T Nation

Stock Question

The word “tax” is in this thread twice, which is absurd.

Not only are there fees for selling stocks and buying stocks, but if you hold on to a stock for less than a year, the capital gains tax is much higher than if you were to sell after holding for longer than a year. I believe it can go up to 35%, according to your tax bracket. http://taxes.about.com/od/capitalgains/a/CapitalGainsTax_4.htm

So, you buy in and pay a fee. You sell and pay a fee a few days later. Gov’t takes up to 35% of any money made on it. You buy in again and pay a fee.

Everyone wants to feel knowledgeable and important and feel like they’re living the sexy life of a “day trader” when more often than not, that boring old buy-and-hold tactic earns you more money in the grand scheme of things. It’s not as cool though.

Just filling out the paper work on money made at the end of the year makes the (after all fees and taxes) 5% gain not worth it at all…

The best investment you can make is in yourself. Get an advanced degree, become someone who is indispensible to your company.

The next best investment is to try to imagine what the world will look like in 20 years and buy mutual funds in industries that would benefit. I’m heavily into Biotech and Oil Exploration through Fidelity. I also went heavily into gold at $270/ounce.

Nevermind Yorik, I did some reading on found why it is it they need a 25,000 account minimum. I guess what I was most likely describing was swing trading. Buying a stock and holding it for a couple days or weeks and like I said sell, not when it hits the top as that is hard to predict but, when you feel you have enough of a profit.

I am interested in all types of trading, as swing trading might not always be ideal in certain markets as is with any other method.

[quote]GhorigTheBeefy wrote:
Ok I guess I need to explain day trading so you guys realize it is shit. Day trading means you buy the stock and never hold on to it for more than 48 hours (excluding weekends). This means you will generally be buying and selling stock each day.

So you have to pay a fee to buy it and you have to pay a fee to sell it. With a day trading account you generally have to have 20+ grand in the account at all times.

So if the stock goes up 10% in one day and you sell for a 10% gain you aren’t getting a 10% Rate of Return. The fees eat day traders alive.

As far as most traders at firms being day traders that is 100% false. Not sure where you heard it but it isn’t true.

At most firms the trader is alloted a certain amount of money…we’ll say 100k. Of that 100k they are only allowed to have a certain % lets say 10-20% in one stock. Also, unless it is industry specific, they generally can’t have a majority in just one type of industry.

Ok so lets see how this works in practice with our example.

Our trader buys 20k worth of Walmart which makes up 20% of the portfolio. The trader then buys 20k worth of another traditionally high performing stock.

The trader now has 60k left to invest but has already invested in their top performers. So now they piddle around and spread that 60k out over a variety of companies for diversity.

This diversity is shit. Diversity means equates to you usually not losing a ton but you’ll never make a ton unless the whole market is going crazy. So this diversity basically breaks even or even loses money for the trader.

So at the end of the day/quarter/year the trader made a good rate of return on the top performers…lets say 20%. Thats pretty fucking good return. But, since he had to spread the rest of the money around the outcome isn’t quite so good. The report is in and the other stocks only made 3% rate of return. Thats not very good unless you are a bank.

Now when the trader sits down to calculate his real return. 40k at 20% = 8000 profit and 48000 in all. The 60k at 3% = 1800 or 61800 in all. So the total is 48k + 61.8k or 109800. So the total ROI was 9800 or 9.8%. That isn’t a bad rate of return but it is a far cry from the 20% return the trader could of potentially made.

The sad thing is that the few good stocks traders pick can make 30-40% then the rest of the portfolio could actually be negative and bring the whole thing down to really low rates of return.[/quote]

Beginner question time, in the example the guy had a 9.8 % return. How is it that firms and hedefunds get returns like 40% if they are not day trading or atleast trading frequently during the quarters/year? Are the stocks they hold just growing dramtically?

Buying and selling stocks is just one of many ways to make money in the markets. Some of those methods are derivatives of the core stock market. For example, many stocks have options, which themselves can be bought and sold.

The professionals use all of the methods.

Please don’t ask me what all those methods are. I only understand a few of them anyway, and I’m not rich yet either. (I’m getting there though.)

I want to be a millionaire!

[quote]xXSeraphimXx wrote:
Well, that is why I said one would have to be trading really high volumes. I guess what I started out asking is what if you buy costco stock, in a week it goes down 2 dollars a week later it goes up 5, you then sell. Sure it could have gone up higher but buy selling you already made a profit.

I was not really implying (well maybe I was) that you trade many times a day but, that you sell as soon as soon as the stock goes up enough(for you), whether it be one day or a week, the stock would have fluctuated a couple dollars in that time.

For ex. yesturday google stock opened at 548 to day it closed at 571 with a high of 575. You only held the stock for a day but you could have made alot of money if you bought enough.[/quote]

Yes, 1% of a really, really big number would be a big number - but there are much safer ways to make the same amount if you start with the really, really big number.

[quote]xXSeraphimXx wrote:
yorik wrote:
UkpairehMombooto wrote:
Don;t kid yourself thinking the measly 25% return you get every year will vault you to millionaire status before youre 40.

If you start at 19 with $10,000 and get 25% return per year with no further capital you’ll be a millionaire at 40, (before taxes.)

I’m just saying.

Thats a pretty high return isn’t it?
[/quote]

Yes. Historical long-term average for the stock market is around 12% or so on an annualized basis - and most professional money managers don’t beat the market long term.

High leverage.

[quote]xXSeraphimXx wrote:

Beginner question time, in the example the guy had a 9.8 % return. How is it that firms and hedefunds get returns like 40% if they are not day trading or atleast trading frequently during the quarters/year? Are the stocks they hold just growing dramtically?

[/quote]

Want to start pointing out all the firms/funds that make 40% consistently? Shit point out a few that make 20% consistently and you can make us all rich.

The ones that perform higher on average give more control to their top fund managers. So instead of 10-20% max for one stock/fund they could pretty much do whatever they want. So they have a much greater chance of making a high rate of return. Course they could lose a whole lot more as well. Thats why they usually have limits.

Eddie Lampert has gotten annual returns of 30% with his fund.

Ok so they have the money to do what they want. I guess I was curious as to why some people say investing for the longterm is better. You buy stocks at a price and over the years it goes up in price, but it will also lose value, aside from dividends is the only way you are making money by hoping the stock goes higher?

It does not make sense to me, why not buy and sell when it has gone up enough(for you), instead of holding with they idea that it will fix itself and rise back up over time? It might make sense because you are amking money for the future but, what if you want it sooner?

I know I am missing something because investors like Warren Buffet buy for the long term, but are still making a lot of money every year. That is why trading methods like day trading, swing trading, scalping etc. seem better because while they are riskier the money is being made now, I don’t understand how investors in stock are getting back high returns yearly if they are just holding them as they go up and down.

Just today I found out one way professionals make so much money day trading. Here’s the explanation…

http://blog.vcmtrading.com/2008/01/23/how-to-net-more-than-you-gross.aspx

In summary, their commissions are mere pennies, plus they get rebates from the ECNs to place trades and drive up volume. For 1000 shares, they’ll pay a commission of 0.20 (yes 20 cents!) and get a rebate of $2.00.

Us poor schmoes paying retail commissions simply cannot do this.

Seraphim:

The reason people don’t day trade is due to the fees. I’m not really sure what part of equation you are having a hard time with.

If you have to pay fees and your daily profit is small then the fees either eliminate any profit or make it smaller. You arn’t going to make 10% in a day it will be more like a % of a %. So you consistently have to be making money each day using a technique where profit margins are miniscule.

When you invest for the long term you generally are only going to pay a fee to buy and/or sell the stock/fund once.

The reason people like Warren Buffet make money each year is because they constantly have investments that are bearing fruit. Ok I buy Ghorig’s Beefy Sausage Corp. at $10 bucks and I want to make 10% at least. So I may have to wait several months to a year. However, I bought Waterbury’s Sweet Bon Bons and TC’s Stripper Shoes 8 months ago and they both went up 20%. So I make money by selling those two stocks now and I’ll hopefully make money later with my stock in Ghorig’s.

Investing isn’t for people who need money now. If you need instant money you are Speculating not Investing.

I hope my examples are helpful.