A convenient way to think about trading

Connecting the dots

So what does this have to do with stock trading? Like the store owner, most traders are small (think corner store vs. Costco) and so the amount of “inventory” (in this case stocks) they keep are also going to be small.  The “inventory” for a trader is also known as a “portfolio”.  What you keep in your portfolio you hope to eventually sell for a profit.  Unlike milk, most stocks don’t taste good on cereal nor do they really have a time limit (although options do!) but like the convenience store owner, you want to put things in your portfolio that are going to make you money.

An important question to ask yourself is: What’s the point of keeping something in your inventory that isn’t going to make you money, or worse, that is depreciating in value (think of all those stores that used to rent movies!)? So, like a savvy store owner, you have to keep your eye on what it is that your customers want but at the end of the day it’s just as much of a guess as to what people will buy and at what price.

If you buy a stock and nobody else wants to buy it from you, how much is that stock effectively worth? The answer is nothing, zip, zero and zilch. If you have one hula hoop it may not be so bad, but if you somehow bought thousands of them, well then that could spell disaster for your portfolio/store.  The lesson – buy what you believe will sell , make sure your assumptions are sound and plan for the scenario in which you’re wrong before considering a purchase.

And just who is your customer anyway? In today’s world of electronic trading, the “person” or entity that you may sell your shares to could be a bank, trading firm, or retail investor/trader. This is where the “convenience store” analogy gets a little, well, inconvenient.

Unlike a real convenience store where somebody buys milk to consume it and pays the owner for the convenience of having it available, you can’t really ‘consume’ the stock. If someone comes into the store, sees the milk at a discount to market value and decides they can resell that milk at a quick profit – then that is most definitely a savvy trader.

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