“It’s a traders market”

It may be the new normal. The advent of computer or electronic based trading has allowed for millions of stock transactions per second and with the 24 hour fast paced news cycle available to us in many different formats, the stock market has changed in two important ways.

Stock Market Changes

First, market volatility has increased. With the potential for millions of transactions per second, stocks can move up or down by multiple percentage points in minutes and second, electronic based trading has allowed for anybody to be involved in the stock market.

Market Volatility

Let’s take a look at volatility. Who do you know that seems to be overly sensitive? They react to everything. Maybe they scream during scary movies or get angry over seemingly meaningless things. Although you may not refer to them as volatile, stocks are the same way. Some are more volatile than others. In financial terms, we call highly volatile stocks, high beta. A high beta stock reacts severely to market conditions.

Not only have stocks become more volatile but the stock market has as well. Over the past couple of decades, we can see swings in the market that happen much more quickly. This happens in large part because large stock trades can happen rapidly. Large investors can buy and sell millions of shares of stocks with the click of a mouse. It only takes seconds and trades this large can move a stock up or down dramatically.

Adding to this volatility is the 24 hour news cycle. On any given day you can watch one of the financial news networks and get a first hand glimpse at how fast a news report can move a stock or the entire market up or down. It only takes seconds.

You might be thinking that this kind of volatility is the enemy to your investment portfolio. You may be right but if you are a trader, somebody who holds stocks for a short period of time, you thrive on it. Traders sometimes hold stocks for only a few minutes. They use the market volatility to their advantage by buying a stock when it takes a dramatic swing down and then sell it when it corrects by going higher.

This can make the trader a lot of money but the statistics are stacked against the day trader. The long term gains that day traders make are less than impressive. The only exception are the professionals who are often using tens of millions of dollars per day and some advanced trading techniques to make money.

Investing or Trading?

For the part time investor who isn’t working in the investment field, the best way to make money is to be an investor. Investors are regarded as people who hold stocks for a larger period of time. Often that means years but many investors are now holding their stocks for one year or longer.

One rule that has never changed is the fact that the market rewards patience. For those with a long term approach based on a belief that true wealth happens over time, the stock market, regardless of the 24 hour news cycle, will reward.

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