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Summer Reading List
Must read books for those interested in stock market trading:
1.Reminiscences of a Stock Operator - Edwin Lefevre
2.Market Wizards - Jack Schwager
3.Trading for a Living - Alexander Elder
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Stockscores.com Perspectives
For the week ending June 27, 2004
In this week's issue:
I receive a lot of email asking me about brokerages. With so many choices available to investors, picking one brokerage to open an account with is a daunting task. The difficult decision is complicated by the many marketing tricks that brokerages use when advertising their services and commission structures. When selecting your brokerage house, here are some things to think about.
Price: the first thing that investors consider is price. While it may seem easy to compare commission structures, there is actually a lot to know and understand. The commission you pay on a trade is only part of what you are paying. Brokerages have choices on how they can get your order to buy or sell stock filled, and there can be hidden costs that you don't see.
Brokerages can route your order directly to the stock exchanges (called Direct Access) or they can route through a market maker. Routing an order through a market maker carries a hidden cost, because the market maker can try to get the stock at a better price than you are willing to pay or accept and keep the difference. This can increases the total cost of your trade.
For example, suppose you would like to buy 1000 shares of a stock that lasted trade at $10. If you enter an order to buy the stock at $10, then a market maker will sell you that stock at $10. However, if the market maker can find that stock for sale at $9.97, then the market maker will keep the $0.03 a share. If you route the order through a Direct Access brokerage, you will get the stock at the cheapest available price. If you enter an order to buy at $10, but there is stock available at $9.97, you will get filled at $9.97, and save yourself $30.
Many brokerages offer very low commission rates but route the order through market makers to make their profit. A Direct Access broker will skip the middleman, but there is a fee (typically $0.003 - $0.006 a share) for the direct access.
In this example, if the broker who routes the order through a market maker charges you a $7.95 commission, while the Direct Access Broker charges you $14.95 plus $0.004 a share, it seems like the first broker is cheaper. However, if you get the best price available in the market by going through a Direct Access broker, you actually save on the overall cost of the transaction.
When evaluating the prices that a brokerage charges, you have to consider the commission plus the cost of order routing. Direct Access saves money in the overall cost of the transaction because you can get the best price in the market.
How do you know if you have a Direct Access broker? If you are paying an ECN fee, you are going direct. Some Direct Access brokers will give you the ability to route through an ECN (and therefore pay the small price per share) or they will offer you a commission rate that does not have the ECN fee. While it may seem cheaper to go outside the ECNs, it may not be as you are not going direct and therefore may not be getting the best price on the stock.
Speed: If you are an active trader, speed is important because hot stocks can move very quickly. If it takes too long to get your buy and sell orders filled in a fast moving market, you may pay too much to buy or get less when you want to sell. When considering brokerages, ask yourself how long it will take to get your order filled. In my experience, the process of entering your order and getting it filled can take as little as one or two seconds with the fastest direct access brokerages.
Service: Full service brokerages have brokers that will give you investment advice and tell you what to buy and sell. This is a service that you pay for through higher commission rates. Other brokerages don't tell you what to do, but give you tools to help you make your decisions. Finally, some brokerages do nothing more than facilitate your trades.
The level of service required depends on the individual needs of the trader. If you just want a brokerage to exercise buy and sell orders, then you don't need to pay for the extra services. However, it may be important that the brokerage house have a help desk to help you learn the order entry platforms and help with technical difficulties. When selecting a brokerage, ask what level of support is available to you.
The selection of a brokerage is difficult because the marketing makes it difficult to compare what you are really getting and what you are really paying. Take the time to do your research, you can save thousands of dollars a year.
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Price volatility is an important chart reading concept. New fundamental information is likely motivating price moves when a stock's price volatility moves from low to high in a single day. Therefore, scanning for stocks that did not have much volatility yesterday, but today do, is a good way to identify stocks that may be trading on new information, and are likely to move in to a trend as more investors learn of the change.
The Volatility Swings Market Scan searches for these situations, and produces a lot of good stock picks for the swing or position day trader. This week, I ran this Market Scan on stocks under $25, and it identified 71 candidates. Of those, the following charts stood out:
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1. LUV
Investors seem to love LUV, which is breaking through resistance from an optimistic chart pattern. Volume increased on the breakout, and the stock has support at about $15. There may be a short term pull back, but it has good potential to higher in the weeks to come.
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2. XING
XINGs longer term downtrend has been broken, as the stock is breaking from a rising bottom. It looks like investors are getting tired of selling this stock, and optimism is coming in. It may take some time to gather upward momentum, but this looks like a good time to bottom fish the stock. A move below support at $9 would be negative.
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References
Get the Stockscore on any of over 20,000 North American stocks.
Background on the theories used by Stockscores.
Strategies that can help you find new opportunities.
Scan the market using extensive filter criteria.
Build a portfolio of stocks and view a slide show of their charts.
See which sectors are leading the market, and their components.
Disclaimer
This is not an investment advisory, and should not be used to make
investment decisions. Information in Stockscores Perspectives is often
opinionated and should be considered for information purposes only. No
stock exchange anywhere has approved or disapproved of the information
contained herein. There is no express or implied solicitation to buy or
sell securities. The writers and editors of Perspectives may have positions
in the stocks discussed above and may trade in the stocks mentioned. Don't
consider buying or selling any stock without conducting your own due diligence.
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