It involves trading the stocks of a public company or other securities for example bonds
By an individual who has access to the non public information regarding a company. In most nations, insider trading often gets considered illegal. It is seen as an unfair practice since it does not work to the advantage of the investors who have no information. Investors who often have insider information have the potential to make huge profits than other traders. The practice is not good since it favors only the knowledgeable individuals who have access to the secret company information. It equally gets considered illegal since it is a type of securities fraud.
An example of insider trading gets explained below.
Let’s assume that the vice-president of the human resource department happens to overhear a meeting that existed between the CEO and CFO. A week before the CFO decided to disclose to the CEO that the company did not meet the expected target regarding sales. It, therefore, meant that a lot of money got lost. The vice-president has a close friend who owns some shares of the company. The vice president, therefore, approaches his friend and advises the individual to sell off all his shares of the company. Such information that is changing hands is inside information since it has not gotten to the public domain. In case the friend to the vice-president decide to sell all his shares, then the action refers to insider trading. Insider trading possess a great negative impact to the industry.
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Cases of insider trading often results in unfair demand as well as supply of stocks. It therefore affects the capital market. Illegal insider training equally weakens the faith and moral and faith of the investors. In such scenarios, the investors will avoid investing their money as a result of the fear of losing it to inside traders. It may harm the economy in general. Insider trading is therefore not a good practice and individuals engaged in them should get charged.
‘ What is the 'Dow Theory?'
Dow Theory (Dow Jones Theory) is a trading approach developed by Charles Dow.
Dow Theory serves as the basis of the technical analysis of any financial market. The basic idea of Dow Theory is that market price action reflects all available information and the market price movement comprises of three main trends (Stansbury, 1960).
Dow theorists use three basic types of charts namely line charts, bar charts and point charts. Line charts are used to connect successive day’s prices. Bar charts have vertical bars representing each day’s price movements. The bar spans the distance from the day’s highest price to the day’s lowest price. A small cross on the bar marks the closing price. Point and figure charts (PFCs) are made of X’s and O’s. It is more complex than line and bar charts. In essence, only significant changes are posted to a PFC. For example, for securities there are highly priced, three or five point price changes get posted. For low priced securities, only one point changes get posted. PFCs do not have a time dimension, unlike the line and bar charts (Végh, 2016).
The ideology behind the Dow Jones Theory is that a genuine economic boom will increase the demand for transport services, as firm’s ship in raw materials to their factories, then ship out finished goods. Similarly, in a recession, firms will lower prices for shipments of both raw and finished products (Stansbury, 1960).
The Dow Theory helps in technical analysis. It also serves as a trading strategy among the stockbrokers. The down theory helps in the identification of trends and not limited to helping a trader identify the entry and exit signals.
Discuss What "Noise" Is In the Stock Market
The term “noise trader” originated from Albert Kyle and Fischer Black back in the mid-1980’s. It referred to a stock trader who had no access to inside information. The individual would, therefore, make irrational investment decisions. These individuals do not use fundamental data in establishing their next trade moves. From this practice, they get characterized by poor timing. In most cases, they overreact to news regarding markets.
Discuss What Technical Analysis On Stocks Is. Active/Passive Investing Which Is Better For What Reasons?
Technical analysis involves an individual studying the history regarding a share price. These individuals often have an objective of monitoring the behavior of the share to establish its possible future movements (Végh, 2016). Technical analysts believe that one can easily project the future of a market if they understand the history of the stock price movements of that particular company.
The technical analysis applies to stocks, indices, commodities, futures or any tradable instrument where the price is influenced by the forces of supply and demand. Price data refers to any combination of the open, high, low, close, volume, or open interest for a given security over a specific timeframe. The timeframe can be based on either intraday, daily, weekly or monthly price data. It may last for a couple of hours or go for several years. Active investing is what often gets referred to as investing. It involves the buying and selling of individual stocks or the bonds. More commonly these days, it means an individual is putting money into mutual funds. The managers of these mutual funds then use the money in making case-by-case decisions on behalf of the investor. Passive investments track indexes refer to those group of securities that share some similarities to given extents. Passive investment involves actions such as the purchase of index funds that own every stock in the S&P 500. Investment approaches often differ based on how the account manager utilizes investments held in the portfolio over time. Active portfolio management focuses on outperforming the market compared to a specific benchmark. Passive portfolio management, on the other hand, aims to mimic the investment holdings of a particular index.
Carl Icahn and His Importance.
In the article “Investment Legend Carl Icahn and Why He Thinks Apple is worth $240 per Share”? It gives an in-depth understanding of this investment legend and the investment approach and philosophy of Carl Icahn. Besides the author outlines the investment skills that are important to any upcoming investor.
Icahn is a contrarian who delights in proving the market wrong by going against conventional wisdom. The markets are stupid in his opinion, and he makes his fortune from its “natural stupidity”.
“ Some people get rich studying artificial intelligence. Me, I make money studying natural stupidity .”- Carl Icahn’s slogan on Twitter
The statement gives us a lot of investment ideas. He is so confident about his abilities that some people might perceive it as being arrogant. However, behind this supreme confidence lies matchless amounts of hard work and due diligence. Icahn hires two dozen associates to sift through the market for investment ideas. When he makes his decisions, they are all well founded with a strong basis for their objectives.
Carl Icahn is an investor that shows us to buy stocks with high growth potential and which are often undervalued by the market. Warren Buffett doesn’t reveal the details of his work easily, but Icahn is a person who publishes his investment ideas on Twitter and Shareholder’s Square Table to convince the rest of the market to follow his lead (Kiat, 2015).
Michael Burry and His Importance in Housing Market Crash
Michael Burry is the physician turned money manager and founder of Scion Capital LLC hedge fund. He successfully ran it for eight years. In 2008, Michael eliminated this fund so that he could concentrate on his private investments. He was among rare investors who took the daring step into the field of mortgages during the crisis period (Kim, 2016).
According to Michael Lewis’s The Big Short, some of the trends, institutions, and events that contributed to the collapse of Scion Capital LLC hedge fund include:
Deregulation which authorized the securitization of mortgages.
This practice incentivized mortgage brokerages to generate as many mortgages as possible. They were then sold off to Wall Street. Banks and brokerages got paid up front for creating loans while being temporarily insulated from the aftermath of failed loans.
The expansion of mortgage products that popularized interest-only loans, only-adjustable rate and not limited to the negative -amortizing “option arm” mortgages. The mortgages allowed borrowers to increase their loan balances, rather than paying their mortgages down.
Second-lien purchase mortgages. It made it possible for the borrowers to not only escape mortgage insurance but also down payment.
The loosening of credit standards that allowed borrowers with poor credit, few assets, and no verified income to buy homes they would not be able to sustain.
Discuss Digital Currencies Such As Bitcoins.
Bitcoins can get used in the purchase of merchandise anonymously. Also, international payments are easy and cheap because bitcoins are not tied to any country or subject to regulation. Small businesses may like them since it does not involve credit card fees. Some people buy bitcoins as an investment, hoping that they’ll go up in value.
Many marketplaces called “bitcoin exchanges” allow people to buy or sell bitcoins using different currencies. Coin base is a leading exchange. Other exchanges include Bitstamp and Bitfinex. The security of this form of currency is still at its inception stages. For example, bitcoins worth tens of millions of dollars were stolen from Bitfinex when it got hacked in 2016.
People compete to “mine” bitcoins using computers by engaging in solving complex math’s puzzles.
Though each bitcoin transaction gets recorded in a public log, names of buyers and sellers never get revealed. It is only their wallet IDs that get used to recognizing them. While it keeps the transaction of every bitcoins user private, it makes it impossible for the users to trace back what they have sold. It is for this reason that bitcoins have become the preferred form of currency in illegal activities (Mishra, 2017).
References
Mishra, S. P. (2017). Bitcoin Mining and Its Cost. SSRN Electronic Journal. doi:10.2139/ssrn.3076734
Stansbury, C. B. (Ed.). (1960). The Dow Theory explained: How to use it for profit. New York: Russell.
Kiat, K. (2015, September 9). Investment Legend Carl Icahn and Why He Thinks Apple are worth $240 per Share. Retrieved from http://thefinance.sg/2015/09/09/investment-legend-carl-icahn-and-why-he-thinks-apple-is-worth-240-per-share/
Kim, K. (2016, January 22). Michael Burry on the Last - and the Next - Financial Crisis (Part 1). Retrieved from https://partners4prosperity.com/michael-burry-the-financial-crisis/
Végh, Z. (2016, December 16). Introduction to technical analysis: charts, opening and managing positions. Retrieved from https://www.mnb.hu/letoltes/mnb-oktatasi-fuzetek-8-eng.pdf
