading Zone. The domain name ugtz.com was registered in the summer of 1998, followed by the implementation of an independent database in the spring of 1999. This database also helped traders by showing them a list of potential trades, saving them a great deal of time in finding trades. In an effort to generate some income, 1999 also introduced advertisements, subscriptions, and an affiliate marketing program to the site. Another popular trading community, Switchouse, popularized the online activity. In the peak of Switchouse's popularity, Amazon.com bought the website hoping users of the community would use Amazon instead.

Formal trading communities

These are business-run websites maintained for the purpose of facilitating trades between members. Some of these charge a fee for each successful transaction.

Peerflix is a DVD trading service which operates networks in the United States and Canada. Members are able to trade their DVDs using the website, with only a small transaction fee for each DVD received. For each DVD sent, members earn trade cash. They can use this balance to request DVDs from other members or to collect the proceeds from Peerflix once they have accumulated 100 dollars. The service provides a guarantee in case of lost or damaged disks.
Title Trader is primarily a book trading service that has expanded into the trading of videos, CDs, and DVDs. Members earn trade points (and positive feedback) for each item sent and may use these points to request items listed by other members. There are no trading fees for this site although a Premium Features subscription is offered on an annual basis.
Swaptree is a trading service which currently operates in the Unites States only. Users can trade used books, CDs, DVDs, and video games for free. Cross media trades are possible as well (for example, you are able to trade a CD for a book). Users add items to their "have list" and "want list" and Swaptree is able to instantly calculate all of the items you can receive in trade.
Flickflop is an inventory-based DVD trading service available in Canada and the United States. In lieu of trading with each other, members exchange their used DVDs for DVDs held in flickflop's inventory. Requested DVDs are sent promptly and there is no need to maintain a want list. The service collects a small fee for each trade.
When compared against online DVD rental, the online trading model is more affordable. In terms of product availability, there will tend to be a shortage of "popular" items and a surplus of unpopular ones.

Informal trading communities

There are several lesser known sites known that specialize in a multitude of services including community trading, but not limited as such:

Craig's List is a site for posting personal advertisements but many users have found this a less than conventional means of trading goods online with local residents.
1UP is a website dedicated to the publishing of news, videos, and other related media dealing with video games. There is a growing section of the site though dedicated the trading of games and DVDs on their message boards.
IGN is another website dedicated to videogame news and media that also has message boards dedicated to online trading. The distinguishing factors being that IGN has a much larger integrated database of games and DVDs in existence that users can add to their collection lists for trade purposes as well as mark the ones they are playing to lock from trade.

General rules of conduct

Some online trading communities have specific rules adopted by the users of that community, and though they can differ most have settled upon a few standard practices:

The less experienced trader (usually indicated by their feedback or trade history) sends their half first.
It is generally frowned upon by most communities to "thread crap" (A term referring to a user not involved in the pending trade undercutting a trade in progress with either a better deal or reasons for the trade not to take place).
When trading any used items be sure to include the condition and quality of the product so as the receiver can determine the overall value of it.

Trading circle

A trading circle is a form of online trading designed for the viewing of TV series and episodic media. Videocassettes, DVDs and CDs represent the items normally exchanged. Each member agrees to pass an episode on to the next member in a timely fashion, thereby allowing all members of the group to view the series.


Tuesday, November 6, 2007

Bond investments

Investment companies allow individual investors the ability to participate in the bond markets through

bond funds, closed-end funds and unit-investment trusts. In 2006 total bond fund net inflows increased

97% from $30.8 billion in 2005 to $60.8 billion in 2006. [4] Exchange-traded funds (ETFs) are another

alternative to trading or investing directly in a bond issue. These securities allow individual

investors the ability to overcome large initial and incremental trading sizes.

Bond indices

Main article: Bond market index

A number of bond indices exist for the purposes of managing portfolios and measuring performance,

similar to the S&P 500 or Russell Indexes for stocks. The most common American benchmarks are the Lehman

Aggregate, Citigroup BIG and Merrill Lynch Domestic Master. Most indices are parts of families of

broader indices that can be used to measure global bond portfolios, or may be further subdivided by

maturity and/or sector for managing specialized portfolios.

Bond market

The bond market (also known as the debt, credit, or fixed income market) is a financial market where

participants buy and sell debt securities usually in the form of bonds. The size of the international

bond market is an estimated $45 trillion of which the size of outstanding U.S. bond market debt is $25.2

trillion. [1]

Nearly all of the $923 billion average daily trading volume in the U.S. Bond Market [2] takes place

between broker-dealers and large institutions in a decentralized, over-the-counter (OTC) market.

However, a small number of bonds, mainly corporate, are listed on exchanges.

References to the "bond market" usually refer to the government bond market because of its size,

liquidity, lack of credit risk and therefore, sensitivity to interest rates. Because of the inverse

relationship between bond valuation and interest rates, the bond market is often used to indicate

changes in interest rates or the shape of the yield curve.


Market structure

Bond markets in most countries remain decentralized and lack common exchanges like stock, future and

commodity markets. This has occurred, in part, because no two bond issues are exactly alike, and the

number of different securities outstanding is far larger.

However, the New York Stock Exchange (NYSE) is the largest centralized bond market, representing mostly

corporate bonds. The NYSE migrated from the Automated Bond System (ABS) to the NYSE Bonds trading system

in April 2007 and expects the number of traded issues to increase from 1000 to 6000. [3]

Types of bond markets

The Securities Industry and Financial Markets Association classifies the broader bond market into five

specific bond markets.

* Corporate
* Government & Agency
* Municipal
* Mortgage Backed, Asset Backed, and Collateralized Debt Obligation
* Funding

Bond market participants

Bond market participants are similar to participants in most financial markets and are essentially

either buyers (debt issuer) of funds or sellers (institution) of funds and often both.

Participants include:

* Institutional investors;
* Governments;
* Traders; and
* Individuals

Because of the specificity of individual bond issues, and the lack of liquidity in many smaller issues,

the majority of outstanding bonds are held by institutions like pension funds, banks and mutual funds.

In the United States, approximately 10% of the market is currently held by private individuals.

Bond market volatility

For market participants who own a bond, collect the coupon and hold it to maturity, market volatility is

irrelevant; principal and interest are received according to a pre-determined schedule.

But participants who buy and sell bonds before maturity are exposed to many risks, most importantly

changes in interest rates. When interest rates increase (decrease), the value of existing bonds fall

(rise), since new issues pay a higher (lower) yield. This is the fundamental concept of bond market

volatility: changes in bond prices are inverse to changes in interest rates. Fluctuating interest rates

are part of a country's monetary policy and bond market volatility is a response to expected monetary

policy and economic changes.

Economist's consensus views of economic indicators versus actual released data contribute to market

volatility. A tight consensus is generally reflected in bond prices and there is little price movement

in the market after the release of "in-line" data. If the economic release differs from the consensus

view the market usually undergoes rapid price movement as participants interpret the data. Uncertainty

(as measured by a wide consensus) generally brings more volatility before and after an economic release.

Economic releases vary in importance and impact depending on where the economy is in the business cycle.

Nature of contracts

Exchange traded contracts are not issued like securities, but they are "created" when one party buys

(goes long) a contract from another party (who goes short). In the beginning there are no contracts, so

the number of long contracts must equal the number of short contracts. This always goes through the

exchange, which means that the exchange is the counter party for all trades. However, the exchange does

not take any net positions. In this way clients do not know with whom they have ultimately traded.

Compare this with securities, in which an issuer issues the security. After that, it is a legal entity

that is traded independently of the issuer. Even if the issuer buys back some securities, they still

exist. Only if they are legally canceled can they disappear.

Standardization

The contracts traded on futures exchanges are always standardized. In principle, the parameters to

define a contract are endless (see for instance in futures contract). To make sure liquidity is high,

there is only a limited number of standardized contracts.

Derivatives Clearing

There is usually a division of responsibility between provision of trading facility and settlement of

those trades. While derivative exchanges like the CBOE and LIFFE take responsibility for providing

efficient, transparent and orderly trading environments, settlement of the resulting trades are usually

handled by Clearing Corporations, also known as Clearing Houses, that serve as central counterparties to

trades done in the respective exchanges. For instance, the Options Clearing Corporation and the London

Clearing House respectively are the clearing corporations for CBOE and LIFFE. A well known exception to

this is the case of Chicago Mercantile Exchange, which clears trades by itself.

Central Counterparty

Derivative contracts are leveraged positions whose value is volatile. They are usually more volatile

than their underlying asset. This can lead to situations where one party to a trade loses a big sum of

money and is unable to honor its settlement obligation. In a safe trading environment, the parties to a

trade need to be assured that their counterparty will honor the trade, no matter how the market has

moved. This requirement can lead to messy arrangements like credit assessment, setting of trading limits

and so on for each counterparty, and take away most of the advantages of a centralised trading facility.

To prevent this, Clearing corporations interpose themselves as counterparties to every trade and extend

guarantee that the trade will be settled as originally intended. This action is called Novation. As a

result, trading firms take no risk on the actual counterparty to the trade, but on the clearing

corporation. The clearing corporation is able to take on this risk by adopting an efficient margining

process.

Margin and Mark-to-Market

Clearing houses charge two types of margins: the Initial Margin and the Mark-To-Market margin (also

referred to as Variation Margin).

The Initial Margin is the sum of money (or collateral) to be deposited by a firm to the clearing

corporation to cover possible future loss in the positions (the set of positions held is also called the

portfolio) held by a firm. In the simplest case, this is the dollar figure that answers a question of

this nature: What is the likely loss that this firm may incur on its portfolio with a 99% confidence and

over a period of 2 days? The clause 'with a 99% confidence' and 'over a period 2 days' is to be

interpreted as that number such that the actual portfolio loss over 2 days is expected to exceed the

number only 1% of the time, although how they know this is unknown. Several popular methods are used to

compute initial margins. They include the CME-owned SPAN (a grid simulation method used by the CME and

about 70 other exchanges), STANS (a Monte Carlo simulation based methodology used by the OCC), TIMS

(earlier used by the OCC, and still being used by a few other exchanges like the Bursa Malaysia.

The Mark-to-Market Margin (MTM margin) on the other hand is the margin collected to offset losses (if

any) that has already been incurred on the positions held by a firm. This is computed as the difference

between the cost of the position held and the current market value of that position. If the resulting

amount is a loss, the amount is collected from the firm; else, the amount may be returned to the firm

(the case with most clearing houses) or kept in reserve depending on local practice. In either case, the

positions are 'marked-to-market' by setting their new cost to the market value used in computing this

difference. The positions held by the clients of the exchange are marked-to-market daily and the MTM

difference computation for the next day would use the new cost figure in its calculation.

Clients hold a margin account with the exchange, and every day the swings in the value of their

positions is added to or deducted from their margin account. If the margin account gets too low, they

have to replenish it. In this way it is highly unlikely that the client will not be able to fulfill his

obligations arising from the contracts. As the clearing house is the counterparty to all their trades,

they only have to have one margin account. This is in contrast with OTC derivatives, where issues such

as margin accounts have to be negotiated with all counterparties.

Regulators

Each exchange is normally regulated by a national governmental (or semi-governmental) regulatory agency:

* In Australia, this role is performed by the Australian Securities and Investments Commission
* In the Chinese mainland, by the China Securities Regulatory Commission
* In Hong Kong, by the Securities and Futures Commission
* In India, by the Securities and Exchange Board of India.
* In Singapore by the Monetary Authority of Singapore
* In the UK, futures exchanges are regulated by the Financial Services Authority.
* In the USA, by the Commodity Futures Trading Commission.

A futures exchange

A futures exchange is a central financial exchange where people can trade standardized futures

contracts; that is, a contract to buy specific quantities of a commodity or financial instrument at a

specified price with delivery set at a specified time in the future.


History of futures exchanges

Though the origins of futures trading can supposedly be traced to Ancient Greek or Phoenician times, the

history of modern futures trading begins in Chicago, United States in the early 1800s. Chicago is

located at the base of the Great Lakes, close to the farmlands and cattle country of the U.S. Midwest,

making it a natural center for transportation, distribution and trading of agricultural produce. Gluts

and shortages of these products caused chaotic fluctuations in price. This led to the development of a

market enabling grain merchants, processors, and agriculture companies to trade in "to arrive" or "cash

forward" contracts to insulate them from the risk of adverse price change and enable them to hedge.

Forward contracts were standard at the time. However, most forward contracts weren't honored by both the

buyer and the seller. For instance, if the buyer of a corn forward contract made an agreement to buy

corn, and at the time of delivery the price of corn differed dramatically from the original contract

price, either the buyer or the seller would back out. Additionally, the forward contracts market was

very illiquid and an exchange was needed that would bring together a market to find potential buyers and

sellers of a commodity instead of making people bear the burden of finding a buyer or seller.

In 1848, the Chicago Board of Trade (CBOT)--the world's first modern futures exchange--was formed.

Trading was originally in forward contracts; the first contract (on corn) was written on March 13, 1851.

In 1865, standardized futures contracts were introduced.

The Chicago Produce Exchange was established in 1874 and renamed the Chicago Mercantile Exchange (CME)

in 1898. In 1972 the International Monetary Market (IMM), a division of the CME, was formed to offer

futures contracts in foreign currencies: British pound, Canadian dollar, German mark, Japanese yen,

Mexican peso, and Swiss franc.

In 1881, a regional market was founded in Minneapolis, Minnesota and in 1883 introduced futures for the

first time. Trading continuously since then, today the Minneapolis Grain Exchange (MGEX) is the only

exchange for hard red spring wheat futures and options.[1]

Later in the 1970s saw the development of the financial futures contracts, which allowed trading in the

future value of interest rates. These (in particular the 90-day Eurodollar contract introduced in 1981)

had an enormous impact on the development of the interest rate swap market.

Today, the futures markets have far outgrown their agricultural origins. With the addition of the New

York Mercantile Exchange (NYMEX) the trading and hedging of financial products using futures dwarfs the

traditional commodity markets, and plays a major role in the global financial system, trading over 1.5

trillion U.S. dollars per day in 2005.

The recent history of these exchanges (Aug 2006) finds the Chicago Exchange trading more than 70% of its

Futures contracts on its "Globex" trading platform and this trend is rising daily. It counts for over

45.5 Billion dollars of nominal trade (over 1 million contracts) every single day in "electronic

trading" as opposed to open outcry trading of Futures, Options and Derivatives. And that is only one of

the worlds current Futures Exchanges, albeit the largest one at this writing.

In June of 2001, ICE acquired the International Petroleum Exchange (IPE), now ICE Futures, which

operated Europe’s leading open-outcry energy futures exchange. Since 2003, ICE has partnered with the

Chicago Climate Exchange (CCX) to host its electronic marketplace. In April of 2005, the entire ICE

portfolio of energy futures became fully electronic.

In 2006, the New York Stock Exchange teamed up with the London Exchanges "Euronext" electronic exchange

to form the first trans-continental Futures and Options Exchange. These two developments as well as the

sharp growth of internet Futures trading platforms developed by a number of trading companies clearly

points to a race to total internet trading of Futures and Options in the coming years.

Irrational behavior

Sometimes the market tends to react irrationally to economic news, even if that news has no real effect

on the technical value of securities itself. Therefore, the stock market can be swayed tremendously in

either direction by press releases, rumors and mass panic.

Over the short-term, stocks and other securities can be battered or buoyed by any number of fast market

-changing events, making the stock market difficult to predict.

Stock market index

Main article: Stock market index

The movements of the prices in a market or section of a market are captured in price indices called

stock market indices, of which there are many, e.g., the S&P, the FTSE and the Euronext indices. Such

indices are usually market capitalization (the total market value of floating capital of the company)

weighted, with the weights reflecting the contribution of the stock to the index. The constituents of

the index are reviewed frequently to include/exclude stocks in order to reflect the changing business

environment.

Derivative instruments

Main article: Derivative (finance)

Financial innovation has brought many new financial instruments whose pay-offs or values depend on the

prices of stocks. Some examples are exchange traded funds (ETFs), stock index and stock options, equity

swaps, single-stock futures, and stock index futures. These last two may be traded on futures exchanges

(which are distinct from stock exchanges—their history traces back to commodities futures exchanges), or

traded over-the-counter. As all of these products are only derived from stocks, they are sometimes

considered to be traded in a (hypothetical) derivatives market, rather than the (hypothetical) stock

market.

Leveraged Strategies

Stock that a trader does not actually own may be traded using short selling; margin buying may be used

to purchase stock with borrowed funds; or, derivatives may be used to control large blocks of stocks for

a much smaller amount of money than would be required by outright purchase or sale.

Short selling

Main article: Short selling

In short selling, the trader borrows stock (usually from his brokerage which holds its clients' shares

or its own shares on account to lend to short sellers) then sells it on the market, hoping for the price

to fall. The trader eventually buys back the stock, making money if the price fell in the meantime or

losing money if it rose. Exiting a short position by buying back the stock is called "covering a short

position." This strategy may also be used by unscrupulous traders to artificially lower the price of a

stock. Hence most markets either prevent short selling or place restrictions on when and how a short

sale can occur. The practice of naked shorting is illegal in most (but not all) stock markets.

Margin buying

Main article: margin buying

In margin buying, the trader borrows money (at interest) to buy a stock and hopes for it to rise. Most

industrialized countries have regulations that require that if the borrowing is based on collateral from

other stocks the trader owns outright, it can be a maximum of a certain percentage of those other

stocks' value. In the United States, the margin requirements have been 50% for many years (that is, if

you want to make a $1000 investment, you need to put up $500, and there is often a maintenance margin

below the $500). A margin call is made if the total value of the investor's account cannot support the

loss of the trade. (Upon a decline in the value of the margined securities additional funds may be

required to maintain the account's equity, and with or without notice the margined security or any

others within the account may be sold by the brokerage to protect its loan position. The investor is

responsible for any shortfall following such forced sales.) Regulation of margin requirements (by the

Federal Reserve) was implemented after the Crash of 1929. Before that, speculators typically only needed

to put up as little as 10 percent (or even less) of the total investment represented by the stocks

purchased. Other rules may include the prohibition of free-riding: putting in an order to buy stocks

without paying initially (there is normally a three-day grace period for delivery of the stock), but

then selling them (before the three-days are up) and using part of the proceeds to make the original

payment (assuming that the value of the stocks has not declined in the interim).

New issuance

Main article: Thomson Financial league tables

Global issuance of equity and equity-related instruments totaled $505 billion in 2004, a 29.8% increase

over the $389 billion raised in 2003. Initial public offerings (IPOs) by US issuers increased 221% with

233 offerings that raised $45 billion, and IPOs in Europe, Middle East and Africa (EMEA) increased by

333%, from $ 9 billion to $39 billion.

Investment strategies

Main article: Stock valuation

One of the many things people always want to know about the stock market is, "How do I make money

investing?" There are many different approaches; two basic methods are classified as either fundamental

analysis or technical analysis. Fundamental analysis refers to analyzing companies by their financial

statements found in SEC Filings, business trends, general economic conditions, etc. Technical analysis

studies price actions in markets through the use of charts and quantitative techniques to attempt to

forecast price trends regardless of the company's financial prospects. One example of a technical

strategy is the Trend following method, used by John W. Henry and Ed Seykota, which uses price patterns,

utilizes strict money management and is also rooted in risk control and diversification.

Additionally, many choose to invest via the index method. In this method, one holds a weighted or

unweighted portfolio consisting of the entire stock market or some segment of the stock market (such as

the S&P 500 or Wilshire 5000). The principal aim of this strategy is to maximize diversification,

minimize taxes from too frequent trading, and ride the general trend of the stock market (which, in the

U.S., has averaged nearly 10%/year, compounded annually, since World War II).

Finally, one may trade based on inside information, which is known as insider trading.

Notes

1. ^ Hagstrom, Robert G. (2001). The Essential Buffett: Timeless Principles for the New Economy. New

York: John Wiley & Sons. ISBN 0-471-22703-X.
2. ^ Cutler, D. Poterba, J. & Summers, L. (1991). "Speculative dynamics". Review of Economic Studies

58.
3. ^ Tversky, A. & Kahneman, D. (1974). "Judgement under uncertainty: heuristics and biases". Science

185: 1124-1131.
4. ^ Stephen Morris and Hyun Song Shin, Oxford Review of Economic Policy, vol. 15, no 3, 1999.

Relation of the stock market to the modern financial system

The financial system in most western countries has undergone a remarkable transformation. One feature of

this development is disintermediation. A portion of the funds involved in saving and financing flows

directly to the financial markets instead of being routed via banks' traditional lending and deposit

operations. The general public's heightened interest in investing in the stock market, either directly

or through mutual funds, has been an important component of this process. Statistics show that in recent

decades shares have made up an increasingly large proportion of households' financial assets in many

countries. In the 1970s, in Sweden, deposit accounts and other very liquid assets with little risk made

up almost 60 per cent of households' financial wealth, compared to less than 20 per cent in the 2000s.

The major part of this adjustment in financial portfolios has gone directly to shares but a good deal

now takes the form of various kinds of institutional investment for groups of individuals, e.g., pension

funds, mutual funds, hedge funds, insurance investment of premiums, etc. The trend towards forms of

saving with a higher risk has been accentuated by new rules for most funds and insurance, permitting a

higher proportion of shares to bonds. Similar tendencies are to be found in other industrialized

countries. In all developed economic systems, such as the European Union, the United States, Japan and

other developed nations, the trend has been the same: saving has moved away from traditional (government

insured) bank deposits to more risky securities of one sort or another.

The stock market, individual investors, and financial risk

Riskier long-term saving requires that an individual possess the ability to manage the associated

increased risks. Stock prices fluctuate widely, in marked contrast to the stability of (government

insured) bank deposits or bonds. This is something that could affect not only the individual investor or

household, but also the economy on a large scale. The following deals with some of the risks of the

financial sector in general and the stock market in particular. This is certainly more important now

that so many newcomers have entered the stock market, or have acquired other 'risky' investments (such

as 'investment' property, i.e., real estate and collectables).

With each passing year, the noise level in the stock market rises. Television commentators,

financial writers, analysts, and market strategists are all overtalking each other to get investors'

attention. At the same time, individual investors, immersed in chat rooms and message boards, are

exchanging questionable and often misleading tips. Yet, despite all this available information,

investors find it increasingly difficult to profit. Stock prices skyrocket with little reason, then

plummet just as quickly, and people who have turned to investing for their children's education and

their own retirement become frightened. Sometimes there appears to be no rhyme or reason to the market,

only folly.

This is a quote from the preface to a published biography about the well-known and long term value

oriented stock investor Warren Buffett.[1] Buffett began his career with only 100 U.S. dollars and has

over the years built himself a multibillion-dollar fortune. The quote illustrates some of what has been

happening in the stock market during the end of the 20th century and the beginning of the 21st.

The behavior of the stock market
NASDAQ in Times Square, New York City.
NASDAQ in Times Square, New York City.

From experience we know that investors may temporarily pull financial prices away from their long term

trend level. Over-reactions may occur— so that excessive optimism (euphoria) may drive prices unduly

high or excessive pessimism may drive prices unduly low. New theoretical and empirical arguments have

been put forward against the notion that financial markets are efficient.

According to the efficient market hypothesis (EMH), only changes in fundamental factors, such as profits

or dividends, ought to affect share prices. (But this largely theoretic academic viewpoint also predicts

that little or no trading should take place— contrary to fact— since prices are already at or near

equilibrium, having priced in all public knowledge.) But the efficient-market hypothesis is sorely

tested by such events as the stock market crash in 1987, when the Dow Jones index plummeted 22.6 percent

— the largest-ever one-day fall in the United States. This event demonstrated that share prices can fall

dramatically even though, to this day, it is impossible to fix a definite cause: a thorough search

failed to detect any specific or unexpected development that might account for the crash. It also seems

to be the case more generally that many price movements are not occasioned by new information; a study

of the fifty largest one-day share price movements in the United States in the post-war period confirms

this.[2] Moreover, while the EMH predicts that all price movement (in the absence of change in

fundamental information) is random (i.e., non-trending), many studies have shown a marked tendency for

the stock market to trend over time periods of weeks or longer.

Various explanations for large price movements have been promulgated. For instance, some research has

shown that changes in estimated risk, and the use of certain strategies, such as stop-loss limits and

Value at Risk limits, theoretically could cause financial markets to overreact.

Other research has shown that psychological factors may result in exaggerated stock price movements.

Psychological research has demonstrated that people are predisposed to 'seeing' patterns, and often will

perceive a pattern in what is, in fact, just noise. (Something like seeing familiar shapes in clouds or

ink blots.) In the present context this means that a succession of good news items about a company may

lead investors to overreact positively (unjustifiably driving the price up). A period of good returns

also boosts the investor's self-confidence, reducing his (psychological) risk threshold.[3]

Another phenomenon— also from psychology— that works against an objective assessment is group thinking.

As social animals, it is not easy to stick to an opinion that differs markedly from that of a majority

of the group. An example with which one may be familiar is the reluctance to enter a restaurant that is

empty; people generally prefer to have their opinion validated by those of others in the group.

In one paper the authors draw an analogy with gambling.[4] In normal times the market behaves like a

game of roulette; the probabilities are known and largely independent of the investment decisions of the

different players. In times of market stress, however, the game becomes more like poker (herding

behavior takes over). The players now must give heavy weight to the psychology of other investors and

how they are likely to react psychologically.

The stock market, as any other business, is quite unforgiving of amateurs. Inexperienced investors

rarely get the assistance and support they need. In the period running up to the recent Nasdaq crash,

less than 1 per cent of the analyst's recommendations had been to sell (and even during the 2000 - 2002

crash, the average did not rise above 5%). The media amplified the general euphoria, with reports of

rapidly rising share prices and the notion that large sums of money could be quickly earned in the so-

called new economy stock market. (And later amplified the gloom which descended during the 2000 - 2002

crash, so that by summer of 2002, predictions of a DOW average below 5000 were quite common.)

Market participants

Many years ago, worldwide, buyers and sellers were individual investors, such as wealthy businessmen,

with long family histories (and emotional ties) to particular corporations. Over time, markets have

become more "institutionalized"; buyers and sellers are largely institutions (e.g., pension funds,

insurance companies, mutual funds, hedge funds, investor groups, and banks). The rise of the

institutional investor has brought with it some improvements in market operations. Thus, the government

was responsible for "fixed" (and exorbitant) fees being markedly reduced for the 'small' investor, but

only after the large institutions had managed to break the brokers' solid front on fees (they then went

to 'negotiated' fees, but only for large institutions).

However, corporate governance (at least in the West) has been very much adversely affected by the rise

of (largely 'absentee') institutional 'owners.'

History

Historian Fernand Braudel suggests that in Cairo in the 11th century Muslim and Jewish merchants had

already set up every form of trade association and had knowledge of every method of credit and payment,

disproving the belief that these were invented later by Italians. In 12th century France the courratiers

de change were concerned with managing and regulating the debts of agricultural communities on behalf of

the banks. Because these men also traded with debts, they could be called the first brokers. In late

13th century Bruges commodity traders gathered inside the house of a man called Van der Beurse, and in

1309 they became the "Brugse Beurse", institutionalizing what had been, until then, an informal meeting.

The idea quickly spread around Flanders and neighboring counties and "Beurzen" soon opened in Ghent and

Amsterdam.

In the middle of the 13th century Venetian bankers began to trade in government securities. In 1351 the

Venetian government outlawed spreading rumors intended to lower the price of government funds. Bankers

in Pisa, Verona, Genoa and Florence also began trading in government securities during the 14th century.

This was only possible because these were independent city states not ruled by a duke but a council of

influential citizens. The Dutch later started joint stock companies, which let shareholders invest in

business ventures and get a share of their profits - or losses. In 1602, the Dutch East India Company

issued the first shares on the Amsterdam Stock Exchange. It was the first company to issue stocks and

bonds.

The Amsterdam Stock Exchange (or Amsterdam Beurs) is also said to have been the first stock exchange to

introduce continuous trade in the early 17th century. The Dutch "pioneered short selling, option

trading, debt-equity swaps, merchant banking, unit trusts and other speculative instruments, much as we

know them" (Murray Sayle, "Japan Goes Dutch", London Review of Books XXIII.7, April 5, 2001). There are

now stock markets in virtually every developed and most developing economies, with the world's biggest

markets being in the United States, Canada, China (Hongkong), India, UK, Germany, France and Japan.
The Bombay Stock Exchange in India.
The Bombay Stock Exchange in India.

Importance of stock market

Function and purpose

The stock market is one of the most important sources for companies to raise money. This allows

businesses to go public, or raise additional capital for expansion. The liquidity that an exchange

provides affords investors the ability to quickly and easily sell securities. This is an attractive

feature of investing in stocks, compared to other less liquid investments such as real estate.

History has shown that the price of shares and other assets is an important part of the dynamics of

economic activity, and can influence or be an indicator of social mood. Rising share prices, for

instance, tend to be associated with increased business investment and vice versa. Share prices also

affect the wealth of households and their consumption. Therefore, central banks tend to keep an eye on

the control and behavior of the stock market and, in general, on the smooth operation of financial

system functions. Financial stability is the raison d'être of central banks.

Exchanges also act as the clearinghouse for each transaction, meaning that they collect and deliver the

shares, and guarantee payment to the seller of a security. This eliminates the risk to an individual

buyer or seller that the counterparty could default on the transaction.

The smooth functioning of all these activities facilitates economic growth in that lower costs and

enterprise risks promote the production of goods and services as well as employment. In this way the

financial system contributes to increased prosperity.

A stock market

A stock market is a market for the trading of company stock, and derivatives of same; both of these are

securities listed on a stock exchange as well as those only traded privately.


The Definition

Trading

Participants in the stock market range from small individual stock investors to large hedge fund

traders, who can be based anywhere. Their orders usually end up with a professional at a stock exchange,

who executes the order.

Some exchanges are physical locations where transactions are carried out on a trading floor, by a method

known as open outcry. This type of auction is used in stock exchanges and commodity exchanges where

traders may enter "verbal" bids and offers simultaneously. The other type of exchange is a virtual kind,

composed of a network of computers where trades are made electronically via traders at computer

terminals.

Actual trades are based on an auction market paradigm where a potential buyer bids a specific price for

a stock and a potential seller asks a specific price for the stock. (Buying or selling at market means

you will accept any ask price or bid price for the stock, respectively.) When the bid and ask prices

match, a sale takes place on a first come first served basis if there are multiple bidders or askers at

a given price.

The term 'the stock market' is a concept for the mechanism that enables the trading of company stocks

(collective shares), other securities, and derivatives. Bonds are still traditionally traded in an

informal, over-the-counter market known as the bond market. Commodities are traded in commodities

markets, and derivatives are traded in a variety of markets (but, like bonds, mostly 'over-the-

counter').

The size of the worldwide 'bond market' is estimated at $45 trillion. The size of the 'stock market' is

estimated at about $51 trillion. The world derivatives market has been estimated at about $480 trillion

'face' or nominal value, 30 times the size of the U.S. economy…and 12 times the size of the entire world

economy.[1] The major U.S. Banks alone are said to account for well over $200 trillion. It must be noted

though that the value of the derivatives market, because it is stated in terms of notional values,

cannot be directly compared to a stock or a fixed income security, which traditionally refers to an

actual value. (Many such relatively illiquid securities are valued as marked to model, rather than an

actual market price.)

The stocks are listed and traded on stock exchanges which are entities (a corporation or mutual

organization) specialized in the business of bringing buyers and sellers of stocks and securities

together. The stock market in the United States includes the trading of all securities listed on the

NYSE, the NASDAQ, the Amex, as well as on the many regional exchanges, the OTCBB, and Pink Sheets.

European examples of stock exchanges include the Paris Bourse (now part of Euronext), the London Stock

Exchange and the Deutsche Börse.


The purpose of a stock exchange is to facilitate the exchange of securities between buyers and sellers,

thus providing a marketplace (virtual or real). The exchanges provide real-time trading information on

the listed securities, facilitating price discovery.

The New York Stock Exchange is a physical exchange. This is also referred to as a "listed" exchange

(because only stocks listed with the exchange may be traded). Orders enter by way of brokerage firms

that are members of the exchange and flow down to floor brokers who go to a specific spot on the floor

where the stock trades. At this location, known as the trading post, there is a specific person known as

the specialist whose job is to match buy orders and sell orders. Prices are determined using an auction

method known as "open outcry": the current bid price is the highest amount any buyer is willing to pay

and the current ask price is the lowest price at which someone is willing to sell; if there is a spread,

no trade takes place. For a trade to take place, there must be a matching bid and ask price. (If a

spread exists, the specialist is supposed to use his own resources of money or stock to close the

difference, after some time.) Once a trade has been made, the details are reported on the "tape" and

sent back to the brokerage firm, who then notifies the investor who placed the order. Although there is

a significant amount of direct human contact in this process, computers do play a huge role in the

process, especially for so-called "program trading".

The Nasdaq is a virtual (listed) exchange, where all of the trading is done over a computer network. The

process is similar to the above, in that the seller provides an asking price and the buyer provides a

bidding price. However, buyers and sellers are electronically matched. One or more Nasdaq market makers

will always provide a bid and ask price at which they will always purchase or sell 'their' stock.[2].

The Paris Bourse, now part of Euronext is an order-driven, electronic stock exchange. It was automated

in the late 1980s. Before, it consisted of an open outcry exchange. Stockbrokers met in the trading

floor or the Palais Brongniart. In 1986, the CATS trading system was introduced, and the order matching

process was fully automated.

From time to time, active trading (especially in large blocks of securities) have moved away from the

'active' exchanges. Securities firms, led by UBS AG, Goldman Sachs Group Inc. and Credit Suisse Group,

already steer 12 percent of U.S. security trades away from the exchanges to their internal systems. That

share probably will increase to 18 percent by 2010 as more investment banks bypass the NYSE and Nasdaq

and pair buyers and sellers of securities themselves, according to data compiled by Boston-based Aite

Group LLC, a brokerage-industry consultant.

Now that computers have eliminated the need for trading floors like the Big Board's, the balance of

power in equity markets is shifting. By bringing more orders in-house, where clients can move big blocks

of stock anonymously, brokers pay the exchanges less in fees and capture a bigger share of the $11

billion a year that institutional investors pay in trading commissions.

Trader (finance)

In finance, a trader is someone who buys and sells financial instruments such as stocks, bonds and

derivatives. Traders are professionals, casual investors or speculators in financial instruments traded

in the stock markets, derivatives markets and commodity markets, comprising the stock exchanges,

derivatives exchanges and the commodities exchanges.

Several categories and designations for diverse kinds of traders are found in finance, these may

include:

* stock trader
* day trader
* floor trader
* paper trading

Trader (finance)

In finance, a trader is someone who buys and sells financial instruments such as stocks, bonds and

derivatives. Traders are professionals, casual investors or speculators in financial instruments traded

in the stock markets, derivatives markets and commodity markets, comprising the stock exchanges,

derivatives exchanges and the commodities exchanges.

Several categories and designations for diverse kinds of traders are found in finance, these may

include:

* stock trader
* day trader
* floor trader
* paper trading

Paper trading

Paper trading (sometimes also called "virtual trading") is a simulated trading process in which would-be

investors can 'practice' investing without committing real money.

This is done by the manipulation of imaginary money and investment positions that behave in a manner

similar to the real markets. Before the widespread use of online trading for the general public, paper

trading was considered too difficult by many new investors. Now that computers do most of the

calculations, new investors can practice making fortunes time and time again before actually committing

financially. Investors also use paper trading to test new and different investment strategies.

Various companies offer paper trading services, some free, others with charges, that allow investors to

try out various strategies (some stock brokerages allow 14-day 'demo accounts'), or paper trading can be

carried out simply by noting down fees and recording the value of investments over time.

The imaginary money of paper trading is sometimes also called "paper money," "virtual money," and

"Monopoly money

Day trader

This article is about a trader who uses "day trading" strategies/techniques. For the characteristics

of "day trading" and its strategies/techniques etc., see the article day trading.

A day trader is a trader who buys and sells financial instruments (eg stocks, options, futures,

derivatives, currencies) within the same trading day such that all positions will usually be closed

before the market close of the trading day. This trading style is called day trading. Depending on one's

trading strategy, it may range from several to even a hundred orders a day.


Occupation

Most day traders are full time due to the devotion of time.

There are 2 major divisions of day traders: institutional and individual day trader.

An institutional day trader is a trader who works for a larger financial institution. This type of

trader has more advantages than individuals since he/she has more resources and access to different

research tools and equipment: large amounts of capital and leverage, large availability of fresh fund

inflows to trade continuously on the markets, dedicated and direct lines to data centers and exchanges,

expensive and high-end trading and analytical software, support teams to help, and much more. All these

advantages allow them to forestall other day traders and minimize the high risks involved in day

trading.

An individual day trader is a trader who works for him/herself. He/she usually works alone. An

individual trader generally trades with one's own capital, from loans, or get finances from others

privately and manage their money. Law has restricted the number of people's money an individual trader

can manage. In the United States, day traders may not advertise as advisors or financial managers.

Nowadays nearly all individual day traders choose direct access brokers as they can offer fast and

direct access to the exchanges, and offer better trading platforms.

In the past, most day traders were institutionals due to the huge imbalances between them and

individuals. Since the technology boom in the second half of the 1990s, the advance in technology and

the popularity of personal computers and Internet, offer fast online trading and powerful analytical

facilities at relatively low costs. Regulation improvements in favor of small and individual traders

help to smooth the imbalances too. All these attract more and more individual and casual traders to day

trading.

Famous day traders
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* Bruce Kovner
* Mark O. Barton, spree killer
* Victor Niederhoffer
* Flemming Kozok, successful Danish day trader

General rules of conduct

Some online trading communities have specific rules adopted by the users of that community, and though

they can differ most have settled upon a few standard practices:

The less experienced trader (usually indicated by their feedback or trade history) sends their half

first.
It is generally frowned upon by most communities to "thread crap" (A term referring to a user not

involved in the pending trade undercutting a trade in progress with either a better deal or reasons for

the trade not to take place).
When trading any used items be sure to include the condition and quality of the product so as the

receiver can determine the overall value of it.

Trading circle
A trading circle is a form of online trading designed for the viewing of TV series and episodic media.

Videocassettes, DVDs and CDs represent the items normally exchanged. Each member agrees to pass an

episode on to the next member in a timely fashion, thereby allowing all members of the group to view the

series.

INTRODUCTION

An online trading community exists to provide its members with a structured method for trading,

bartering, or selling goods or services. These communities often have forums and chatrooms designed to

facilitate communication between the members. These communities are sometimes described as the

electronic equivalent of bazaars, flea markets, garage sales, and so on.

History
The earliest trading site known to the internet (Not including sites such as eBay that accept cash

transactions for all goods) appears to be Game Trading Zone. The domain name ugtz.com was registered in

the summer of 1998, followed by the implementation of an independent database in the spring of 1999.

This database also helped traders by showing them a list of potential trades, saving them a great deal

of time in finding trades. In an effort to generate some income, 1999 also introduced advertisements,

subscriptions, and an affiliate marketing program to the site. Another popular trading community,

Switchouse, popularized the online activity. In the peak of Switchouse's popularity, Amazon.com bought

the website hoping users of the community would use Amazon instead.

Formal trading communities
These are business-run websites maintained for the purpose of facilitating trades between members. Some

of these charge a fee for each successful transaction.

Peerflix is a DVD trading service which operates networks in the United States and Canada. Members are

able to trade their DVDs using the website, with only a small transaction fee for each DVD received. For

each DVD sent, members earn trade cash. They can use this balance to request DVDs from other members or

to collect the proceeds from Peerflix once they have accumulated 100 dollars. The service provides a

guarantee in case of lost or damaged disks.
Title Trader is primarily a book trading service that has expanded into the trading of videos, CDs, and

DVDs. Members earn trade points (and positive feedback) for each item sent and may use these points to

request items listed by other members. There are no trading fees for this site although a Premium

Features subscription is offered on an annual basis.
Swaptree is a trading service which currently operates in the Unites States only. Users can trade used

books, CDs, DVDs, and video games for free. Cross media trades are possible as well (for example, you

are able to trade a CD for a book). Users add items to their "have list" and "want list" and Swaptree is

able to instantly calculate all of the items you can receive in trade.
Flickflop is an inventory-based DVD trading service available in Canada and the United States. In lieu

of trading with each other, members exchange their used DVDs for DVDs held in flickflop's inventory.

Requested DVDs are sent promptly and there is no need to maintain a want list. The service collects a

small fee for each trade.
When compared against online DVD rental, the online trading model is more affordable. In terms of

product availability, there will tend to be a shortage of "popular" items and a surplus of unpopular

ones.

Informal trading communities
There are several lesser known sites known that specialize in a multitude of services including

community trading, but not limited as such:

Craig's List is a site for posting personal advertisements but many users have found this a less than

conventional means of trading goods online with local residents.
1UP is a website dedicated to the publishing of news, videos, and other related media dealing with video

games. There is a growing section of the site though dedicated the trading of games and DVDs on their

message boards.
IGN is another website dedicated to videogame news and media that also has message boards dedicated to

online trading. The distinguishing factors being that IGN has a much larger integrated database of games

and DVDs in existence that users can add to their collection lists for trade purposes as well as mark

the ones they are playing to lock from trade.

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