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Introduction to Same Day Trading

Same Day Trading is defined as buying and selling the same security on the same day, i.e. during the same trading session. It is a facility that most developed stock exchanges offer to their investors to enhance the market liquidity and efficiency.

Day traders rapidly buy and sell stocks during the day to benefit from the slight price fluctuations throughout the session, allowing them to lock in quick profits in short terms. This in turn, will increase the volume and the value traded on the stock and hence increase its liquidity. Same day trading also protects the investors from uncertain long term price movements.

However, Same Day Trading has been and still is a debatable issue among stock market specialists because of the high risk it involves. Day traders usually suffer from financial losses in the first months due to lack of experience in price movementsÕ patterns and trading techniques, in addition to the risk they are taking if keeping the stocks overnight without a proper study of the possible price movements.

Therefore, day traders (either individual investors or institutions) should be aware of the following:

*Day trading strategies usually require large capital to benefit from the slight price fluctuations.

*Day trading is a stressful, expensive full-time job, that demands high concentration to keep watching and tracking the price fluctuations to spot market trends and act accordingly.

*Do not follow blindly claims of quick and sure profits from day trading. Check out the sources thoroughly and carefully.

*Day traders should know up front how much they need to make to cover expenses and break even. The accumulated commissions involved in the frequent buying and selling transactions associated to this kind of trading, may result in a significant reduction in profits.

*Day traders may suffer financial losses in the first months of trading and accordingly, day traders should only risk money they can afford to lose, i.e they should not use the money needed in their daily expenses, retirement, mortgage .. etc.

*Day trading on margin or short selling may lead to incurring losses beyond the initial investment, so investors should first know how margin works and when to meet a margin call and the risks associated with not meeting margin calls.

*Last, but not least, day traders should check out day trading firms with the market regulators. Investors must confirm that day trading firms have obtained a license from the regulator and that they are member firms of the Exchange. It is also advisable for investors to check out the track record of the member firms with the stock exchange, the regulator and their customers.

Same Day Trading on CASE:

Within the framework of Cairo & Alexandria Stock Exchanges (CASE) current plan to increase market depth and liquidity, the Exchange has formulated new rules to arrange the Same Day

Trading activities. In that respect, the Capital Market Authority (CMA) Chairman has issued Decree No. 24 on August 7th 2005, that introduced the ÒSame Day TradingÓ concept for the first time to the Egyptian market.

According to the rules, member firms wishing to carry out Same Day Trading transactions, should first obtain a license from the CMA, and should meet the following requirements:

*A Minimum deposit of L.E 5 million in one of the clearing banks in order to meet the settlement of the Same Day Trading transactions. Member firms can only trade within the limits of four times the amount deposited at the clearing bank.

*A disclosure statement from the member firm to its clients on the investment risks involved with such transactions.

*The form of the contract issued between the member firm and the client including the detailed rights and obligations of each party.

For the security of the investor only securities that fulfill the following requirements can be traded according to the Same Day Trading System.

*The securities must be dematerialized.

*The securities must be listed on the Stock Exchange (official or unofficial schedules)

*The minimum trading days of the security should not be less than 95% of the total number of trading days throughout the year.

* The average number of brokerage companies executing transactions on this security should not be less than 50 companies per year.

*The security average number of transactions per day should be at least 1% of the total market average number of transactions throughout the year.

*The minimum free float should be 15% of the total listed shares.

Before the start of the trading session, CASE shall announce on the trading terminals the securities permitted to be traded according to this system.

At the investor level, he has to conduct the same day trading transactions (the purchase and the sale) through one broker. Moreover, the volume of daily transactions made by one investor, according to this system, should not exceed 1/10,000 (one over ten thousand) of the company's listed securities on CASE.

The Misr Clearing, Settlement, Depository and Registry (MCDR) shall perform clearing and settlement transactions on the trades done according to this system on the same day (T+0).

Finally, in order to ensure investor protection and stability in the market, and for the benefit of the market participants, the CMA retains the right to suspend any violating member firms or modify the daily transactions value of the member firm.

Understanding Margin Trading

An investor who purchases securities may pay for the securities in full, from his own resources, or may borrow part of the purchase cost from a lender. The lender may be a bank or a broker. If the investor chooses to borrow the money from a broker he/she has to open a margin account. “Margin”, in this context, is borrowing money from a broker to buy securities and the securities themselves are used as collateral for the borrowed money. Investors generally use margin to increase their purchasing power so that they can own more stocks (or other securities) without fully paying for them.

Margin exposes investors to the potential for higher losses when prices of the “margined” securities go down and at the same time it is more profitable to investors when the prices pick up.

*Understanding How Margin Works?

Assume an investor buys a stock for LE 50 and the price of the stock rises to LE 75. If the investor had bought the stock and paid for it in full, he will earn a 50 percent absolute return on this investment i.e. (LE 75 - LE50) / LE 50. However, using the same example if the investor bought the stock on margin - paying LE 25 in cash and
borrowing LE 25 from the broker – the return earned will be 100 percent on the money invested i.e. (LE 75 - LE 25 - LE 25) / LE 25. Of course, the investor will still owe the brokerage firm LE 25 plus interest. Interest will differ from one broker to another, depending on the agreement between the broker and the investor, and is
computed on the duration and the amount “margined”.

The downside of using margin is that if the “margined” stock price decreases, substantial losses can mount quickly. For example, if the investor bought the share for LE 50 on margin and it fell to LE 25 the investor will lose 100 percent, plus he/she must still come up with the interest payments owed to the broker.

In markets that allow margin trading, investors, who put up an initial margin payment for a stock, are required, from time to time, to provide additional cash if the price of the stock falls to or below a certain level. This is called the maintenance level.

Conversely, if the stock price rises, then cash can be withdrawn from the account to conform to the maintenance level.

Example: Assume an investor buys LE 16,000 worth of stocks by borrowing

LE 8,000 from his brokerage firm and pays the balance of LE 8,000 from his own cash. If the market value of the stocks bought drop to LE 12,000, the value of equity in the investor’s brokerage account will fall to LE 4,000 (LE 12,000 – LE 8,000 = LE 4,000).

Thus the term equity, in this context, is defined as the market price less the
amount borrowed to purchase the stock. If the investor’s brokerage firm has a 25 percent maintenance requirement, the investor must have LE 3,000 worth of equity in his account (25 percent of LE 12,000 = LE 3,000). In this case, the investor does have enough equity because the LE 4,000 worth of equity in the account is greater than the LE 3,000-maintenance requirement.

However, if the investor’s brokerage firm has a maintenance requirement of 40 percent, he would not have enough equity. The firm would require the investor to have LE 4,800 worth of equity (40 percent of LE 12,000 = LE 4,800). The investor’s LE 4,000 in equity is less than the firm's LE 4,800 maintenance requirement. As a result, the firm may issue the investor with a "margin call," since the equity in the investor’s account has fallen by LE 800 below the firm’s maintenance requirement.

If the investor’s account falls below its maintenance requirement, the brokerage firm generally will make a margin call to ask the investor to deposit more cash or securities into his account. If the investor is unable to meet the margin call, the brokerage firm will sell the securities to increase the equity in the investor’s account up to the firm's maintenance requirement.

If the investor does not meet the marginal call and the broker sells the investor’s margined securities then the investor will lose the opportunity to recoup his losses should the prices of these margined securities bounce back.

*Trading on Margin Can Be Very Risky and Is Not Suitable for Everyone

There Are A Number of Risks The Investor Has to Consider before Deciding to Trade Securities on Margin. These Risks Include The Following:

Investors can not only lose their initial investment but may lose more.

Investors must be ready to deposit additional cash or securities in their accounts on short notice to cover market losses.

Brokerage firms may sell some or all the investors’ securities without consulting them in order to pay off the margin loan made to them, if margin calls are not satisfactorily met.

Margin accounts tend to exaggerate market movements that could be a systemic problem when markets are spiraling down.

Furthermore, investors must remember that the brokerage firm will charge them interest for borrowing money and this will also affect the total return on their investments. Thus investors must be sure to ask their broker whether it makes sense for them to trade on margin in context of their financial resources, investment objectives and tolerance for risk.

It is also good practice for investors to carefully review the margin agreement before signing it. This agreement explains the terms and conditions of the margin account. It also describes how the interest on the loan is calculated, the responsibilities assumed by the investor for repaying the loan, and the manner in which the securities purchased on margin serve as collateral for the loan. The investors must carefully review the agreement to determine the conditions under which the brokerage firm will sell their securities to collect the borrowed money.

According to the Capital Market Law No. 95/1992, margin trading was not allowed.

However, a new chapter was added to the Executive Regulations of the Capital Market Law 95/1992 i.e. Chapter 9 in year 2002 that allowed margin trading based on certain rules.

The margin trading rules set the conditions for opening a margin account i.e. the minimum amount the investor must deposit to open a margin account, the maximum amount that the broker can lend to the investor and brokers actions in case of market movements, specifically downward.

The rules also set conditions for periodic review of the procedures by the regulatory authorities. It was decided by CASE that margin trading will not be implemented in the Egyptian market, until the draft membership rules are implemted by the Exchange.

From another perspective, banks in Egypt are allowed to lend their clients to buy stocks against pledging shares, but the policies and rules of the lending bank govern such lending.

*Conclusion

margin trading involves more risk than cash accounts (full payment for the securities). Investors should be aware that they may lose more than the amount of money initially invested in case of a market down turn, margin trading will be more profitable to investors when the market picks up. Investors should think twice in view
of their financial status, investment objectives and risk tolerance before engaging in margin trading.

Online Trading

Stocks Online Trading in Egypt was launched since July 2007 to meet a strong demand in the market, with the internet invading our lives and pushing us to do almost everything virtually. Market Information, live stock quotes, Researches, recommendations, and much more are all available online, and You can now carry out all your Buy/Sell transactions in the Egyptian stock market through a licensed stock broker.
 

Advantages of Online Trading

Lower commission rates

Throwing out brokers’ preference for only large portfolios

Empowering investors with full control over their portfolios, and enabling them to watch the trade execution details and to track their portfolios online.

Providing Investors with Real-time market information, what would increase the tempo of their reactions to market and prices’ changes and accordingly suggest higher returns.

However, analysts pointed out that online trading could be associated with some risks such as Encouraging active day trading, leading the overall market to be more vulnerable to volatility and Speculative deals.

Therefore, online investors should be aware of the following:

Although online trades can be executed in few seconds, investors and traders must take their Time to make wise investment decisions.

Online trading requires high concentration as some investors place their orders more than once mistakenly assuming that the orders have not been executed, hence ending up either owning more than the amount demanded or with selling stocks they don’t own.

In fast moving markets, delays may occur due to the rush of orders placed on the market at the same time, combined with quick price changes, online traders might end up with transactions executed at different prices than wanted. Some investors protect themselves by placing Limit orders rather than Market orders, where a limit order is an order to buy or sell a security at a specific Price, so a buy limit order can only be executed at the limit price or lower, and a sell limit order can only be executed at the limit price or higher.

Online traders should determine if the stock quotes and account updates received are real-time or delayed data.

Technological obstacles (e.g. internet provider delays, computer or modem problems, .. etc) must be taken into consideration.

Online traders should verify the registration status and disciplinary history of the online broker they chose to deal with.

Getting started !

Choose your broker
The first step to start investing your money and trade in the stock market is to choose your brokerage firm, to chose your broker, you first have to define clearly your demands, or which services you are expecting the brokerage firm to provide you with, then you should know enough information about the company, its services, professional history, commissions, and how will you be paying for it.
Don’t rush! Explore the market well, before making up your mind!

Choose companies or stocks
An intelligent trader to invest in a certain security should empower him/herself with information. You have to know and learn about the company you invest in, from past records and future plans.
But first you have to determine your investment objectives, do u invest for long term financing for example you are planning for your retirement, or you invest for short-term financial needs.
Then you can come up with a list of the companies you want to invest in, your decisions or choices should be based on knowledge, Research companies you are intending to invest in. There is information available for every company that has stock offerings and you can almost always find some sort of financial information, management style, products offered, and its market position with respect to its competitors.  This can give you an insight on how the company is performing and possibly how well the stock will perform. Do not blindly purchase a stock, sometimes an individual might get lucky but more often than not, this will lead to very little returns or even the loss of all the money invested on that particular stock. You may also ask your broker their opinion on the stock that you plan to buy, they are there to help you in any way they can, remember, when you make money, they do too.

What can you get from a company’s income statement:

Earnings growth (earnings acceleration is even better). Does the company have a record of exceeding analysts' expectations? Earnings are considered by many investors to be the most important single number, the assumption being that earnings pave the way for future dividends.

Revenue growth.

Stable or increasing margins

Stable or increasing R&D spending as a percentage of sales (specifically for technology companies).

Tax abnormalities. For example, taxes below 25% usually mean the company is using tax loss carry-forwards against income, which are only a temporary earnings booster.

Number of common shares outstanding. Increases in the number of shares negatively impact earnings per share (issuance of new shares isn't necessarily bad; the important consideration is why they're doing it).

How to manage your portfolio
When you invest your money in stock market, the first consideration is how to minimize the risk of your portfolio. However, usually high risk implies high return, but this isn’t the case all the time, study the company well before investing, and always play for meaningful stakes.

The key to a lucrative portfolio is diversification, diversification is a portfolio strategy designed to reduce exposure to risk by combining a variety of investments, which are unlikely to all move in the same direction. The goal of diversification is to reduce the risk in a portfolio. Volatility is limited by the fact that not all asset classes or industries or individual companies move up and down in value at the same time or at the same rate. (Not all companies or sectors respond similarly to an event, one sector’s opportunity can be other sector’s threat). Diversification reduces both the upside and downside potential and allows for more consistent performance under a wide range of economic conditions.
Another factor that can reduce risk is time, your investment comfort zone should allow you to use a ‘‘buy and hold’’ strategy so that you are not chasing market returns during upswings, or fleeing from certain funds during downswings.
But keep in mind that investing too conservatively over the long term is also risky because your account may not grow enough to achieve your retirement savings goal, especially when you consider that inflation erodes your purchasing power over time.
Your time horizon directly affects your ability to sustain risk. The more time you have to invest, the more risk you can assume because early losses can be offset by later gains. However, if your time horizon is short and you experience losses you will not be able to recover from those losses by the time you need the money.

Choose your broker
The first step to start investing your money and trade in the stock market is to choose your brokerage firm, to chose your broker, you first have to define clearly your demands, or which services you are expecting the brokerage firm to provide you with, then you should know enough information about the company, its services, professional history, commissions, and how will you be paying for it.
Don’t rush! Explore the market well, before making up your mind!
 

Choose companies or stocks
An intelligent trader to invest in a certain security should empower him/herself with information. You have to know and learn about the company you invest in, from past records and future plans.
But first you have to determine your investment objectives, do u invest for long term financing for example you are planning for your retirement, or you invest for short-term financial needs.
Then you can come up with a list of the companies you want to invest in, your decisions or choices should be based on knowledge, Research companies you are intending to invest in. There is information available for every company that has stock offerings and you can almost always find some sort of financial information, management style, products offered, and its market position with respect to its competitors.  This can give you an insight on how the company is performing and possibly how well the stock will perform. Do not blindly purchase a stock, sometimes an individual might get lucky but more often than not, this will lead to very little returns or even the loss of all the money invested on that particular stock. You may also ask your broker their opinion on the stock that you plan to buy, they are there to help you in any way they can, remember, when you make money, they do too.

What can you get from a company’s income statement:

Earnings growth (earnings acceleration is even better). Does the company have a record of exceeding analysts' expectations? Earnings are considered by many investors to be the most important single number, the assumption being that earnings pave the way for future dividends.

Revenue growth.

Stable or increasing margins

Stable or increasing R&D spending as a percentage of sales (specifically for technology companies).

Tax abnormalities. For example, taxes below 25% usually mean the company is using tax loss carry-forwards against income, which are only a temporary earnings booster.

Number of common shares outstanding. Increases in the number of shares negatively impact earnings per share (issuance of new shares isn't necessarily bad; the important consideration is why they're doing it).

How to manage your portfolio
When you invest your money in stock market, the first consideration is how to minimize the risk of your portfolio. However, usually high risk implies high return, but this isn’t the case all the time, study the company well before investing, and always play for meaningful stakes.
The key to a lucrative portfolio is diversification, diversification is a portfolio strategy designed to reduce exposure to risk by combining a variety of investments, which are unlikely to all move in the same direction. The goal of diversification is to reduce the risk in a portfolio. Volatility is limited by the fact that not all asset classes or industries or individual companies move up and down in value at the same time or at the same rate. (Not all companies or sectors respond similarly to an event, one sector’s opportunity can be other sector’s threat). Diversification reduces both the upside and downside potential and allows for more consistent performance under a wide range of economic conditions.
Another factor that can reduce risk is time, your investment comfort zone should allow you to use a ‘‘buy and hold’’ strategy so that you are not chasing market returns during upswings, or fleeing from certain funds during downswings.
But keep in mind that investing too conservatively over the long term is also risky because your account may not grow enough to achieve your retirement savings goal, especially when you consider that inflation erodes your purchasing power over time.
Your time horizon directly affects your ability to sustain risk. The more time you have to invest, the more risk you can assume because early losses can be offset by later gains. However, if your time horizon is short and you experience losses you will not be able to recover from those losses by the time you need the money.

Key market participants in Egypt`s stock Exchange

In Egypt the capital market has five major players who are governing the process of trading in the stock exchange market:
The Capital Market Authority ''CMA''
The Capital Market Authority (CMA) is the market regulator, whose primary mission is to protect investors and maintain the integrity of securities market in Egypt. The Capital Market Authority oversees key market participants such as brokerage firms, mutual funds, investment banks, rating companies etc. in addition to the Cairo and Alexandria stock exchange.

The Egyptian Exchange ''EGX''
Cairo & Alexandria Stock Exchanges (CASE) is the only registered Securities Exchange in Egypt. CASE is the trading venue whereby member firms or brokers could buy/sell securities electronically, on behalf of their customers or investors. CASE is currently a public juristic person and there are no shares issued or owned by other entities as it is owned by the government. Though, CASE is owned by the government, it is managed like a private company.

Misr Clearing, Settlement, Depository & Registry Company ''MCDR''
MCSD is a private company, which handles the clearing and settlement operations as well as acting as the Central Depository for all securities in Egypt. The main shareholders of MCDR are CASE, banks and member firms. Since MCDR was established in October 1996, the securities market in Egypt moved toward a completely dematerialized environment, in which physical stocks are no longer existent. Dematerialization has several advantages including: avoiding the inconvenience of carrying documents, eliminating the danger of losing securities either by thrift or any damage, eliminating the risks associated with securities being lost or faked, simplifying the trading process as securities become easily transferred through the book entries or accounts of member firms at the Depository, having in place a safe and electronic way for distributing dividends and other corporate actions of listed companies.

Brokers
A brokerage firm is licensed by the Capital Market Authority to trade on CASE. In addition, CASE must approve membership after the brokerage firm passes an exam on the trading system of CASE. The brokerage firm acts as the link between the investor and CASE. The brokerage firm carries out investors’ transactions whether buy or sell in return for an agreed upon commission fee from investors. In other words, member firms act as agents so they buy and sell securities on behalf of investors since investors are not allowed to trade directly nor have access to CASE trading system. Brokers also provide advice to their customers based on their in-house research capabilities.

Investment banks
Investment banks are financial institutions that deal primarily with raising capital, corporate mergers and acquisitions, and securities trades.
A key role of investment banks is to help companies raise capital in the capital markets by arranging the issuance of new securities. There are two ways to do this: through a public offering or through a private placement.
A public offering involves selling securities to a wide range of investors. The investment bank can sell the company's stock in an initial public offering (IPO) or secondary offering, or they can arrange a bond issue.
 Private placement is an offering of securities to a small group of investors. There are fewer rules to comply with, though the investment bank must show that the investors comply with certain criteria. The distribution of other types of investment, other than securities, is usually also done through a private placement. This could include investments in venture capital or private equity, acquisitions and other strategic investments by companies.