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Stock Market Basics (You Won't Hear About On CNBC)
 
The stock market used to be a fairly straightforward mechanism.  It was based on fundamentals such as profits, future growth potential and the quality of management.  There were still over swings of enthusiasm and pessimism but for the most part things were based on measurable aspects.  Today that has all changed.  In fact it has been gradually changing for many years.  
 
The stock market was once a place the rich stashed their money for income.  That's right, income.  The idea that stocks would go to the moon was viewed as risky and low probability.  People put money in stocks to reap the dividend.  Dividends are that portion of a company's profit that they send out to stock holders.  With start up companies, there is rarely a profit and therefore no dividend.  The only way that these companies can get funding is through stock offerings.  The proceeds were then used to fund the company.  People putting in money knew this was a high risk and the company would most assuredly be promising to pay a dividend in a few short years.
 
This changed dramatically in the 1990's as technology companies came into fashion.  These companies promised astounding growth potential and NEVER mentioned dividends.  This type of company was only interested in stock price growth as management's salaries was directly tied to this through stock options.  Remember stock options are the right to buy a stock at a set price for a limited period of time.  The set price is usually very close to the price at the time of the options offering.  Therefore if the price of the stock went up a lot, the owner of the options could in essence make free money.
 
For example if executive A received stock options at $15 for two years when the stock price was $16, and he could get the stock price up to $25 before two years, he could borrow money and "buy" his stock at $16, immediately sell at and pay back the loan, all on the same day.  Sweet deal!
 
This mechanism led to all types of bad behavior including stock buy backs, where a company uses funds to buy it's own stock to support it's price.  Can't have those stock options expire worthless!  This also led to companies giving certain analysts inside information.  The analyst, who could make a name for himself on television, was given the information with the implicit agreement that only positive coverage of the stock would be given.  
 
Because the stock prices were manipulated higher with no basis in fundamentals, the prices eventually had to crash, which they did in 2000.  As the retail traders (that's you) left the stock market, it was gradually taken over by mutual funds, hedge funds and the trading desks of the major investment banks.
 
Today, the vast majority of trading on the stock market is done by these entities.   They aren't typically interested in fundamentals or long term investing or even dividends, for that matter.  They just care about THIS quarter.  Nothing else matters at all.  In and out, the faster the better.
 
Let's look at the three big classes of traders that now dominate the market:
 
Mutual Funds
Mutual funds are a collective of money from multiple investors, pooling the funds together under one manager.  These used to be tired old entities that traded rarely.  Today they often "turn" their portfolios over 100% a year.  This means that stocks they hold will have completely changed in one year's time.  Does that sound like the "buy and hold" philosophy you'll hear from the main stream commentators?  To make matters worse, these guys often charge "loads", or up front fees, as high as 6 or 7% so that the second you buy the darn thing you've lost 6 or 7%.  These load funds have consistently been shown to underperform no-load funds even when you ignore the load.  This means their returns are lower than no load funds even when you don't count the load haircut.  This is truly criminal and these companies should be taken to task.
 
Mutual funds often take part in what's called "window dressing".  As the quarter is ending they will look at what has gone up this quarter and shift money from their losers to the winners.  Since the mutual fund only reports holdings at the end of the quarter, you never see their losers.  Tricky, huh?  I don't recommend any funds except index funds with the exception of precious metal funds.  My favorite and one I own is TGLDX.
 
Hedge Funds
These are like mutual funds but are only open to wealthy investors.  These guys will stop at nothing to earn money as their pay comes almost completely from the funds profit.  If their fund is losing money they don't make much at all.  Window dressing doesn't work for them but they will manipulate the market to their benefit.   Here, one of the biggest skunks in all of financial media, tells how he did it when he ran his hedge fund:  
 
 
 
Don't you wish you could do that?  Just give CNBC a call and have them announce something that is a lie to help your stock holdings go up or down?  These admissions by Cramer have NEVER been looked into by the SEC or any law enforcement agency.  Wonder why?  Could it be that he understands that criminality in finances is condoned and looked over?  How about naked short selling, where these slime balls sell stock they don't have until the stock is unable to obtain financing, due to low stock capitalization, and then just pocket the money?  If you are interested in learning about this, here is a pretty slick video explaining how it works:  (this is in two parts and runs about 18 minutes.  I will warn you up front that you might not understand it all at first and the parts you do understand will cool your enthusiasm for stocks)
 
 
 
In case you didn't watch this, the bottom line is that hedge funds "owe" a bunch of stock that they never borrowed in the first place.  They just sold the stock without any intention of producing it. To cover these shorts (buy the stock back) is now impossible without driving the prices of the stocks to the moon.  The authorities are looking the other way and in fact, HIDING the names of the entities who are engaging in these activities, citing "proprietary trading technique protection".  This is another way of saying, "If you we told you the who's and what's of this activity, the whole system might collapse."  Feel better?  Me either.
 
Investment Banks
The last of these entities is the most diabolical, in that they are in cahoots with the Federal Reserve and the government.  These are the Goldman Sachs and JP Morgans of the world.  They do their damage through their "prop desks".  This is short for proprietary trading desk.  The companies use extremely complicated trading algorithms to "make" money.  One of the newest methods of trading is called high frequency trading.  This method allows these crooks to see orders before anyone else.  This allows them to cheat.  Read this:
 
"Stock Traders Find Speed Pays, in Milliseconds
Published: July 23, 2009

It is the hot new thing on Wall Street, a way for a handful of traders to master the stock market, peek at investors’ orders and, critics say, even subtly manipulate share prices.

It is called high-frequency trading — and it is suddenly one of the most talked-about and mysterious forces in the markets.

Powerful computers, some housed right next to the machines that drive marketplaces like the New York Stock Exchange, enable high-frequency traders to transmit millions of orders at lightning speed and, their detractors contend, reap billions at everyone else’s expense.

These systems are so fast they can outsmart or outrun other investors, humans and computers alike. And after growing in the shadows for years, they are generating lots of talk.

Nearly everyone on Wall Street is wondering how hedge funds and large banks like Goldman Sachs are making so much money so soon after the financial system nearly collapsed. High-frequency trading is one answer.

And when a former Goldman Sachs programmer was accused this month of stealing secret computer codes — software that a federal prosecutor said could “manipulate markets in unfair ways” — it only added to the mystery. Goldman acknowledges that it profits from high-frequency trading, but disputes that it has an unfair advantage.

Yet high-frequency specialists clearly have an edge over typical traders, let alone ordinary investors. The Securities and Exchange Commission says it is examining certain aspects of the strategy.

“This is where all the money is getting made,” said William H. Donaldson, former chairman and chief executive of the New York Stock Exchange and today an adviser to a big hedge fund. “If an individual investor doesn’t have the means to keep up, they’re at a huge disadvantage.”
 
 
Hmmmmmmm....Goldman Sachs, that sounds familiar.  I think I read something about their trading prowess the other day:  (from zerohedge.com)
 
 

"Absolute Perfection: Goldman Loses Money On Just One Trading Day In Q3

The Goldman 10-Q is out, providing numerous interesting datapoints for those willing to scour through them. The key one: Goldman lost money on just one trading day in Q3, making money on all the other 64. As a reminder, even in Q2 Goldman lost money on two trading days. The statistical probability distribution of 1 out of 65 is something that not the SEC, but Richard Feynman should be looking into, as Goldman Sachs, after rewriting the lass of risk/return, is now set to redefine normal distributions and other Statistics 101 concepts."
 
 
So let's see here.  The company whose former employees practically blanket the federal government, had a successful trading percentage of 98.5%?  In case you don't know, the BEST traders in the world don't even get 60% of their trades correct, but these yahoos were nearly perfect?  And you think the playing field is level? 
 
This Saturday Night Live skit explains exactly how Wall Street works.