Thursday, December 1, 2011

Do you like the Stock Market?

Wow! yesterday was something! The DOW Jones surged 490 points. Hey, it's about time! Right? Well, ya, but don't hold your breath. A lot of money was made yesterday. But a lot will be lost again when they once again sound the alarm about the world economy. For the real players on the stock market, volatility is the name of the game. That's where the big money is made. That is also where your hard earned money is generally lost. That's because you have to play by different rules.

The market makers can sell short and can also move the markets with option trading, and of course by distorting the news so you panic and they gain. In your 401K you probably cannot short sell or deal in options. You can only go long and are therefore destined to lose on the bad news days. Not fair!

Here's how it works: If you own 500 shares of a stock such as GE. Traders have the right to borrow your stock that you paid for and short sell it. This nearly guarantees a loss for you and a profit for them and they don't even own the shares. Once the stock runs down they buy to cover their shorts which can drive the stock back up. They win on both sides and your 401K only goes up and down like a yo-yo.

If the SEC was serious about stabilizing the market they would ban the short selling of actual stock and restrict it to options trading only. After all, would you knowingly give someone permission to borrow your shares so they could sell it short and cause you to lose money? Probably not.

Enjoy the surge while it lasts. It will change, and sooner than you think.

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