by Terry Featherstone

Created on: September 15, 2010   Last Updated: January 04, 2011

Not Your Father's Stock Market

Once upon a time, you could buy a little piece of a company. You would receive a stock certificate, a real piece of paper, attesting to your ownership. Some of these owners stored their stock certificates in the attic and forgot about them. It was the ultimate buy and hold strategy.

Theoretically, buying stock means buying a share of company ownership. But the trading environment has changed drastically. Gone are the days when a man might leisurely read yesterday's closing prices over breakfast, mosey on down to his office and call his broker.  If buying and selling stock was a wild ride before, today's electronic communication networks (ECNs) and split second order fulfillment ensure that transactions occur at a stomach-lurching

pace.  Settlement speed has not caught up with transaction speed.  It still takes three days to record change of ownership, and it is quite possible to unwittingly sell stock you do not yet legally own.

Paper certificates have been rendered obsolete by trading speed. First, the same block of shares may have changed hands innumerable times even within the same day. Second, buyers and sellers trade “positions,” rather than fractional ownership, and make “plays” with only oblique relationships to actual companies. Some participants are not investors; they are “traders” who may use computers with complicated algorithms to crunch numbers and trigger automatic buy or sell transactions. Third, those with access to the highest tiers of information have distinct advantages. Some trades take place in “dark pools” invisible to the market.  Even big brokers have taken to dividing a transaction into 100-share increments to avoid detection by number-crunching computers.

The little investor is especially at risk. It used to be an investor needed substantial assets to secure the services of a broker. Today, anyone with a couple grand laying around can open an account at a discount brokerage where it is especially easy to get into trouble.  Many discount brokerages advertise their services to the little investor while simultaneous expecting the little investor to be sophisticated and experienced enough to independently make sound investment decisions. For example, very few investors understand the role and special privileges of market role and special privileges of makers, while overestimating the ability of news to affect the market, leading to

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