Dearest readers, I am still learning about markets, investing and trading; hope you like following me in my journey. :) The more I dig below the surface covered with typical copy and paste topics and ideas trending on YouTube, the more I am realizing that most of us do not get to find out how the market really works. I mean, unless you accept some basic truths that there is such a thing as a "THEY" in the market and no it is not a conspiracy theory, you will not find the right sherpa to take you to the top. Having said that, I have been wrestling with some important market concepts such as liquidity, stock float and derivatives and my goodness, was there ever anything more important than beginning to understand these things in the current downturn! So, let me share this topic with you and convince you that, if you own even as little as shares of a single stock, you may want to give a damn about this. :)
So, we begin with Investopedia because hey, let me get decent definitions from somewhere haha:
So, now that we defined the three, how do they make the market worse? How are they connected? Ok, here we go (and remember, feel free to do your own research as well unless you already have). The US market is not volatile enough in the mid and large cap sections due to low float and low liquidity. Did you know the following?
Why does this matter? Well, if this is a major but not the only component in how you see the market, then your options may become clearer. One option is to take some money and put it into your RRSP or a 401K or something similar, keep paying into it and hope you do not have to retire during the next market crash. Option number two is to learn how to trade as well with your after-tax income and zero leverage and slowly build your account by swing trading alongside your day job. If you choose to trade, it seems there are only two options. One would be small and mid cap stocks where you can benefit from short squeezes and low float rotation to bank big but those kinds of trades seem to be more for full-time traders. For swing trading, the smartest thing would be to follow the big player moves because they control the most shares of the best stocks and their moves alone move the price up and down. The closer you follow their moves, the bigger your return would be.
Whatever you do choose, wherever you are in your journey to understand the markets, I guess the most important thing is to take your time and not give up. Anything this powerful is not easy, but can certainly be worthwhile.
So, we begin with Investopedia because hey, let me get decent definitions from somewhere haha:
- Liquidity, or market liquidity, is the measure of how easy it is to e.g. convert stock shares into money and vice versa. The more shares of a stock are held by institutions and individuals, the less shares there are to buy and the less liquid the stock is.
- Float refers to the number of stock shares available for investors to trade and it fluctuates at any given time. For example, low float stocks, whenever they are fueled by good news, a PR puff piece or a pump and dump, tend to rapidly rise in price due to float rotating over and over again to meet the demand.
- Derivatives are typically financial instruments that let you bet on financial instruments, sometimes at a higher risk but with a leveraged return. CFD's, options, and the dreaded CDO's (explained in the Big Short) are examples of derivatives.
So, now that we defined the three, how do they make the market worse? How are they connected? Ok, here we go (and remember, feel free to do your own research as well unless you already have). The US market is not volatile enough in the mid and large cap sections due to low float and low liquidity. Did you know the following?
- Apple: 59.72% of shares held by institutions, 0.07% by insiders.
- Amazon: 60.77% held by institutions, 9.86%by insiders.
- Netflix: 80.51% of shares held by institutions, 1.49% held by insiders.
Why does this matter? Well, if this is a major but not the only component in how you see the market, then your options may become clearer. One option is to take some money and put it into your RRSP or a 401K or something similar, keep paying into it and hope you do not have to retire during the next market crash. Option number two is to learn how to trade as well with your after-tax income and zero leverage and slowly build your account by swing trading alongside your day job. If you choose to trade, it seems there are only two options. One would be small and mid cap stocks where you can benefit from short squeezes and low float rotation to bank big but those kinds of trades seem to be more for full-time traders. For swing trading, the smartest thing would be to follow the big player moves because they control the most shares of the best stocks and their moves alone move the price up and down. The closer you follow their moves, the bigger your return would be.
Whatever you do choose, wherever you are in your journey to understand the markets, I guess the most important thing is to take your time and not give up. Anything this powerful is not easy, but can certainly be worthwhile.