Are leverage/ko products the only reasonable way to trade stocks?
"There's no free lunch. Here are some positions that should be economically equivalent (same risk and reward) in a theoretically-pure universe with no regulations or transaction costs: You're proposing to buy the call. If you look at the equivalent, stock plus protective put, you can quickly see the ""catch""; the protective put is expensive. That same expense is embedded in the call option. See put-call parity on Wikipedia for more: http://en.wikipedia.org/wiki/Put%E2%80%93call_parity You could easily pay 10% a year or more for the protection, which could easily eat up most of your returns, if you consider that average returns on a stock index might be about 10% (nominal, not real). Another way to look at it is that buying the long call and selling a put, which is a synthetic long position in the stock, would give you the put premium. So by not selling the put, you should be worse off than owning the stock - worse than the synthetic long - by about the value of the put premium. Or yet another way to look at it is that you're repeatedly paying time value on the long call option as you roll it. In practical world instead of theory world, I think you'd probably get a noticeable hit to returns just from bid-ask and commissions, even without the cost of the protection. Options cost more. Digressing a bit, some practical complications of equivalency between different combinations of options and underlying are: Anyway, roughly speaking, any position without the ""downside risk"" is going to have an annual loss built in due to the cost of the protection. Occasionally the options market can do something weird due to supply/demand or liquidity issues but mostly the parity relationships hold, or hold closely enough that you can't profit once expenses are considered. Update: one note, I'm talking about ""vanilla"" options as traded in the US here, I guess there are some somewhat different products elsewhere; I'm not sure exactly which derivatives you mean. All derivatives have a cost though or nobody would take the other side of the trade." "I am assuming you mean derivatives such as speeders, sprinters, turbo's or factors when you say ""derivatives"". These derivatives are rather popular in European markets. In such derivatives, a bank borrows the leverage to you, and depending on the leverage factor you may own between 50% to +-3% of the underlying value. The main catch with such derivatives from stocks as opposed to owning the stock itself are: Counterpart risk: The bank could go bankrupt in which case the derivatives will lose all their value even if the underlying stock is sound. Or the bank could decide to phase out the certificate forcing you to sell in an undesirable situation. Spread costs: The bank will sell and buy the certificate at a spread price to ensure it always makes a profit. The spread can be 1, 5, or even 10 pips, which can translate to a the bank taking up to 10% of your profits on the spread.  Price complexity: The bank buys and sells the (long) certificate at a price that is proportional to the price of the underlying value, but it usually does so in a rather complex way. If the share rises by €1, the (long) certificate will also rise, but not by €1, often not even by leverage * €1.  The factors that go into determining the price are  are normally documented in the prospectus of the certificate but that may be hard to find on the internet. Furthermore the bank often makes the calculation complex on purpose to dissimulate commissions or other kickbacks to itself in it's certificate prices.  Double Commissions: You will have to pay your broker the commission costs for buying the certificate. However, the bank that issues the derivative certificate normally makes you pay the commission costs they incur by hiding them in the price of the certificate by reducing your effective leverage. In effect you pay commissions twice, once directly for buying the derivative, and once to the bank to allow it to buy the stock.  So as Havoc P says, there is no free lunch. The bank makes you pay for the convenience of providing you the leverage in several ways. As an alternative, futures can also give you leverage, but they have different downsides such as margin requirements. However, even with all the all the drawbacks of such derivative certificates, I think that they have enough benefits to be useful for short term investments or speculation."
"The penny/pink sheet stocks you tend to see promoted are the ones a) with small public floats or, b) they are thinly traded.  This means that any appreciable change in buy/sell volume will have an outsized effect on the stock's share price, even when the underlying fundamentals are not so great.  Promoters are frequently paid based on how much they can move a stock's price, but such moves are not long-lasting.  They peter out when the trading volumes return to more normal ranges for the stock because all of the hype has died out. There are some small-cap NASDAQ stocks which can be susceptible to promotion for the same reason -- they have small floats and/or are thinly traded.  Once someone figures out the best targets, they'll accumulate a position and then start posting all kinds of ""news"" on the web in an effort to drum up interest so they can sell off their position into the buying that follows.   The biggest problem with penny/pink sheet stocks is that they frequently fail to publish reliable financial statements, and their ownership is of a dubious nature.  In the past, these types of stocks have been targeted by organized crime syndicates, which ran their own ""pump and dump"" operations as a way to make relatively easy money.  This may still be true to some extent today.   Be wary of investing in any publicly-traded firm that has to use promoters to drum up investor interest, because it can be a serious red flag.  Even if it means missing out on a short-term opportunity, research the company before investing.  Read its financials, understand how it has behaved through its trading history, learn about the products/services it is selling.  Do your homework.  Otherwise you are doing the investing equivalent of taking your money and lighting it on fire. Remember, there's a good reason these companies are trading as penny/pink sheet stocks, and it generally has nothing to do with the notion (the promoters will tell you) that somehow the ""market has missed out on this amazing opportunity.""  Pump and dump schemes, which lie at the heart of almost all stock promotion, rely on convincing you, the investor, that you're smart enough to see what others haven't.  I hope this helps. Good luck!" "Market cap doesn't mean that much money went into the system. Money in equals money out over time, and is not directly tied to market cap, which can actually be lower if price drops far enough. These concepts are the same for all traded assets, such as stocks, bonds, and commodities. ""Market cap"" is simply the current price times the number of shares available in the market. So a $300 billion market cap does not mean $300 billion was paid to somebody to buy it all. Instead, what's happened is that some money went in at first, but much much less, and then price increased.  Bitcoin is a little different in that ""money in"" for many innovators and early adopters was in the form of time spent and contributing to the network (what they call mining). 1 Now, as to the price jump, that's an effect of market forces. For many reasons, the market has clamored to buy bitcoin over the last year 2, but many already holding bitcoin weren't ready to sell. Supply and demand worked in a way that increased price. Supply low, demand high, price increases.  This situation could easily reverse. Just as suddenly as the market wanted bitcoin it can decide it doesn't want bitcoin. Supply and demand would work in a way that would decrease price. Supply high, demand low, price decreases.  This kind of massive market price movement in this short timeframe is exactly what traders mean by ""volatile"". It's actually not that unusual, it's just that most stocks and other assets that experience such gains don't get much media attention. Further, gains like this often reflect ""inflated"" prices, market ""euphoria"", and trading ""bubbles"". All of these terms essentially mean ""price will correct (go down) eventually, because price is currently much higher than actual value"".  If the market loses all faith in the asset, price will drop to zero and the ""money in equals money out"" maxim breaks down. Some traders will be left ""holding the bag"",  meaning they owned the stock at the moment trading permanently ceased. 3 NOTES: Exact reasons cannot be pinpointed with facts. Instead, we enter the realm of opinion on this point. In my opinion, bitcoin has increased massively in value mostly due to the media attention it has received. And this media attention is not new. It received equally pervasive attention in 2013. As an effect, price went from under $100 to over $1000 back to under $200 in about 20 months. It's great news if you're a trader. You could have made tons of money. As for the early bitcoiners, it was actually kind of annoying because it then brought in all the skeptics calling it a ""ponzi"" scheme or ""pyramid"" scheme, despite the quite obvious fact that bitcoin cannot be either by definition. Further upward market forces may have come from the fact that bitcoin is built on an innovative technology that may very well change the way we do a lot of things in the future. I'm referring to ""blockchain"". This effect can be seen in several failing companies rising from the darkness like Valkrie simply by adding the work blockchain to their name. I personally find this exactly analogous to the ""dot com bubble"", where companies in the late 1990's made millions in stock selloffs simply by adding "".com"" to their name, despite having no profits or sometimes not even a working product. For high volatility stocks, this is not unusual. Many ""penny stocks"" fail, and typically the road down is faster than the road up. Bitcoin may indeed fail, but again, it's a bit different than a stock. Bitcoin is not a company. There's no financials for Bitcoin, no VC investors, board members to report to, no product to produce, etc. Bitcoin is designed to simply be a thing itself. The hope is to disrupt currency and commodity markets and create a new ""store of value."" Literally, Bitcoin is designed to have intrinsic value. Whether it's actually working at this point is still unknown." "Yes, many hedge funds (for example) did not survive 2008-2009.  But hedge funds were failing both before and after that period, and other hedge funds thrived.  Those types of funds are particularly risky because they depend so much on leverage (i.e. on money that isn't actually theirs). More publically-visible funds (like those of the big-name index fund companies) tended not to close because they are not leveraged.  You say that ""a great many companies"" failed during the recession, but that's not actually true.  I can't think of more than a handful of publically-traded companies that went bankrupt.  So, since the vast majority of publically-traded companies stayed in business, their stocks kept some/most of their value, and the funds that owned those stocks stayed afloat. I personally did not see a single index fund that went out of business due to the recession." "First of all, the annual returns are an average, there are probably some years where their return was several thousand percent,  this can make a decade of 2% a year become an average of 20% . Second of all, accredited investors are allowed to do many things that the majority of the population cannot do. Although this is mostly tied to net worth, less than 3% of the US population is registered as accredited investors. Accredited Investors are allowed to participate in private offerings of securities that do not have to be registered with the SEC, although theoretically riskier, these can have greater returns. Indeed a lot of companies that go public these days only do so after the majority of the growth potential is done. For example, a company like Facebook in the 90s would have gone public when it was a million dollar company, instead Facebook went public when it was already a 100 billion dollar company. The people that were privileged enough to be ALLOWED to invest in Facebook while it was private, experienced 10000% returns, public stock market investors from Facebook's IPO have experienced a nearly 100% return, in comparison. Third, there are even more rules that are simply different between the ""underclass"" and the ""upperclass"". Especially when it comes to leverage, the rules on margin in the stock market and options markets are simply different between classes of investors. The more capital you have, the less you actually have to use to open a trade. Imagine a situation where a retail investor can invest in a stock by only putting down 25% of the value of the stock's shares. Someone with the net worth of an accredited investor could put down 5% of the value of the shares. So if the stock goes up, the person that already has money would earn a greater percentage than the peon thats actually investing to earn money at all. Fourth, Warren Buffett's fund and George Soros' funds aren't just in stocks. George Soros' claim to fame was taking big bets in the foreign exchange market. The leverage in that market is much greater than one can experience in the stock market. Fifth, Options. Anyone can open an options contract, but getting someone else to be on the other side of it is harder. Someone with clout can negotiate a 10 year options contract for pretty cheap and gain greatly if their stock or other asset appreciates in value much greater. There are cultural limitations that prompt some people to make a distinction between investing and gambling, but others are not bound by those limitations and can take any kind of bet they like." "By definition, there are no guaranteed profits. There are sometimes arbitrage opportunities, which are more accessible to some investors than others. In this case, I'm not referring to HFT as that is covered elsewhere on this site already.  At certain times, in certain equity markets, candlestick charts were used for profitable trading, though more for trades set up for weeks or months, not day trading. I am referring specifically to Nikkei 225 equities, in the 1980's and 1990's. I don't know why it was effective, and it hasn't worked for me since then. I recommend reading and heeding this answer. Some people DO use technical analysis (see ""TA is not..."" section) as a primary trading strategy, but they are not going to divulge their methods, not here nor anywhere else." How should we disregard leverage when it's the leverage that creates the 'wipe-out' potential? If you simply convert 100K EUR to USDollars, you dollars might then fluctuate a few thousand, maybe even 10K over a year, but the guy that only put up 1000 EUR to do this has a disproportionally higher risk. "Disclosure: I don't have an iPhone, so I don't use RobinHood.  That being said, I have a less ""they're-out-to-get-ya"" view of what they're doing. As a small business owner (2 businesses), employees cost the most.  If you can create a solid business with few (or no) employees and let robots run it, you will drastically reduce your costs.  Joe Polish said it similarly with sales letters, something along the lines of they never complain about a headache, need to take a year off to discover themself, or just need a personal day.  Robots are the same; they do not have human limits.  Most simple trading can be done and maintained by well written code and AI, there's very little need for humans to do anything other than build it.  Think about the efficiency of bitcoin versus all the central banks combined; how many people are employed by central banks? Robinhood states that they are using technology in these ways to minimize costs and they're using a system that doesn't need physical branches (this doesn't mean they will never have them, just that they don't need them).  Robinhood does not indicate that they allow everything to happen for free; only stock trading.  I worked for a large trading firm once and observed that stock trading wasn't the bulk of where they made their money anyway; trading options, futures, index funds, etc are where the big money was and Robinhood says nothing about those being free.  Like the CQM mentioned too, they'll be charging for margin as well. In a way, the individual stock trader is dead; many people - including this forum - prefer index funds, so more than likely, Robinhood will strike up a deal with an index fund company or create their own (this is just easy, passive income with an expense ratio).  In this category, the markets are their playground, but they do need to attract enough people to their platform, thus free stock trading is a good way to do it. As for selling your information for advertising, that is always a possibility, but they have quite a few other options that would be good for most investors (index funds, affiliating with financial fund companies, etc) where they can start before ever needing to dip their toe in selling information.  This isn't to say they won't do it, but that there are few other options they have. The major concern I have for Robinhood is ongoing security.  Just building it and letting it run kind of assumes that there won't be major compromises in the future and as AI evolves, superior AI might be able to crush older AI." "There needs to be a buyer of the shares you are offering.  There are a lot of feature rich options for buying and selling.  I don't understand them all in depth, but for example on TD Ameritrade here are some of the order types ""Limit"", ""Market"", ""Stop Market"", ""Stop Limit"", ""Trailing Stop %"", ""Trailing Stop $"".  This web page will explain the different order types https://invest.ameritrade.com/cgi-bin/apps/u/PLoad?pagename=tutorial/orderTypes/overview.html Stock with a higher volume will allow your trade to execute faster, since there are more frequent trades than stocks with lower volume. (UPDATE: More specifically, not more frequent trades, but more shares changing hands.) I'm a bit of a noob myself, but that's what I understand."