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Tuesday, January 20th, 2009 at 3:36 pm  
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How does the Stock Market Work?

How does the Stock Market Work? To know the answer, continue reading …

How does the Stock Market Work?

How does the Stock Market work? Let us start from the basics. When a company is started, it needs a capital for its startup. Capital is all the money that is invested to start a business. Capital can be raised in two ways. One is by borrowing money, which will be paid back later. Second option is issuing stock to those, interested in sharing the profits of the company. By this we mean, people who buy the stock will help in the venture of the company in return of which they will have a share in the profits the company makes. By issuing stock, the company can raise more capital and it does not have to bear the interest as in case of repayment of debt. But one of the disadvantages involved in issuing stock is that shareholders share the company ownership and have a say in deciding the company policies.

Stock market basics

  • Stock: The ownership units of a company are referred to as stock.
  • Stock price: The price for which a specific stock sells is the stock price. Health of the economy, the trends that prevail in trading and spending influence the stock prices. These prices also depend on financial and technical reports put out by the company.
  • Offering price: The price of the stock presented in the final prospectus at the time of issuing the stock is known as the offering price.
  • Underwriter: To sell its stock, the company hires an investment banker for help. The process is underwriting and the person hired is known as the underwriter. He mediates between the public and the issuing company. The process of underwriting works in one of the following ways:
    1. Best effort arrangement: The investment banker acts as an agent trying to sell maximum possible issues at market prices.
    2. All-or-none arrangement: The company withdraws the issue from the investment banker in case he fails to sell all the stocks previously issued to him.
    3. Negotiated Underwriting: The issuing company and the issuer negotiate the terms of issue and price.
    4. Firm Commitment: The underwriter buys all the stock from the company and sells it to the public.
    5. The company may opt for competitive bids from the investment bankers and appoint the top bidder as their undertaker.
  • Prospectus: It is a legal document presenting the financial facts about the offering company. A prospectus includes the offering price, the other costs involved in investing, the company history, its management team, legal opinions about the issue, the underwriting method and the SEC’s disclaimers. Prospectuses are sent to all those who want to buy the primary offering. They are made available to the customers before any transactions are performed. Customers should read them before purchasing any offering.
  • Broker-Dealer: Broker is someone who facilitates trade between customers. He does not bear any risk in the trade. He charges commission. Dealer is someone trades for his own securities and for others. He assumes some risk in the transactions. A broker-dealer plays either of the roles at a time. Brokers and dealers must be registered with the National Association of Securities Dealers and follow the rules set by it.
  • Stock market Index: It is a way of measuring the stock market as a whole. Many indices are combined by financial firms and used to measure the performance of portfolios.
  • Market capitalization: It is the value of the stock that is being offered. Its value is the product of the number of outstanding shares of the company and price of the stock.
  • Bull market: It is characterized by increase in the confidence of the investors in anticipation of capital gains in future. A famous example of a bull market was the one formed in the 1990s when US and other financial markets had grown at an exceptionally fast space.
  • Bear market: Investors anticipate losses and take to selling. A bear market is characterized by pessimism in the market. The period of early 1930s that marked the beginning of the Great Depression is a famous example of a bear market.

Stock Market on the verge of collapse     video below

How does the Stock Market Work?
After a company decides to sell stock, the first step it takes is to file registration statements with the Securities and Exchange Commission and wait for 20 days before the sale of stocks. When issuing the stock, a final prospectus containing offering price of the stock is brought about. The underwriter buys all the company stocks to sell them to the public. He decides the markup price for his offering. The new price holds his service charges. During that period of 20 days, the issues of stocks can be advertised. Representatives can send preliminary prospectuses containing information about why the stocks are being sold, to the customers.

When you want to buy stocks, you place an order. If there is a broker with a sale order at the same price as that presented by your order, your order is filled and completed. Once the order is filled, the trade details are transmitted to all the parties interested. In 3 business days from the trade date, the brokerage firm exchanges the stock certificate and money for the stock. For selling the stocks, you should inform your broker about the number of shares of whichever company you wish to sell. You will have to enter a sale order accordingly.

To trade in shares, you will need an investment account. It can be with your share broker, who acts as a firm or it may be an online account, which does not require broker mediation for transactions.

When a business makes money, the price of its shares rises. On the same lines, if the business suffers from losses, its share prices fall. Buyers and sellers of shares are watchful about the company business. Based on the financial conditions of the business and their speculations, they decide when to buy and sell company shares. This has a large impact on the type of the market, largely influencing the economy.

1929 Wall Street Stock Market Crash       video below

 

World Stock Markets
Some names of the North American stock exchanges are Alberta Stock Exchange and Montreal Stock Exchange of Canada or the AMEX and NASDAQ of the United States. Rio de Janeiro Stock Exchange of Brazil and Chile Electronic Stock Exchange are those of South America. A drastic drop in share prices leads to a stock market crash. Profits and dividends affect share prices but there is no specific reason for the changes in world stock markets. The changes are often results of the thinking patterns of the investors and their imaginations about market trends.

Stock markets increase the money that directly flows to the market. They cause the businesses to go public. World stock markets allow investors to share company profits and get involved in the company ownership. It is you, who decides trends in stock market. Stock market is a key player in the world’s economy. Transitively, you are a cardinal component of the economic system of the world.

By Manali Oak

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Hedge Fund Collapse

Tuesday, January 20th, 2009 at 3:36 pm  
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Hedge Fund Blow Up


"Hedge fund blows up-Friendly banker eats them for dinner"…

You might be familiar with Amaranth LLC, the giant hedge fund that collapsed last fall, after blowing up $6 billion of investors’ money. It now comes out that the circumstances under which they self-destructed are worth studying.

But first – A METAPHOR

What would happen if you had a pain in your chest, and you had tests taken at your doctor on a Monday who you have known and trusted for 30 years? He tells you that the results will tell you if you are going to live or die, no in between. You now visit the doctor on a Friday to discuss the results. The doctor says to you how would you like to bet on the results.

You offer to bet $1 million that you are going to live. The doctor says, "I will take your bet myself." Would you still make the bet? The answer is no, of course you wouldn’t because the doctor already knows the result. and you don’t. It’s like betting against the house in Las Vegas when the house already KNOWS how the results will turn out.

WSI TV – Hedge Funds, Alert Systemic risk     video below

This is the same situation in our opinion that Amaranth the hedge fund faced during its trading crisis. Hedge funds have to book their trades through a clearing firm, no different than many major brokerage firms clearing trades for smaller brokerage firms. The smaller firm pays a fee to the bigger firm that clears the trades for them.

In the case of Amaranth the hedge fund, JP Morgan was the clearing broker, known as a Prime Broker. In essence Amaranth made bets on the energy futures markets, and these bets went the wrong way. As a hedge fund, Amaranth uses leverage when it trades against its equity, usually borrowing about 6 to 1, and sometimes as high as 8 to 1. JP Morgan as the clearing broker was the lender of the additional margin.

Now when a trade goes against a hedge fund, the fund may be called upon by the clearing firm to put up more margin, meaning cash, or securities to protect the clearing firm. In this case the problem happened on a Friday. Amaranth wanted to get rid of billions of dollars of toxic bad trades by giving them to Goldman Sachs, who agreed to take them if Amaranth would give Goldman $2 billion in cash along with the trades. Goldman would then assume the risk of what happens to those trades. Amaranth wanted its clearing firm, JP Morgan to give Goldman the $2 billion from its capital account simultaneous with the movement of the trades.

JP Morgan would not release the funds. They barked, stating that they felt they would still be at risk if this were to happen. A clearing firm hates risk, and never wants to take risk. Amaranth very quickly had to operate in the most treacherous waters imaginable. They had to begin talking to outsiders in a desperate attempt to structure a transaction with anyone capable of taking these trades or injecting new additional capital. Remember, this is Wall Street, the sharks were circling.

Anyone who had knowledge of Amaranth’s trades knew immediately how precarious the oil markets that Amaranth was involved in. They also knew how to play the market to its own advantage using Amaranth’s weaknesses. The SHARKS came in and did trades that would work to their advantage. Within a matter of trading hours, this giant hedge fund was losing hundreds of millions of additional dollars. Merrill Lynch decided to take a piece of the funding deal, and this drove Goldman Sachs up a wall. Goldman upped the ante, and decided to charge Amaranth hundreds of millions more to do the deal which would partially save Amaranth.

Now here’s where our story of the doctor with the patients information and the patient’s bet come in handy. JP Morgan as the clearing broker was in a position to know more about the condition of Amaranth’s books, and their trading positions than anyone else in the industry. Since JP Morgan also trades in the same market as Amaranth, the bank knew the market’s condition better than anyone else also.

When the Morgan bank was informed that a deal was imminent between Goldman and Amaranth, the Chairman of Morgan got involved himself and called in his top energy trader over the weekend. Morgan was thinking of making their own deal for Amaranth’s positions, the very positions that they cleared for Amaranth over the preceding months.

The Morgan bank was sitting in the catbird seat. They knew everything; they saw everything, no different than a black jack dealer in Las Vegas being able to tell everyone’s cards. As a person who has been in this field for 30 years, and watched a few firms go down the tubes in a deal like this, I tell you, it doesn’t SMELL RIGHT.

JP Morgan knew that Amaranth couldn’t make a deal with anyone as long as the Morgan bank held the collateral. No deal could be structured if Morgan wouldn’t release at least part of the money in the Amaranth account at Morgan. The Morgan bank was in complete control of Amaranth’s destiny. What would the bank do?

JP Morgan also acts as a giant hedge fund trader for its own account in the energy markets, and in other markets. In a sense it competes against its clients if it chooses to, in these markets. The difference is when you are a major clearing firm as well as trading yourself, which is what Morgan does, you have the advantage. You have an understanding of the market place that nobody else can even dream about having. It is the trader’s ultimate dream. There are times when the clearing firm can dictate the market.

The FINAL DEAL

Discussions ensued through the weekend, into Monday, and Tuesday. Amaranths finally capitulated at 5:30AM on Wednesday morning, and guess who signed the deal. J.P. Morgan in conjunction with the Citadel Investment Group, another hedge fund inked the deal. Amaranth’s $800 million in portfolio losses from the weekend would be eaten by Amaranth themselves. Morgan and Citadel got $1.6 billion in cash to take the trading positions in the portfolio off Amaranth’s books. They got another $300 million to assume options positions, plus a $250 million kicker for commodity investments.

What’s the bottom line here? It just became public information that J.P. Morgan made $725 million for its bottom line on the deal. Congratulations to a nice conservative bank, that always catered to conservatively managing the trust funds of its wealthy clientele. Do you think that GREED had anything to do with the bank’s decision to cut the deal with Amaranth, as opposed to arranging a bailout? Gee, a bank wouldn’t function like that, would it?

By Richard Stoyeck

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How to Build Huge Long Term Gains

Tuesday, January 20th, 2009 at 3:35 pm  
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Futures Trading Systems – How to Build Huge Long Term Gains

Futures trading systems allow anyone to build long-term capital gains – quickly, and without incurring high asset manager fees. Systems and can yield annual profits of 50% to 100% – sometimes even more.

You should consider using a futures trading system for the following reasons.

Charles Ward on Future trading          video below

1. Diversification – a number of asset classes are covered that are uncorrelated to the stock markets – and they include, currencies, interest rates, stock indices, metals, energies, grains and meats, and food and fibre.

2. Systems generate profits in any market condition – you can make money in both rising, and falling markets – meaning there are constant opportunities for profit.

3. The global economy is expanding fast – and countries such as India and China, are leading a worldwide global economic expansion. The perfect example of this boom is the huge rise in the price of crude oil.

4. Futures trading systems have a technical basis – they follow market momentum. Systems don’t care why prices move – they simply follow market trends, to stack up huge capital gains.

5. Futures trading systems are quick and easy to use – you can manage your own investment in less than 30 minutes a day, and still make huge gains – without paying large fees to fund managers.

The Popularity of Futures Trading Systems

The popularity in futures trading systems is fuelled by the growth of the Internet – and the fall in the price of high-powered computers and software. Now, anyone with a basic computer and an Internet connection can trade for big profits.

Build Your Own System, or Buy One?

It’s down to the individual – but it is easy to build your own system.

If you want the perfect futures trading system, then read articles on breakout systems. Breakout systems are simple to understand and use – and the rules are programmable into many software packages, such as Supercharts and Tradestation.

If you want to buy a futures trading package there are many good ones around, just use this checklist:

1. Make sure you understand the logic – the logic needs to be easy to understand – so you have the confidence to follow it. Avoid the so-called "black box" systems – where the logic not visible to you.

2. Track record – Look for some form of real time track record – not just a hypothetical simulation. Let’s face it – we can all make money – if we know the price history!

3. Check the vendor and his background carefully – so you are comfortable with the support, and backup you may need.

4. Make sure you check the drawdowns – check the worst time to invest and the fall from this level – also, how long does it take to make a new high. This of course could happen again – and you will need to be prepared for short-term losses – and this will give you good guide.

5. Look for a long-term trend following system – as long-term trends make the biggest profits. Avoid day trading systems, as these tend to be less effective.

Buying a futures trading system is really just down to common sense. Find out as much as you can about the system, and logic – until you are comfortable about making a purchase.

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Liam Tomkins on Future Trading         video below

 

Get Ready for Big Profits

We are seeing huge moves in commodity and future contracts – and these moves can yield big profits.

The advantage of a technically based futures trading system, is that you don’t need to decide when to enter – the system will simply lock in, and follow the big trends as they emerge.

A Disciplined Plan for Profits

The advantage of using a futures trading system, is that you are not subject to your emotions – which is the main reason futures traders tend to lose money.

Crude oil has made many people look at trading the markets – but there are always great trends around. For example, currencies are always trending – as are many of the other groups.

In conclusion, futures trading systems are quick and easy to use, save you money on advisor fees, add diversification to your portfolio, and give you the potential for big capital gains.

1,000 Pages Of Wealth Building Material FREE! Including tips, strategies and systems and more on futures trading systems info. Visit our web site at http://www.tradercurrencies.com

 By sacha tarkovsky

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