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FINANCIAL CHRONICLE™ » CORPORATE CHRONICLE™ » Nice article to read for knowledge

Nice article to read for knowledge

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1Nice article to read for knowledge Empty Nice article to read for knowledge Tue Dec 08, 2015 9:55 am



Its a bit lengthy but nice article to read.



How I Made A Virtual Billion In Four Months

By Will Kenton

That moment when you realize you just booked $108 million dollars in less than an hour: it puts butterflies in your stomach. It’s like winning the lottery, but better because you did it all yourself. If every day were a $108 million dollar day, you’d be a billionaire in less than a month. You’d be Carl Icahn having a very good day.

Virtual Money

Of course, if I had actually made TWO BILLION DOLLARS in less than six months, I would not be wasting my time writing about it – I would be on my mega yacht tooling around tropical waters somewhere. My $2 billion windfall was entirely virtual money made with a Kapitall $100K practice portfolio, which comes with a free membership on their website.

Kapitall bills itself as “an online investing platform that combines the world's friendliest investing experience with powerful yet simple tools to build your skills.” Though there is a brokerage attached to the website, you don’t need a funded account (I don’t have one) to play with their practice portfolios and in their monthly tournaments.

I opened a $100K practice portfolio at the beginning of 2014 and didn’t do much with it until the Alibaba (BABA) IPO in September. This is partly because the only thing you can do with a Kapitall practice portfolio is buy and sell stocks. No options. No shorts. You can’t even trade on margin with these accounts: they are as plain vanilla as you can get and not nearly as realistic as some other practice trading platforms out there.

There is a Zen, however, in the simplicity of Kapitall’s function and design. And when I discovered purely by accident I could buy Alibaba at 8:45 the day of its IPO, I realized that, at least for practice portfolios, you could buy a stock at its last listed price the morning before the market opened. (Alibaba had been listed on Kapitall the day before the IPO.)

Of course, this is impossible in real life, and Kapitall’s tournament portfolios execute trades based on the next available price, which means you can’t trade on yesterday’s close. But for the sake of scientific inquiry (and a $2 billion fantasy) I wasn’t picky about the specifics.

The Inestimable Value of Practice

So my $2 billion dollar portfolio was a pipe-dream all along. There is no way to replicate my success in the real world. But that doesn’t mean the experience of doggedly pursuing extreme, if virtual, wealth was a waste of time. Using any practice trading platform is useful exercise, and using Kapitall’s extremely pared-down but intuitive simulator made the following lessons about day trading crystal clear. (For more, see: An Introduction To Day Trading.)

Lesson Number One: The best way to master anything is to practice it.

Malcolm Gladwell’s famous 10,000 hours are required for a person to cultivate the intuitive knowledge necessary to outperform the thousands and millions (and billions) of other people who are playing the same game you are with the same resources and objectives. Not that investing is a zero-sum game, but day trading buyers are pitted against sellers, and only one of those participants “wins” the trade.

Many people who are new to trading underperform because they haven’t spent enough time practicing. Learning day trading is peculiarly difficult because the stakes are very high: not many people can afford to lose $100,000 dollars to learn a lesson on market timing. What’s more, good practice starts with fundamentals and builds complexity as you “level up.” Kapitall’s bare-bones platform forced me to look at one metric everyday: pre-market futures.

Future, yet-to-be-invented financial simulators will use gamification techniques to lead users through practice routines than teach them how to make good financial decisions – and how to avoid bad ones – automatically.

Lesson number two: Making big money requires leverage.

People with a limited understanding of how market traders make money may think they just need to get in on the ground floor of tomorrow’s Microsoft Corp. (MSFT), Apple Inc. (AAPL) or Alphabet Inc. (GOOGL) in order to kick back and let the future pay for itself.

But let’s say you bought $506 dollars’ worth of Apple stock at its IPO price of $22 on December 12th, 1980 (23 shares). Today you would have around 1,488 shares, which as of April 2015 would be worth $188,976 – an outstanding 18.5% return. If your initial buy had been $5,000, you would have $1.8 million. If you had invested $50,000, you would have $18 million, and so on.

But $188,976 isn’t even close to $1 million, let alone $1 billion, and your real return was eaten away by 35 years of inflation. Received wisdom says 7% annual returns are normal, 15% returns are phenomenal and 25% returns are investing unicorns. (Bernie Madoff’s annual returns were all between 12% and 15%.) The more you start with, the more you gain from a buy-and-hold strategy.

Day traders can use tools like margin to increase their leverage, or they can trade derivatives like the ones in leveraged ETFs. Trading decisions, however rigorously strategized, are based on the probability that a stock will increase or decrease in value. Attempting to make money speculating on future probabilities is gambling, plain and simple, and any gambler will tell you, you have to make big bets to get big payouts. Unfortunately, leverage increases downside risk, which means these techniques should only be employed by traders with iron stomachs.

Lesson number three: More money = more problems.

Following on lesson two, all investors should know that the more money you have in your trading account, the harder it is to make a trade. At first, it was easy to add 10% or 20% to my portfolio value a day. There is a lot of volatility in cheap biotech shares. A stock can go from $3 to $4 on good news, and a 33% gain on $1 million is (of course) $330,000. Not bad for a day’s trade.

But Kapitall’s practice portfolio has an interesting quirk: you can’t buy or sell more than 500,000 shares at a time. When you’re still trading $1 million or $100 million, that isn’t much of an issue. But when you have $1 billion in cash, and you want to buy shares in increments of 500,000, trading a $3 stock get very time consuming.

I calculated it takes 15 seconds to trade a stock on Kapitall’s platform. At $3 it would take me almost 3 hours to spend $1 billion. Consequently, I often had to give up high percentage return in order to trade volume in a timely fashion. Shares trading below $50 were out, though, like Ichann, I made a killing when Netflix Inc. (NFLX) jumped from $475 to $565 (a 19% gain) – mostly because I was able to buy several hundred million dollars-worth of it in a few minutes.

I contacted Dale Gonzaga, a client service associate at Kapitall Generation LLC, the brokerage arm of Kapitall, to ask why this seemingly arbitrary barrier had been put in the way of my dreams of riches. He told me that in Kapitall brokerage accounts (funded with real money), the quantity of any and all positions is limited to 500,000 shares. What happens if your 500,000 shares split, I asked?

In reply, he said, “The policy comes from a risk assessment. While it's possible to own more than 500,000 shares of something, most likely you're a millionaire and we would accommodate that on a case-by-case basis, (e.g., taking an order over the phone). Orders that big usually don't come from your everyday investor.” In practical terms that means by the time you have $100 million to trade, you are no longer a “regular” investor.

Regular investors are retail investors (as opposed to funds or other institutional investors), and when retail investors want to buy more than 500,000 shares at a time, they usually want to buy low priced securities – like I did – where price fluctuations are high. Penny stock traders deal in low priced securities characterized by high volatility and little regulatory oversight, which, can be very attractive and dangerous to the beginning investor.

This is why Kapitall limits stock holdings in their real brokerage to 500,000 shares and why the practice portfolios do the same for verisimilitude: to discourage penny stock trading.

The Bottom Line

Putting aside the real-world complications of making $2 billion in four months – from the IRS to the SEC to the technical difficulty of getting into and out of $100 million dollar trades – sudden immense wealth comes with many other problems as any lottery winner can tell you. Fantasies of great riches are far more enjoyable than their reality.

Virtual trading platforms can be good teaching tools for beginners, and more advanced simulators may be of interest to more advanced trading enthusiasts. The biggest lesson I learned from becoming a billionaire in one quarter is that there is no such thing as easy money in the stock market – even in a virtual, pared down replication of the stock market.



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