Price Discovery Explained For Beginners

Financial Advise
What is Price Discovery

Price discovery is the process where buyers and sellers determine where a transaction can take place based on supply and demand.

This evaluation process uses the economic concept of supply and demand to find a price where a buyer and a seller agree to trade.

The supply and demand for an asset are based on several factors including the future abundance of an asset in any specific location. Transaction costs, as well as transportation costs and the storage of an asset, can play a pivotal role in determining the price discovery.

The formula to determine price discovery is ever-changing and will be different for each asset.

Why It’s Important

Did you ever notice that when a new company stock trades for the first time on an exchange like the NYSE, it can take a while for buyers and sellers to agree on a price?

What generally occurs is that buyers move their bids higher and the seller moves their offers lower until a trade is transacted. This process is called price discovery. Its were buyers and sellers agree to a price to allow a transaction to take place.

The process of setting a price on any asset, whether is a security a commodity, or currency pair is referred to as price discovery.

Traders will evaluate several factors including supply and demand, risk, politics, as well as the economic environment during the price discovery process.

How Does It Take Place

The study of price discovery is a relatively new theory, but the concept has been around for thousands of years.

Every barter for goods or services is part of the price discovery process.

Every street market where a vendor is willing to negotiate participates in price discovery. As you can imagine this will change from transaction to transaction.

The Development of Price Discovery

The bizarre in China and India provided some of the first marketplaces around the globe. The issue for buyers and sellers was that the same product could trade simultaneously in separate locations and experience different prices.

The supply and demand in a specific location could be very different and it could take weeks or months for buyers and sellers to realize that prices were higher or lower at a different location.

For prices to be consistent they rely on traders to close an arbitrage.

The term arbitrage means the simultaneous buying and selling of assets in different markets to take advantage of differing prices.

A location arbitrage means that the price difference allows you to transport the price from one location to another and still make a profit.

Vehicles and the telephone helped close location arbitrages around the globe.

The modern-day marketplace has morphed from an in-person ring of traders to an electronic auction where traders place bids and offer to help in the price discovery process.

The advent of an electronic auction has increased market transparency, but still provides scenarios where trades can simultaneously take place at different prices.

Sophisticated electronic trading programs are constantly scanning all possible electronic trading platforms to take advantage of any price anomalies.

Price Discovery in the Marketplace

Price discovery is the most important function of a marketplace.

Every market participant has a reason to purchase and sell at a specific level.

As markets become transparent, the liquidity that is provided creates a smooth movement in price action. Consistent price movements due to observable price discovery increase confidence in a market.

When price discovery is opaque, investors tend to shy away from trading.  Opaque markets tend to have wide differences between where traders are willing to purchase and sell an asset.

Generally, fewer traders are involved in opaque markets.

While the difference between the bid and offer will narrow to generate a trade in an opaque market, investors understand that exiting a position could take time.

For example, you should be confident that you can exit a position in Apple shares immediately after you purchase them. This would not be the case if you decided to purchase a cabin in the middle of an uninhabited rural area.

One of the downsides of a highly transparent asset is that large quantities can be moved quickly which can generate whipsaw price movements.

When it Concerns Day Traders

Price discovery mainly concerns day traders on days IPOs open up for trading and there is no previous price action to trade off of.

In the first few hours of trading, shares can be very whippy and hard to trade. This is because it’s the first time the shares have traded on the open market which means there are no real levels of support and resistances.

This means shares can be very volatile. Trading with that type of price action can be hard to manage risk which could end up costing you a lot of money.

One way to approach IPO trading, especially for beginners, is to let the morning trading cool off. Let the stock establish levels of support and resistance.

This will give you something to trade off of and provide you with a way to manage risk.

In the example above, Palantir Tech (PLTR) opened up for trading on September 30. Prices were going back and forth between $10.20 and $11.40 before settling down and establishing and trading range.

Then you can see that at $10.60 prices started to hold on multiple occasions before breaking down and trading lower for the rest of the day.

This is what you want to wait for, especially on IPOs.  Allow prices to establish some sort of price discovery to trade from and then take advantage of the moves when they breakup/down.

Price Discovery and Valuation

When markets are active with thousands of traders placing bids and offers, they tend to be transparent. The price discovery process can be relatively easy. Price discovery is not the same as valuation.

The process of trading uses a model-driven concept to determine that the current price is either overvalued or undervalued relative to future prices. This differs from price discovery which is a market-driven concept that determines the current price of an asset.

Terms such as fair value, focus on the future value of an asset relative to price discovery which is geared to determining the current value of an asset. For traders, price discovery provides a key metric for determining future price values.

For example, if you don’t know the price today, you cannot bet on the future price value.

What Influences Price Discovery

Several factors influence price discovery.

Some of these impetuses include:

  • Availability of an asset
  • The demand for an asset
  • The available information
  • Whether the asset is fungible (meaning it’s the same assets in all locations)
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Dotcom Bubble

Finance News
What is the Dotcom Bubble?

The dotcom bubble was the exponential rise of tech stock prices between 1995 and 1999. While tech stocks were on fire throughout the late 90s, the real explosive growth came in 1998 and 1999.

The period was a time of market mania in which plumbers and mechanics were becoming millionaire day traders, tech IPOs would multiply on their first days of trading, and vanity metrics such as “eyeballs” or “mind-share” were becoming serious valuation metrics for analysts of technology companies. 

While the dotcom bubble spawned many spectacular failures like Pets.com and Webvan, some of the largest companies in the world went public during this time.

Companies that shape the world we live in today, like Amazon, eBay, and Priceline. Others, like Google and Netflix, were privately founded during the bubble. 

Once the bubble popped, the NASDAQ 100, the index which featured the most prominent tech stocks of the era, had dropped more than 80% peak-to-trough.

Dotcom Bubble Chart
Dotcom bubble

 When you hear trader interviews on a podcast like Chat With Traders, they speak of the dotcom boom as a time of unconstrained mania that will never return.

A time when just about anyone can make a fortune trading, even without a sound methodology. “Taking candy from a baby” is a common analogy. 

Bubbles tend to occur during times when credit is freely available, and other macroeconomic factors like unemployment and inflation are at healthy levels. When lending is permissive, companies that wouldn’t survive under less favorable conditions get funded and contribute to the bubble.

Of course, macroeconomic factors are just one piece of the puzzle. 

As you’ll see in this article, I think people tend to oversimplify how many factors lined up at just the right time to create this bubble. The bubble can be attributed to the culmination of several factors in the flavors of the rise of the internet’s utility for commerce, socioeconomic trends, macroeconomic trends, and trends in demographics. 

The Early Seeds of the Dotcom Bubble

The boom was the perfect storm of a few factors that contributed to the rapid across-the-board growth of US equities, and tech stocks in particular.  

Most commentators and pundits refer to the rise of the internet in the mid-90s as the catalyst for the bubble. Still, the first seeds of the bubble were actually planted during the US presidential election of 1980 when Ronald Reagan campaigned for social security funds to automatically be invested into the stock market.

In the coming years, Americans would become consumed by stocks and the economy defined by markets. 

Until the 80s, the stock market was seen as a dull, old man’s game. Most savings were invested in bonds and securities other than stocks. Any run-up in the stock market would be accompanied by a congruent downfall in prices, presenting itself as an unattractive place to park your money.  

Americans who lived through the Great Depression were forever skeptical of the stock market. Significant bubbles couldn’t happen because not enough people would get involved.

Those who did still had their Depression-era ideals, that anytime the getting is too good, a Depression is probably right around the corner.

Market skepticism was a safeguard against bubbles. It wasn’t until the baby boomers were ready to start investing that a real bubble could inflate. 

By the late 1980s, when Alan Greenspan took over as the Chair of the Federal Reserve, the stage was being set for a massive stock market bubble. Americans were already interested in stocks again due to the rise of the hostile takeover, creating enormous price spikes in declines in just one day. 

The market was getting ready for a bubble; it just needed boomers to get a bit older, and a new catalyst: the internet. 

How Did the Dotcom Boom Happen?

When looking back at the period, there were so many factors converging at the same time that laid the groundwork for a massive asset bubble.

The most obvious is that the internet was becoming advanced and ubiquitous enough that it began to have serious potential for businesses.

Still, several other factors were at play, all acting as contributors to the bubble.

The Demographics

Baby boomers were the largest American generation up until that point. As a consequence, their attitudes and situations at any given time shaped that of the entire nation. In the late 1990s, 76 million boomers were entering their prime earning years–their 40s and were beginning to save and invest for retirement.

 Boomers, who were about to become the largest buyers of stocks, were especially ripe for building an asset bubble because throughout their entire lives up to that point, stocks have basically only gone up.

They hadn’t gone through the Great Depression and developed the market-skepticism of their parents.

The Economy

The 1990s economy under Federal Reserve chairman Alan Greenspan, or ‘Uncle Alan’ as Wall Street fondly called him, was referred to as the Goldilocks Economy. The level of unemployment, inflation, and interest rates was just right.

 Greenspan was a fan of expansionary monetary policy.

He favored lowering interest rates when he could to stimulate the economy, and as a result, the stock market. Uncle Alan also adored the new technological advancements coming out, and largely bought into the dotcom hype.

 Throughout the bubble, each time stock prices would fall, Wall Street would trust that Uncle Alan would be there to ‘save’ the market. In later years, Greenspan would admit that he and the Federal Reserve made many mistakes in the handling of the tech boom.

The Advent of Financial Entertainment

If you’re an American, you’re undoubtedly familiar with 24-hour news networks like Fox News and CNN. Endless pontification, oversimplification, and verbal quarrels for entertainment, not informing the public.

 You might be surprised to hear that CNBC served as a proof of concept for these networks. Roger Ailes, a media executive, known for turning Fox News into what it is today, first tested the “entertainment news” idea on CNBC when he became the president of the network in 1993.

CNBC anchors began reporting market news with the same excitement and suspense as a sportscaster like Chris Berman.

 The network made trading and investing fun and easy. CNBC replaced local news and even sports as the programming of choice at restaurants, cafes, and bars. It wasn’t abnormal to see CNBC playing in an NYC pizza joint.

Democratization of Investing

Before the advent of online discount stock brokers, Americans were used to full-service brokers, from whom they were charged sky-high commissions for stock tips and investing advice. Most deferred to the wisdom of their broker and seldom concerned themselves with the gyrations of the market.

 Online brokerages like E*TRADE, Datek Online, and Ameritrade enabled retail investors to fire their brokers and make trades for a fraction of the former cost, at the click of a button.

As much as 40% of individual investors with financial assets between $25,000 and $99,000 made their first stock trade after January 1996.

These greenhorn investors were chasing the hottest tech IPO, hoping to double their money overnight.

Valuation Confusion

Internet companies were a whole new breed. Few on Wall Street had much knowledge about the internet. But, everyone intuitively understood how much leverage a company could have access to if the internet was properly harnessed.

So, while a few companies were making any profits, or even sales, investors knew that their future earning potential is virtually unlimited.

 So, the market had no idea how to value these high-risk, high-potential, pre-earnings tech companies. Because there was no accepted methodology, hype and FOMO came to rule valuations, leading to a violent downturn as the bubble popped.

 Seeing as professional money managers and analysts couldn’t figure out how to value internet stocks, how well do you think amateur investors were at evaluating uncertain future earnings growth? 

The Stars of the DotCom Boom
Henry Blodget

One of the stars of the dotcom boom was Henry Blodget. Blodget was a young analyst at Oppenheimer, a lower-tier investment bank at the time. He was mostly hired due to his youth, as banks were looking for anyone with unique insight into internet companies.

Out of mostly luck, Blodget’s first recommendation on Amazon.com’s stock was a huge success, leading to him becoming a stock market celebrity on Wall Street and Main Street. He was a frequent guest on CNBC, and retail investors heavily followed his stock picks.

 He was soon hired as the head of global internet research at Merrill Lynch in his early 30s and became the most followed analyst on Wall Street. Before the bubble, there was really no such thing as a celebrity research analyst, but the CNBCization of the market, as Brian McCullough of the Internet History Podcast called it, was turning trading into the new national pastime. 

In her book about bull market cycle that started in the 80s, Maggie Mahar described Blodget as an ordinary young guy who didn’t have any more internet wisdom than your average web user, but was catapulted into fandom due to bank’s need for internet stock picks.

She goes onto explain how, in every asset bubble, there is a non-expert propelled into expert status based on faulty criteria, and Blodget was that guy. 

Alan Greenspan

Alan Greenspan, or ‘Uncle Alan,’ as Wall Street referred to him, is often blamed for his role in allowing the market and economy to get out of hand. The 90s was the time of “Goldilocks Economy,” where inflation, interest rates, and unemployment levels were just right.

Retail and institutional investors alike revered Uncle Alan for ‘saving’ the market each time things got too out of hand.  

Greenspan became enamored with the “new economy” like the rest of the market. At one point, when productivity statistics weren’t as favorable as he believed they should be, he ordered the recollection of the data.

He firmly believed that new technology had to be improving productivity across the board, and thought the conventional calculation methods weren’t capturing the increased productivity. 

Uncle Alan became such a believer in the bull market that he did whatever he could to support and prop the market up, based on the belief that this bull market was different, that this level of technological innovation has never occurred inside such a compressed time period, and deserved the same unprecedented price movement.

 Greenspan created an environment where too much money was chasing too few assets. 

What We Can Learn From The Dotcom Bubble
Innovation Doesn’t Equal Returns

Of the several internet companies that went public during the dotcom bubble, a small handful is still around in a meaningful way: Amazon, eBay, and Priceline come to mind, with a few other smaller companies still around. 

Investors in the 1990s knew that the internet and computers were going to change the world. But, sometimes, calling a trend correctly doesn’t convert into investment returns. Those around at the start of the automobile industry probably knew cars would change the world, too, but unless they heavily weighted into Ford, GM or Chrysler, their portfolios were also crushed. 

There’s a significant Pareto distribution at play here. In a new industry like the internet, a tiny percentage of companies will ultimately succeed, and of those that do, they get a giant slice of the pie.

Investing in the Future

Most investors pay a premium for a company with massive future potential, but nothing to show for it today. This is backward, as the vast majority of companies with new, untested ideas fail. Think about how many companies have tried to enter the alternative energy space.

Outside of Tesla, can you think of any massive successes? In industries like these, losers outnumber winners big time, and you should expect that to be priced into a stock that you’re buying based only on its future potential.

 Bottom line: when investing in new, untested ideas, your price should reflect the massive risk inherent within.

Valuation Matters

A share is a claim on a company’s earnings. If a company in a new, frothy industry is trading at sky-high multiples of their earnings, the market is pricing in massive growth. But, the thing about companies within frothy sectors is that the vast majority fail in the long run.

Once the hype and momentum cool down, and the traders get off the train, the real investors are going to be expecting to see some earnings. Once the positive-feedback loop of price advancement stops, the stock usually craters.

 Even the strongest companies of the era, Amazon, Cisco, etc., were still brutally punished as the bubble burst. Once rationality set in, the buyers who survived the crash were only willing to buy proven companies that can justify their valuation. 

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Top 5 Most Famous Traders Of All Time

Finance News

In all industries there are people credited to being the best.

In design, the late Steve Jobs is credited to being the best in his industry. In boxing, Muhammad Ali was credited to being the best boxer of all time.

In U.S. politics, there is a consensus that Abraham Lincoln was the nation’s greatest President by every measure applied.

In the trading world, a number of traders are known worldwide for their skills. From Jesse Livermore to George Soros, we are sharing these tales of past and present traders who had to claw their way to the top.

Here, we will look at the five most famous traders of all time and cover a little bit about each trader and why they became so famous.

Jesse Livermore

Jesse Livermore jumped into the stock market with incredible calculations at the age of 15, amassed huge profits, then lost them all, then mastered two massive crises and came out the other side while following his own rules, earning him the nickname “The Great bear of Wall Street.”

Livermore was born in 1877 in Shrewsbury, Massachusetts.

He is remembered for his incredible risk taking, his gregarious method of reading the potential moves in the stock market, derivatives and commodities, and for sustaining vast losses as well as rising to fortune.

He began his career having run away from home by carriage to escape a life of farming that his father had planned for him, instead choosing city life and finding work posting stock quotes at Paine Webber, a Boston stockbroker.

Livermore bought his first share at 15 and earned a profit of $3.12 from $5 after teaching himself about trends.

George Soros

George Soros has an incredible backstory.

Born in Hungary in 1930 to Jewish parents, Soros survived the Holocaust and later fled the country when the Communists took power. He went on to become one of the richest men and one of the most famous philanthropists in the world.

Most day traders know him for his long and prolific career as a trader who famously “broke the Bank of England” in 1992. Soros made a huge bet against the British Pound, which earned him $1 billion in profit in just 24 hours.

Along with other currency speculators, he placed a bet against the bank’s ability to hold the line on the pound. He borrowed pounds, and then sold them, helping to push down the price of the currency on forex markets and ultimately forcing the UK to crash out of the European Exchange Rate Mechanism.

It was perhaps the quickest billion dollars anyone has ever made and one of the most famous trades ever taken, which later became known as “breaking the Bank of England”.

Soros is believed to have netted a total of about $44 billion through financial speculation. And he has used his fortune to fund thousands of human rights, democracy, health, and education projects.

Richard Dennis

There are only a handful of traders that can take a small amount of money and turn it into millions and Richard Dennis was one of them.

Known as the “Prince of the Pit”, Dennis is said to have borrowed $1,600 when he was around 23 years old and turned it into $200 million in about 10 years trading commodities. Even more interesting to note, he only traded  $400 of the $1,600.

Not only did he achieve great success as a commodities trader, he also went on to launch the famous “Turtle Traders Group”. Using mini contracts, Dennis started to trade his own account at the Mid America Commodity Exchange.

He made a profit of $100,000 in 1973. The following year, he capitalized on a runway soybean market to earn $500,000 in profits. He became an outstanding millionaire at the end of year.

However, he incurred massive losses in the Black Monday stock market crash in 1987 and the .com bubble burst in 2000.

While he is famous for making and losing a lot of money, Dennis is also famous for something else – an experiment. He and his friend William Eckhardt recruited and trained traders a handful of men and women how to trade futures. These so-called Turtle Traders went on to make profits of $175 million in 4 years, according to a former student.

Paul Tudor Jones

Paul Tudor Jones thrust into the limelight in the 80s when he successfully predicted the 1987 stock market, as shown in the riveting one hour documentary called “Trader”.

The legendary trader was born in Memphis, Tennessee in 1954. His father ran a financial and legal trade newspaper. While he was in college, he used to write articles for the newspaper under the pseudonym, “Eagle Jones”.

Jones kicked off his journey in the finance business by trading cotton. He started trading on his own following 4 years of non-trading experience, made profits from his trades but got bored, and later hired people to trade for him so he would no longer get bored.

But the trade that shot him to fame came on Black Monday in 1987, when he made an estimated $100 million even as the Dow Jones Industrial Average plunged 22%.

He became a pioneer in the area of global macro investing and was a huge player in the meteoric growth of the hedge fund industry. He is also known for betting on currencies and interest rates.

He founded his hedge fund, Tudor Investment Corp, in 1980. The fund currently has around $21 billion in assets under management and he himself has an estimated net worth of nearly $5.8 Billion.

John Paulson

Super-trader John Paulson built a personal fortune worth $4.4 billion from managing other people’s money. Born in 1955, Paulson made his name and much of his money betting an enormous amount of cash against the U.S. housing market during the global financial crisis of 2007–2008.

Paulson bought insurance against defaults by subprime mortgages before the market collapse in 2007. He netted an estimated $20 billion on the collapse of the subprime mortgage market, dubbed the greatest trade ever.

However, his track record since that bet has been patchy at best. In the years following the financial crisis, Paulson struggled to match this success.

Failed bets on gold, healthcare and pharmaceuticals stocks caused investors to flee his hedge fund Paulson & Co, cutting its assets under management to $10 billion as of January 2020 from a high of $36 billion in 2011.

Earlier this year, Paulson announced the fund would stop managing money for outside clients and turn it into a family office. He launched the fund in 1994.

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What Is The Best Strategy For Small Accounts?

Financial Advise

Most people often start to day trade with a small account and then build their bankroll and skills as time goes by.

Not only is starting out small a great way to limit your losses, it is also an excellent way of gaining the experience you need to be confident.

A small account requires you to make smarter stock selections since you don’t have as much capital to throw around. So being picky is a good thing!

But what is a good strategy for small accounts?

There is no one perfect strategy – no matter your account size.

However, we have found the bull flag pattern to be a great beginners day trading strategy that is easy to learn and identify.

Trading a small account

If you are going to be trading with a small account, you will not have a lot of room for error. Entries will be key for managing your risk so be patient and pick the best possible spots to get in.

Ensure to stay away from setups that are not A+.

Your main goal with a small account is to protect your capital and take profits when you can. It will be a grind but as you grow your account you will allow yourself more of a cushion to take more risk on.

Additionally, you have to exercise extreme patience while waiting for your setup to evolve and trigger a buy/sell signal in a small account.

Don’t just trade to trade as that will almost certainly send your account down the drain with fees and losses hurting your capital.

You also need to know when to jump out of a trade and trim your losses before they mount. That means you need to learn how you to use a stop loss order and a popular profit-taking strategies that are used by day traders.

Discipline is key no matter your account size, but it is especially important when you have limited capital.

Why stock selection and risk management is crucial

Stock selection and risk management skills are critical in trading a small account.

The market has thousands of stocks, ETFs, and mutual funds that you could trade. Traders have to pick between 5 to 10 stocks worth trading daily, and maintain a decent accuracy of winners versus losers in order to make profit.

They do this by looking for stocks that have big upside potential. Almost every single day, there is always at least one stock makes a 20-30% intraday move. These are the types of stocks professional day traders love.

To get a piece of the action, traders usually jump into these stocks as soon as one of them starts popping up. Keep in mind that the stock market runs on crowd mentality and rumors, so when a stock begins to make a move, other traders get on the bandwagon.

However, it’s important to remind everyone that just because some experienced traders can make stock selection easy, it does not mean profitability is easy.

Trading is difficult, and it requires quite a lot of dedication to make consistent profits.

Bull flag pattern

While there is no bullet proof strategy no matter the account size, we favor the bull flag pattern for trading a small account, due to its low risk entry points with potential big winners.

A bull flag is a chart pattern that forms when a stock is in a strong uptrend. The reason why it is called a flag pattern is because when it forms on a chart, it looks like a flag on a pole and since we are in an uptrend it is considered a bullish flag.

Typically, a bull flag pattern has the following features:

  • Stock has made a strong move up on high relative volume, forming the pole.
  • The price of the stock consolidates near the top of the pole on lighter volume, forming the flag.
  • Stock breaks out of consolidation pattern on high relative volume to continue the trend.
Bull flag chart pattern
How to trade the bull flag pattern with limited capital

Bull flag patterns are an excellent setup for traders with small accounts or limited capital because they are easy to identify once you understand what to look for.

Like most patterns, volume must be present on the breakout. This confirms the pattern and increases the likelihood that the breakout will be successful.

Here is a checklist for trading bull flag patterns after identifying one:

  • Stock is moving up on high relative volume, preferably from a news catalyst like earnings or CEO resignation.
  • Stock consolidates at or near highs with a defined pullback pattern.
  • Buy when the stock breaks out above the consolidation pattern on high volume.
  • Place a stop order below bottom of consolidation pattern.
  • Your profit target ought to be at least 2:1 risk/reward. Therefore, if you are risking 30 cents, then first profit target is 60 cents from your entry price.

Trading the bull flag is pretty straightforward and strategy that any aspiring trader can learn.

The challenging part of trading this pattern is spotting it in real-time.

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What Are LUPA Stocks?

Finance

You may have heard stock traders discussing “LUPA” stocks. But what are they?

LUPA is a relatively new acronym that refers to four high-profile tech companies that have made their public debuts in recent years:

  • Lyft Inc
  • Uber Technologies Inc
  • Pinterest Inc
  • Airbnb Inc

Take the first letter of each stock and you get LUPA. These stocks are also referred to as “PAUL” stocks.

In this article, we will first look at LUPA stocks as a whole then drill down into each stock.

LUPA Stocks

LUPA stocks are often grouped together for a number of reasons. First, they are all tech companies, meaning that they all generally operate within the same market sector.

For example, Lyft and Uber both operate online ride-hailing services, Pinterest runs an image-based social media network, while Airbnb is an online home-sharing giant.

Second, before they went public, these companies were “unicorns,” which meant that private equity investors had valued each company at more than $1 billion. Lastly, they are all recent IPOs that hit public markets with a mix of copious red ink and heady growth.

Here is a deeper look at each of the LUPA stocks to help you understand their business model and growth potential.

Lyft (NASDAQ: LYFT)

Lyft began trading on the NASDAQ on March 29, 2019 and became the first ride-hailing company to become publicly traded in an eagerly-awaited market debut that netted it a valuation of about $18 billion.

Lyft and rival Uber have been challenging each other for dominance in the ride-hailing industry for years.

However, Lyft is only available in is only available in Canada and United States unlike the world-spanning Uber. Lyft boasts a market share of about a 35% in the United States.

But like Uber, Lyft is also deeply unprofitable. Both companies provide basically the same basic services so the competition boils down to market share, driver pay, and other factors that can help get them to positive cash flow.

Shares of Lyft soared 8.7% in its first day of trading after opening at $87.24, well ahead of its initial public offering price of $72 per share. But the stock has taken quite a hit since completing the IPO. It is currently changing hands at $57.06 per share with a market cap of about 18.79 billion.

Uber (NYSE: UBER)

Uber went public in May 2019, ten years after Garrett Camp and Travis Kalanick launched the company. The Lyft competitor priced its public offering at $45 a share valuing it at about $82.4 billion. It raised $8.1 billion from the offering.

But the stock began a downward trajectory as soon as it went public. At the time of this writing, shares of Uber are currently trading at $49.80 apiece.

There have been concerns from investor about the company’s business model and workplace culture. Uber has previously been rocked by a series of scandals, including sexual harassment, embarrassing leaks about the conduct of top executives, and questionable spy programs. Kalanick was ousted as CEO of ride-hailing behemoth after a shareholder revolt in 2017.

The company also faces stiff competition both in its ride-sharing and food delivery services, and price wars with Lyft and other rivals in each market are projected to continue.

While CEO Dara Khosrowshahi described Q1 2021 as the “best quarter ever” for Uber as gross bookings hit an all-time high, the company still posted a net loss of $108 million.

However, that was a drastic improvement from the $968 million net loss the company recorded in the fourth-quarter of 2020.

Pinterest (NYSE: PINS)

Pinterest is a social media site that allows users to visually share, and discover new interests by “pinning” videos or images to their own or other’s board and browsing what users have pinned.

People use it to get inspired across a variety of subjects like interior design, cooking, clothing and travel. Simply put, it is a visual platform optimized to inspire users with new ideas and understand one’s tastes.

Shares of Pinterest began trading in April 2019, giving the company a valuation of $10 billion.

Pinterest has been able to put together a solid business since it was founded in 2010. As of Jan. 2021, the company ranks as the 14th biggest social media network in the world in terms of global active users. It ranks below social sites such as Facebook, Snapchat, Instagram and TikTok — but above Twitter.

In 2020, Pinterest added more than 100 million monthly active users, its biggest ever increase. While the company does not pose much of a threat to social media titans Google and Facebook, some analysts believe there is still room for it to grow.

The core of its philosophy is that by inspiring its users with products, ideas, etc., it creates value for both its shareholders and its users. Over the last year, the company has raised its average revenue per user (ARPU) substantially in all markets, while user growth was reasonable.

Airbnb (NASDAQ: ABNB)

Airbnb finally hit Wall Street in December 2020 after years of toying with the idea of whether to become a public company or not.

The IPO capped a meteoric rise in valuation for the company. According to PitchBook, Airbnb’s Series A fund-raising round in 2010 gave it a valuation of $60 million.

A decade later, during a pandemic that has battered the travel industry, the company is worth more than $100 billion, or more than Marriott and Expedia combined.

Airbnb has already rapidly grown since it was founded in 2008, but it is expected to expand even further now that it has gone public.

The home-rental company has also made several acquisitions in the last few years to expand its offerings. The most notable acquisition is HotelTonight, an app that allows users to book their stays last minute. Airbnb completed the acquisition of HotelTonight in 2019.

Airbnb has a network of more than 4 million hosts spread across 220 countries and more than 100,000 cities. The company derives just over 50% of its revenues in North America, another 30% in EMEA, and the rest in Latin America and Asia-Pacific.

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Want To Become A Day Trader? Here Are The Pros And Cons

Financial Advise

Day trading has grown in popularity particularly in the past year as more and more individuals sought financial freedom and the ability to live life in a way that is meaningful and fulfilling to them amid the global coronavirus crisis.

The surge in amateur day traders has helped to create a record number of new accounts at brokerages like Robinhood, TD Ameritrade, and Charles Schwab (NYSE: SCHW).

Such small-scale traders now account for a fifth of overall stock-market trading activity, according to some estimates.

In this article, we will dig deeper into the main benefits and downsides of day trading to help decide whether day trading is the right thing for you.

What Is Day Trading?Day trading is one of the most common trading styles that is used by traders around the world.

This speculative trading style involves opening single or multiple trades during a day and exiting them by the end of the current trading day.

Simply put, day trading is the act of buying and selling stocks on the same day, based on price fluctuations.

Example

If you open a new position at 8:45 a.m. and close it by 2:00 p.m. on the same day, you have completed a day trade.

If you were to open the position and fail to close it later that same day, it would not be considered a day trade.

Unlike in position trading or swing trading where trades are held for weeks or days, day traders can immediately analyze their trading performance by the end of the day.

Day traders generally spend over 2 hours every day to watch short term price movements and trade setups. They use advanced charting systems that are plotted by 1, 5, 15 or 30 minute intervals.

Pros Of Day Trading

Under the right circumstances, day trading can be an amazing career option with plenty of benefits. Let’s take a look at a few of them.

However, this line of work isn’t for everyone. Successful day traders need to be self-motivated, disciplined, levelheaded and financially independent.

If you’re thinking about pursuing a career in day trading, compare your own personality profile against this list of key characteristics and personality traits.

  • You are your own boss

To begin with, most day traders work from home and don’t have hard-nosed bosses telling them what to do at all times. Even better, successful traders may earn enough money to live life comfortably.

They simply stay on task during trading sessions and commit to intensive preparation and research sessions. After settling upon a profitable strategy, they stick with it until it no longer works.

  • Day trading provides you an opportunity to earn a comfortable living

There are not many things that can equal the emotional high that comes with a sweet profit achieved solely by the effort of a single individual.

As a day trader, you have the opportunity to make a great living, provided that you have a well thought out strategy, understand the inner workings of the financial markets, and can afford to take the risk.

For example, on March 7, 2015, an options trader raked over $2.4 million based on a single news wire in just 28 minutes.

According to CNBC, the trader executed the trade after a respected Wall Street Journal reporter tweeted at 3:32 pm that Intel (NASDAQ: INTC) was holding talks to acquire Altera.

Shares in Altera began to shoot up, so much so that the stock was halted after only three minutes at 3:35 pm. But within that short time period, the trader was able to place a bid for 300,000 Altera options at $36 a share.

At the closing bell, Altera shares were up $44.39 helping the trader to make more than $2.4 million.

Granted these types of gains are not normal and shouldn’t be expected especially if you’re just starting out. But it is possible.

You can also make or lose more money by utilizing leverage i.e., money that you borrow from your broker to in order to trade more, which most day traders use.

  • A variety of trading strategies

Day traders has several trading strategies they can use to trade across all major markets. Some of the most popular day trading strategies include trend-following, breakout trading, and counter-trend trading.

  • Overreaction to news

Markets consist mostly of humans, and they tend to overreact to news.

This is why you will see big price moves when certain news is released. Day traders often take advantage of that behavior and squeeze out extra profits.

Volatility is what day traders look for.

Cons Of Day Trading

Day trading can be rewarding, but it also carries a high risk. First, there is never a guarantee that you will earn money.

As a matter of fact, the U.S. Securities and Exchange Commission (SEC) says that “day traders typically suffer severe financial losses in their first few months of trading.”

A good example is what happened in late January during the Gamestop Reddit mania that puzzled Wall Street and triggered federal scrutiny.

Shares of some heavily-shorted stocks including Gamestop (NYSE: GME) rocketed to record highs before plunging back to earth.

While some traders made a fortune by trading these stocks, those who failed to time the trade perfectly lost money.

Here are two other top risks in day trading:

  • It requires capital

Day traders need to have the right computers and software to access the necessary financial information and spot the price variations.

The U.S. law also requires that day traders maintain a minimum of $25,000 in their trading accounts at the end of the trading day if they want to make at least four round-trip trades over a period of five days.

In addition, taxation can become a nightmare because you may acquire capital gains and losses when day trading various instruments available in financial markets.

  • Success tends to be closely tied to the state of the current market environment

When the market is in a period where there is no huge upward or downward moves, day traders often lose their cash by churning their accounts and holding onto losers too long.

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How Many Day Trades Can You Make In A Week?

Financial Advise

As with kicking off any career, there are plenty of things you should learn if you have dubbed yourself a brand-new day trader.

Not only will you need to decide what to trade, when to trade, how to manage your risk, but you’ll have to get the right software and equipment, and of course, determine how many day trades you can make in your brokerage account.

In this detailed guide, we will go over how many day trades you can make in a week depending on what type of account you have. 

What is a Day Trade?

A day trade is when you buy or short a financial instrument and then sell or cover the same instrument in the same day with the goal of making a profit.

For example, if you buy 100 shares of XYZ stock at 9 am and sell all the shares at 1 pm on the same day, you have completed a day trade. Just opening, without closing that position that same day, would not be considered a day trade.

Another day trade example is when you open a position to purchase 200 shares of XYZ stock at 9:30 am, followed by a purchase of another 200 XYZ shares at 2:30 pm, followed by a sale of 400 XYZ shares at 4 pm.

In addition, if you short sell 150 shares of XYZ stock at 9:30 am and then open a buy position to cover 150 shares of XYZ stock at 10:30 pm, you will have made another day trade.

Individuals who indulge in this style of speculative trading are known as day traders. The most common day traded financial instruments are stocks, futures, and forex.

Day traders typically make use of technical analysis tools and a trading strategy to try and profit off within a short period of time and will often take advantage of portfolio margin to boost their buying power.

Successful day traders don’t just trade any stock they come across. They have to be fully prepared with a well-planned strategy and employ a wide variety of techniques.

Cash Accounts and Margin Accounts

If you are looking to day trade securities, you can do so using an online brokerage account. Generally, there are two main types of brokerage accounts: cash account and margin account.

The difference between a margin account and cash account is that the margin account lets you borrow from your broker while the cash account does not.

In other words, when you open a cash account with a broker, you will be required to pay in full for the securities you buy for your account. If you have $200, you can only buy $200 worth of securities, and can’t use the securities in your account as collateral to borrow more money.

On the other hand, if you open a margin account, you can borrow money from the broker to buy securities, using those securities as collateral for the loan. Generally, when applying for this type of account, the process has to be approved by the broker to make sure you are qualified for the account.

Margin accounts also come with special features for active traders, like short selling.

Now that your understand the difference between the two accounts, let’s dig deeper to find out how many day trades you can take in a week in a cash account and how many you can take in a margin account if you are under $25,000 and if you are over.

How many day trades you can take in a week in a cash account?

One of the main benefits of day trading using a cash account is you can place as many day trades as you would like until you cash is used and won’t be held to the pattern day trading rules in a margin account.

But you will have to wait for your trades to settle before you can proceed to use that cash again. Typically, it takes one day from the trade date for options and two days from the trade date for stocks.

Example: If you have $10,000 in your cash account and you buy and sell $2,000 worth of stock, then you have $8,000 left to day trade until the $2,000 you used settles in two business days.

Cash accounts don’t follow the dreaded Pattern Day Trader Rule (PDT) rule that may prevent traders with less than $25,000 equity in their accounts from executing 4 day trades or more in a 5 day period. This is a huge benefit for traders who don’t have the extra $25,000 lying around.

The PDT rule was implemented back in 2001 by Financial Industry Regulatory Authority (FINRA) as a safety measure to help minimize the risks associated with day trading.

How many day trades can take in a margin account if you are over $25k?

When trading on a margin account, you will be subject to the pattern day trading rule, meaning you will be required to maintain a minimum of $25,000 in equity in your account if you place more than 4 intraday roundtrip trades in any rolling five-day period.

If your account is labeled as a pattern day trader, you will have to maintain that account minimum and if you don’t, you will not be able to day trade.

If you do have the minimum equity requirement in your margin account, you will be given day trading buying power which is 4x more than normal amount.

So, if you have $26,000 in your margin account, for example, you can trade up to $104,000 per day as long as you maintain the $25,000 minimum margin amount.

Keep in mind that day trading buying power can not be held overnight.

How many day trades can take in a margin account if you are under $25k?

If you have less than $25,000 in your margin account to day trade, you can get around the PDT rule by making only three day trades in a five-day period. But this means you’ll need to pick a stock from several valid trade signals, so you are not going to receive the full benefit of a proven strategy.

Essentially, if you have a $5,000 account, you can execute three-day trades in any 5 consecutive trading days. Once the account value surpasses $25,000, you will not be affected by the PDT restriction.

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Why You’re Not Making Money Consistently With Your Trading

Financial Advise

The stats are pretty clear – over 90% of people who day trade are not able to generate consistent profits.

This pretty shocking statistic means only a handful of traders actually have anything to show from their day trading activity and some have sadly lost money.

And still millions of people around the world still engage in day trading, many of them on a regular basis.

Once primarily practiced by professional investors, day trading is increasingly becoming popular thanks to superior online trading platforms and free-stock trading apps such as Robinhood.

But what is going on? Why do so many people lose money while trying to profit from market fluctuations and how can you join the 10% of traders who are consistently profitable enough that they have made it their full time living.

Why Most Traders Lose MoneyLike Ross Cameron says, day trading is the hardest yet easiest job in the world. What he means by that is that you can trade on your laptop from home or a hotel room from almost anywhere in the world, as long as you are connected to the internet.

It is an easy and amazing job.

You are not hammering roofs in August or going out on the highway in 10 degree below weather in the middle of January. But while day trading is a pretty nice job in a lot of ways, it is very hard in some aspects since 9 out of 10 traders fail.

So, what are some of the reasons for those failures and why do most traders struggle to turn a profit.

  • They lack of a trading edge/strategy

One of the reasons why most traders fail to bring their trading to its full potential is because they trade without an edge or strategy that works. Most traders don’t even have a clue what a trading edge is, let alone how to develop one.

A trading edge is when you can identify something in the market that gives you an advantage or insight into how well a trade will do.

Whether you are a beginner trader or have been trading for some time, a trading edge is necessary as it can greatly keep you on track to achieve profitable and steady trading results.

  • They fail to review their trade results

The second reason is because they don’t keep a record of their past trading activities that they can go later study to sharpen their skills.

Chess masters keep journals to record down their thought process of the game and their plays. Scientists have journals to track their latest findings and the results of their experiments.

This should be the same for traders! Unfortunately, only a few traders have a trading journal that they use to review their trades.

  • They trade with emotion rather than systematically

Thirdly, many traders fail to control their emotions when trading and end up ruining their hard-earned cash. For instance, after having multiple losses in a trading session, a trader is afraid of having a losing day.

This worry triggers the trader to over-leverage and blow up their trading accounts.

It can also cause FOMO. One of the most common trading emotions you will come across, which stands for fear of missing out.

This happens all the time when you see a hot stock that is ripping higher and all you want to do is buy some shares but can’t get a good entry so you end up chasing it. This usually results in a bad entry and increases the likelihood of taking losses.

  • Lack of discipline

Discipline is the most important trait of successful trading.

Lack of discipline is often the cause of the most common trading mistakes like executing trades prematurely, over-trading, revenge-trading, breaking trading rules, violating risk management rules, making impulsive trading decisions, and more.

All of these things mostly result in losing much more cash than what a trader had initially projected and what would be necessary.

What You Can Do To Realize More Success In Your TradingTo avoid both of these mistakes and become more successful, traders ought to a few important things that we’re going to discuss in the following section:

Define your trading edge

Focus on a strategy that makes sense to you and master it as opposed to trading all types of strategies.

For example, Ross focuses on small cap momentum. Basically, a small cap is a company with a market capitalization of between $300 million and $2 billion.

Ross has mastered several small-cap trading strategies and knows how to find support and resistance on charts. His trades are mostly based on small cap stocks that rise 20-30% or more in a single day. These stocks are typically priced between $2 to $10.

So, instead of trading Apple (NASDAQ: AAPL) and many of the other large cap stocks, Ross prefers to trade small cap stocks which are generally more volatile.

Review your trading process with an open mind

 As mentioned earlier, most traders never look at their trades again once they have closed them. They just jump to the next trade, forget everything they did previously, and completely avoid learning effects.

Make sure to review your trading process on a regular basis. Keep an open mind while doing so and it will show you everything you need to know.

You also have to be wary that if you are too stuck in your ways, you will end up imposing your ideas on what the market ought to do, instead of reacting to what is really happening.

Make revisions where you see weakness in your trading

Most traders do not understand why they need to revise their strategy. You need to take your trading strategy through a process of trial and error for it to be complete. While this will take time, it is effective and works perfectly with the market and increases the chance of success.

One easy way you can do this is by writing down the mistakes you make frequently and putting those physical notes next to your trading screen where they can see them at all time, so they can help you become more aware of your actions.

Always work on improving and adapting to market conditions

Having a trading strategy is not enough.

You constantly have to change your trading behavior from trade to trade in order to adapt to changing market conditions. If you don’t adapt to constantly changing market conditions, you will never be able to make decent profits in trading.

Volatility is the factor that keeps on changing and when it changes, you have to change your trading strategy too. By adjusting your trading approach and analyzing volatility accordingly, you can provide a whole new level of help to your trading strategy.

Traders have to know what to change, why to change it and when. While no trading strategy works 100% of the time, it is your responsibility to find ways to make your trading strategy work in every market condition.

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Stock Broker Essential Guide

Finance

When you want to day trade stocks, options, currencies, futures, or other financial instruments, you need a broker who will execute the trades in the market on your behalf.

The broker you choose is a very important decision. They will play a key role in helping you to trade in the market day in and day out.

We have prepared this stock broker guide to help both beginner and experienced traders to understand the role of brokers, what they are, how to choose them, what to look for, and the importance of choosing the right one for your trading.

We are also going to provide a list of the best brokers that you can rely on in your trading journey.

All About Brokers

A broker is an intermediary between buyers and sellers of financial instruments. Their role of is to facilitate the buying or selling of these instruments for a commission or fee.

There are many well-known brokerage firms in the U.S. through which you can use to trade in financial markets.

In addition to facilitating the purchase and sale of various instruments, some brokers also offer an array of services to their clients such as financial advisory services, portfolio management, retirement planning, depository services, and mutual funds services.

You have probably seen brokers showcased in movies as guys wearing suits, picking up their telephone and calling their clients to inform them about hot stock tips.

While these on-screen portrayals of brokers are accurate, the financial industry is transforming rapidly, and the traditional brokers as we know them are slowly becoming extinct.

With the advancement of technology, it is now easier for traders and investors alike to transact online, thanks to the emergence of online brokers.

Online brokers are convenient, as traders can place orders, make changes and check quotes from anywhere. These brokers also facilitate faster execution of trades, enabling traders to take advantage of market volatility in a better manner.

Importance Of Choosing The Right Broker For Your Trading

Choosing a day trading brokerage firm is the imperfect storm of science and art.

The art, of course, is the cosmic connection that has to be there between you and the broker you are counting on to execute your trades. The science is all the research that you put into it. You require both.

Your decision on whether to stick with the broker, though, should not be based on science or art — but on your individual priorities.

How To Choose Brokers

The basic things to remember when picking a broker are simple and few. Undoubtedly, your first priority should be to make sure that your funds are in safe hands.

The best way to take care of this by ensuring that you only use a brokerage firm based in and regulated by a financial regulator in a respected financial center.

Once you have taken this precaution, look at what the broker offers in terms of:

  • Commissions, ECN fees, data fees, margin fees and fees for phone order executions.
  • Speed of trade execution and platform stability.
  • Range of available financial instruments to trade (stocks, options, commodities, OTC, forex, futures, and eve access to international markets).
  • Customer service.
  • Customer incentives for new traders.

It doesn’t really matter which broker you choose, so long as you feel like your hard earned money is safe and the broker provides the necessary tools for you trading style.

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Can A Broker Sell Your Position Without Permission?

Finance

Robinhood was at the center of the unprecedented and monumental Reddit trading mania that saw shares of GameStop (GME) and other companies, including headphone maker Koss (KOSS) and cinema operator AMC (AMC) soar to extreme levels as amateur traders piled into the stocks earlier this year.

However, the popular trading app was accused of selling off the Reddit stocks without customers’ permission.

Selling stocks out of a client’s brokerage account without authorization in order to maximize the broker’s commissions is generally considered unauthorized and illegal trading.

The circumstances under which a broker is authorized or unauthorized to sell your position depends on the broker agreement the trader has signed and the type of brokerage account.

However, unauthorized selling of positions is very rare in an online discount stock brokerage account.

That said, your first resource should be your client agreement that you signed when the brokerage account was established. This document outlines all of the permissions and authority given to your broker to execute on your behalf.

Discretionary vs non-discretionary accounts

According to the Financial Industry Regulatory Authority (FINRA) unauthorized trading is one of the most common problems that traders and investors should watch out for.

Generally, if a broker sells your position without your consent and knowledge, they could be liable for unauthorized trading. In situations like these, the main issue is determining what kind of account you had with that broker.

There are various types of brokerage accounts and some of them are subject to unauthorized trading rules while some are not. In this blog post, we’re going to focus on discretionary and non-discretionary accounts, as well as margin accounts.

Discretionary accounts

A discretionary account is an account that gives a brokerage firm the right to make individual trades without the permission of their client.

If the terms of the client agreement you signed with the broker give the firm the right to use its own discretion to make trades in your account, you have given prior consent and the broker will probably not be liable for unauthorized trading.

Non-discretionary accounts

A non-discretionary account, on the other hand, is an account that gives the client the authority to always decide whether or not to make a trade.

Therefore, an account must have to be non-discretionary in order to qualify as an unauthorized trade. Basically, a non-discretionary account means that the broker must get prior consent before carrying out any transactions in securities.

If your account was non-discretionary and the broker sold some securities without your consent, he likely broke several securities laws.

What if you have a margin account?

While the laws regarding unauthorized trading vary from state to state, there is an exception when a broker may make a trade in a non-discretionary without the broker getting prior permission from the client for the said position.

For instance, if you have a margin account and the value of the account drops below the broker’s requirements, they may be able to sell your positions without seeking your approval beforehand.

Basically, a margin account is a type of brokerage account that allows you to buy securities on margin by borrowing money through your broker.

Buying on margin allows you to buy more shares than what you could otherwise be able to buy with just the money in your cash account (buying power).

There is a $2,000 minimum requirement for margin accounts, but you will be given 2:1 leverage, which means if you have $2,500 in the account you will have up to $5,000 in buying power.

Consider a scenario where you buy a stock for $200, and the stock price goes up to $250. If you purchased the stock using a cash account, then you will receive a 25% return on your trade.

But if you purchased the stock on margin, paying $100 in cash and borrowing $100 from your brokerage firm, then you will earn a 50% return on the money that you used.

However, not all stocks bought on margin will rise in value. If the price of the stock goes down, then your loss will be amplified in the same way.

Using our example, a $200 stock that falls to $100 represents a 50% loss in a cash account, as well as a 100% loss in a margin account (plus interest on the $100 loan).

If the value of the collateral in your trading account dips below the required margin threshold, then the broker may issue a margin call.

Basically, this is a request by your broker to repay the money you borrowed by immediately depositing additional securities or cash to raise the account value above the maintenance margin.

If you fail to pay the margin call, the broker has the right to seize your positions and begin liquidating them to recover them loan.

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