Page 253

same. They are the middlemen acting on behalf of the buyers and sellers. In effect, they act as buyers for the sellers and sellers for the buyers, and they settle all stock trades. When you sell a number of shares, it is the clearing house that in effect moves the shares from you to the would-be buyer(s) and moves the money in reverse. Clearing houses mostly operate transparently to the traders. In most cases you don’t even know they’re there, and that’s the way it should be. When you buy or sell shares, you only care about an efficient and orderly settlement of your transaction, and that is what clearing houses are there for.

Finally, it should be noted that all stock transactions take three days to settle. When you sell or buy a number of shares, your broker may indicate that your transaction has completed immediately, where in effect it takes three days for your transaction to become officially settled. In most cases and for average investors this is no more than a technicality.

Investment Strategies

Before we delve into this section, let’s clear up an important point. Throughout this book so far, I have used the terms investor and trader interchangeably. In my opinion they are one and the same, but my opinion is not the only one around. At times the term investor is used to refer to an individual who makes long-term investments. She may hold a stock for 10, 20, or 30 years. She is not interested in the short-term price gyrations of the stocks, but the potential long-term returns including dividends. A trader on the other hand may be regarded as a career but fickle investor. He may not be particularly interested in dividends or a company’s fundamentals (unlike the investor). Instead he may be more of a technical analysis follower with a lot more trading frequency than the investor. I will continue to use the terms trader and …