Why does the stock market allow stock trades by the second?
Doesn’t that promote ‘gambling’?
Why doesn’t the market make it so that ‘investors’ must buy a stock and hold it for 30days.
That makes it less gambling and more investing.
Why not?
You can also “gamble” by trading long term. Whether or not you’re gambling is really about how much research you’re doing on your trades. Also, there’s no compelling reason why “gambling” should be disallowed. If you want to make stupid trades why should you be stopped from doing so?
Why would I buy a stock if I am not allowed to sell it at any time? Who would invest in a market with these restrictions?
Please define the difference.
Without the time for a long-winded answer for you, I will say that what you propose would be against the whole premise of a stock market. A stock market is supposed to provide an efficient means of exchanging ownership in public companies.
Secondly, a 30-day hold period would depress the value of all stocks by taking away a liquidity premium. Investors pay up because they have the right to sell any time.
Finally, I’d counter that a 30-day hold period is more like gambling. North Korea bombed South Korea on day 29 of my 30-day hold period? Damn, I should have bought Samsung a day earlier!
A “stock market” (let’s say the NYSE or NASDAQ) is never going to put in that sort of restriction, as it would both add complexity to their marketplace and make their product less useful to their customers. The “value” you are claiming in your proposal (punishing the gamblers amongst us) is of no value to the markets.
Perhaps the federal government should do something that would promote holding properties awhile before they are sold - say, by taxing returns on long-term investments less than those on short-term investments. Oh, wait -they already do that.
I’d be happy with a 10 minute holding requirement…
The big industrial day traders aren’t gambling. These people are moving tens of millions of dollars around every day. They’re not perfect, but they know what they’re doing. The hobbyist day traders all combined do a fraction of the business.
And the experts on the market say that day traders of all sorts provide a valuable service by boosting liquidity in the market.
Furthermore, a 30-day restriction on trading is meaningless. All I’d have to do is approach Giant Bank Corp. I’ll say “I just bought 50 shares of XYZ and now I want to sell it two hours later. How about you sell 50 shares of your XYZ stock for me, and then at the end of my 30-day holding period, I’ll give my 50 to you.” Giant Bank Corp would be happy to do this (at a fee, of course). This arrangement isn’t all that different from trading practices that are already in place and the investment world would happily make it a standard practice if it were necessary.
[moderating]
I don’t think there’s a definitive GQ-style answer, nor does this look like a real Great Debates candidate, so I’m moving the thread from GQ to IMHO for further discussion.
[/moderating]
And to answer the OP:
Sure it’s gambling. And the stock market hasn’t been about investing in decades.
The 60 Minutes segment on this a few weeks ago was fascinating. Traders are co-locating servers as close to the NYSE as possible to get sub-millisecond advantages on their trades. We’re not talking about holding stock for a few seconds anymore; they’re buying and selling in under a second.
In which case, an unregulated secondary market would quickly open up…if not in the US, then abroad somewhere. In essence, you’ll pay up to trade inside the 10 minutes, but some large firm or government will be pocketing your additional trading costs.
Again, so what? If I ran a program that will make bets on a roulette wheel a million times a second, will my odds improve?
There is a difference between trading and investing. Traders are looking for inefficiencies in the markets in order to take advantage of the price differences. They typically do not hold a position for any real length of time.
Investors look at a companies valuation to buy and hold positions on companies they believe are going to go up in value over a long period of time.
If you are dollar cost averaging stocks you buy each month or contributing to your 401k, the daily activities of traders has little to do with you. While they are taking advantage of fluctuations in the price, the average daily price has more to do with the value of the company itself.
OTOH, day traders are at a distinct disadvantage, even with their 12 monitors hooked up to E*trade. They simply do not have access to all the information that institutional traders do. One article I read today actually describes it as a high school football team playing the NY Giants. It doesn’t matter if you “level the playing field” because the institutional traders (with the information they have access to) are so far out of their league.
Stock exchanges are for-profit private institutions and may be happy to see lots of millisecond trades. Rapid turnover is something which poses real risks with little benefit, and should be discouraged by governments. This would be easily accomplished with a very tiny transaction tax.
I’ve posted links in the past showing high-speed trading schemes, some contrary to stock market regulations, yet hard to detect. Those who claim these are all beneficial ways to make markets more efficient have lost sight of the trees (details are important) for the forest (yes, “free markets are good”).
Wrong. Whenever you trade, you lose, on average, a tiny amount to the activities of high-speed traders. This amount may be less, or much less, than a penny per share, but it’s not zero. If this is not clear, review the notion of Fixed-Sum Game.
The real problem with high-speed trading is not, of course, the few pennies lost by the average investor, but the risks of instabilities.
(* - I’ve made this point before, and Dopers more eager to quibble than to think argue that, if a stock rises from $90 to $100 over a period, the players were not in a “Zero-sum game.” It’s a fixed sum game, of sum $10. If high-speed traders got two cents of that $10, where did the two cents come from?)
The term is “zero sum game”. There’s no such thing as a “fixed sum game”. I Goggled it. You basically just invented it. And the stock market isn’t one because stocks represent the changing value of an underlying asset. The sum of $10 you provided as an example is not “fixed”. It’s variable. Another investor does not need to be short on my position. Nor does the person I sold the shares at $100 need to lose money. The stock may go to $110 or more.
The trader got his two extra cents because he bought different shares when the price was at $89.99 and sold at $100.01. Their high speed trading computer was able to see the trend before you and take advantage of it.
But you are long anyhow. You aren’t concerned about market timing. You are just investing in a good company that you believe will increase in value.
We are mostly in agreement except for a few points.
(1) I don’t need your permission to “invent” Fixed-sum game. It is analyzed, in game theory, exactly as a Zero-sum game (hence that it is not treated separately in literature); but I avoided the term “Zero-sum” since some Dopers might get confused, given that a stock might appreciate, and not understanding that fixed-sum games analyze like zero-sum.
(2) The fact that a hypothetical $10 price gain isn’t known in advance, and is therefore “variable” has no effect on my argument, as long as the trading in question has no long-term effect on price.
(3) We seem to agree that “I” got $9.98 of the price appreciation and the “computer” got $0.02 because it “was able to see the trend before you and take advantage of it.” (We can ignore, or agree to disagree about whether this is good or bad.)
(4) I agree that for the long-term investor making $9.98 is essentially the same as $10. (The real problem with HFT is not the loss of a few pennies to the average investor.) I was just making the point that the $0.02 profit was NOT conjured out of nowhere and had to “come from” profits that would otherwise have accrued to other traders or investors.
HFT (high frequency trading) does add liquidity to the market. The problem is that there is no obligation for these traders to stay in the market when the shit hits the fan. That’s at least a part of what happened in the flash crash earlier this year - once the crash started, the HFT shops rolled up the sidewalk and went home. It used to be that you had specialists on the floor who had an obligation to make a market in specific stocks. Under the current system, no one is obliged to do anything.
As for day traders, they are all deluded in my opinion. It requires so much time and energy that even when they win, they lose. If you figure out what they’ve earned per hour, they would have been better off shoveling fries at McDonalds. And that describes the fairly small minority that have a net gain over the course of a year. For the rest, it’s just a matter of the burn rate - what percentage of your account will you burn through in x months and how much will you have to lose before you realize you’re a sucker.
But say you have a hypothetical stock that steadily increases 10% every year since its IPO. You would never have a “loser” no matter when you enter or leave the market.
This is the current hot topic in regards to equity market structure. See here for a current article on the issue.
Most of the populist anger towards HFT is based on bad (or incomplete) information.
Interesting. I thought specialists were completely extinct. I just skimmed the article and didn’t really get a sense for what they see the solution as being. Let’s say you get all the HFT’s to become market makers. How does that work when you can execute your order on any exchange? Wouldn’t at least part of the solution have to be imposed by the exchanges themselves?
BTW, do you happen to know if people with colocated servers are still allowed to peek at the order queue and essentially front-run the market?
I think I read somewhere that for a fee, essentially yes, they can front-run the market by a few milliseconds. I’ll have to check on that.
If I’m understanding this correctly, how could it not be considered insider trading?
From what I read, it’s currently still up for debate. The argument is that because the service is open to all (who can afford it), it’s not really insider trading. Sort of like having a Bloomberg terminal or access to the internet affords a competetive advantage.
This “fact” is based on false and/or misleading information.