The risks of short term trading on the stock market

Like all types of investment, stock can escape not from the risk inherit in the trading itself. The risk is beyond normal, accidental, natural, educational, calculated, or pure chances, but it involves more to the speculative, human fear, human greed, or senseless behavior.

An ounce of gold can jump from US$ 850 to 1000 in a few days and plunge precipitously back to where it originated just a few more days later. A barrel of oil can shoot up from US$ 40 to 150 in a few months time only to avalanche back again to the US$ 46 level in a few months later.

This is beyond reason and the wildest guess of any world Guru. It has nothing to do with the basic demand, supply, cost, interest or economic fundamentals. This phenomenon happens exactly in short term stock trading and it is what makes stock market so risky.

I can still recall vividly the drop of cuttlefish price in early 1960 while I was a trader in seafood. We were buying the whole cleaned cuttlefish for EU markets at the cost of US$ 0.6 per kg. only to wake up one day to find the price fell to just  below 0.15 per kg. It hovered at that level for about 2 weeks before it jumped back suddenly to sixty cents.

We may argue and give the reason for the free fall at the time was because Italy, the major importer of Thai whole cleaned cuttlefish, rejected 3 Thai cuttlefish shipments at the Genoa port. But was it really the reason for the situation. Was the fall justified?

Another incident occurred earlier when USFDA detected part of a fly in the frozen shrimp shipment from India to New York. The price of shrimp in Thailand dropped senselessly in a similar manner.

Certainly, a clear and sound mind would tell us that the significant drop is stupid. We know there is a cost to the fish. We need a boat, equipped with fishing gears, filled with petrol, and boarded with fisher men to fish. They all add up to cost and a cost much more than the 25 % we could get after the 75 % price dropped.  We also know that if Italy or USA halted to buy whole cleaned cuttlefish and shrimp, there are still markets like Japan to absorb production.

Looking closer to the present time in June 2008, the Thai stock index was at 880. Today, it is at the 380 level or a fall of 60 %. I can appreciate the ill effects of the sub-prime crisis, financial turmoil, the Detroit dilemma, recession, pull back of foreign investment, and what have you to the stock market. But are these the real causes of the 60 % fall?

 What about the GDP growth of 4.5 %? What about the profits and dividend yields many blue chips companies are still making and investors enjoying? What about the good future earning forecasted for many SMEs? What about the PE of merely 2 or 3 for many companies being traded? What about the trading prices far below the solid book or market values of many firms (which means the companies still have plenty of cash to pass back to shareholder should they decide to liquidate)?   

Again, we can easily see the fall has no reasonable support. Why then the cheap stock still keeps on falling? Why stocks are being sold in panic day after day? Why?

The reason is that we are dealing with sentiment and feeling. We talk about senses, senseless, sheer, panic, and the like in the market. This is why we need circuit breaker to cool down traders when emotion reigns in stock trading. And this is why it makes short term trading on the stock market so risky. The risk is the fact that the market is trading not under reason, but emotion and emotion is indeed very unpredictable. So take heed of market sentiment when dealing with risk in short term trading on the stock market and Good Luck!