Margin Trading Dangers Explained with Real Life Cases

Several recent high profile company share price collapses on the Australian Stock Exchange highlight the danger posed to ordinary shareholders from large scale margin trading of shares by directors of listed firms. So dramatic have been the consequences that no equities investor can afford to ignore the lessons.
Significant shareholdings by directors in a listed company have traditionally been viewed favorably as an alignment of executives’ and other private shareholders’ interests, but this ideal can be dramatically compromised in cases where those large shareholdings have been aggregated through, and remain security for, margin loans. Directors leveraging into positions well beyond their capacity to meet margin calls may create a known and acceptable risk for themselves but their actions inescapably also create a significant but hidden and usually unsuspected risk for other shareholders. Continue reading

Momemtum Stock Trading

Momentum can make a stock move quite far in a short period of time and create spectacular money making opportunities for us. You recently received from me an article in which you learned to recognize some of the typical patterns that stocks form when they are moving with a lot of momentum. Sometimes stocks will move well for no particular reason (as you learned in the previous article) but other times it is a news headline that gets these stocks moving.
When a stock moves on news the trade is similar to a momentum trade that occurs for no apparent reason but there are some distinct differences that you need to be aware of. First, the timing is different on a news trade because momentum plays out much more quickly that usual. Second, news creates opportunities with other stocks in the same sector that you may not have had otherwise.
Let’s start with the timing of a news trade. When a stock moves because of a good or bad headline we immediately see an influx of volume as traders react and buy the stock to take advantage of something positive or sell to protect their position. We usually see a lot of movement on the first day of the trade but as more and more people hear the news there can be continued buying or selling pressure for the next day or so. Most reactions to news last anywhere from one to three days and most of the movement occurs on the first day. Because of this you need to be diligent in setting your stops. What we get with a news trade is a great way to trade momentum and bank our profit within a few days. Continue reading