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DAY TRADING IN CYPRUS By: Andy George
In the time it takes to read the first paragraph of this article, a number of investors across Cyprus will have hit a button on their computer keyboard and bought a batch of shares using an online dealing service. By the time you have read it to the end, those same investors may have had another peak at the share price and decided to sell the shares – either at a profit or sometimes at a loss.
Is this easy money for little work? Sometimes this may be true but not always. Is this the way Cypriot investors must invest? Personally I believe this is not a way that investors should invest. However what is certain is that new technology has helped to forge a new type of private investor (or speculator): the day trader.
Unlike traditional investors, the day traders have no interest in the future earnings of the company whose shares they are buying. They could not care less about fundamental analysis or even what the company does. Hence one can say that the terms: Earnings per share, Price Earnings Ratio, Dividend Yield or Cash Flow would not be in their dictionaries. MOMENTUM: However day traders chase fast and easy profits by buying and selling shares several times per day – their decisions are driven purely by momentum. This means they are more interested in the arts of technical analysis, volume of transaction, volatility of stocks and bid-depth analysis. They aim to buy shares whose prices are rising and sell once the momentum slows. The typical day trader will switch out of shares in a matter of minutes. Often the price rises are tiny but day traders can make profits because commissions are low (though the 0.6% sales levy does not help) and because they buy and sell over and over again.
There’s no question of holding stocks overnight – portfolios are emptied ready for when the market opens the next day. The Internet has made all this possible.
Whatever one may say about them, day traders are a vital part of any Stock Exchange. Their constant wheeling and dealing creates liquidity in stocks something that is necessary in any Stock Exchange. ONLINE TRADING HAS TAKEN OFF IN THE USA: On other international stock exchanges, day trading by private investors existed in the pre-internet era of telephone-based dealing on a much smaller scale. However in the late 1990s with the arrival of online-based dealing that coincided with a bull market, the number of day traders soared especially in the US. In Cyprus online trading started in 2000 (after the spectacular rises of 1999) with a number of online brokers offering such services. Hence private investors sitting at their personal computers (PCs) can manage their own portfolios minute by minute.
Often the day trader spends hours at a time monitoring share prices and they tend to rely heavily on information passed on by other traders via chat rooms. In Cyprus there are a handful of chat rooms. Even a number of brokerage firms have set up their own chat rooms.
Though in the US online trading has taken off, the same is not true of Europe (especially the UK). In Cyprus most of the day traders are related to stockbroker firms though there is a small number of private investors who act as day traders. ONLINE TRADING IS NOT POPULAR IN CYPRUS: In my opinion there are a number of reasons why day trading hasn’t taken off amongst private investors in Cyprus.
The first concerns it’s timing. Online trading has come at a time when the Cyprus Stock Exchange (CSE) has been in a severe bear market. As a result investor confidence is at a low point and this in itself would not encourage investors to become day traders.
Secondly, investors in Cyprus must pay a sales tax of 0.6% on top of commissions & CSE fees. The implication of this (assuming commissions are at 0.4%) is that to break even investors must achieve a return of 1.5% that is extremely difficult on a daily basis. The following example illustrates how hard it is to make money: If an investor invests CYP 10,000 in ABC Limited and he/she makes a 2% gain then he/she will be making a net gain of only CYP 50 (after deducting various costs). However a 2% loss will result in losses of CYP 350. This example suggests that the dice is weighed against day traders.
Thirdly, a day trader thrives on stocks that are liquid and where there is volatility. Though there are around 130 stocks listed on the CSE, only around 10 stocks have the necessary volatility for the day trader. In other words it is no good to the day trader to but shares in companies that he/she cannot sell later due to a lack of buyers. The implication of this is that there are not enough stocks for the day traders in Cyprus to put their teeth into.
Nonetheless it is possible for Cypriot investors with a PC, internet connection and nerves of steel to try their hands at day trading. However before doing so investors should read up on the subject first so that they understand exactly what they are getting into and to find a handful of financial information sites concerning the CSE. DAY TRADING IS A HIGH RISK ACTIVITY: Make no mistake: day trading is a high – risk activity. In other stock exchanges such as the US, the regulators have urged online brokers to issue warnings to investors about volatility and the perils of being highly leveraged. By this I mean that day traders may be trading on the basis of external capital (i.e. loans). The regulators were worried that if there were fallout in the market that many investors would dash for the exit and this would create panic in the market. It would appear that this is something that did occur in mid September when the Dow Jones and NASDAQ Index fell due to panic selling. Hence day trading is very risky especially if the trader borrows to invest.
Another risk is of being fed false information. Day traders should not rely on information from dubious sources. For example on many chat rooms, a number of participants become the victims of “pump and dump” of rubbish shares by being told that such and such a share will go up x% due to a significant announcement by the firm. In fact the rumour may be false and it may be an attempt by the person to dump the shares (at a profit) on some naοve investors. Finally, another risk is that of system failure that could prevent the day trader from selling at crucial moments. Day traders should ask his brokers what alternatives are available should there be a systems failure before opening an account.
CONCLUSION: Day trading is a very high-risk activity and anyone who aims to become a day trader needs to carry out proper research on shares if he/she is to be successful. Though I do not have any concrete information to prove this, many day traders in Cyprus have got their fingers burnt due to the bear market conditions prevalent during the past few years. Despite this fact, the market needs day traders since without these people there would be no liquidity in the market.
Andy George is an accountant with years’ experience as a lecturer. Andy was financial correspondent for eight years at the Cyprus Financial Mirror where he wrote articles on business & accounting related issues to a non-technical audience. He is the author of eBooks: How to write and Publish Your Own With a Shoestring Budget http://www.budgetebook.com New! Easy Way to Make Auto-Pilot Income http://www.budgetebook.com/cbmall