Interesting yet puzzling article!!!

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Finance Freaks: Day Trading

Finance Freaks: Day Trading

Ask - Bid

"Ask" is the price at which a prospective seller wants to sell a particular stock. It is generally higher than the current value at which the stock is trading.

"Bid" is the price that a prospective buyer intends to buy a stock. The bid value is generally lower thanm the current price of the trade.

The difference between the two is called as "Spread".

Day Trading

Wikipedia defines Day trader as "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.". And the process of trading is called Day Trading.

Types of Day Traders:

Institutional Day Traders:
This type of investor performs trading on behalf of a large financial institution. He has an edge over individual investors as he has access to huge financial resources,high-end analytical softwares that keep him informed and in several cases, a team that aids him in the process.

Individual Investors:
An individual investor is the one who invests his/her own funds or funds borrowed personally. Historically, these investors have been trading through middlemen. However, with the boom in internet and also cheaper loans, trading has become more convinient for individual traders too. Nowadays, Direct Access is available to the individual traders, wherein, the transaction is made and confirmed in a split second, which is faster than the conventional method.

Day Trading

Day traders generally borrow the money they invest. This money is termed as "Call Money".They bet their profits on the difference between the return on investment and the rate at which they borrowed. The rate at which they borrow the Call Money is the "Call Money Rate".

Margin:
It is the collateral that the trader has to pay to cover for the credit risk to hold positions.

An example would better explain what margin actually is.
If the margin is put at 25%, it means that the trader can buy and trade stocks worth $100 by paying a collateral of just $25, as long as half the stock options are sold by the end of the trading day.

Techniques used by Day Traders:

Before we proceed to know about the techniques used by Day traders, you will be introduced to a few terms which form the basis for further understanding.

Short Selling or Shorting:

Shorting is the process of buying stocks at a price and immediately buying them back.

Example:
Suppose that the stocks of a company XYZ are trading at $10 at present. The trader buys 100 stocks at $10 and sells them immediately. After a while, when the stock is trading at $8, he buys back the 100 stocks for $8 each. Eventually, he has the same number of shares and also the $200 that he saved. Short selling could lead to losses too. Supposing thjat the stock raises to $15, he has to buy back the shares for $1500, thereby paying an additional $500.

Having known this, you are ready to know the various techniques used by day traders.

Trend follower approach:

The trader observes the trend of the stock over a period of time. He expects the same trend to continue and bases his trade on this same trend. If there is an uptrend, he buys the stock and waits for the stocks to increase in value to sell and make a gain. If a downtrend is observed, he "Short sells" the stock with an exception of further downtrend to buy them back and make a gain.

Contrarian:

In this approach, the trader expects a reversal of the observed trend. That is, if there is an uptrend, he expects a reversal to a downtrend and viceversa if there is a downtrend. If there is an uptrend at present, he expects a fall in the stock value and Short Sells; if there is a downtrend, he expects a raise in the value and buys them and waits for the value to raise to sell and make profit.

Scalping:

Scalping is the practice of buying a security for one's own account before recommending it to another as a long term investment. In the process, he sells the security for a higher price, making a profit. This is generally done in huge volumes to maximise gains even if the margin is low for the short period of holding.
This practice has been prohibited for traders who are not Investment Advisors. However, several day traders violate this prohibition and still make gains!

Rebate Trading:

This method of trading is suited to high volume trading. When a trade is performed over Electronic Communication Network(ECN). Traders place bids and offers on the ECN. The ECN charges a fee for those who hit the bid and take the offers. Part of this fee is passed on those who posted the bids as a rebate. When trading in high volumes(generally in the scale of millions), the rebates workout to be a huge profit. A day trader minimises his loss or extends his profit by doing this.

Yet another method of trading used by day traders is to base thier decisions on the news. Depending on the news pertaining to a specific company, he makes a decision. That is, if there is a bad news, he short sells the stock and, if there is good news, he buys stock in anticipation of an increase.

Why is everyone so keen about what the Fed does?

Click Here to know why

Interesting facts for women!

• On average, women spend 11.5 years out of the workforce during their lifetime. This contributes to lower income levels and lower levels of retirement savings for women.
• There are over 9 million female-owned businesses in America, generating more than $2.3 trillion in annual revenue.
• Women are starting new companies at twice the rate of men, according to the National Foundation for Women Business Owners.
• On average, women have significantly less retirement savings than men. In 1997, median income among elderly unmarried women was $11,161, compared with $14,769 for elderly unmarried men and $29,278 for elderly married couples.

Federal Fund Rate-Things made easy!

The Fed is bank of the banks, it regulates the banks. The Fed has 12 regional Federal Banks which ensure the conformity on part of the member banks, to the regulations laid down by the Fed. One of these regulations is that each member bank must have a fixed percent of it's total reserves as a reserve with the Fed. This generally varies from 3 to 10 % of the the total reserves of the member bank. The most important thing about this reserve fund is that, they are zero interest reserves. So, the member bank doesnot get any return on this amount. As this amount earns no return, the bank has to take a very careful decision about the percentage it wants to hold as federal reserve.This reserve amount is meant to come to the bank's rescue in unexpected circumstances of very low liquidity. Low Liquidity meaning a situation where in, the bank has not enough cash reserves.Sometimes, this liquidity crunch could get much worse where the bank cannot entertain cash withdrawl from their customers.In such situations, the member bank can take loan from another member bank which has a larger federal reserve, but at an interest rate. This interest rate is called the Federal Funds Rate. The lower the rate, the easier it becomes to borrow this money from another member bank and in turn lend it to the customer at a higher rate. On the other side, if the fed rate is high, it becomes costlier for member banks to do the same.

In a Recesion:

In a recession, the Fed reduces the interest rate(as it did recently) to encourage more liquidity resulting more cash being available with the banks. As a consequence, the banks can lend more money at attractive rates to it's customers. This money in turn is spent in buying property or products, which in turn increases the industrial production(or sector specific growth), leading to increase in GDP. This is one of the very widely used techniques to handle a recession.
Read a detailed article on recession.
Other articles on Recession

In an inflationary economy:

In an inflationary economy, more money is chasing lesser value of products. As demand increases, the prices increase, which is otherwise called inflation.
So,in an inflationary economy, the Fed increases the Federal Funds Rate. This ensures that banks are left with lesser money that they can lend to the customers.This decreases the spending capability of the customers, effectively reducing the demand. Reduced demand leads to fall in prices,thereby lowering inflation levels.
Know more about Inflation

Definition of the week

Definition of the week:

A recession is a prolonged period of time when a nation's economy is slowing down, or contracting. Such a slow-down is characterized by a number of different trends, including:

* People buying less stuff
* Decrease in factory production
* Growing unemployment
* Slump in personal income
* An unhealthy stock market

By the conventional definition, this slow-down has to continue for at least six months to be considered a recession.

Detailed Explanation:

What goes up...

In a growing economy, consumer demand is increasing, overall, more than it is decreasing. Since there is increasing demand, producers want to increase supply. To do this, producers have to increase their consumption of other goods and services, including labor. This means there is greater demand for labor, so the labor pool, on the whole, can raise the price of their product (in other words, people can get paid more for their work).

Working people with higher incomes have more money to spend on other products, which increases demand even more. If demand is high enough, the price of some things goes up. For example, if there are more travelers than there are seats on airplanes, airlines can raise their prices to decrease demand (this could lead to high inflation if it happened across the board, but in the past decade the U.S. economy has shown the ability to grow steadily while keeping inflation under control). In a growing economy, some consumers and producers will not do well, but most will, so the general feeling about the economy is good.


In such an economy, a lot of consumers tend to make investments: They buy things, such as stock in a company, that they plan to sell at a later date. They know that if the economy keeps going the way it has been, their investments will increase in value. These consumers figure they will make money just by holding onto the product for a while.

...must come down!

History has proven that an economy will not keep expanding indefinitely -- eventually it will contract for a while. A prolonged period of contraction is known as a recession. If the recession lasts long enough, and is particularly severe, it is known as a depression. In the next section, we'll find out what happens in this sort of economy.

There are all kinds of things that can change the course of the economy, just as there all kinds of things that can change the demand for a particular product. In some cases, a recession might be kicked off by over-production -- a situation in which the supply exceeds the nation's ability to consume.

One factor that generally plays a role in a recession, whether or not it is the cause, is the confidence level of the millions of consumers and producers. If consumers stop feeling confident about their job security or the value of their investments, they won't buy as much stuff. In the current recession, a lot of people who have been laid off are spending as little as possible, and many people who fear they may be laid off are also saving their money.


Just as in an expanding economy, things tend to snowball in a contracting economy. There are thousands of different elements in this downward spiral; you can see the snowballing effect in any number of specific situations.

Hi'STORY'

Why do we need the Fed?

Sometimes, in order to understand why you need something, it helps to find out what it was like before that "something" was created. Before the Federal Reserve was created in 1913, there were over 30,000 different currencies floating around in the United States. Currency could be issued by almost anyone -- even drug stores issued their own notes. There were many problems that stemmed from this, including the fact that some currencies were worth more than others. Some currencies were backed by silver or gold, and others by government bonds. There were even times when banks didn't have enough money to honor withdrawals by customers. Imagine going to the bank to withdraw money from your savings account and being told you couldn't because they didn't have your money! Before the Fed was created, banks were collapsing and the economy swung wildly from one extreme to the next. The faith Americans had in the banking system was not very strong. This is why the Fed was created.

Facts of the week!

• Did you know that 80 billion Aspirin tablets are taken a year?
• Google's name is a variation of the monumental mathematical figure "Googol", the equivalent of 1 followed by 100 zeroes. Brin and Page felt the name helped illustrate google's monumental mission of Organizing billions of bytes of data found on the web.
  

This week's K-Pill

When I pay for my groceries by check, where does that check go?




In an year, an estimated 70 billion checks will be written in the United States alone. This means that about 270 million checks are processed every business day. Keeping track of all that paper is a pretty complex procedure.

Once you've paid by check for your groceries, the first place that check goes is to the grocery store's bank, where it is deposited. But the funds may not be immediately available, unless you and your grocery store use the same bank -- and actually, about 30 percent of checks are drawn on and deposited into the same bank, in which case the processing, or clearing, is handled internally. But otherwise, the grocery store's bank will probably want to verify the check with your bank, the paying bank, before it converts the check value to cash. But most banks do not communicate with each other directly; instead, they go through a middle man, an intermediary bank.

There are three types of intermediary banks:

* Federal Reserve Bank
* Correspondent bank
* Clearinghouse corporation

The Federal Reserve Bank is the central bank of the United States. Regional branches of the Federal Reserve handle check processing for banks that hold accounts with them, and they charge a fee for their services. Such services include check collection, air transportation of checks to the Reserve Bank and delivery of checks to paying banks. Reserve Banks handle about 27 percent of U.S. checks.

Correspondent banks are banks that have formed "partnerships" with other banks in order to exchange checks and payments directly, bypassing the Federal Reserve and its fee. Outside banks may go through a correspondent bank to exchange checks and payments with one of its partners.

Correspondent banks may also form a clearinghouse corporation, in which members exchange checks and payments in bulk, instead of on a check-by-check basis, which can be pretty inefficient when each bank might receive thousands of checks in a day. The clearinghouse banks save up the checks drawn on other members and exchange them on a daily basis. The net payments for these checks are often settled through Fedwire, an electronic funds transfer (EFT) system that handles large-scale check settlement between U.S. banks.

Correspondent banks and clearinghouse corporations make up the private sector of check clearing, and together they handle about 43 percent of U.S. checks.

There are five basic steps in the settlement process:

1. The grocery store deposits your check in its bank.
2. The grocery store's bank passes your check, along with a payment request, onto an intermediary bank for verification and settlement. The intermediary bank identifies the paying bank.

To identify the paying bank, the intermediary bank looks at your check's routing number, the nine-digit number on the bottom left hand corner of your check, to the left of your account number. The routing number identifies the bank that issued the check. Every bank in the United States has at least one routing number.

3. Having identified your bank as the paying bank, the intermediary bank presents your bank with the check you wrote, along with a payment request. If your bank agrees to pay, the check has been verified.
4. The intermediary bank proceeds to settle the check, debiting your bank and crediting the grocery store's bank for the value of the check.
5. Your bank debits your checking account.

At the end of this process, the grocery store has full access to the cash value of the check you wrote. And at the end of the month, when your bank statement arrives, reflecting the transaction.