Jordan Belfort, played by Leonardo DiCaprio in the Oscar nominated film The Wolf of Wall Street, profited in the markets. But there are easier, honest ways to be an effective trader.Mary CybulskI
"Inside the restaurant young Strattonites carried on their time-honoured tradition of acting like packs of untamed wolves." - Jordan Belfort, The Wolf of Wall Street
You don't have to act like a wolf to make money as a trader, and as Mr. Belfort demonstrated, you shouldn't.
Mr. Belfort, who was played by Leonardo DiCaprio in the Oscar nominated film The Wolf of Wall Street, served 22 months for fraud and related crimes connected with slinging penny stocks through Stratton Oakmont, a boiler room brokerage he founded.
There are easier, honest ways to be an effective trader, whether you're a professional broker or do it on your own. With a variety of technical indicators available and some expert advice, savvy traders can predict, to some extent, where markets are headed, and where to invest.
The first step is to stay calm and carry on, says Mike O'Brien, vice-president and director at TD Asset Management and the lead manager of the TD Canadian Equity, TD Canadian Blue Chip Equity and TD Balanced Income funds.
Already in 2014, the ride has been bumpier than last year, when there was a fairly smooth upward trend in North American indexes since last summer.
"If you really want to go back and be a market historian, in a typical year you'll have at least three occasions where the markets will check back by at least 5 per cent. The last time that [downturn] actually happened was in June, 2013," Mr. O'Brien says in a video posted online for TD Waterhouse customers this month.
Calm, unflappable traders can take advantage of the more subtle nuances in the market. They can profit from swings by taking highly leveraged positions that amplify even small shifts in price.
To be this kind of successful trader requires nerves of steel, and paying close attention to current advice from experts. Savvy traders also need to understand the different types of securities products and how to use the buying and selling effectively. Some basic advice:
Determine your trading strategy.
Are you a buy-and-hold person who doesn't want to think too much about your investments day-to-day, a day trader who buys in the morning and sells in the afternoon or something in between? Have a strategy before you jump into the market.
Understand different securities.
At a minimum, traders should know the difference between stocks and bonds, common shares and preferred shares. If this is the limit of your knowledge as an investor, you should work with an adviser.
Understand leverage.
This is when an investor puts down a small amount of money in the expectation that future profits will cover the full price of a trade and yield a profit. Leverage can bring great rewards, but it also holds greater risk than unleveraged investment. There are several types of leveraged securities.
Futures.
They are contracts in which a buyer and seller agree to trade a stock some time in the future at a price they agree on now. The buyer puts up a portion of the price right away and has to pay the rest on the agreed future date. If the stock is higher than the agreed price on that date, the buyer profits – if it's down, the buyer still has to pay the agreed price and loses.
Options.
They are similar to futures, except that what the trader is purchasing is the right to buy a stock in the future at a price set now, but not the obligation. If the stock is lower than the agreed price when the set date arrives, the option is useless because the buyer can buy the stock cheaper on the open market. If the stock is higher, the option can be exercised. Options trade on markets just like stocks up to the date when they become due – when shares rise toward the due date, the options can go up, too.
Selling short.
It is not as complicated as you might think. You borrow the shares from a broker, who puts the proceeds into your account. At some point, you are supposed to buy the shares you borrowed, using the money that was deposited. If the stock has gone down, you get to keep the difference between what was put into your account (the original price) and the price when you buy. If the stock has gone up, you have to pay the full price and you lose. Short sellers can profit from a downturn, but there are risks. The money that gets put into your account is borrowed money, so eventually you have to pay it back. If the stock you have shorted soars, you lose big.
Savvy traders should also know when to sell shares as well as when to buy. As the song goes, you've got to know when to hold 'em, know when to fold 'em.