Is the Stock Market Just a Big Casino?

I hear it all the time, “the stock market is just another way to gamble.” But is it a gamble or a calculated risk?

Let’s back up a minute and talk about balloons. Yep, ballons!

What happens when you keep pumping air into a balloon, over and over and over and over again? It eventually pops, right?

So what do you think happens when you keep pumping money into a company (or index) over and over and over and over again? Eventually, it too pops.

Some companies become so overpriced, for whatever reason (usually has to do with profits), that investors begin to sell their stake in them – the stock pops!

If a company is selling for $50 per share (hypothetical) but it is only worth $20 per share on paper, eventually a sell-off will ensue. The company at $50 just cannot keep up with its profits.

Or maybe they were committing accounting fraud, who knows!? But either way, they’re just too expensive for whatever the reason.

Now, take that same company and multiply it by thousands. Why? Because there are thousands of companies in the stock market. Sure, some might be undervalued (worth $50 but selling for $20). But some are also overvalued (worth $20 but selling for $50). When the balance tips in favor of overvalued companies, you get a bubble. Or balloon, you choose the wording.

When there are more overvalued companies than there are undervalued companies, things get risky when buying. This is when a lot of investors will sit on the sidelines in cash… or, they might buy bonds instead. They see the bubble (or balloon) expanding, and they know it will eventually pop (sell-off).

So what in the hell is my point?

Retail investors (you and me) are always the ones to get caught with our hands in the cookie jar at the top of markets. What happens is this: Joe Blow, your market wizard neighbor, sees that company ABC (hypothetical) has been moving up for a month or more. So what does he do? He says “WOW! This is fantastic. Easy money!”, and he buys shares of company ABC.

This is fine if Joe Blow bought the shares at a decent price. But if he did not buy at a decent price, then Mr. Market and Smart Money might decide to sell their shares soon because the company is now overvalued. And when Mr. Market and Smart Money sell shares, it’s usually in extremely large blocks – millions, if not billions of dollars worth. This, of course, drives the share price of company ABC down. Joe Blow is now bankrupt because he invested his whole life savings into company ABC.

Getting back to the original question, “Is the Stock Market Just a Big Casino?” The answer is a resounding NO, in my opinion.

The problem with most (the average) retail investors is this… they fail to do their homework. They don’t perform technical and/or fundamental analysis on the companies they buy into. They, in essence, have no idea what’s going on. So instead of chocking it up to a learning experience, they simply say dumb things like “the market is a big casino. It’s all just a gamble.”

I firmly believe investing is a calculated risk, and not a gamble. This is just my opinion. I relate it to buying a house; would you go out and buy house without researching home values in the area? If you don’t, you might pay thousands more for the house than you needed to. This basic concept applies to the stock market as well.

With all that said… you are never going to win them all. I don’t know of anyone who ever has. Even Warren Buffett has lost on investments.

But with solid analysis (technical, fundamental, or both), I believe it is a calculated risk and not a slot machine.

How Does Short Selling Work?

Short selling is a way to potentially make money in a bear market. When stocks go down, you can profit. Crazy concept huh? After all, as the saying goes, “buy low, sell high.” With short selling, the saying goes, “sell high, buy low.”

This is actually a strategy used by many, even in bull markets. There are always short selling opportunities. Do I short sell? Nope, never have. I do buy put options, which is kinda-sorta the same thing.

So what is short selling?

You borrow shares from your broker and sell them on the open market. Later on – if your analysis was correct and the share price drops – you buy the shares back at a cheaper price than you sold them for, and you keep the difference as profit.

Let’s say ABC is currently selling for $100 per share. You have done your research and proper analysis, and you think ABC is going down. So, you enter a “sell to open” order with your broker, for 100 shares. Your broker lends you those shares and they are automatically sold for $10,000 ($100 per share times 100 shares).

The $10,000 goes into your account, as that is what you sold them for. But DO NOT SPEND THIS MONEY, lol… the trade could go against you.

A week goes by and ABC is down $10 per share to $90. Woo hoo!! Fantastic analysis you did. You decide to close out your position by placing a “buy to close” order. The order is executed, and you just bought the shares back for $9,000 ($90 per share times 100 shares). The broker gets their 100 shares back, and you keep the difference of $1,000 ($10,000 you sold for minus the $9,000 you bought them back for).

Short selling was a bit confusing to me when I first learned of it. I thought, how in the world can you make money when a stock goes down. Well, if your broker is willing to lend you shares, that’s how. You do need a margin account to place short trades. And, of course, margin accounts can be very dangerous for a multitude of reasons.

If you are interested in short selling, contact your broker to find out what you need to do. Also, DO YOUR RESEARCH AND KNOW WHAT YOU ARE DOING FIRST!!

Descending Triangle

I like to keep my charts simple – simple is better! There is no need for a chart to look like a laser-light show. So, my favorite chart patterns are the simple shapes: Rectangles, pennants, flags, and triangles. All are simple, and all are consolidation patterns waiting for a break-out.

Take this /CL chart I did today (/CL is oil futures). An almost perfect descending triangle has been in play since April.

Notice the lower-higs? Notice the major support on the bottom of the triangle? Ya, it’s pretty much a classic descending triangle. If I were to trade a descending triangle, I would simply sell at the resistance (top edge), and buy at the support (bottom edge). Does this mean I will make money? No, but it gives me better odds.

The thing about any chart pattern, is you have to make sure it’s going to end up like the pattern you think it’s going to be. If you notice, oil broke out of the triangle a month ago – that is when the Saudi Aramco attacks happened. But It soon came right back into the triangle, and eventually bounced off support once again. However, if you were bullish on the break out, you would have lost if you held your position. Just goes to show you that NOTHING is 100% certain.

I look for certain things when I think I see a triangle: 1) Has the triangle resistance and support been touched at least 2 times each? And 2) Is the size of the triangle relative to the chart size. What I mean is… if it’s a daily chart, and I think I see a triangle but it has only been in the making for a week or 2, I won’t play it. Notice the chart above has been in play since April – that’s pretty convincing to me.

Lastly, in general, descending triangles usually break to the downside once they break out of that pattern. The opposite is true for ascending triangles. Does it always happen this way? NOPE! Again, NOTHING is 100% in the market, which is why you must do your homework and stay diligent with your trades.

ZERO COMMISSION AT TD AMERITRADE

Woo hoo! My broker, TD Ameritrade, now has ZERO commissions. I am very excited about this.

TD Ameritrade announced this a couple days ago, after Charles Schwab announced they were doing the same. The zero commission trades on stocks, ETFs and options started this morning; Charles Schwab rolls their zero commission out on October 7.

I can only assume this is the latest, greatest, and next big thing to hit the online broker market. We can all thank Robin Hood for this, as they were the first to do so a while back.

This is really fantastic news in my opinion. Prior to this morning, I paid TD Ameritrade $6.95 for stock and ETF trades, and $6.95 PLUS .75 cents PER contract for option trades. YIKES! For options, that adds up quick! There is still a per contract fee for options, but it’s only .65 cents per contract and that’s it.

If you are a long-term investor and hold your investments for 6 months, year, 2 years, etc., then the fees were probably no big deal to you. However, for people like me – swing traders and day traders – the fees added up QUICK!

I placed my first option trade this morning with the new zero commission thing, and it felt GREAT!!