Securities trading involves specific trade approaches, techniques aiming to generate a profit by speculating on the margin.
This concept is closely associated with the stock exchange speculation – conducting operations by means of successful securities trading. Sometimes in addition to profit making it targets to mislead other participants of the stock market, prompting them to conduct hasty and, ultimately, unprofitable operations with securities.
Trading refers to the speculative kind of investment, therefore trading operations in trading are often called “speculative.” The word “speculate” comes from the Latin word specular, meaning “track down.”
A specialist who deals with trading is called a trader, or in the old classic version, stock-exchange gambler. A trader is a specialist who trades in securities for the benefit of clients or for his own benefit. A trader takes the securities purchase and sale decisions independently, using his own trading strategy and tactics.
The trader tracks down the market and chooses a favorable moment for opening or closing the position which is essential for the trading success. A trader should not be in a position on a constant base holding shares, and he does not have to trade every day.
In order to have an insight to a new profession, it is necessary to know and use the professional language of any field. Trading is no exception. Start with an article “Trader and Investor Vocabulary”. The better you understand the meaning of the basic terms of trading, the more effectively you will master the material.
Place of trading in the investment system
Financial investments, depending on the investment period, are divided into:
- long-term (more than 3-4 years);
- medium-term (from 1 to 3-4 years);
- short-term (less than 1 year).
Short-term investments are the most commonly used in trading.
Term and purpose classification of investments
Investments are divided into two groups: real and financial. The object of real investments is “tangible assets” – fixed assets of the enterprise, land and etc. The purpose of this investment is, as a rule, to update the material and technical base, increase production and develop new types of activities.
The object of financial investments is mainly securities and derivatives. Investments are divided into strategic, portfolio and speculative, which are used in trading.
Strategic investments involve a take-over bid and, as a result, board membership. Meanwhile, the profitability is not in priority. Such investments are more long-term or medium-term rather than short ones.
Portfolio investments are associated with an investment structure that ensures an optimal return with an acceptable level of risk. Here, not only the possible final result of operations is important, which can be determined by the expected return, but also the level of risk that an investor is ready to accept. Meanwhile, income arises from the growth of the asset’s value as well as through dividend and coupon payments. Portfolio investments are handled by mutual funds, trustees, pension funds and other collective investors as well as private ones. Risk management process is usually followed by diversification approach.
Speculative operations (trading) are mainly aimed at obtaining profit from the securities exchange rate margin. Such investments are made in the short term. Let us dwell on the study of speculative investments.
Trading shares characteristics
Only liquid shares are suitable for trading.
Liquidity means the ability of quick and loss-free shares exchange for cash and vice versa. Quantitative liquidity is measured by the trades turnover of a particular share and its spread. The higher the turnover and the lower the spread, the higher the stock’s liquidity.
Let me remind you again that the spread is the margin between the best price (quotation) for purchasing and the best price (quotation) for selling particular stock on the exchange market in the ” application queue “. The smaller the spread, the higher the liquidity.
The spread of the most liquid shares traded on the MICEX and the RTS ranges from 0.05% to 0.5%. Such shares include Russian “blue chips”.
The exchange value of shares or price constantly changes, fluctuates. On one hand, that makes it possible to earn, but on the other hand, to lose on these changes. So why are stock prices constantly changing?
In the first chapter we examined the trading roles of participants in stock exchange and noted that each of these groups has its own plans, its own calculation and its own working strategy. Someone needs money and he decided to sell the shares, someone got money and decided to buy shares. Some consider the shares expensive and sell, others consider them cheap and buy. Some consider the news positive and hold shares or start buying, while others consider the same news negative, stop buying shares or begin selling them. There are many other reasons that affect the trading activities of exchange trade participants. Basically, due to the difference in evaluation and plans of exchange trade participants, there are constant fluctuations in the exchange value of shares.
Price instability can be measured and used in trading. And the level of fluctuation in the share price is measured by volatility.
Volatility (variability) is a measure of a share value instability regarding its average or ordinary level. The greater the fluctuation of the share value, the higher its volatility.
Sometimes traders are said to “trade in volatility.” This means that they use a deviation from the average value to extract profit. There are many ways to calculate volatility.
For example, to determine the daily level of volatility, you can take the minimum price of the day from the maximum one, and then divide this difference by the minimum price and multiply by 100%. Thus, we get the value of the daily volatility level in percent. If we add the daily volatility values for the last five days and divide by five, we get the average value of volatility in the last five days.
The higher the volatility of the stock, the more it can be earned theoretically. But this is only in theory, but in practice it can be different. I would recommend trading beginners not to choose shares with the maximum value of volatility. This can be compared to a horse riding. If you learn to ride, probably, first you choose a calm horse, but not a hot one. The same is about choosing shares for trading. Russian “chips” – these are the shares of “Gazprom”, “LUKOIL”, “RosTelecom”, “Sberbank”.
In trading, volatility is used to determine the size of protective orders (“stop-loss”, “take-profit”, “sliding-stops”). The higher the volatility, the greater the size of protective orders. To determine the level of volatility, I usually use the volatility index.