Ten Things That You Need to Know About the Stock Market

You thinking of investing some of your hard earned money into the stock market? There are some things that you need to know, universal truths that I have come to realize after nearly ten years of investing in the stock market:

1. In the eyes of brokers, individual investors exist solely to absorb risk. Big brokers like Merrill Lynch and Goldman Sachs don't have the interests of individual investors at heart. Their number one concern isn't you making money; it's you absorbing their risk. What does this mean? It means that they want you on the other side of their trades, whether that means selling you a secondary they have underwritten, having you buy an IPO they have underwritten, or upgrading a stock in order to sell their shares to you (it happens, trust me.)

2. Insider trading is as big of a problem as ever. Check out the last fifteen major deals that have been announced. Prior to each one, there was an average of a 300% increase in call option activity on the day before the buyout was announced. People are making millions off of insider trading, and only a few will be caught. There are way too many people involved in complex deals now; inevitably, someone will talk.

3. The SEC is woefully underfunded. Occasionally the SEC will make a big splash and announce that a bunch of people have been indicted for some sort of nefarious scheme. The fact of the matter though is that for every one arrest that the SEC makes, ten offenses slip through the cracks. The SEC simply does not have the resources to properly enforce and regulate the stock market.

4. The big brokers control the Nasdaq and NYSE. The big brokers act in their own best interests, and not in the best interests of the individual investor. Read up on the Pattern Daytrader Rule. This is a prime example of brokers acting in their own best interests. For those who don't know, the Pattern Daytrader Rule is a rule that allows you to only execute three daytrades over a five day period if you have less than $25,000 in your account. This rule was implemented to discourage people from trading their own money, and instead use full service brokerages. I mean, it's my money, how come I can't trade it the way that I want?

5. The only reason that market makers don't gouge you anymore is because they were caught. One of the biggest settled lawsuits of all time occurred in the late 90's. Market makers had been accused of gouging individual investors, and settled for hundreds of millions of dollars. If market makers hadn't been caught, they'd still be extracting their lumps of flesh off of every trade that you execute.

6. Companies exist mainly to create wealth for their top executes. How else do you explain some of the outrageous compensation packages that top-level executives receive? Why is there not more outrage about this?

7. "Gurus" are rarely successful traders themselves. I am talking about people who charge money for their picks. I used to be a guru.  I quit so that I could just trade by myself. Why would a successful trader want the headache of charging money for picks? Because they need the money.

8. Everyone on the stock message boards is hyping their position in one way or another. If they didn't own the stock, they wouldn't be there. Don't believe someone who says "I don't own the stock, but here is what I think.."

9. The first "Internet boom" saw the greatest amount of fraud since the Great Depression. Everyone was in on it. Brokers were hyping positions that they knew were worthless. Commentators on TV were breathlessly hyping stocks. Snake oil salesman on the Internet were hyping their next great pick. The first Internet boom era was second only to the Great Depression in terms of the amount of new regulations that came after. You know that there was a lot of fraud when this aforementioned period resulted in the re-writing of many laws.

10. The stock market is still the best place to invest. After all that, you still can not beat the stock market for rate of return. If you know what you are doing and educate yourself, the sky is truly the limit when it comes to investment returns.

Filed under: Stock Market Education | General Knowledge