About The Stock
Market
Over
The Counter Stock Market – NASDAQ
The NASDAQ
stock market is different from the NYSE
because the exchange has no physical
location nor trading posts. This
exchange is 100% electronic and the
specialist here is replaced with Market
Makers (MM.) These Market Makers are
individual firms that are willing to
make a market in a specific stock. The
Market Maker is similar to a specialist
on the NYSE, but he acts as a dealer,
not as a broker. In general, the Market
Maker has a position in a particular
stock and sells out of his own
inventory. Market Makers make their
money from a markup or markdown rather
than from commissions. The Market Maker
regularly publishes Bid and offer quotes
and is ready to buy or sell stock at the
quoted prices. These quotes can be seen
on a Level II screen.
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Risks
in Online Stock Trading
When we talk
about risk, we refer to the possibility
of a loss. Risk cannot be measured in
exact numbers, but we can look at some
factors which affect the risk of
investing in stocks or trading them. It
is important to remember that the
possibility of a loss is always present,
and that the stock market does not
provide us with a guaranteed way to make
profits.
General
stock market risk is always present. A
stock market crash can occur on any
given day without prior notice. If this
was to happen, all stocks would most
likely trade significantly lower. The
first risk to consider is the general
market risk. This risk is derived from
numerous variables that affect the
market, such as new government policy (a
capital gains tax hike, interest rate
hike, etc.), which we have no control
over.
The next
risk is an industry risk or sector risk.
Certain sectors/industries can be on
fire one day and ice-cold the next.
Stocks move with the sector (industry)
they belong to. If you look at the bull
market we had in tech stocks and compare
it to the oil drilling stocks in the
period of time from October 1997 to
January 1999, you will see that the
NASDAQ 100 index was up 89% in 15
months, while some of the drillers (such
as Marine drilling) were down as much as
83% in the same period of time. So the
sector a stock belongs to represents the
next risk to be considered. (and
now, of course, the oil stocks been the
best performers going into 2006).
Volatility
represents another risk; this risk is
also known as beta. Some stocks are more
volatile than others. Consequently, they
represent higher risk. That is not to
say that low beta stocks (less volatile)
represent lower risk at all time,
because you also have to factor in the
potential returns. In certain
environments, low beta stocks can gap
down big and become more volatile than
other high volatility stocks.
