the customer decide.
• Futures trading costs. As you progress in your trading, you may want to consider using futures to help hedge your portfolio. Similar to stocks and options, these costs may vary.
Virtual Trading Platforms
Over the years, brokerage firms have developed platforms to help individual investors better understand financial markets and how to buy or sell investment securities. The idea is not new, but the technology is. Virtual platforms offer an advanced way to paper trade, which simply means to write down and track your ideas on paper rather than implementing them with real money in the live market. Paper trading makes a lot of sense when attempting to learn new strategies and ideas.
In essence, a virtual trading platform lets you test-drive ideas without risking a dime. The goal is to help you develop an understanding of various financial instruments and the process of investing, which will help you build confidence as a trader.
Keep in mind that successful virtual trading during one period does not guarantee successful investing of actual funds during a later period, as market conditions are always changing. Backtesting is great for learning but has its limits. As you have probably heard many times, past performance is not an indicator of future results.
Many of the examples throughout this book are pulled from TD Ameritrade's paperMoney® virtual trading platform, and therefore, the bells and whistles will be duly highlighted in later chapters.
Summary
The first step in the process is to establish longer-term goals and objectives. Develop a trading plan that considers how much time you have available to trade, your risk tolerance, and the types of investments that might best help you to achieve your longer-term goals. Find a broker who offers the research and tools that meet your objectives. Identify potential trading ideas and test them on paper. Once new positions are opened, monitor, adjust, and exit them accordingly.
There has never been a better time to take a proactive approach to investing. Technology has resulted in better efficiency in financial markets and has substantially reduced trading costs. Research, data, and charts are readily available at little or no cost. Confidence in your plan, strategy selection, and risk management are important elements to long-term success. A virtual trading platform can help by offering a realistic tool to practice trading before going live.
References
CBOE Extended Trading Hours for VIX and SPX www.cboe.com/micro/eth/pdf/ethfactsheet.pdf
CME Futures Trading Hours www.cmegroup.com/trading-hours.html#equityIndex
NASDAQ Trading Schedule www.nasdaq.com/about/trading-schedule.aspx
www.thinkorswim.com/t/pm-registration.html
Chapter 2
First Days of Trading
I am interested in the stock market because it really is a fascinating and exciting world to me. Each day, millions of investors make decisions to buy or sell shares of companies based on the latest news and information. Whether it's economic data, earnings, a merger story, geopolitical headlines, or some other event, it's often reflected in the stock market before it even makes the rounds in the news outlets. It's truly an amazing and efficient process.
While stock prices can react rapidly to incoming information, trends often develop over time as well. In bull markets, for instance, stocks are moving broadly higher, and investor sentiment is typically upbeat. In bear markets, shares trend lower, and the overall mood can sour. In addition, there are periods of quiet and uneventful trading, while at other times prices swing wildly in volatile fashion.
But when we say stock market, what exactly do we mean, and how do we gauge it from one day to the next? Is it the New York Stock Exchange? Are we referring to the Dow Jones Industrial Average or the NASDAQ? How do we measure the stock market, track its performance from one day to the next, and trade it? Those questions are answered in this chapter. Let's first begin with a brief history of stock market averages and then focus our attention on the key barometer the pros use: the S&P 500 Index.
Brief History of Stock Market Averages
In 1896, Charles Dow computed the average share price of twelve leading companies of the day and started printing the number daily in The Wall Street Journal, a publication founded by Dow, Charles Bergstresser, and statistician Edward Jones. Outside of the railroads, the included companies were considered to have the most economic importance at that time. He called his index the Dow Jones Industrial Average, and the index is still a widely watched barometer for economic activity today.
The Dow has since expanded to include thirty different companies; General Electric is the only component of the first average that is still a member today. In fact, the term industrial average is a bit deceiving, because the index now includes health care names such as Pfizer and Johnson & Johnson; tech companies such as Apple and Microsoft; food companies such as Coke and Procter & Gamble; and financial companies such as American Express, Goldman Sachs, and Travelers. Table 2.1 shows the Dow Jones Industrial Average, then and now.
Table 2.1 The Original Dow Twelve and the Dow Thirty Today
The Dow Jones Industrial Average is one of the benchmarks for the stock market (the Dow Transports date back to 1884 when Charles Dow first created the Dow Jones Railroad Average) and is still mentioned daily when the media discusses day-to-date happenings. For instance, if reporters say, “Stocks were up two hundred points,” or, “The market lost sixty points,” they're likely talking about the industrials. However, the Dow tracks the average performance of just thirty names, and thousands of stocks are trading on the U.S. exchanges.
Key Market Indexes Today
While the Dow tracks the share price action of thirty leading companies and is considered a “cool” market indicator for television, it is not what professional traders rely on day-to-day. Instead, the S&P 500 is an index that includes five hundred of the largest names traded on the U.S. stock exchanges and represents roughly 80 percent of the total value of the U.S. stock market.
The S&P 500 is not only viewed as a barometer for the performance of the U.S. equities market, but it is often used to benchmark the performance of portfolio managers from one year to the next as well. That is, the relative performance of many money managers is measured against the S&P 500. When your livelihood depends on something, you will watch it very closely!
According to Standard & Poor's, the index represents a total of $2.2 trillion in assets today. The companies are included within the index not because they are the largest, but because they are considered leading companies in key industries within the U.S. economy. In addition, although you cannot buy or sell the index itself, there are many ways individual investors can trade the S&P 500, including options on the S&P 500 Index (SPX); S&P 500 Futures (/ES); and the exchange-traded fund (ETF) SPDR 500 Trust (SPY), or Spiders.
With a history dating back to 1923, the S&P 500 is now the most widely watched barometer for the performance of the U.S. equity market. In addition, nearly $8 trillion is benchmarked to its performance. Therefore, when a stock is added or removed from the S&P 500, the adjustment triggers strong buying or selling by the mutual funds and portfolios that attempt to