Aneesh Ponduru · Follow
--
The Stock Market is a place in which you can buy, sell, and trade stocks on any business day. It consists of a collection of companies from all kinds of industries in which buyers and sellers can negotiate prices and make trades. Investors can then buy and sell these stocks among themselves, and the exchange, such as the New York Stock Exchange, tracks the supply and demand of each listed stock.
Shares represent the ownership of a company that is divided up into units, allowing multiple people to own a percentage of a business.
Before familiarizing themselves with how stocks work, many people believe that investing and trading are the same, after all, both involve seeking profits in the stock market. However, their means of obtaining profits are completely different. This difference can be summed up by saying that investing is long term, while trading is a short term.
Investing is a means of building long term wealth. When one invests in a company, they are expecting the company to grow over the span of a few years, even decades. This requires a lot of patience and discipline to stick through the markets’ good and bad days. Investing can return millions of more retirement dollars than keeping your money in a savings account or keeping it in cash.
*Yawn* Boring right. You probably aren’t looking to make money in thirty years; you want it now. Well have no fear, ’cause trading is here.
Trading stocks is a means of building short term wealth. Traders hop in and out of stocks within weeks, days, minutes, sometimes even a few seconds. Imagine making 400 dollars in thirty seconds… crazy right? Well, it isn’t unheard of in the world of trading.
You might be thinking, “Damn, 400 dollars in thirty seconds. Count me in!” But hold up. I don’t mean to burst your bubble or anything but this takes an abundant amount of stock analysis, experience, planning, and money to start off in the first place.
“Whoa, whoa, whoa… I don’t want to do that. I just want to make money.”
I can tell you from experience, it’s not going work. Just like anything else in life, becoming a good trader takes time and practice. Luckily for us, we live in a world where there is an app for everything. I recommend setting up a ThinkOrSwim paper trading account for practicing trading. This app gives you fake money but mimics the stock market in real-time, so you can practice trading as much as you please.
There are many different types of trading too. The most common are scalpers, day traders, and swing traders.
Scalpers are the gutsy ones. They are only in trades for a few seconds and can be in and out of a trade by the time you say, “Wait, what?” Remember how I said it isn’t uncommon to see someone make 400 dollars in thirty seconds, well, those are the scalpers. They spend a lot of money in a short amount of time, looking for the stock to go up a few cents so they can take the profits. This kind of trading requires a lot of knowledge because if you mess up one time, you could lose the same $400 dollars you expected to make. I highly recommend you do not do this.
Next, we have day traders. These guys trade during the day, and only during the day. They execute intraday trade strategies to profit off of price changes. At 4 PM, when the market closes, they do not have anything in their portfolio, but rather they sell before 4 PM. Similar to scalpers, this also requires sound knowledge and analysis of stocks.
Lastly, we have swing traders. Swing traders are very similar today traders, except, they have shares or contracts in their portfolio to hold overnight. In other words, they are interday traders. They can hold shares/contracts for days and even weeks. This requires a lot of analysis and assurance because a lot can happen overnight, and you generally can’t trade stocks after 4 PM.
For example, our… interesting… president, Mr.Donald J. Trump, can crash or blossom the market with one tweet. Take a look at the tweet below:
This one Trump tweet, or trump dump as some traders call it, sent the Dow Jones Industrial Average down 3.68% in just two trading days. Just to put that in context, 3.68% is equivalent to more than 800 dollars. For this reason, both day traders and swing traders have to be really careful of “Trump Dumps.”
On the contrary, some Trump tweets can pump up the market. For example, in May, Donald Trump sent out the following tweet:
In this tweet, Trump mentioned the company Workhorse, and how they obtained the Lordstown Plant. This same day, the Workhorse share price went up 250%. Clearly, Trump’s tweets can be really good for the market, but it can also be really bad, and knowing how to play off of these tweets can make you a lot of money.
Some people, like me, can use these tweets to make money even if the stock market goes down.
The dictionary definition of an option is a “contract that allows (but doesn’t require) an investor to buy or sell an underlying instrument like a security, ETF or even index at a predetermined price over a certain period of time.” Let me break that down for you.
An option is a contract that gives the buyer the right, but not the obligation, to buy or sell the underlying asset. An options contract typically represents 100 shares of the stock, resulting in either a very high profit or a very high loss.
Nevertheless, options are very safe and highly profitable if you know what you are doing. They allow you to sell whenever you want and can exponentially increase one’s portfolio even if they start with very little money.
Additionally, options work even if the market is going down, meaning it is possible to make money both when the market is going up, and when it is going down. Calls options are contracts which you buy in anticipation of the stock going up, while put options are what you buy when you think the stock is going down. Either way, you can make a lot of money.
Let me give you an example of how call and put option contracts work. So let’s say that we are looking at a stock whose share price is $300. And let’s say that you think the stock price will go up, meaning you will buy a call. You will want to buy a call for a contract that costs $0.70. So if the value of your 70 cent contract goes up by one cent, then you will make one dollar, because this options contract represents 100 shares. Similarly, if the contract price goes down by one cent, you will lose a dollar.
Now let’s say you have put options contracts. We can use the same example as above, so you have a stock whose share price is $300, but this time, you expect the share price to go down, meaning you will buy puts. You will buy a put contract worth, let’s say $0.50. So if the contract value goes up by one cent, meaning the share price goes down, then you will make one dollar.
Take a look at the pictures below:
This was my portfolio⬆️ two days ago. I started at $320, and with one call option contract, I got a 728% return of $510. When I got the contract, it was valued at $0.70, and by the end of the day, it was worth $5.80, meaning I made $510. I ended that day at $920. But wait… don’t get too excited, because there are also some bad days where you can lose a lot of money. Although I don’t have my own pictures of losses (because who takes pictures of losses), this is similar to a situation that I faced a week ago.
There are a lot of risks associated with trading stocks. However, we live in a time where technology is evolving to the point where it interferes with everything, including the stock market.
Nowadays, Artificial Intelligence systems are using deep learning techniques to recognize patterns in stock charts that a human might not be able to.
For example, there is a common pattern known to traders called the ascending triangle. This pattern indicates that the share price will go up. A human might not be able to recognize this pattern quick enough or even notice it at all. But AI systems will be able to recognize this pattern instantly.
Additionally, AI Systems will use historical data to learn how the market reacted in past events. Based on these reactions, they can learn to behave in more productive ways in future market conditions, making them even more accurate and reliable.
So now you’re probably like, “Wait, then why don’t we just use AI to trade?”
Well, one of the biggest problems today with AI in the stock market is its inability to handle extreme situations. AI systems will be efficient under normal conditions, but as soon as an unusual event occurs, such as a recession, they will be clueless. Recently, world-renowned investor, Warren Buffet announced that there will be a stock market recession soon similar to that of 2008.
An AI system would have no clue what to do in this scenario because it is not equipped to handle unnatural and unorthodox changes in the stock market. If a recession really did take place, then the AI system wouldn’t know what to do and it would likely lose all your money.
Another huge problem facing AI in the stock market is the discussion of who is to blame if the system does lose money. If you choose to use a financial firm to take care of the investing for you, and they use a third-party AI system, is the firm to blame for losing the money, or is the company that created the system to blame?
Clearly, there is an abundance of problems with AI in the stock market, and for now, I am going to stick with myself for making my financial decisions, and I highly encourage you all to start trading or investing in the near future.
- Before you do anything, find out what type of stock trading/investing you want to do. Make sure it’s the right fit for you and not the person next to you.
- Practice before you start trading; Don’t just jump right in and blow all your money because you don’t know what to do. Use ThinkOrSwim Papermoney to practice trading with fake money.
- Learn how to analyze charts, recognize patterns, and use the news to predict the movement of stocks.
- You will not win all of them, and that is not what is important. It is only important that you learn from your mistakes, and win more than you lose.
- DO NOT QUIT because you have one bad trade or investment. There will be many more opportunities to make money, so it’s okay if you lose one.
- Start small. Do not spend all your money on your first trade. Try to start with smaller trades to reduce the risk of losing a lot. One trade should only cost you 5–10% of your portfolio.
- Be patient. I can’t tell you how many times I got out of a trade too early because it was going down a little bit, but then it ended up skyrocketing.
Be sure to leave a clap👏 for this article and feel free to email me with any questions or comments at aneesh.ponduru@gmail.com.
