An army of Davids takes on Wall Street

Wall Street trading will never be the same again. This “thing” they call the meme stocks, the Reddit Army, the Robin Hood traders -- it's not a fad. It’s real. And it has only just begun to change Wall Street forever. 

What happened? In the last few years, the friction that used to benefit the powerful in the system of trading stocks has been eliminated. And on top of that, social media has become widely adopted and used by bajillions of people around the world. The way this has changed things requires us to look at the way things were to understand the magnitude of this shift and what it means for the future. 

Historically, you had to meet a broker and fill out a stack of paperwork and he had to get it approved by his back office, then you had to fund the account with a check, it had to clear, and then you could start trading. It could take a week or longer. You had to pay a commission on both a buy and sell. As an individual, this was a meaningful “negative” start to your trade. You were immediately behind and unprofitable. In addition, you were required to buy a “round lot,” which was 100 shares. That was the minimum required by Wall Street. Buying 100 shares of a $25 stock was a $2500 investment and you were charged around $2650. Because of commissions, one would be down -6% immediately on the trade. In order to break even, the individual investor would have to make around +12% on that trade because another commission would be charged when you sold the stock. 

Can you see how this system put the small investor at a huge disadvantage? A larger player only had to make a fraction of a percent to pay for his commission. This is why the institutions and big investors ruled the markets and the little guy was shut out. This “hurdle” made the individual investor stay in a trade longer just to get to profit territory. So he traded less often. He was also priced out of buying stocks such as Amazon or Nvidia which have stock prices of over $3,000 and over $700 per share. A round lot of Nvidia would be $70,000 just for that one position! Most individuals don’t have that kind of money to trade in a single stock if they’re trying to be diversified into 10-25 stocks. 

Now we have “fractional share” ownership. Anyone can buy just a slice of Amazon with as little as $50. This fractional ownership, which only just came onto the scene in the last few years, has solved the round lot problem and made it a term we may never hear about again. My guess is most new traders don’t even know what round lot means! Finally, instead of meeting a broker and filling out a bunch of papers and waiting for approval, you can now open an account online and fund it online and be funded and trading within hours or even minutes. 

We have compressed the time frame to open an account and begin trading. We have stripped out the friction of round lots with fractional ownership. We have destroyed the idea of paying commissions on trades by eliminating it. We have stripped the system of friction that prevented the individual from trading as often as an institution. The individual now has access to powerful, sophisticated trading software and market analysis that previously was only in the hands of the institutions and mutual funds. They were the only ones that could afford it. All of this has been accomplished with technology and thank the Lord for that. It has democratized Wall Street. And it has only just begun. Other “restrictions” and frictional barriers that they’re trying to hang onto in the system at brokerages will fall away eventually, and anyone with virtually any amount of money will be on just about the same footing as any institution with $1 billion in assets. This is not a small shift, this is not a fad, this is tectonic. 

Historically, an idea for a trade came from your broker with a phone call. How antiquated, right? Now, with the internet, with social media, and with sites such as Reddit, and instant text alert services like Carnivore Trading, your trading ideas can come from anywhere. Instantly. Wall Street has changed, and it isn’t going back. The individual is a massive force to be reckoned with and it's only going to get bigger and more powerful over time. The Davids are just beginning to pick up their stones.

Dutch Masters is with Carnivore Trading which is educating, entertaining, and delivering real-time instant text alerts of their trades to their subscribers around the globe. For more information, go to www.CarnivoreTrading.com

Image: Pix4Free

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