In the past couple of months, the entire world has taken a hit from the Novel coronavirus. Unfortunately, not only our health is affected, the economy and everything that has to do with it is affected. This includes trading, stocks, and securities.
We have had stock prices crashing in one day and rising the next day. In this challenging time, you need a strategy to weather the storm and keep your investment against the forces of the market. Here is a guide to take you through careful trading.
You might not get what you need immediately. That is not the end of your trading game. There will be another day hence avoid chasing a stock.
We recommend trying again when the market storm is over. This will probably be very soon. In a couple of days, the 28-cent spread on SCHP came down to two cents.
The best idea is going for day trade using an order that disappears automatically if not completed by evening. Some orders might be there for one to three days based on the broker.
One big issue with GTC is the volatility of the market. Whenever the market makes a big move, your bargain price could become obsolete. In a case when the interest rate climbs over the night, and bond funds specified to trade at $57.50 the next day! It will not make sense to be forced to buy at $58.01
While the portfolio value and price do not move together, they are pretty close. Prices are set based on the order flow. There are ETF shares when prices move away from the portfolio value. This happens by bringing supply and demand in alignment.
With this, if you want to buy, wait for a day, at least when the fund price is down. This is a pointer that the market markers are having more sell than buy orders. The ETF shares are probably pricing ETF shares less than portfolio value.
Trading cost is greatly affected by volatility. They are way more than the difference between “the ask" and the bid amount that reflects on your screen.
Consider the SPDR Gold Shares – the bullion fund featuring a daily trading volume of $2 billion. The spread they quote is a small value – a few of a $158 share. The price is, however, not as stable as it fluctuates every second.
Let us assume they quote it at $157 bid, $157.02 offer. You request a buy at $157.02, with the assumption that your cost will be some cents from the midpoint of quotes. In a few seconds, the ask reduces to $156.97. Clicking the order status didn't precisely make you lose anything as you had the exact price you wanted. In frictional cost, however, you have paid six pennies a share.
In another scenario, however, the price might go up by a nickel. With this, you will not be able to fill your order.
Have a specific time you trade – it can be between 9 and 10:30 in the morning, or between 4 and 5:30 in the evening. Stay away from the first half-hour of trading. This is the period when the markets for the underlying bonds and stocks are waking up.
The implication of this is that market-makers in the ETF might not easily hedge their bets. This causes them to widen their spread. You also don’t want to a final half-hour of the day as it comes with poor execution, volatility, and poor execution.
The middle of the day is your best bet since it comes with lower volatility and less liquidity.
You cannot completely avoid frictional costs; you can only reduce their impacts. This happens by not trading. Instead, we recommend buying and holding for a decade. An open-end fund is a good idea if you have a short time frame.
No-load mutual funds do not come with a frictional cost for the investor that is coming or going. With these funds comes portfolio costs triggered when redemption collectively run ahead of purchases or vice versa. These costs, however, go to all shareholders, including the ones just entering and leaving the markets.
Advanced Accounting & Tax Planning