Beginner Stock Market Basics
There are currently 9 Market Participant Groups buying and
selling at the same time in the Stock Market. For every stock purchase there is
a seller, and for each buy there is a sell. The role of the Market Maker is to
balance the buying and selling.
There are huge Pension Funds, medium sized funds, small
funds, and tiny funds. There are well managed funds and poorly managed funds.
There are Investor groups, Independent Investors who are wealthy, and
Independent Investors who are just making ends meet. There is the Odd Lot
Investor who buys just a few shares, the Options Traders, and the Futures
Traders. There are also the Market Makers, who are the savviest Day Traders on
the planet.
Market Makers are in this to make money for their company,
but they must abide by the rules. They typically do not want to ever be holding
a position at the end of the day. Their responsibility to the market is to
"make a market" by stepping in if there is no buyer or no seller. The
rest of the time, they are buying and selling just like any other
Professional Trader. If someone places a market order, they can to some extent
dictate the price of that order based upon supply and demand.
However the popular notion that Market Makers are "out
to get the little guys" is inaccurate. The reality is that most Retail
Traders aka "the little guys" who often work from home trading in
100-500 share lots. It would be impractical for the Market Maker to chase such
small orders because there would be no profit in it for them. However there is
also something far more important that has happened to the Stock Market, and
the Market Makers role in the past few years.
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Nowadays most stock orders are routed and executed
automatically. It is estimated that about 80% of all transactions are
fully automated. These orders originate from many different venues, exchanges,
Alternative Trading Systems, Electronic Communication Networks, and foreign
markets. This means that your order is matched with the opposite
required order to fill but not by a Floor Trader or a Market Maker as was the
case in the past, but with a computer program that matches up the orders and
fills them automatically.
Sometimes beginner Investors and Traders place Stop Losses
incorrectly, are taken out of the trade and mistakenly think this may have been
done by the Market Maker. There are hundreds of millions of shares traded
each day, and there are billions of orders placed every day. One 100 share lot
order is lost in such volumes.
If you are taken out of a trade due to an incorrect
placement of a Stop Loss, it was due to the millions of other traders who are
trying to buy or sell that stock. You are for the most part totally unaware of
those millions of other traders. It may also be that you are using a Retail Online
Broker that fills your order out of their inventory of stock. This occurs
frequently with small lot orders placed with brokers that offer extremely low
execution fees, and make up the difference with slippage on the spread.
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Another factor that is relatively new to the markets is the
High Frequency Trading Firms. These are fully computerized orders that are
triggered automatically by an algorithm computer program. These computer based
triggers can fire off 60,000 orders each minute. You need to be aware of
what triggers the High Frequency Trading so that you can either avoid them, or
enter ahead of their millisecond trading. By Securities and Exchange Commission
law, Independent Investors and Retail Traders are not allowed to trade on the
millisecond, only on the one minute. This may seem unfair, but it is designed
to protect you from extreme speculative trading activity.
Another new trading platform are the Dark Pools, with
actually a form of it in existence since the giant Pension Funds were allowed
to invest in stocks. A Dark Pool is a venue where giant lot orders are
transactions. Giant Institutions buying millions of shares of stock do not want
to have High Frequency Trading disturbing price, as they buy in incrementally
over a period of many weeks. This massive buying can distort the balance between
buyers and sellers if it is not done carefully and properly.
Be aware of where, when, and how these Dark Pool Investors
buy and sell.
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Periodically there is an imbalance between buyers and
sellers. When one side overwhelms the market with orders then the Market
Maker as is his duty, steps in to "make the market" and either sells
stock out of his own inventory or buys stock that is offered for sale. When
this occurs, price can move suddenly and in the opposite direction than you
expected. That is why you can end up on the wrong side of the trade.
Summary
Often a beginner Investor or Trader rushes training on the
simulator with paper trading. Take your time until reaching a 75-80% success
rate using the simulator before going live in the market. Learn the 6 different
Market Conditions, and correct Stop Loss placement for your Trading Style.
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Trade Wisely,
Martha Stokes CMT
Chartered Market Technician
Instructor and Developer of TechniTrader® Stock and Option Courses
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